Blame big (local) government for the high cost of housing by Chris Matthews @FortuneMagazine October 7, 2014, 11:55 AM EST E-mail Tweet Facebook Linkedin Share icons In this era of widening income inequality, in which all of the gains of the recovery have gone to the already well off, we are consistently treated to an abundance of economic news that will depress those in the bottom 90% of the income spectrum. Perhaps the most frustrating bit of data for middle and lower-class earners is that even following the most epic housing bust in generations—in which housing prices tumbled 33% nationally after a spate of over-investment in housing—affordable housing is well out of reach for most Americans who need it. The anxiety over the lack of affordable housing is palpable. San Francisco Mayor Ed Lee has said the lack of downmarket housing in his city is a “genuine crisis,” while New York City Mayor Bill de Blasio came to office in 2014 on a platform of making housing more affordable. Indeed, in nearly every economically vibrant part of the country, finding affordable housing is a burden even for the middle class. And according to economists Joseph Gyourko and Raven Molloy, much of the blame for this can be laid at the feet of local housing regulations. In a review of over 30 years of literature on regulation and housing supply Gyourko and Molloy conclude that “regulation appears to raise house prices,” “reduce construction,” and that the benefits of most of these regulations are “difficult to quantify.” The following chart from Gyourko and Molloy highlights the crux of the problem. While the inflation-adjusted prices of the things that actually go into building a house, like labor and materials, have remained flat for 30 years, home prices have skyrocketed, even when taking into account the housing bust: The authors write: In theory, the availability of buildable land might not constrain the supply of housing units if housing could be constructed as densely as necessary to meet demand. But in most places in the U.S. local land use policy imposes limits on residential development that restrict the size and type of housing units that can be built on a given amount of land. These restrictions add extra costs to a construction project, creating a wedge between the sales price of a house and the cost of buying the land and building the structure … the growing wedge between house prices and construction costs illustrates that the price of land has been trending upward over time. In their review of dozens of studies on the subject, the authors conclude that while geographic constraints play a role in the problem (i.e. that some areas in which there is a lot of housing demand don’t have enough room to build to meet that demand), man-made regulations against denser living have played a huge role in the current affordability problem. Based on the data, it’s clear that the combination of a growing population and an increase in the number of land-use regulations have led to a divergence between the cost of construction and the price of housing that began in the 1970s. But what is less clear are the reasons behind the explosion in these types of regulations, or what we can do to try to curtail them. One theory is that homeowners use the political process to restrict building, because these laws raise the value of their homes. But the evidence for this notion is mixed: some studies show that places with higher percentages of homeowners also have a greater tendency to impose strict land use regulations, while others fail to make that case. It’s likely that a number of factors have led to a rise in land use regulations. Some voters might understand that stricter regulations raise the value of their homes, while others might just like living in communities with large, uniform plots of land and restrictions against subdivisions. But whatever the reasons behind these laws, the data show that these regulations have made housing much more expensive that it would otherwise be. And in a country where there are only 31 affordable housing units for every 100 families that need one, the pain is getting more acute by the day.