A Proposal to Address the Housing Crisis

by Bill McBride

Calculated Risk News Letter

Economist Adam Ozimek and John Lettieri (CEO, Economic Innovation Group) have a new proposal to address the housing crisis in the United States: 

How the next president can solve America’s housing crisis

U.S. housing costs are out of control. The median home for sale was rarely more than four times the median household income throughout the 1980s and 1990s. But by 2022, it had risen to nearly six times. Renters have not fared better. In 1980, around one third of renters were cost burdened, meaning they spent 30 percent or more of their income on housing. Fully half of renters are cost burdened today. 

The main reason housing is too expensive is that we don’t build nearly enough of it. …

How did we get here? After all, buyers want to buy and builders want to build. The answer is found in a labyrinth of local zoning rules, building codes, and land use regulations that shape the map of what gets built and where. Thanks to the proliferation of local red tape, it is now impossible for the market to deliver the housing supply Americans need at prices that are broadly affordable.

Housing has a supply problem.

California has attempted to address the state’s housing crisis with several measures, including allowing Accessory Dwelling Units (ADUs) on any property in the state (including zoned R-1). This has led to a sharp increase in ADU construction, and in 2023, ADUs accounted for approximately 20% of new housing units in California. However, this has done little to ease the state’s housing crisis.

To make significant progress on reducing the housing crisis, rezoning will be needed. Instead of mandating this rezoning, this proposal incentivizes local governments to rezone.

[T]he necessary solution is quite simple: a dramatic reduction of local regulatory barriers. The tough part is convincing local governments to act. That’s why, rather than having taxpayers fork over money in the hopes of local “empowerment,” the next president should stimulate reform by directly rewarding tangible results at scale — an idea that we call “Density Zones.”

Here is how it would work. First, the federal government would establish a standardized zoning and building code drawn from best practices nationwide and designed to allow builders to meet local housing demand without having to navigate onerous bureaucratic hurdles.

Second, municipalities would be given the opportunity to adopt this code for specific areas within their jurisdiction, be they individual blocks or neighborhoods, or entire redevelopment districts. Developers in these Density Zones, in turn, would have clear and predictable rules within which to operate, eliminating the interminable delays and setbacks that currently drive up costs and reduce the number of units that come onto the market. …

Third, any place that adopts the national zoning rules and meets the program’s construction targets would be awarded a “Density Dividend” proportional to the number of new housing units completed — a direct reward to housing supply. 

Municipalities could use the dividends for four primary purposes: the construction of sewer, roads, or other infrastructure needed to support new housing developments; education funding enabling school districts to serve growing K-12 enrollment; public transit projects that serve local residents; or loans, grants, or other subsidies to support construction of affordable housing. Each community gets to decide for itself which needs to prioritize. 

This approach aligns the interests of all parties.

emphasis added

This proposal keeps local governments in control while providing an incentive to rezone certain areas.

A couple of suggestions: Perhaps the size of the “Density Dividend” should be based on local measures of housing costs to income. And – as the authors note – “Density Zones” has a negative connotation. Maybe “Boost Zone” or “Expansion Zone” – or same name with a positive feel. Overall, this seems like an excellent suggestion.