Strict land-use regulations create segregated cities

Michael Lens and Paavo Monkkonen study the effects of land-use regulations on segregation and find that regulations enable the rich to isolate themselves in exclusive enclaves.

Density restrictions do drive urban income segregation of the rich, not the poor, but should be addressed because rich enclaves create significant metropolitan problems. Planners at the local level need assistance from regional and state efforts to ameliorate income segregation. Inclusionary housing requirements have a greater potential to reduce income segregation than bringing higher-income households into lower-income parts of the city. Finally, comprehensive and consistent data on the impacts of local land use regulations should be collected to inform future research and planning practice.

On racial segregation, Jonathan Rothwell and Douglas Massey study the effects of density zoning specifically:

Anti-density zoning increases Black residential segregation in U.S. metropolitan areas by reducing the quantity of affordable housing in White jurisdictions. Drawing on census data and local regulatory indicators compiled by Pendall, the authors estimate a series of regression models to measure the effect of maximum density zoning on Black segregation. Results estimated using ordinary least squares indicate a strong and significant cross-sectional relationship between low-density zoning and racial segregation, even after controlling for other zoning policies and a variety of metropolitan characteristics, a relationship that persists under two-stage least squares estimation. Both estimation strategies also suggest that anti-density zoning inhibits desegregation over time.

Why are our cities expensive?

The housing shortage we face today in LA is not new, and it’s not exclusive to Los Angles. Raven Molloy, an economist at the Federal Reserve, studied the topic in Manhattan (with coauthors) by comparing the cost of building an extra floor to the (much higher!) sale price. They refer to the gap between prices and costs as the regulatory tax imposed by zoning and other regulatory restrictions.

In Manhattan, housing prices have soared since the 1990s. Although rising incomes, lower interest rates, and other factors can explain the demand side of this increase, some sluggishness in the supply of apartment buildings is needed to account for high and rising prices. In a market dominated by high-rises, the marginal cost of supplying more housing is the cost of adding an extra floor to any new building. Home building is a highly competitive industry with almost no natural barriers to entry, and yet prices in Manhattan currently appear to be more than twice their supply costs. We argue that land use restrictions are the natural explanation for this gap. We also present evidence that regulation is constraining the supply of housing in a number of other housing markets across the country. In these areas, increases in demand have led not to more housing units but to higher prices.

In related work, the authors study house price increases nationally, and blame a “significant increase in the ability of local residents to block new projects and a change of cities from urban growth machines to homeowners’ cooperatives.” They also find:

In 12 out of the 21 markets that we examine, the typical home costs no more than 110 percent of the combined costs of the physical structure and the land. However, in the Boston, New York City, Norfolk–Newport News, Salt Lake City, and Washington, D.C., metropolitan areas, the gap between construction costs and home prices is between 10 and 33 percent. In the Los Angeles, Oakland, San Francisco, and San Jose areas, the gap is from one-third to one-half of typical house value.

They find particular problems in California:

The impact of regulation on land values is much greater in other markets, especially those on the West Coast. In Los Angeles, Oakland, San Francisco, and San Jose, the gap between prices on the extensive and intensive margins amounts to from one-third to one-half of home value at the mean.

Regulations and prices in California

John Quigley and Steven Raphael take a regional approach study the house price extremes we see in Los Angeles, and link them directly to regulations:

The rise in housing costs in California has far exceeded the national inflation rate. During the past three years, housing prices in five coastal counties increased by more than 60 percent. For the highest quintile of cities, prices increased by an average of more than 30 percent per year. Evidently California housing markets differ qualitatively from those in the rest of the country.

They continue:

We also find evidence that new housing construction is lower in more regulated cities relative to less regulated cities. Holding constant the change in the price indexes over the decade, we find that changes in the housing stock arising from new construction are smaller in more regulated cities. While this relationship may arise from unobserved differences in the changes in housing demand over the decade, this is unlikely. As the initial results suggest, housing price appreciation in more regulated cities exceeded the comparable price changes in less regulated cities. Thus, those cities with the greatest increases in housing demand experienced the lowest increases in new housing supply. The strongest evidence of the impact of regulation on housing costs comes from the estimates of the supply elasticity of housing for regulated and unregulated jurisdictions. Using an exogenous predictor of changes in housing demand, we find that the responsive- ness of the housing stock via new construction is weaker in more regulated cities, relative to less regulated cities. Moreover, the difference in responsiveness is greatest for the supply of multi-family housing units, the source of supply that is most frequently the target of regulation.

Exclusionary zoning today

John Mangin, in a thorough legal analysis, provides a detailed description of the exclusionary aspects of big-city and suburban zoning:

This Article considers these issues through the lens of housing costs in gentrifying neighborhoods, defined as low-income neighborhoods experiencing an increase in demand and a consequent rise in housing costs and average incomes. There are a couple reasons to shift down in scale. First, gentrification and exclusion are intimately related at a neighborhood level. If a high-demand, high-cost neighborhood won’t build, developers and people looking for housing will be diverted to the nearest low-cost neighborhoods. That increases demand and development and leads to gentrification. (Don’t blame in-movers or developers for gentrification—they’d rather be in the high-cost neighborhoods. Blame the exclusionary practices of people in the high-cost neighborhoods.) Second, gentrifying neighborhoods are the most contentious and perhaps the most important front of the affordable housing wars—they are the areas where costs are rising the fastest and most consequentially. For the universe of people concerned with the ability of low-income families to house themselves, gentrifying neighborhoods present the starkest picture of the problem.

This Article uses economics as a positive analytic tool to think through the causes and potential solutions of some of the problems that attend gentrification in low-income neighborhoods. It does not use economics as a source of normative commitments. The proposals in this Article do not seek to maximize economic efficiency, land values, consumer surplus, welfare, or similar topics. This Article also makes no arguments (despite their considerable merits!) about the benefits of agglomeration to individual productivity or about the benefits of density for local, regional, and national economic output, locational efficiency, and the environment. Much of the voluminous qualitative and social-theoretical work on gentrification is indispensable, but this Article proceeds in the belief that when studying the consequences of various policy prescriptions one should not ignore economics.

How big is the problem?

Big. Friend-of-AHLA Devin Bunten estimates that, nationwide, locally-chosen restrictive zoning reduces welfare by 1.4%, equivalent to over $500 per person, and finds that the problem would be ameliorated by moving the choice of zoning laws from the local to the regional level. Chang-Tai Hsieh and Enrico Moretti find an even larger effect of 9%. In both papers, the losses come because workers face too-high rents in cities like Los Angeles, San Francisco, and New York and choose to live instead in other, less productive cities like Phoenix or Atlanta. With all due respect to the Sun Belt, allowing more people into the most productive cities can only help the incomes of US workers.