Do Americans Really Only Want Sprawl?

Plus: the House votes for more affordable housing subsidies, Portland tries to fix its "inclusionary housing" program, and is 2024 the year of the granny flat?

Happy Tuesday and welcome to another edition of Rent Free. This week's stories include:

• The House of Representatives' surprisingly bipartisan $78 billion tax bill expands and tweaks the federal government's program for funding new affordable housing.
• Portland reworks its controversial "inclusionary housing" policy that's been blamed for suppressing housing construction.
• Arizona tries to legalize starter homes, Minnesota takes on parking minimums, and more…

But first, this week's lead item is a brief rebuttal to the idea that what all Americans really want is to sprawl, baby sprawl.

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Do Americans Just Want To Sprawl?

Urban geographer Joel Kotkin has stirred up a lot of strong feelings over the weekend with a recent essay in National Review called "Let America Sprawl"—which was published in January but started making the rounds on YIMBY Twitter over the weekend.

Kotkin argues Americans' "deep-seated preferences" are for single-family homes in the suburbs where everything is a convenient drive away. The persistent population and job sprawl of the last century is evidence enough of this preference.

Messing with America's true suburban desires, writes Kotkin, are center city-loving planners and pundits who are eagerly forcing density on existing communities and "hindering, and even prohibiting, development on the periphery…where costs tend to be lower."

This war on suburbia is ultimately a war on America's future, says Kotkin.

"Policies to force people back into denser urban areas will ensure a decline of population and ever greater dependence on undocumented workers," he writes. The sprawling suburbia of New America meanwhile "suggests an alternative shaped by popular desires for a better life."

Though Kotkin's article is light on the specific policies threatening suburbia, he's not wrong when he says there are regulatory barriers to exurban growth: literal urban growth boundaries, environmental regulations, agricultural zoning, rural multi-acre minimum lot sizes, the federal government's hoarding of western land, etc.

Absent these policies, there likely would be more, and more affordable, single-family housing.

What's so odd about Kotkin's essay is that he treats these regulations as binding, indefensible restrictions on Americans' true preferences, while criticizing efforts to liberalize equally restrictive zoning regulations as forced densification.

The contradictions of this position are endless.

If ending single-family-only zoning forces density on the suburbs, does repealing urban growth boundaries also force the suburbs on rural communities? If Americans' preference for single-family suburban housing is indeed so "deep-seated," why is it necessary to ban every other type of housing on most residential land?

Much of the evidence Kotkin cites for Americans' suburban preferences could also be easily interpreted as evidence of regulation forcing Americans out of the urban areas they really want to live in.

Kotkin writes that "those running California managed to create a situation where housing prices have soared, even as the state has lost population." He also says that people are moving to the exurbs where "costs tend to be lower."

People moving away from high-priced housing in dense urban areas is more obviously interpreted as evidence of a regulation-induced shortage, not a collapse in demand for urban living. Urban Californian home prices couldn't stay so high if no one wanted to live there. When restrictions on density are repealed, builders respond by building a lot of housing.

If you're interested in a deeper dive, Reason published a debate on this very topic between myself and demographer Wendall Cox last year.

At the end of the day, I think this whole argument is a bit of a waste of breath for anyone who doesn't want to force people to live a certain way.

We don't need policy wonks to figure out whether Americans really want large-lot, single-family homes in the suburbs, a high-rise apartment downtown, or anything in between.

Free markets do a pretty good job of sorting out people's preferences without lots of white papers and magazine columns. It's why we don't need endless articles at National Review and Reason about whether Americans prefer Coke or Pepsi.

Of course, we haven't left markets (i.e. individuals) to figure housing out on their own. Instead, we've applied layer after layer of red tape on both urban infill development and suburban single-family home construction. (The messy reality is we also subsidize both types of housing.)

With that red tape removed, people could more easily decide for themselves what kind of housing they want and builders could construct whatever buyers and renters are actually willing to pay for. Odds are they will end up choosing more of both.

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House Tax Bill Expands Low-Income Housing Subsidies

Child tax credits and small business tax relief are dominating most of the discussion of the $78 billion tax bill passed by a solid bipartisan majority in the House of Representatives last week.

Less covered is the bill's expansion of the federal government's primary program for subsidizing affordable housing construction: the Low-Income Housing Tax Credit (LIHTC) (pronounced Lie-Tech) program.

Through LIHTC, the federal government gives states tax credits that they then gift to developers of low-income housing. Developers will sell these credits in exchange for cash or equity in their housing projects.

There are two types of LIHTC credits: a generous credit that mostly subsidizes new construction and a less generous credit typically used to subsidize rehabilitation projects.

The House's tax bill increases every state's allocation of the more generous new construction credits by 12.5 percent. The bill also reduces how many tax-exempt bond projects need to be used to qualify for the less generous credits, expanding the program's ability to subsidize rehabilitation projects.

LIHTC builders are happy about the changes, which restore some cuts made to the program in 2021.

"This would be the most meaningful expansion of investment in affordable housing in decades," says Emily Cadik of the Affordable Housing Tax Credit Coalition. "We have these shovel-ready developments that, if states were given a little more allocation or didn't have to put so many bonds into one project, would be able to move forward right away."

Critics of LIHTC have long argued that the program's complicated financing mechanisms and voluminous regulations are a wasteful and indirect means of subsidizing affordable housing.

"Research indicates that the benefits of the Low-Income Housing Tax Credit (LIHTC) program primarily flow to developers, rather than low-income tenants," said the Cato Institute's Vanessa Brown Calder to the Senate Banking Committee last year. Brown Calder recommended eliminating LIHTC in favor of direct subsidies to the lowest low-income renters.

