The Heritage Foundation

Executive Summary #1426es on Smart Growth

April 6, 2001

April 6, 2001 | Executive Summary on Smart Growth

Executive Summary: Smart Growth, Housing Costs, and Homeownership

America's commitment to providing every citizen with homeownership opportunities is facing a serious challenge as more and more entry-level homebuyers are priced out of the market by poorly conceived "smart growth" initiatives. These initiatives, which attempt to limit a community's growth and development through such regulations as growth boundaries, lower population densities, "downzoning," impact fees, construction prohibitions, and land set-asides, have the effect of raising home prices and discouraging homeownership. As a result, one of America's greatest public policy successes--its historically high homeownership rate--is at risk.

Until World War II, less than half of Americans owned their own homes. But postwar prosperity pushed homeownership to a record 55 percent in 1950, and above 60 percent by 1960. Since then, it has inched its way up to a record 68 percent in late 2000. Among its many benefits, homeownership offers families the opportunity to accumulate wealth over the years. As monthly mortgage payments reduce the debt on the home and as its value rises, homeowners generally experience an increase in equity--the difference between what their house is worth and what they owe on it. Counting both the house and all other assets, the median net worth of the American homeowner in 1998 was an impressive $132,100, compared with only $4,200 for renters.

Net worth attributable to home equity is particularly important for modest- and middle-income homeowners. For homeowners with incomes between $20,000 and $49,000, home equity accounts for 40 percent to 45 percent of their wealth, and as much as 65 percent for those with incomes below $20,000.

Such prospects for prosperity face regulatory obstacles from the "smart growth" movement. Although smart growth strategies vary significantly across the country and among their advocates, at their core is the goal of preventing or slowing suburbanization by limiting the amount of land available for new construction.

Recognizing that a growing population needs a steady flow of new housing units each year, some smart growth advocates seek to reduce land use by directing needed new construction into higher density developments, such as high-rise apartments or townhouses. Other, more extreme growth control advocates simply want to discourage all growth, regardless of density, in order to preserve their neighborhoods exactly as they are. They support policies that discourage or severely limit any new construction.

Policies typically adopted by those wanting to guide growth into more compact forms usually involve a growth boundary and/or more rigid zoning requirements that define where growth can occur and where it cannot, and often mandate smaller lot sizes. By restricting the amount of land available for development, growth-guiding policies indirectly raise the price of homes by rationing the supply of land. At the other extreme, policies designed to reduce or discourage growth generally involve techniques that directly raise home prices, such as requiring large lots, high impact fees, or costly amenities.

By raising home prices, such policies force households of modest means into smaller units or out of the community altogether. In either case, the burden is borne largely by entry-level homebuyers and other households with low to moderate incomes. To the extent that such policies become more commonplace in American communities, the rate of homeownership will fall as more and more moderate-income households are forced into the rental market.

The Portland, Oregon, region provides an appropriate illustration of the effect of harsh growth control policies. In 1979, it imposed a rigid growth boundary around Portland's metropolitan area. When it was drawn, the boundary included substantial areas of undeveloped land; but by the early 1990s, much of this land had been built upon, and the boundary imposed a significant constraint on land available for new construction. As a consequence, land costs soared and Portland's home prices raced ahead of the national average, beginning in the mid-1990s. In turn, homeownership rates in Portland bucked national trends and actually declined over a period of time that saw the national homeownership rate rising to record levels.

Home price surveys conducted since 1991 reveal that while Portland was one of the most affordable communities for housing at the beginning of the decade, by late 2000 it had become one of the least affordable; its affordability index had plunged by 60 percent. Indeed, over a period in which affordability nationwide increased, Portland's fell faster and farther than that of any other large metropolitan area in the United States.

Those who are harmed by escalating prices are those who are not yet owners, and this group consists largely of those with household incomes below the median, especially racial minorities. As of mid-2000, 81.7 percent of households with incomes at or above the median income were homeowners, compared with only 52.2 percent of those with incomes below the median. Because most smart growth strategies achieve their intended result by raising home prices, those with household incomes below the median--who are already underrepresented as homeowners--must bear the brunt, and racial minorities represent a disproportionate share of this at-risk group.

There are solutions to the problems associated with sprawl that can achieve the goals of quality communities and still preserve individual choice, property rights, and reliance on market-based solutions. Governments can play a role in fostering such solutions, both by resisting demands to impose coercive policies and by clearing away the aging regulatory impedimenta that often direct development into unattractive patterns and directions. Other potential solutions include the use of public funds to purchase parks, woodland, and farms to provide more green space, and transportation improvements to facilitate mobility.

Wendell Cox, Principal of the Wendell Cox Consultancy in St. Louis, Missouri, is a former Visiting Fellow at The Heritage Foundation. Ronald D. Utt, Ph.D., is Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Wendell Cox Visiting Fellow
Thomas A. Roe Institute for Economic Policy Studies

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

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