Addressing the Housing Cost Crisis: Zoning Regulations and their Impact on Affordability in the U.S.

In recent years, housing affordability has become a significant issue for both renters and homeowners. Since the pandemic began, the value of homes in the U.S. has appreciated at a fast pace. The U.S. National Home Price Index rose 34 percent between 2020 and 2022. In 2023, just 15.5 percent of homes for sale in 2023 were affordable, meaning that mortgage payments represented more than 30 percent of the average monthly household income for 84.5 percent of households buying a home. The home price-to-income ratio was estimated to hit a record high in 2022, with housing values reaching 5.6 times the median household income.

The rental market is equally challenging. Since 2020, rental prices have surged, with the average monthly rent increasing by over 30 percent, according to the Zillow Observed Rental Index (ZORI). Moreover, an estimated 19 million renter households across the country find themselves allocating more than 30 percent of their income solely to cover housing expenses.

Several factors contribute to the lack of affordable housing, including rising construction costs, regulatory compliance, real estate market dynamics, and high interest rates.

Within the scope of regulatory compliance, zoning codes are the primary laws governing land use. These codes dictate parameters such as permissible land use types, size specifications, physical characteristics, building heights, and more. However, their impact extends beyond city planning, significantly influencing land values and housing accessibility across the United States.

The Relationship between Land-Use Regulation, Housing Supply, and Affordability

Zoning regulations significantly impact housing costs, with density restrictions being a main cause. The widespread adoption of single-family zoning ordinances, which typify low-density residential zones, highlights the pervasive nature of zoning constraints hindering housing affordability initiatives.

These density regulations directly affect housing supply. Restrictive zoning practices, common across many jurisdictions, act as barriers to development by limiting the creation of much-needed housing stock. By curbing supply amid rising demand, these regulations inadvertently drive up property values and rental prices, worsening the affordable housing shortage. According to “The State of the Nation’s Housing 2023 ” report from the Joint Center for Housing Studies of Harvard University, the supply of homes for sale remained near record lows in early 2023.

Research has shown a strong correlation between restrictive zoning and reduced housing supply, leading to higher home and land values. A 2003 study found that stringent zoning regulations are closely linked to elevated property prices. In California , most municipalities allocate more land for single-family units than for apartments, further constraining housing options. In the San Francisco Bay Area, research found that land use regulations are directly tied to the value of houses sold.

Zoning also influences land and home values by dividing land into distinct districts, each designated for specific uses, thereby limiting parcels available for residential development that could alleviate housing shortages. Additionally, severe building requirements, such as mandatory parking minimums, add complexity to the housing cost equation, increasing construction expenses and, consequently, housing prices.

An Examination of Zoning Restrictiveness on U.S. Cities

Understanding the complexities of zoning restrictiveness requires a robust methodology to compare different areas across the country. This need led to the creation of the Zoning Restrictiveness Index, developed by ESI and the Penn Institute of Urban Research. This index evaluates zoning codes nationwide, assigning numerical values that reflect the degree of restrictiveness in each locality’s regulatory framework. Higher values indicate more units allowed, while lower values signify more restrictive zoning practices.

The index offers a standardized measure of the maximum allowable housing units per acre. Figure 1 showcases seven U.S. cities with some of the highest housing values (U.S. City Home Value Ranking), based on the Zillow Housing Value Index for July 2024. It compares the allowed units per square mile with the actual number of housing units per square mile.

Among these cities, Heber, Key West, Hailey, and Boulder have developed more units than permitted by right, indicating that these markets are built to their current allowable capacity. Conversely, San Jose, Seattle, and Boston have fewer actual housing units than their by-right capacity, suggesting that these markets have room to increase their housing supply under existing zoning laws.

Figure 2 highlights four cities that are considered to have affordable housing. These cities have zoning ordinances that permit a higher number of units by right compared to the actual units built, indicating that these markets have zoning laws conducive to growth. This flexibility in zoning can help accommodate increasing demand and potentially keep housing costs more manageable.

Preliminary research using the NLURI index presented at the American Real Estate and Urban Economics Association in January 2024 found that restrictive zoning resulted in higher priced homes and the impact on prices was greatest for more expensive homes. This makes it more profitable for housing developers to create higher priced homes.

Navigating the Policy Landscape: Implications for Action

A comprehensive understanding of the interaction between zoning restrictiveness, land value dynamics, and housing affordability is necessary to generate effective policy interventions aimed at addressing the housing crisis. While zoning reform represents a crucial avenue for mitigating housing cost pressures, it is imperative to acknowledge the multifaceted nature of the challenge at hand.

The Zoning Restrictiveness Index shows restrictions to housing development imposed by land use law as it relates to allowed density. However, there are other land use restrictions at play that prevent development. Moreover, even if land restrictions are removed, zoning law is still far from creating new development by itself. This underscores the challenge to incentivize affordable development through other policy intervention.

Policymakers, urban planners, and stakeholders must navigate these complexities with a holistic approach that addresses the systemic roots of the issue. A comprehensive housing strategy is essential for creating sustainable and inclusive communities for all.