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Can Inclusionary Zoning Put a Dent in the Housing Crisis?

Zoning laws have a long history in America, dating back to the early 20th century. Often, exclusions of certain property types, such as apartment buildings, were used to racially segregate communities. The prize-winning book The Color of Law by Richard Rothstein gives a detailed history of housing discrimination and racial segregation that came with exclusionary zoning. The 1968 Fair Housing Act was supposed to rectify some of these unfair policies and practices by prohibiting discrimination based on race, national origin, religion, and other areas. But the act falls short of preventing class-based discrimination, providing a legal way to confine low-income people to specific neighborhoods. Things like high minimum lot sizes and expensive construction requirements have systemically prevented building housing for low-wage earners from the ability to move into areas with better opportunities. Exclusionary zoning is still the norm in many American cities, and it is segregating communities and adding to America’s housing crisis.

These exclusionary zoning laws come in many forms, but to sum it up, they are land-use restrictions that include single residence per lot. Exclusionary zoning severely hinders the construction of multifamily housing that would increase the housing supply and provide affordable places to live. The rules play out at the local level, but in the aggregate, they add up across cities and towns nationwide to contribute to housing unaffordability. Exclusionary zoning used to be seen mainly in coastal areas and large metro markets, but it’s now more common in cities of all sizes and market conditions. The restrictions are more prevalent in the suburbs, but urban cores have seen more exclusionary zoning lately.

The impact of these restrictions is that it creates areas of concentrated poverty and concentrated wealth. The unfortunate thrush is that affordable housing is already expensive to build, and, recently, pressures from inflation and pricier construction materials have worsened the situation. If the cost of housing is to go down, it will have to be thanks to densification that only comes with multifamily developments.

A beast not easily tamed

Economic experts have warned about rising housing costs for decades. Their prophecies, by and large, have come true. Multiple solutions have been proposed, but the complex economic factors contributing to the problem are hard to sort through and untangle. One increasingly popular solution is replacing exclusionary zoning with the inclusionary type. Inclusionary zoning policies aim to incentivize affordable housing for builders and sometimes make affordable development mandatory. For example, some inclusionary policies will mandate that 10 to 15 percent of rentals be set aside as “affordable,” usually using median household income requirements for qualification. Often, there are terms set up to ensure the housing remains affordable, and those terms sometimes extend up to 30 years. 

An example of inclusionary zoning can be found in Massachusetts’ state law 40B. Chapter 40B is a law that enables zoning boards to approve affordable housing if at least 20 to 25 percent of the units have long-term affordability restrictions. The regulation was enacted in 1969 to address the state’s affordable housing shortage and reduce barriers created by local zoning, approval processes, and other restrictions. Chapter 40B has helped generate more than 60,000 affordable units since the early 1970s. Over half of these units are reserved for households with incomes below 80 percent of the area median. Inclusionary zoning laws such as this have also been tried in Oregon, California, Pennsylvania, and New Jersey.

Minneapolis has taken a more radical stance, and in 2020 it became the first major U.S. city to establish a ban on single-family zoning in every neighborhood. Minneapolis officials are hoping the historic and controversial policy will bring a host of duplexes and triplexes citywide. Another reason for the ban is that Minneapolis is proliferating in population rapidly and needs to increase housing for future demand. Minneapolis-St. Paul needs to add about 14,000 homes each year to meet future demand, according to the Family Housing Fund, but right now, they’re only building about three-fourths of that on average.

Several approaches and strategies have been tried to boost affordable housing, some have made progress, but most haven’t been sufficient. Inclusionary zoning helps, but affordable housing is a beast that’s not easily tamed. The impact of inclusionary zoning and bans like the one in Minneapolis vary because the policies often have so many different goals, not just increasing affordable units, according to Allen Feliz, Vice President of Affordable Housing Managed Services at MRI Software. For example, other goals of the policies include bridging racial wealth gaps. Feliz also said that one problem with the laws is effective enforcement. “The big driver of success is enforcing the policies, and some regulators don’t have the will or bandwidth to enforce them,” Feliz said. “The only way to ensure compliance is if local governments check-in, but enforcement of the laws sometimes isn’t done in the long run.”

