How Over-Regulation Fuels the Affordable Housing Crisis
American home ownership is becoming increasingly elusive. Across the country, rent and home prices have risen faster than wages. As a result, roughly 36 million adults are “housing cost burdened,” meaning that over 30 percent of their income from a full-time job goes toward their rent or mortgage payment. The lack of affordable housing impedes their ability to save, making retirement, higher education, or a down payment less attainable. This perpetuates cyclical poverty and hinders upward mobility, making the American Dream less attainable.
Over the past two decades, home construction has plummeted, while the U.S. population has steadily increased. The resulting bottleneck has driven up home prices, making it harder for first-time buyers to break into an increasingly competitive market. This stagnation has similarly impacted the rental sector, where prospective tenants increasingly outnumber the available units. With demand outstripping supply, the costs of rent has risen dramatically in recent years.
Over-regulation at every level of government is exacerbating the crisis for renters and buyers alike. Between 2001 and 2019, commercial construction costs doubled, driven in large part by government policy. Rising tariffs on building materials, onerous permitting fees, and stringent zoning regulations have inflated costs and suppressed development. As a result, housing has become more scarce and less affordable.
In the 1990s, the United States began to embrace trade liberalization, with President Clinton signing over 300 free trade agreements to reduce tariffs. Cutting these import taxes made imported construction materials more affordable, which helped fuel housing development in the early 2000s. However, the pendulum began to swing towards protectionism with Trump’s election in 2016. Under Trump, the federal government imposed tariffs on a variety of home building materials, including steel, aluminum, plywood, cement, nails, washing machines, tile and solar panels. Tariffs effectively raise the prices of these items anywhere from 28 to 134 percent. Tariffs have contributed to ballooning construction costs, which are ultimately passed onto everyday people. A Brookings study found that “American firms and consumers paid the vast majority of the cost of Trump’s tariffs.” Concerningly, the Biden administration has doubled down on many of Trump’s tariffs, eschewing free trade for “fair trade.” Both administrations have pursued policies that considerably increase the cost of construction, making housing less affordable.
Rising fees for construction permits at the local level have also inflated construction costs and created a barrier to entry for developers. In theory, cities charge these fees to offset the burden a new development would place on the local schools, infrastructure, transportation and environment. However, these so-called “impact fees” are often arbitrary, excessive, and inhibitive of development. Across the country, the average fee for obtaining a building permit has risen by 45% since 2005. Many cities initially increased these fees to sustain revenue as property taxes fell during the recession. However, even as property values rebounded, most cities’ fees have not been reduced to their pre-recession levels. Cities with higher permit fees tend to have less residential construction, and are less affordable for buyers and renters alike. Higher fees make the development of entry-level properties riskier for builders, pushing them to cater to a luxury market where profit margins are wider. According to housing expert Ivy Zelman, “The higher you go in home price, the more you can pass those fees off to buyers.” As a result, fewer units are built at an affordable price point. These hikes in permitting fees have stymied development, particularly at the entry level, sharpening the shortage and pushing prices upward.
Local zoning ordinances also inhibit the development of affordable housing by restricting density, which drives up the cost of each unit. Single-family zoning – a common feature of many cities – prohibits multi-unit residences from being built or subdivided in a given area. There are valid arguments for limiting certain forms of development to preserve neighborhood character; skyscrapers won’t fit on every block. However, single-family zoning is a needlessly draconian measure. Areas zoned single-family do not even allow house-sized duplexes, triplexes or quadplexes. These multi-unit residences, often dubbed the “missing middle,” are significantly more affordable for both renters and buyers, and could otherwise provide much-needed density with minimal disruption to the surrounding area. Though single-family zoning is the most salient example, there are many other local ordinances insidiously contributing to the affordable housing shortage. Minimum lot sizes, parking capacity requirements and height restrictions also limit density, thus raising costs for developers, renters and buyers alike.
The affordable housing shortage threatens the ethos of American opportunity. Polling shows that belief in the American dream has trended downwards since the recession, when the affordable housing crisis began to intensify. A growing number of Americans feel that home ownership is out of reach. If current trends continue, despair is likely to compound.
Deregulation could offer a way out. Reducing tariffs, permitting fees, and zoning restrictions would promote the development of more housing, which – with time – would alleviate the shortage and bring down prices for buyers and renters alike. Although we are far from realizing this goal, there have been some recent green shoots.
Areas that have eased zoning restrictions to encourage development of affordable housing have blunted the effects of the shortage. Minneapolis is one such success story. In 2009, Minneapolis began to roll back zoning restrictions to facilitate the construction of more multi-unit dwellings. The city cut parking requirements, eliminated single-family zoning, and permitted apartment buildings in more areas. As a result, Minneapolis now leads the midwest in per-capita home construction. What’s more, the city has avoided the volatile rent spikes afflicting many urban areas in recent years. From 2017 to 2023, rents in Minneapolis increased by just 1% – far below the national average of 31%. Several other cities – including Portland, Buffalo and Tulsa – have successfully followed Minneapolis's lead. A widespread embrace of Minneapolis’s model would go a long way towards making housing available and affordable for more Americans.
While many cities have become reliant on permitting fees to sustain their budgets, there has been some movement towards curbing this trend. In April, The Supreme Court ruled unanimously that legislatively-imposed land use and permitting fees could constitute a violation of the Takings Clause under the Fifth Amendment of the United States Constitution. This decision could open up a new avenue for legal challenges to excessive fees, which may push localities to reduce them. Furthermore, this case highlights increasing public scrutiny towards a key facet of overregulation, which could put political pressure on local lawmakers to change course. Reducing permitting fees in urban areas could significantly increase construction of new housing, particularly at the entry level.
Neither Trump nor Biden seems inclined to change course on tariffs: protectionism has been the new bipartisan consensus. Particularly as tensions with China ratchet upwards, encouraging imports from our biggest rival seems unlikely. Frustratingly, this means we tax “almost everything you need to build a house, from the foundation to the roof and in between,” as Scott Lincicome of Cato writes. However, the pendulum could swing back towards liberalization within the coming decades. As inflation persists, national leaders may come to embrace cutting tariffs to bring down prices, which would help boost construction and make housing more affordable. Embracing these changes could help restore the American dream of home ownership, ensuring that more people have access to affordable, quality housing.