Despite several years of decline in the aftermath of the 2008 housing market collapse, home prices in most markets across the United States are steadily increasing. Prices in some select markets now exceed levels achieved at the height of the mortgage credit bubble in the mid-2000s. In the post-housing-crisis recovery, tight supply and strong demand have put upward pressure on prices, making housing across the U.S. less affordable. Government regulations, mostly imposed at the state and local levels, remain the most significant hindrance to housing supply, holding back inventory that would moderate high prices and improve affordability in many U.S. markets over time.
While state and local government regulations are the crux of the problem, those problems are exacerbated by federal programs like the federal mortgage insurance and guarantee programs. Limiting the scope of these federal programs would moderate the interplay between local, state, and federal policies that affect housing affordability, even though the most significant improvement would be gained by deregulatory reform on the state and local level. For housing to be made more affordable for more Americans, regardless of any deregulatory reforms at the state and local levels, federal policymakers should eliminate federal programs that restrict land use, that constrain the supply of new housing inventory, and that encourage higher levels of mortgage debt, all of which increase housing costs.
Land-Use and Housing Development Regulations Increase Costs
Aside from geographical constraints, the most significant limitations to developable land and new housing supply arise from government regulation. Unlike some nations, South Korea and the United Kingdom, for example, the U.S. does not have an explicit federal land-use regulatory system. Such regulations are predominantly imposed by state and local governments in the U.S. and generally involve some combination of at least the following restrictions:
- Prolonged approval periods for attaining building permits;
- Building and construction fees;
- Allowance restrictions for new construction, including requirements for density on existing properties (primarily impacting the “building up” in urban areas); and
- Explicit growth boundaries.
Everything else being equal, these regulations limit the availability of land and housing development, thus restricting housing supply and increasing costs. Numerous economic studies confirm that highly regulated housing markets face restricted supply, which ultimately creates upward pressure on prices and costs in these markets.
More restrictive (highly regulated) housing markets are also the most volatile: Highly regulated markets have experienced more dramatic price volatility (with longer durations of boom-bust periods) across market bubble cycles. Households taking on higher levels of mortgage debt to finance more expensive homes are another side effect. Indeed, misguided federal policies, such as increased use of taxpayer-covered mortgage insurance and guarantee programs, have generally magnified this housing cost problem.
Long-term Decline in U.S. Housing Affordability
Over the past half century, housing has generally become less affordable across the U.S., and highly regulated markets remain less affordable than those areas with minimal land-use and development regulations. From the early 1970s through the mid-1990s, as states and local governments slowly implemented land-use and housing-development regulations, housing gradually became less affordable. Since the 1990s, however, when the federal government began to implement its own “smart growth” policies, in addition to the incredible expansion of demand-side affordable housing (mortgage credit) policies, housing affordability has steadily decreased.
This combination of regulations and subsidies was central to the dramatic increase in home prices during the mortgage credit bubble in the mid-2000s. As a consequence, median home prices have outpaced median household incomes, a price-to-income ratio that increased from 2.75 to 3.44 between 1990 and 2017.
There has been a resurgence in prices since post-crisis lows in 2011 and 2012. The recovery in home prices has largely resulted from strong demand combined with the lack of housing supply. At present, home prices in many housing markets across the U.S. exceed the peak levels reached prior to the collapse of the housing market in the mid-to-late 2000s. Although there is variation across markets, approximately 38 percent of markets are “seriously” and “severely” unaffordable due to these demand–supply conditions. In fact, in highly regulated markets, such as Boston and Portland, Oregon, median home prices remain five times above median household incomes, and even worse, home prices outpace incomes nine times in numerous California housing markets.
While homeowners benefit from increased home equity, the higher home prices also make it more difficult to purchase a home. Furthermore, increasing prices can keep people from selling their homes in order to relocate or “purchase up,” keeping sales down in such housing markets. Overall, the sharp increase in home prices across the U.S. has at best resulted in mixed effects in many housing markets, limiting the available inventory of affordably priced homes while nominally benefiting homeowners with higher home equity. The dramatic increase in home prices has certainly restricted opportunities for affordable entry points to homeownership, especially for those looking to purchase homes valued in the bottom two-thirds of the market.
Improve Housing Affordability by Eliminating Federal Land-Use Regulations
Federal government intervention in jurisdiction over the land use and development patterns of local housing markets further exacerbates problems caused by regulations at the state and local level. Thus, federal policymakers should take the necessary steps to eliminate any federal regulatory programs that restrict land use and development in housing markets across the U.S. Specific reforms should include rescinding the Affirmative Furthering Fair Housing rule promulgated by the Department of Housing and Urban Development (HUD), as well as eliminating the “sustainable” and “livable communities” initiatives managed by both HUD and the Environmental Protection Agency.
Such federal smart-growth programs place onerous regulations on the development patterns in local housing markets and restrict individual choice in housing by forcing “people to live at higher densities, in multi-family units, townhouses, or clustered single-family developments, while restricting the expansion of suburban commercial development.” Similar programs that have been in place for the past several decades waste federal taxpayer dollars, as these funds tend to target areas that remain low productivity areas. Also, contrary to advocate concerns of overdevelopment in the U.S., 95 percent of land in the continental U.S. remains undeveloped.
In addition, federal policymakers should eliminate the federal mortgage guarantee and insurance subsidy programs that encourage high levels of mortgage debt used to finance expensive homes. Absent getting the federal government out of the home-financing market altogether, federal policymakers should ensure appropriate pricing of risk for mortgages across the U.S., as well as decreases in the loan limits in the federally backed mortgage insurance and guarantee programs. Limiting the scope of these federal mortgage insurance and guarantee programs, particularly within those high cost and highly regulated local markets of the U.S., would moderate the interplay between local, state, and federal policies that affect housing affordability.
Deregulations at the state and local level would have the most significant impact on expanding the housing supply in markets across the U.S. Such deregulatory efforts at the state and local levels would likely ease the restrictions on housing supply and over time expand the inventory of affordable housing and moderate prices, which would likely make it easier for more Americans to live and work closer to areas with higher productivity. Academic research suggests that robust deregulatory reforms at the state and local levels of government, especially in select high-cost markets on the coasts, would likely result in a more efficient allocation of labor across the U.S. and consequently boost overall economic growth.
For at least the past half century, government regulations that restrict land availability and housing development—predominantly those imposed at the state and local level, but exacerbated by interventions at the federal level—have increased costs and made housing less affordable across the U.S. Between 1990 and 2017, median home prices relative to median household incomes increased significantly. Moreover, in approximately 38 percent of the markets across the U.S., housing is seriously or severely unaffordable: Median home prices exceed median household incomes by more than four times. Thus, irrespective of deregulatory reforms by state and local governments, federal policymakers should eliminate the various federal programs that increase housing costs by restricting land use, constraining the supply of new housing inventory, and encouraging higher levels of mortgage debt—thus making housing more affordable for more Americans.
—John L. Ligon is Senior Policy Analyst and Research Manager in the Center for Data Analysis, of the Institute for Economic Freedom, at The Heritage Foundation.