Closing the gap

It’s not just zoning that affects the housing crisis. Affordable housing is hard to make profitable for many developers. The federal low-income tax credit is the most abundant financial resource to help finance affordable housing, but Feliz said many deals can’t get done without additional resources. Projects still need gap financing, so housing advocates push governments to do more. The gap between the amount of revenue a building will generate based on rents and what developers need to pay lenders prevent many affordable units before they even begin, according to the National Housing Conference. Without enough tax credits and grants, developers need to take out bigger loans, and many lenders won’t provide them. If the rent is genuinely affordable, the property’s net operating income will often be too low to justify.

Housing advocates are fighting hard for more subsidized housing assistance, but it’s a fight that will take a long time to resolve. A significant recent federal milestone came in the form of a $5 billion competitive grant program passed by the Biden administration in the summer of 2021. The program incentivizes the reform of exclusionary zoning by giving money to jurisdictions that eliminate barriers to more affordable housing. The grants package was part of a larger program aiming to expand access to home and small business ownership in Black and minority communities.

The Biden program, especially the emphasis on eliminating exclusionary zoning, should help. But in addition to exclusionary zoning, other factors have created a general housing shortage in America. Housing starts have been depressed since 2008, and the shortage causes rising housing prices, according to Charles McNally of NYU’s Furman Center, which researches housing, neighborhoods, and urban policy. “The financial crisis of 2008 started in the housing market, and we’ve never really recovered,” McNally said. There are many options to build more than single-family homes, but McNally said it just doesn’t happen as much. One reason is that some developers may be reluctant to take on more expensive-to-build affordable multifamily projects, instead opting for safer and more lucrative single-family ones.

Long road ahead

Nowhere is the housing crisis worse than in California, where the median home price is expected to rise to $834,400 in 2022, and an estimated 161,000 people experience homelessness. Governor Gavin Newsom recently signed sweeping legislation to tackle the crisis, the most significant commitment to affordable housing in the state’s history. The $22 billion legislation package aims to create 84,000 affordable units and fund the state’s Housing Accelerator to streamline affordable deals that had been stalled. The bill also extends the Housing Crisis Act, cuts down on red tape, and should accelerate affordable developments. Lastly, the law will establish new zoning rules for multifamily units. Feliz said California jurisdictions had had little incentive to fix things, so there was a need for the state to play a more prominent role. The law should make a positive impact, according to Feliz, and will, among other things, help families live closer to where they work.

California, of course, is far from the only place in America where housing costs have priced many out of homes and some right onto the streets. The housing crisis is caused by many structural economic factors that will take years to solve. For evidence of this, look no further than how quickly cities become unaffordable. People who move out of expensive large metros like New York and San Francisco flock to places like Spokane, Washington, and inevitably, those cities’ housing prices become out of control. An excellent New York Times piece explained how, just a few years ago, a Spokane household that made the median income could afford about two-thirds of houses on the market, according to Zillow. In the past two years, an influx of new residents led to home prices shooting up 60 percent and “pricing out broad swaths of the populace and fomenting an escalating housing crisis marked by resentment, zoning fights, and tents.” Recent survey data shows that only one apartment unit out of every 167 is vacant in Spokane now. The same story is playing out in cities and towns across America.

Replacing exclusionary practices with inclusionary zoning policies can help the affordable housing fight, but it’s just one piece of the puzzle. America’s housing crisis reflects several deep inequalities in our society, mainly the widening income gap. Overall, the bottom 10 percent of income earners in America have seen the biggest rise in costs since 1980, while the top 25 percent of earners have seen their costs decline, according to research from Apartment List. Renters at all income levels spend more on rent than they did in 1980, while homeowners pay a smaller fraction of their monthly paycheck on housing. Even if the housing crisis is a symptom of more significant socioeconomic problems, inclusionary zoning and legislation like that in California are steps toward providing more affordable units on the market and balancing the scales.

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