Housing costs, regulation, and the promise of reform

Housing affordability is a pressing concern in cities across the United States. Rents have surged faster than general inflation in recent years, and the median price of an existing home surpassed $400,000 nationally in late 2024.

Nearly half of renter households now spend over 30% of their income on rent (and a quarter spend over 50%), a level of cost-burden that was once rare.

These strains intensified during the COVID-19 pandemic when low mortgage interest rates, a rise in the frequency and spatial location of crime, and the shift to remote work fueled a rush of home purchases and relocations. Demand for larger homes and suburban space spiked, but the supply of available homes did not keep up. The result was bidding wars and soaring prices in many markets, exacerbating an already severe housing shortage.

There has long been a recognition that this affordability crisis is fundamentally a mismatch between housing demand and housing supply. When more households compete for essentially fixed housing stock, prices rise. Ample federal stimulus and mortgage credit availability during the pandemic put more money in buyers’ pockets, but without new construction, that money translated into higher housing costs rather than more homes.

Indeed, these rising rents and prices are closely linked to supply shortages. This has prompted a closer look at the drivers of housing supply—in particular, the role of state and local regulations in limiting new development. Understanding what drives housing costs requires examining not only economic forces like income and interest rates, but also how policy choices constrain the housing we build.

How regulations shape housing supply and costs

A growing body of evidence links restrictive land-use regulations to higher housing costs and diminished supply. Zoning laws that favor single-family homes, minimum lot size requirements, height limits, lengthy permitting processes, and other rules can all slow down or outright prevent new housing construction in high-demand areas, thereby leading to higher house prices and growth in rental rates. Regulation often makes housing supply less responsive to rising demand, leading to shortages and, as a result, U.S. housing construction was far slower (relative to population) than in past decades, e.g., per capita housing permitting rates had fallen to less than half of what they were in the 1970s. Local opposition and complex rules have gradually throttled the nation’s ability to add homes, especially in the places people most want to live.

Not all regulations are created equal, however. Recent research used language models to analyze thousands of zoning codes and found that land-use regulations vary along two major dimensions. One set of rules is about “value capture”—ways in which municipalities extract fees or concessions from development in high-demand areas (for example, requiring developers to include affordable units or pay for infrastructure). Another set is essentially “exclusionary zoning”—rules like single-family-only zoning or large minimum lot sizes that restrict density. Crucially, the researchers found that exclusionary zoning correlates with higher housing costs and socioeconomic exclusion. In other words, communities that aggressively limit multi-family housing tend to be more expensive and less inclusive. They also observed regional patterns: for instance, suburban jurisdictions in the Northeast enforce particularly strict zoning, contributing to severe housing shortages across entire metro areas. These findings underscore that regulatory burdens not only differ from place to place, but that the most restrictive regimes drive up housing costs the most.

Regulation’s impact can also be seen in extreme examples. In many California cities, for instance, the layering of zoning limits, environmental reviews, parking requirements, and other rules makes building new housing extraordinarily difficult and costly. A federal audit of the Low-Income Housing Tax Credit (LIHTC) program—the nation’s largest subsidy for affordable housing development—revealed eye-popping per-unit costs in California. One LIHTC project in the Los Angeles area cost $739,000 per apartment to build, due in part to local policies in a fast-growing but tightly zoned city. Factors such as strict zoning (which limited where housing could be built), local preferences for including commercial space instead of more units, and state requirements for high labor wages all contributed to this staggering figure.

