By all available accounts, the Federal Reserve’s unilateral war against the worst inflationary crisis in 40 years is going precisely according to plan. The fastest monetary tightening cycle since the Volcker era in the early 1980s has succeeded in bringing down consumer price index inflation from the near-double digits to 3.2% as of this February. That likely means fewer rate hikes than expected, with the aim of keeping prices lower.
Yet the one, crucial industry the Fed has been unable to penetrate despite its best efforts is perhaps the most consequential for the country more broadly: housing. Average and median home sale prices rose by around 48% from the peak of the coronavirus pandemic to the end of 2022, but they have only fallen by around 11% in the past year. And why? Because of years of anti-growth zoning laws, which in a bipartisan patchwork across the country effectively criminalized creating new housing.
Zoning laws range from restrictions that residential zoning include only single-family homes to height and parking spot per capita requirements. While localities began to pass zoning laws more than a century ago — and yes, often to enact racial discrimination by another name — zoning laws amped up in number and rigor after the Great Recession of 2008-09. The motivation was no longer racism but rather protectionism. Those in the property-owning class wished to preserve and inflate the value of their own investment artificially by criminalizing the creation of new supply, which would decrease housing prices in the overall market.
And interestingly enough, economists have made a novel case that on top of the demand induced by federal “diversity” incentives in mortgages, restrictive zoning laws that forced lower-income buyers into less restrictively zoned markets also triggered the Great Recession in the first place.
All of which brings us to the pandemic-era federal spending spree, in which Uncle Sam inadvertently lit the housing market on fire. Thanks to an unprecedented $5 trillion in COVID stimulus, home prices soared, allowing boomers to cash out and retire early from the labor force altogether, exacerbating the labor shortage that in turn has fueled our inflation crisis. The result is one of the lowest rental vacancy rates since the ’80s and the third lowest homeowner vacancy rates ever recorded by the Census Bureau. And it all comes down to supply.
New housing starts have slowed for decades, but precipitously so after the Great Recession. Whereas the Census Bureau estimated there was one housing unit per every 1.79 people in 2008, there’s currently only one housing unit for every 1.835 people. That may not seem like much of a difference, but extrapolate that out to more than a decade of new family formation and population growth, and we have an estimated 7.2 million homes missing.
Even before COVID-19, building multifamily housing, even as modest as two-story townhomes or duplexes, was illegal in 75% of land zoned for residential property. Zoning codes often also ban workarounds, such as accessory dwelling units (think guest or pool homes for a grandparent), single-room occupancies (think rooms rented out for a boarder), and manufactured homes (think low-cost trailers or mobile homes). On top of restrictions for what a homeowner can do on his or her own property, zoning laws can also restrict minimum lot sizes, explicitly pricing out lower-income earners who would be happy to own 800 square feet instead of a lot for a McMansion with a patio.
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Luckily, the tide seems to be turning, and the effort may be bipartisan. The zoning reform movement spearheaded by YIMBYs, which stands for “yes in my backyard,” has taken off in the least likely of red and rural states. Gov. Greg Gianforte (R-MT) effectively legalized affordable dwelling units and multifamily zoning statewide with the so-called Montana Miracle, overriding local NIMBY regulation. Gov. Doug Burgum (R-ND), who has proudly called for more walkable cities that reincorporate coffee shops and barbers back into residential neighborhoods, has presided over a greater rate of new housing permits than in Manhattan. Democrats at a local level in places like California are finally catching on, but still, seven of the 10 top homebuilding states voted for then-President Donald Trump in 2020, while seven of the bottom 10 went for President Joe Biden.
But local YIMBYism may be the best we can continue to hope for as Biden seemed to ignore the supply-side factor altogether during his latest State of the Union address. The president entirely ignored his halfhearted past attempts to incentivize zoning reform on a federal level, instead promising $5,000 cash credits to first-time homeowners. Free money and less deregulation may have caused the problem in the first place, but in the national spotlight, even the worst economics still sound like a great sell in an election year.