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The American dream, symbolized by homeownership, is increasingly out of reach. Despite the high demand for affordable, small, and entry-level starter homes, more and more homebuilders are opting out of constructing such homes given the tight profit margins—margins which are increasingly tight due partly to overly-zealous regulations and exclusionary zoning. As a result, there is a national shortage of starter homes, which is pricing many Americans out of homeownership entirely. The American dream can avoid fading into memory by modifying local ordinances and zoning regulations to decrease costs to builders and would-be homeowners.

Housing Crisis

The starter home represents financial stability and an essential element of the American dream for first-time homebuyers, smaller families, and retirees. While homeownership was once considered an assured life milestone, Freddie Mac estimated in 2018 that America faced a housing supply shortage of approximately 2.5 million homes or “units.” By 2020, that estimate increased to 3.8 million units. The number of starter homes on the market has decreased by more than 50% between 2017 and 2022. The long-term decline in the construction of starter homes significantly worsens our national housing shortage. Equally alarming, home prices have skyrocketed due to the woefully inadequate supply relative to the ever-growing demand. When adjusted for inflation, home prices overall have increased by approximately 60% over the past decade. Specifically, between 2016 and 2021, the price for starter homes alone has risen by over 64%.

Costs of Zoning Regulations

Zoning ordinances regulate land use by designating compatible areas for certain land uses (like single-family, multi-family, commercial, or industrial) and by setting development standards. As such, zoning is important for guiding development. But it can go too far, and over-regulating home construction via excessively restrictive residential zoning rules increases housing costs and lowers inventory, contributing to the slow erosion of the American dream. A homebuilder’s overhead costs, including those related to regulatory compliance, are passed on to a homeowner through the purchase price. Builders estimate that approximately 24% of a home’s final cost stems from expenses resulting from local, state, and federal regulations, including fees, design reviews, bureaucratic delays, and permits. Modernizing residential zoning regulations to accommodate different types of housing (including “Missing Middle” housing) can reduce development costs and lower the barrier of entry to homeownership for millions of Americans.

1.  Reduce the Impact of Land Costs and Increase Supply

The building costs for starter homes have dramatically increased in recent years—increases largely attributable to residential zoning regulations. For decades, local governments and homeowners have embraced zoning regulations promoting the detached single-family home over other housing models in areas primarily zoned for residential use. As such, the construction of alternative housing projects on approximately 75% of the residentially-zoned land in many cities is illegal, with a majority of residential areas seeing a ban on the construction of townhouses, duplexes, rowhouses, accessory dwelling units, co-opts, triple-deckers, condominiums, courtyard clusters, and other housing models fostering increased homeownership through a higher density of homeowners. Even if single-family homes are not outright required, zoning regulations often include requirements encouraging the construction of single-family homes. Yard and setback requirements can prevent the construction of interconnected higher-density housing models (like townhouses) and courtyard clusters. Minimum lot sizes can make tiny homes cost prohibitive. The construction of residential buildings over a particular height may be barred, effectively stopping attempts to build a condominium. Consequently, fewer starter homes are available on each lot, and the land costs for one lot rest on the shoulders of a single homeowner.

2. Reduce Costs for Aesthetic-Only Requirements

Along with limiting density, zoning regulations generate outsized external costs through aesthetic mandates, prescribed architectural flourishes, requisite building materials, site-building limitations, and so forth. For example, by requiring a homebuilder to use masonry instead of natural wood or a fire-resistant composite material, the house’s purchase price automatically increases. Those costs can rise even more due to supply chain issues. During 2020 and 2021, lumber prices rose by 250%, and the price of starter homes in Texas increased by $40,000 – $50,000 as a result. Additionally, zoning regulations for built on-site homes with particular materials or architectural features may require specialized labor, further increasing overhead costs and risks of delays while simultaneously preventing the use of economical construction options (like modular homes). Despite seemingly good intentions, many regulations bolster housing prices for the sake of appearances and deepen the ongoing housing crisis.

Some states have recognized this issue and sought to pass legislation restricting zoning regulations. For example, in 2019, the Texas Legislature passed House Bill 2439 to ban local municipalities from adopting or enforcing ordinances that bar construction materials approved in the model building code adopted by Texas or that require more stringent standards for a building product, material, or aesthetic method than required in such code. Because the model building code is silent on certain features, like paint color restrictions, the reach of this new law is still under debate. Additionally, the legislature has clarified that the bill would not apply to the enforcement of land use restrictions contained in plats or private deed restrictions between property owners or to certain carved-out zoning regulations (like for historic locations). In the fight against over-regulation, laws like House Bill 2439 are a victory, but not the entire solution.

3. The NIMBY (Not In My Backyard) Problem

Current homeowners often oppose changes that could result in higher-density housing models or aesthetic changes in their neighborhoods. While these individuals may claim to support such changes in general, they will argue it should occur elsewhere and use scare tactics to prevent rezoning in their direct area successfully. When attempting to update zoning regulations to lower homebuilders’ costs, parties must be prepared to oppose these groups. Even in states willing to regulate zoning restrictions, NIMBYs can be influential. From Boerne to Arlington to Austin, NIMBYs have threatened, delayed, and killed projects in Texas after the passing of House Bill 2439 by protesting the rezoning of land currently used for single-family homes. To succeed in rezoning efforts, homebuilders should seek the support of local homeowners, HOAs, similar groups, and local politicians.

To ensure future Americans have access to homeownership, local governments may need to revisit their approach to residential zoning regulations. By updating zoning regulations to permit additional affordable housing models, homebuilders can be incentivized by widening profit margins to construct more starter homes, reduce the housing shortage and provide a road to the American dream for millions.

CONTACT:

Ginger Epstein I  214.745.5405  I  gepstein@winstead.com

Ginger Epstein is a member of Winstead’s Real Estate Development & Investments Practice Group. Ginger represents developers, landlords, tenants, borrowers, landowners, financial institutions, and servicers on commercial real estate and lending matters, with a particular emphasis on acquisitions and dispositions, loan originations, and servicing transactions.