Liberalizing housing policies: Lessons from the field

If restrictive regulations drive up costs, the natural question is whether liberalizing those rules can improve affordability. An emerging wave of policy experiments across different cities and states is testing exactly this—and the early evidence is promising. Increasing housing supply through deregulation has helped temper prices in several cases, without the negative fallout some feared. A few examples illustrate the range of approaches:

• Houston’s “Light-Touch” Land Use: Houston famously has no conventional zoning code, and its flexible approach has long enabled abundant construction. Even so, in 1998, the city identified one regulatory bottleneck—a high minimum lot size of 5,000 square feet in residential areas—and shrank it to 1,400 sq. ft. for its urban core, later extending that citywide. Between 2005 and 2018, Houston’s inner loop added nearly 75,000 new housing units, about double the number built in San Francisco and Oakland combined (which have comparable land area). By making modest density legal, Houston enabled the market to deliver a surge of new homes—and notably, despite rapid population growth, Houston’s median house prices remain below the national median and rents are about half of Los Angeles’.
• Minneapolis’ Zoning Reforms: In 2018, Minneapolis became the first major U.S. city to eliminate single-family-only zoning, allowing duplexes and triplexes on all residential lots. It also enacted a slew of other pro-housing reforms, from easing parking mandates to upzoning transit corridors. In the few years since, Minneapolis has indeed seen housing construction outpace regional peers. From 2017 to 2022, the city expanded its housing stock by 12%, permitting about 21,000 new units—vastly more than other Midwestern cities—while the rest of Minnesota grew housing by only 4%. This increased supply had a measurable effect on prices: Minneapolis rents rose just 1% from 2017 to 2022, even as rents jumped 14% across the rest of Minnesota during that period. By allowing more apartments and infill housing, the city absorbed demand that would have otherwise driven up costs. Interestingly, the headline-grabbing triplex legalization produced only a modest number of units so far, since developers still opt for larger multifamily buildings where allowed, but the overall package of reforms—especially upzoning along transit lines and removing parking requirements—made it far easier and cheaper to build, which kept rent growth near zero in Minneapolis even as population grew.
• California’s Experiments (ADUs and SB 9): California has taken a state-driven approach to override local restrictions. One success story has been the state’s support for accessory dwelling units (ADUs), like backyard cottages or in-law suites. Starting in 2016, California passed laws to legalize and streamline ADU approvals. The response was dramatic: ADU construction increased by over 15,000% between 2016 and 2022, resulting in more than 83,000 ADUs permitted in that span. By 2022, roughly one in five new homes in California was an ADU. On the heels of ADUs, California enacted Senate Bill 9 (SB 9) in 2021, which effectively ended single-family zoning statewide by allowing up to four units on a lot (through duplexes and lot splits). However, many cities adopted ordinances to impede SB 9 projects, and as a result most jurisdictions saw little to no uptake in 2022. Los Angeles, the state’s largest city, approved only 38 units under SB 9 in that first year. The law’s promise—potentially hundreds of thousands of infill homes over time—has been undercut by local barriers still in place. Policymakers are already discussing “clean-up” legislation to remove these roadblocks. The mixed early results from SB 9 underscore that legalizing housing on paper isn’t enough if onerous local processes remain; robust implementation and procedural streamlining matter too.
• Florida’s Live Local Act and Statewide Coordination: Enacted in 2023, Florida’s Live Local Act (SB 102) represents a comprehensive, state-led push to expand workforce housing through a mix of new funding, tax incentives, and land-use reforms. The Act encourages residential development in safe locations in commercial and industrial zones, preempting some traditional zoning constraints. It also encourages the use of publicly-owned land and introduces targeted tax exemptions to incentivize construction, including for “missing middle” housing. The Act shows the value of state-local coordination, pairing statewide investment with local implementation support—an approach that may serve as a model for other states seeking to scale housing solutions without relying solely on federal reform.

When demand-side policies meet supply constraints

In high-cost urban housing markets, demand-side housing subsidies—like vouchers, tax credits for renters, and easier mortgage credit—provide vital help to individual households but often struggle against the reality of limited supply. When housing supply is tightly constrained by zoning, lengthy permitting, or other barriers, infusions of subsidy money can bid up prices rather than expand access. In effect, these well-intended programs risk enriching landlords and sellers more than the low-income families they aim to assist. Balancing immediate housing aid with the longer-term need for more homes is a central policy challenge.

