Missing middle housing policies balance interests while addressing the affordable housing crisis

As the United States faces an ongoing, shortage-driven affordable housing crisis, “Missing middle” housing reform is one promising and increasingly popular policy tool. Missing middle housing policies incrementally increase residential density while accounting for homeowners’ interests. The “missing” component of the name refers to the severe housing shortage of homes affordable to middle-income earners and the rapid decline of medium-density development. “Middle” refers both to the modest density of units added and the middle-income earners who are the target residents of these homes. 

While some progress has been made, medium-density housing is still far outpaced by traditional single-family homes. Currently, 75% of residential land in U.S. cities is zoned exclusively for single-family detached homes. Zoning restrictions are a substantial barrier to housing development, both in terms of the quantity and the type of homes that can be built. Relaxing zoning is one way to expand the supply of housing voluntarily and effectively. However, this policy change faces substantial opposition from homeowners. 

Homeowners who oppose density increases in their neighborhoods typically have two concerns: the potential for multi-family development to adversely affect their property values and the potential for it to alter the structural and design character of their neighborhoods. While understandable, both reasons are insufficient to justify the current zoning regime, which restricts property rights and the supply of housing. 

One problem is that those who use local government to restrict dense development in their neighborhoods on the grounds of a potential decline in the market value of their home are conflating their property rights with entitlement to value. Property rights do not and cannot extend to maintaining a specific price of a home. Markets and all the actors that participate in them determine home prices. Under the most common understanding of property rights, neighbors should not be able to dictate what an owner does with their property unless it poses a tangible and demonstrable invasion of their parcel. The use of local zoning restrictions to enforce a certain value is a misuse of government power. Organized homeowners who treat homes as investments rather than depreciable consumption goods vote in favor of policies that maintain the value of their investment under the assumption that multifamily development entering their community will diminish it. This pattern is outlined in “The Homevoter Hypothesis” by William A Fischel and empirically backed up in the following research. 

The motivations of homeowners are clear and rational. However, they do not justify exclusionary zoning over most of the country’s residential land. One alternative to lobbying local government could be the use of deeds and private covenants, as is commonly done in Houston, Texas. These legal tools are a much more voluntary and individualized approach to residential land use regulation. Without these, many current exclusionary zoning laws are based on a faulty understanding of property rights. They are further based on the unsupported fear that the addition of multifamily housing automatically decreases their property values. 

Despite common perceptions, research has consistently shown that multifamily developments do not necessarily decrease property values and can even increase them. The Joint Center for Housing Studies compiled a review of the existing literature in 2007. It concluded that while there are anecdotal cases where property values have declined upon entry of a multifamily residence, “in general, neither multifamily rental housing, nor low-income housing, causes neighboring property values to decline.” More recent research from 2020 has arrived at the same conclusion.

In a case study observing Little Rock, Arkansas, and employing a difference-in-difference analysis, researchers found that “most forms of multifamily housing have either no effect or a positive effect on sales prices for single-family homes within 2,000 feet of a new multifamily housing development.” Of course, with large additions to supply nationally, home values should be expected to decline–alleviation of the housing affordability crisis is the goal of expanding supply. However, research has repeatedly suggested that the presence of multifamily development does not in itself decimate property values on the neighborhood level.

This basis for rejecting denser development based on a fear of declining property values is not only dubious in principle but also unsupported by existing literature. Property values, however, are only part of the concern of homeowners; community character is another. Homeowners buy into neighborhoods with the expectation of a specific lifestyle and an architecturally consistent design. Missing middle policies balance the desire to maintain the suburban character of neighborhoods by increasing density marginally. This usually means allowing duplexes, triplexes, and fourplexes in places where only single-family detached homes were allowed before (though specifics vary by state and locality). Numerous other less common developments are also covered by the umbrella of missing middle housing.

Recently, medium-density development, defined here as developments with between two and four units, has been modestly climbing, likely due in part to the enactment of zoning reforms (see Figure 1). A comparison of recent missing middle policies in California, Oregon, and Florida highlights successes and remaining challenges in passing missing middle policies to remedy the existing housing shortage.  

California Senate Bill 9

On September 16, 2021, Governor Gavin Newsom signed Senate Bill 9 into law, effectively ending exclusive single-family zoning in California. This law, also known as the Housing Opportunity and More Efficiency (HOME) Act, preempts local governments and automatically grants homeowners and developers the right to either split their lot into between two and four separate lots or develop additional structures with a minimum of 800 feet in floor area on one lot (which can be either attached or detached). Note that this does not require developers to build more units on each lot; single-family home construction is still allowed, and many buyers prefer it. But now, state law does not allow local governments to ban developers from putting more units on a lot if they desire. The HOME Act is a missing middle housing policy in the pure sense—modest density increases that allow for middle-income housing.

