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Housing Regulations Restrict Mobility

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Housing Regulations Restrict Mobility

November 30, 2016

Lack of affordable housing is forcing Americans to stay put despite a shortage of jobs. Researchers have found that, even after a decade, unemployment in manufacturing regions had still not been absorbed by residential mobility. Furthermore, some “booming” metropolitan areas such as Silicon Valley have barely experienced any population increases since the 1990s.

This can be partially attributed to the high cost of housing in these metropolitan areas, as zoning and land use regulations act as a barrier to mobility. In California, regulations add $50,000 onto the price of new home construction, and New York City regulations increase housing prices by 134 percent. Poor Americans cannot move to better economic opportunities because they simply cannot afford to.

Many regulations in California and New York City are unnecessary and do not serve a reasonable or legitimate purpose. For example, 40 percent of buildings in Manhattan could not have been built under the complex and burdensome regulatory code of today. Existing buildings that were grandfathered in do not present any danger to the public. If these regulations were truly a measure to protect public health, then these “illegal” buildings would have been removed. If other U.S. cities can function without such a high regulatory burden, then cities in New York and California can as well.

A report coauthored by Peter Ganong of the University of Chicago and Daniel Shoag of Harvard University demonstrates the severe effects of regional land use regulations on nationwide mobility. From 1880 to 1980, a period characterized by high interstate mobility, incomes in states rapidly converged. Essentially, the ability to move from poor states to rich states allowed for a dramatic reduction in inequality. Today, however, this convergence only takes place in areas with less regulated housing markets.

While higher income localities typically have more expensive housing markets, the study found that there is a much stronger correlation between high housing prices and high levels of housing regulations. Cases in appeals court that referenced “land-use” increased by 265 percent in New York and 644 percent in California between 1950 and 2010 - demonstrating an overall increase in housing restrictions. Lower-income localities did not see this increase with Alabama, representing the Deep South, only seeing an 80 percent increase over the same 60-year period.

By 2010, housing in New York cost six times what a median family makes while Alabama homes only cost 3.5 times more. This difference in cost of housing led to migration shifting accordingly, with New York’s population only growing by 2 percent. Poor Americans no longer have incentive to move to rich states because of high housing costs.

Ganong and Shoag use a simple example to explain why this is so. Both an attorney and a janitor could typically make more money if they worked in New York than in the Deep South. However, increases in housing prices change this reality. High-skilled attorneys can still afford to move, since housing in New York only accounts for 21 percent of their income. However, it no longer makes sense for the low-skilled janitor to make the move as rent takes up 52 percent of income. This is likely why trends show that low-skilled workers are leaving high-productivity metropolitan areas.

Data from the California Legislative Analyst’s office support these findings. Much of the population growth in California has occurred in low-income localities. Counties with incomes below the state median accounted for 37 percent of state population growth between 1990 and 2014. Additionally, income convergence across counties in the Golden State has flat-lined between 1990 and 2010. Due to a lack of affordable housing, Californians are choosing to live in counties where wages are significantly lower.

In this way, zoning restrictions increase inequality and prevent many from fleeing stagnant economic conditions. The poorest Americans are being priced out of the most productive labor markets by incumbent homeowners and well-intentioned regulators. 

The costs of this government-enforced inequality are quite high for the United States. Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of the University of California estimate that increased wage inequality due to zoning restrictions decreased U.S. GDP by 13.5 percent.

Policymakers are realizing the negative effects of artificially increasing housing prices, as there is a growing bipartisan agreement that many local housing restrictions are far too stringent. As stated by Jason Furman, chairman of the President Obama’s Council of Economic Advisers:

“While land use regulations sometimes serve reasonable and legitimate purposes…zoning regulations and other local barriers to housing development allow a small number of individuals to capture the economic benefits of living in a community, thus limiting diversity and mobility.”

Furman recommends that “the most problematic” restrictions be reformed or reversed. State and local governments should start by reexamining the necessity of land use restrictions that are far more stringent than in comparable localities. This regulatory audit, while extensive, could be the first step in rolling back the regulatory burden in some of the United States’ most productive cities. Such an audit could serve as a powerful boost to the economy.  Hsieh and Moretti estimate that rolling back land-use regulations in San Jose, San Francisco, and New York City to just the median regulation level would increase GDP by 9.5 percent

Policies directed at decreasing inequality in the United States need to change their approach. Instead of increasing government benefits, we should lower government barriers to entry – especially those in the most productive labor markets. 

Allie Howell is a contributor to Economics21.

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