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Portland Reforms Supply-Killing Inclusionary Housing Policy

Portland's "inclusionary housing" policy has been a poster child for all sorts of unintended consequences. Housing advocates are hoping recent changes to the program will transform it into a model affordability policy for other cities to follow.

In 2016, Portland created the "inclusionary housing" policy requiring builders of projects with 20 or more units to make at least 10 percent of those units affordable to lower-income renters.

Forcing developers to give away some of their units at money-losing discounts will obviously make them less likely to build. That's been the record of "inclusionary zoning" policies the country over.

To try and avoid a predictable collapse in new construction, Portland's inclusionary housing program paired its affordability mandates with property tax abatements meant to make developers whole.

But "late in the process in 2016, it came to light that there wasn't going to be enough tax abatement to offset everybody's costs," says Michael Andersen of the Sightline Institute.

To split the baby, the city offered tax abatements on all units built by developers only in the high-cost central city. But outside the central city developers could only claim tax abatements on the affordable units they were being forced to build. That partial tax offset proved fatal for a lot of projects.

"It had a massive effect. It was implemented when we were top of market, so land prices were high, construction [costs] were escalating, projects were already starting to get tight on underwriting," says Paul Del Vecchio, president of Ethos Development. "It was the final straw."

Some developers rushed through applications before the program went into effect. A few cut the size of their project to under 20 units. Inevitably, a lot of projects also just ended up not happening, as reflected in tumbling permitting numbers within Portland and increasing construction outside of it.

A program intended to improve housing affordability ended up cutting rates of new housing production.

To right this wrong, the city convened a panel and hired a consultant to study fixes to the program. On Wednesday, they passed recommended updates to the program that allow projects citywide to claim tax abatements on all the units their units.

Andersen says fully subsidizing developers to include some affordable units in market-rate projects is cheaper for taxpayers than the city issuing bonds to finance all-affordable projects.

"This is a pretty significant step forward in my opinion toward feasibility for projects outside the central city that might not have been feasible previously," says Sarah Zahn, a developer with SEC Properties, who was on the city's inclusionary housing panel.

Other developers are less bullish.

Del Vecchio, who was also on the city's advisory panel, says that expanded tax credits will help more projects pencil. But some capital will still flow to other jurisdictions that don't have affordability mandates. Inclusionary housing still ends up placing a lot of low-income people in need of particular services in market-rate buildings where they're not provided, he adds.

"Low-income people aren't getting the services they need and the city isn't getting the equity it needs," he says.

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Is 2024 the Year of the Granny Flat? 

Last week, the California Court of Appeals ruled against Malibu, California's restrictions on accessory dwelling units (ADU) in a case litigated by the Pacific Legal Foundation.

It's a mopping-up action in California's successful war on local granny flat bans. State reforms since 2016 have turned annual ADU construction from a rounding error into a quarter of the state's new housing.

Now, the Golden State is spreading its ADU revolution nationwide. This year, bills have been introduced in Nebraska, Virginia, Massachusetts, Kentucky, and Colorado that would allow ADUs on all residential land and preempt some ADU regulations.

Most are pretty good, but Nebraska's might be the best of the bunch. It legalizes ADUs of 1,000 square feet (or 75 percent of the primary if that's less) while prohibiting localities from imposing parking mandates, design requirements, impact fees, owner-occupancy requirements, and setback, height, and lot size regulations that are tougher than what's applied to single-family homes. If a municipality doesn't pass a law incorporating these standards into its zoning code by 2025, state standards automatically kick in.

This is a pretty airtight preemption that bans all the typical local regulations that can thwart ADUs. It's also a standalone, single-subject bill. That reflects the lesson from last year's legislative sessions that housing bills do best when they're kept simple.

Massachusetts' and Kentucky's ADU bills are part of larger housing logroll bills that have a pretty poor track record. Everyone finds something to not like about them.

Colorado's bill still allows localities to charge ADU builders impact fees, which can be ruinous for new construction. It also comes with subsidies for ADU construction. California's experience shows you can get a lot of new ADUs at zero expense to the taxpayer.

Virginia had a pretty decent ADU bill introduced. It appears that good, initial version took a beating in its first committee hearing, and has been amended to still allow local governments to require ADUs to have off-street parking, and be owner-occupied.

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Quick Links

• The Long Island community of Oyster Bay, New York, is preemptively downzoning its golf courses so that no one comes along and builds too much housing on them.
• The Minnesota Legislature is considering a bill that would prohibit local governments from imposing minimum parking requirements on any type of development. Minneapolis' elimination of parking minimums has been credited with allowing a lot more small apartment construction.
• The Arizona Legislature is considering a "starter home" bill that would prohibit municipalities in urban areas of 50,000 or more people from regulating the lot size of single-family properties, imposing setbacks of greater than five feet, or imposing design and aesthetic requirements on single-family homes. The bill has already passed two committees in the House.
• Cincinnati, Ohio, is considering a zoning reform package that would eliminate all density restrictions in newly created "neighborhood business districts" and allow two-, three-, and four-unit homes within a quarter mile of these districts.
• Developers are proposing more residential high-rises under Florida's new Live Local Act, and raising the hackles of local governments when they do it. The New York Times reports on the first builder to sue to enforce the law, which he says entitles him to build a 600-unit project in wealthy Bal Harbour​.
• A Missoula, Montana, realtor asks to intervene in a lawsuit against anti-density activists who managed to block the implementation of statewide ADU legalization.