Housing Vouchers in Tight Markets: Housing vouchers (such as HUD’s Section 8) are a cornerstone demand-side support, giving low-income renters the ability to afford market-rate units. Yet in cities with very low vacancy rates and restrictive housing production, vouchers can inadvertently drive rents higher. For example, metropolitan areas with more housing vouchers saw significantly faster rent growth for low-income units than cities with fewer vouchers. In that study, vouchers raised rents for unsubsidized poor households by roughly 16% on average in the 90 largest metro areas.

More recent research reinforces this point, showing that when voucher payment standards were made more generous across entire metro areas, landlords captured most of the gain by raising rents with minimal impact on housing quality or neighborhood conditions for tenants. This illustrates a misalignment of incentives: landlords in tight markets have pricing power and can absorb extra subsidy by upping the rent, while tenants end up no better housed than before the subsidy boost. Vouchers are a market-based form of assistance, but they only work that way if housing markets are free enough for supply to adjust to demand.

Mortgage Credit and Demand Expansion: A similar dynamic can occur with broader demand-side interventions like tax credits for homebuyers or government-backed mortgage loans. Federal support for mortgage credit is often justified as a way to make homeownership more attainable. However, in supply-restricted areas, easier credit mainly enables more buyers to chase the same limited number of homes, pushing prices up. This can give a short-term boost to home sales and home values, but without adding housing stock it does little for affordability or long-term ownership rates. In fact, evidence suggests such demand-side boosts can be capitalized into higher housing costs. The United Kingdom’s recent “Help to Buy” program—a government equity loan for first-time buyers—is a cautionary example. It increased house prices substantially in Greater London’s tight market while having no effect on construction volumes. In the United States, critics note that decades of federal mortgage guarantees and tax incentives have coincided with volatile housing price swings, but no permanent increase in the homeownership rate. The housing bubble of the mid-2000s also shows how a surge of easy credit can inflate prices to unsustainable levels, ultimately hurting the very families the policies meant to help when the bubble burst.

LIHTC: The Low-Income Housing Tax Credit (LIHTC) is designed as a supply-side program, subsidizing the construction of affordable rental units. In theory, adding new subsidized units should alleviate supply shortages. In practice, however, LIHTC’s impacts can resemble a demand stimulus, especially in tightly regulated urban markets. Research has found that LIHTC developments had mixed effects on neighborhoods depending on local market conditions. In weaker or declining neighborhoods, building LIHTC housing tended to raise nearby property values and improve the area’s appeal. This value bump suggests the program can revitalize disinvested areas—an intended benefit—but in already high-demand neighborhoods, new LIHTC units often crowd out an equivalent number of private market units that would have been built otherwise, particularly in gentrifying areas. In those cases, LIHTC was just replacing what would have been market-rate construction with subsidized units. The total number of homes in the market remained roughly the same, while some indicators (like average income of residents) shifted due to the income-targeting of LIHTC.

Of course, these studies do not imply abandoning demand-side housing assistance. However, any demand support must be paired with robust supply expansion to fully succeed. When rent subsidies or buyer incentives are introduced, complementary policies should be in place to remove barriers to new housing construction. If more development can occur, then increased purchasing power will result in additional homes and downward pressure on prices, rather than just price inflation. The trade-offs of demand-side programs become more acceptable when supply is flexible: landlords have less leeway to raise rents if new units are coming online, and home prices will not rise as much if an increase in buyers spurs builders to ramp up production.

Balancing trade-offs and charting a path forward

Reducing regulatory barriers to housing construction is not a simple ideological agenda; it is increasingly seen as a practical necessity to fix a broken market. That said, deregulation is not an end in itself—it comes with trade-offs that need to be managed through smart policy design.

Local zoning arose from real concerns: communities wanted to separate heavy industry from homes, manage traffic and school capacity, and preserve neighborhood character. Simply abolishing all land-use rules is neither politically feasible nor desirable from a planning standpoint. The challenge is to reshape regulations to allow much more housing where it’s needed while addressing legitimate community interests.

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Source: https://reason.org/commentary/housing-costs-regulation-and-the-promise-of-reform/