Existing property owners are also now allowed to add units to their property, adding a second unit or rebuilding as a duplex, for example. These additional structures still must comply with all other regulations and impact fees and maintain “neighborhood scale” (floor-to-area ratio (FAR), height restrictions, aesthetic considerations, etc.) Instead of requiring an application for special permission, owners may now expressly split their lot, transform their home into a duplex, or add an accessory dwelling unit (ADU) onto their property. California was already passing a string of ADU-friendly legislation, and S.B. 9 only furthered the commitment to supporting ADU policy. These additional units can provide valuable streams of income to homeowners or provide the opportunity for family members to live near them. The HOME Act removes a roadblock to a practical way to add housing supply through the voluntary projects of homeowners. 

The most vocal opposition to S.B. 9 has come from city governments over the preemption of their zoning authority. First, cities were concerned that just allowing the option found in S.B. 9 did not guarantee additional housing. The California League of Cities executive director and CEO, Carolyn Coleman, said the following when urging Governor Newsom to veto the bill: 

We’re disappointed that the Legislature passed Senate Bill 9 and urge Governor Newsom to veto this flawed legislation. SB 9 would undermine the ability of local governments to responsibly plan for the type of housing that communities need, while usurping local democracy and the input of local residents. 

These complaints beg two questions. The first is how much democracy and majority rule are desirable when making decisions about property rights. Democratic decision-making is useful for certain policies, but its place in determining whether or not an individual can build a duplex on their own land (if they are not creating a tangible invasion onto the property of another) is much more dubious. The HOME Act would be a reinstatement of property rights that should have been respected all along. 

The second is whether localities are inherently more capable of planning what kind of housing is necessary for communities than the homeowners and developers who directly bear the cost of additions. Both existing community members and developers are free to build middle-density development under this law. Presumably, they would not invest in unprofitable projects that would not benefit consumers because of the loss of their investment. Individuals, whether homeowners or developers, who take on projects have every reason to perform the necessary market research and, with housing prices consistently high, have an incentive to develop additional housing units. With the ongoing housing shortage and consequent affordability crisis, communities need more housing, and the market is signaling to developers that they would benefit from providing it. 

While understandably disgruntled with the overriding of their authority and planning considerations, cities should not overlook the ability of homeowners and developers to make wise decisions about the housing additions their communities would benefit from, especially because of the stakes they hold in their decisions. 

The League of Cities is correct: Senate Bill 9 does not guarantee additions to the housing supply. It does not require any duplexes or ADUs to be constructed; it only gives developers and homeowners the option to choose. However, considering the severity of the housing crisis and consequent profit incentives for homeowners, it is reasonable to expect they will respond accordingly, and they have (see Figure 2). 

Data on ADU permitting from the California Department of Housing and Community Development suggest homeowners immediately exercised their right to modify their property. After the passing of this legislation, California experienced the largest single-year increase in ADU construction in its history, with 4,827 more permits issued in 2021 than in 2020, and the trend has continued—though not at such a staggering pace. While data on single-unit to duplex expansion are not available, evidence from ADUs alone suggests homeowners are not only willing but do, in fact, add to the supply of housing when given the opportunity. 

California’s S.B. 9 is an example of a modest and incremental housing policy that has helped add to the supply of housing. Though not without opposition, its focus on homeowner choice, option expansion, and extreme cost-effectiveness makes it an important policy for other states to consider emulating. 

Oregon House Bill 2001

Oregon’s 2019 missing middle housing policy, House Bill 2001, is very similar to California’s Senate Bill 9 in the way it approaches density increases incrementally. Oregon’s state government created a tiered system that allows developers and homeowners even more choices, depending on local populations. 

By mid-2021, this law required that duplexes be automatically permitted in areas zoned for detached single-family homes in cities with between 1,000 and 25,000 residents. By mid-2022, cities with populations above 25,000 were required to allow not only duplexes but triplexes, fourplexes, cottage clusters, and townhomes as well. Towns with under 1,000 residents are exempt from any zoning alteration requirement. 

Despite the seemingly modest proposals of his bill, it had opponents from multiple angles. Some opponents say that developers will take advantage of this loosening of zoning not to build affordable housing but to build more expensive duplexes. Whether this is the case is yet to be clear, but even expanding the supply of high-end development increases housing supply and overall affordability. Further, multiple affordable housing coalitions supported the bill. Before this legislation, developers could not build anything but single-family homes on these plots—whether affordable or otherwise. H.B. 2001 gives more options for developers to fill a missing space in the housing market with medium-density housing. 

