The blog of the Urban Institute
December 19, 2019

How 2020 Candidates Plan to Increase Nationwide Housing Supply

December 19, 2019

Several Democratic presidential candidates have released plans to address the severe nationwide housing supply shortage. Seeing this issue capture the attention of candidates is promising, and the evidence suggests that the proposed solutions are a major step in the right direction.

A quick review of the problem

New housing construction is failing to meet the needs of the 80 million millennials entering their prime homebuying years. Low supply and high demand always result in one thing: higher prices for consumers. Although big cities were most affected early on, in the absence of a nationwide response, smaller markets have recently begun feeling the affordability pinch.

To increase housing supply, candidates have proposed multipronged solutions that include direct federal investments to build homes and incentives for states and localities to ease up on land-use and zoning regulations that discourage construction.

Most proposals aim to increase supply, which is what the country needs

The most ambitious proposals call for investing hundreds of billions of dollars into the production, preservation, and rehabilitation of housing units. Although candidates differ in how much they would spend, there are key similarities.

Several propose using vehicles such as the Housing Trust Fund, the Capital Magnet Fund, low-income housing tax credits, block grants, and specific programs for rural, Native American, and public housing.

The proposals also include incentive payments to states that ease land-use and zoning restrictions. Not surprisingly, funding for these incentives is much smaller than the funding proposed for actual construction and housing rehabilitation: $10 billion under Elizabeth Warren’s and Michael Bennet’s plans, $16 billion under Cory Booker’s, and $2 billion under Julián Castro’s, compared with the hundreds of billions—or trillions—some candidates have committed to building and rehabilitating millions of homes.

Additional focus on easing zoning and land-use restrictions could help solve a major problem for builders: in many communities, they are unable to build homes at price points even middle-income—let alone lower-income—families can afford. Much of this is because of the high cost of restrictive zoning, land-use restrictions, and code requirements—all of which generally favor larger, more expensive construction.

The result? A serious mismatch between the type of construction local policies are encouraging and what families in those communities can afford. The affordability problems caused by the high cost of new construction are exacerbated by how the least expensive homes have appreciated much more than the most expensive homes over the past five years (see the figure below).

figure 1

Two suggestions that could increase the plans’ effectiveness

Increase incentive payments to states that ease restrictive zoning

Federal funding that rewards states for reducing or eliminating restrictive zoning could pave the way for more construction of smaller, less expensive units. Likewise, incentives to reduce land-use restrictions and building codes would remove unnecessary costs and bring prices closer to what families can afford.

Savings from reduced building costs would then enable subsidy dollars to go further. As an illustration, a 1 percent cost reduction in Bernie Sanders’s $2.5 trillion “Housing for All” plan would save $25 billion, enough to build more than 80,000 additional homes (assuming a $300,000 cost per home). Making zoning and land-use incentives a larger element of the candidates’ proposals would thus have a multiplier effect: each dollar of incentive payment would help cut costs and support more construction at a lower price point.

Encourage alternative forms of housing

Another supply-side solution worth consideration is encouraging greater construction of manufactured homes and accessory dwelling units (ADUs), both of which cost substantially less than traditional site-built, one-to-a-lot housing. These types of housing also generally use less land per unit than traditional single-family zoning requires or allows.

The quality, durability, and visual appeal of manufactured homes has improved drastically over the decades, yet number of units shipped annually has dropped over time because of financing constraints, stigma, and zoning regulations that exclude manufactured homes. Similarly, ADU construction is held back by lack of financing and stringent requirements concerning square footage, owner occupancy, number of parking spaces, and other hurdles.

Two provisions may have negative consequences

Two ideas found in some plans may have negative side effects, especially in a market downturn, and warrant further examination:

Taxing empty homes

The Sanders plan proposes a 2 percent tax on empty homes. The intention is to increase supply by encouraging both property owners to sell empty homes quickly and landlords to keep properties rented.

Although this may improve housing supply in strong housing markets, in a down market, a tax on empty houses could result in faster sales at lower prices, thus exacerbating declines in house prices.

Speculative homebuying

Another potentially counterproductive measure is a 25 percent tax on speculators who sell a non-owner-occupied home for profit within five years of purchase, a feature included in the Sanders proposal.

Although this idea seems attractive in the context of “paint and flip” housing transactions at large profits, without further refinement, it could also discourage sales of the large inventory of investor-owned homes to renters or other homebuyers at prices that reflect the value of improvements and a reasonable profit. Moreover, in a future market downturn, such a tax could reduce the role of investors in stabilizing downward-spiraling house prices.

The solutions proposed by Democratic presidential candidates are an acknowledgement of the single largest problem our housing market faces today: lack of supply. Although mostly on point, the plans need some fine tuning and a reevaluation of strategies likely to be detrimental during economic downturns.

Photo by fotog via Getty Images.

SHARE THIS PAGE

As an organization, the Urban Institute does not take positions on issues. Experts are independent and empowered to share their evidence-based views and recommendations shaped by research.