Further, members of local government councils are concerned about the trampling of their authority to determine the best housing measures for their communities. Local government officials say they would prefer to be funded for planning projects rather than have their zoning authority undermined. However, these are the same localities that put the original barriers to denser housing in place. H.B. 2001 allows for private market solutions to the housing shortage, focused on voluntary additions made by developers and homeowners alike. 

Medium-density housing has been on the rise in Oregon since the early 2010s (see Figure 3). The passing of H.B. 2001 has made it easier for individuals to construct these types of housing. Further, it considers the varying needs of cities of different sizes by creating a ladder of density increases. When passing state-wide legislation, policymakers may benefit from considering a tiered system to increase political feasibility while enforcing the property rights of developers and homeowners. 

Florida Senate Bill 102

Florida Senate Bill 328, otherwise known as the Live Local Act 2023 (LLA), takes a radically different approach to missing middle housing than the two previous two laws discussed. This law is the revised and updated version of Senate Bill 102 (the original “Live Local Act”), which passed in 2023. In both versions, this law is much less incremental than both Senate Bill 9 in California and House Bill 2001 in Oregon. Due to Florida’s substantial housing shortage across the low-middle range of the income spectrum, this law aggressively incentivizes additions to supply via additions to “workforce housing.” 

LLA allows developers to override local use restrictions if they are building affordable housing. Specifically, it allows for residential development on plots zoned for commercial, mixed-use, or industrial use as long as 40% of units are rental units that will be affordable for 30 years. One of the primary intentions of this bill is to allow working individuals to live closer to their place of employment – something that many current zoning laws make very difficult.

Affordable in the context of the bill is defined as not charging individuals who make up to 120% of area median income (AMI) more than 30% of their monthly income for rent. This AMI threshold is a key indicator of alliance with missing middle principles, requiring that additional housing is designed for middle-income earners. Unlike California’s HOME Act and Oregon’s H.B. 2001, which both only hint at the type of development they incentivize by universally allowing plexes and ADUs, LLA enforces a strict affordability threshold, without which developers will not gain a zoning bypass. 

While originally allowing substantial bypassing of local height restrictions, the amended version of LLA allows localities more say in height restriction if the proposed developments are near single-family home neighborhoods. 

Further, LLA offers property tax exemptions to developers willing to substantially add to the supply of affordable housing. Instead of targeting modest density increases, this exemption applies to massive multifamily developments. It is sometimes referred to as the Multifamily Middle Market Property Tax Exemption. If more than 70 units in a development are designated as affordable, there are two categories of tax exemption that developers can qualify for. To developments with units affordable to those making between 80% and 120% AMI, a 75% exemption is granted. If they are all affordable to those making less than 80% AMI, a full exemption is granted. 

These are not the only provisions included in LLA, though they are most pertinent to the discussion of missing middle housing policy. 

Officials in localities have, predictably, protested this bill. In addition to contesting the override of their authority, some have argued that this bill adds the wrong kind of development. By not only allowing but incentivizing affordable housing, they worry that the LLA will encourage residential development instead of the industrial and commercial development their specific area needs. As discussed in California’s case, it is not always immediately obvious that developers will engage in unnecessary projects, considering their need to make a return on their venture.

However, LLA’s substantial tax exemptions make incentive distortion a more realistic possibility. Officials of some smaller cities were further worried about detractions from their tax base brought up by the large tax exemptions awarded to large developments. These are reasonable concerns. The LLA strays from the missing middle playbook by going beyond simply allowing voluntary additions and explicitly incentivizing large projects inconsistent with the character of many residential neighborhoods. This deviation has made it a target of substantial protest. 

While LLA directly addresses affordable housing, it lacks many of the typical characteristics of a missing middle policy. The income threshold prioritizes middle-to-low-income earners, but LLA lacks the homeownership element and the marginal nature of the density increases. Because the bill is so new, whether it will be successful in substantially adding to the supply of affordable housing is yet to be seen. However, it offers an alternative perspective and approach to missing middle housing. 

S.B. 9 in California, H.B. 2001 in Oregon, and S.B. 328 in Florida are a few examples of recent and successful state-wide missing middle housing policies. They are far from the only ones. Experience in a number of communities shows that simply allowing duplexes can have large impacts on housing supply and affordability. The marginal density increases offered by typical missing middle policy simultaneously refocus property rights, maintain the general character of neighborhoods, and add to the supply of housing voluntarily. While not perfect in every case, missing middle policy broadly is a promising step toward expanding the housing supply.  

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Source: https://reason.org/commentary/missing-middle-housing-policies-balance-interests-while-addressing-the-affordable-housing-crisis/