Report Affirms More Housing Means Lower Rents And Prices

When you read as many reports as I do, you develop a taste for them not unlike oenophile develops for wine. There are dry reports that are dense and even foreboding. They seem to be saying, “Agree with my executive summary, because the deadly counter to your criticism is buried in the footnotes you didn’t read.” Then there are the sweet, cloying reports with lots of pictures and cartoonish graphs that you agree with but don’t know why. Then along comes a report that is truly well written, concise, easy to read, and confirms what you already know – but with a few things you aren’t quite sure about in the finish. That’s where Local Zoning Laws and the Supply of Multifamily Housing in Greater Boston,a report from the Federal Reserve Bank of Boston (the Bank) lands on my mental palette.

The report starts at the right spot, asking “how multifamily zoning, relaxed maximum-height restrictions, and relaxed density restrictions . . . affect the supply of multifamily houses and the cost of multifamily rents as well as house prices for single-family homes.” I’ve tried to get at this question, but data is hard to get. My look at rents and prices in Boston relied on data from the Federal Reserve Bank of Saint Louis (FRED) and Zumper for rents. I also looked at population over time. My efforts are limited by lack of access to data across population growth, permits, and price for Boston property. Instead, the easiest free and accessible data is at the Metropolitan Statistical Area (MSA) level. This isn’t very granular, and draws in all sort of different jurisdictions.

The Bank used a variety of sources for data. Housing supply data came from tax assessment records and rent data for multifamily properties with five units or more came from CoStar, a proprietary service. Where the Bank couldn’t get data, they made smart guesses using property values and the information about subsidized housing came from the Massachusetts Department of Housing and Community Development. I could spend a good amount of time asking the authors questions about these sources and I’d be interested in other variables like the time it takes to deliver a housing unit from start to finish. But I think given the profound and surprising limitations of publicly available housing data, I think their approach is solid.

What did the Bank find? One thing I like about this report is that the last paragraph of the executive summary has a succinct sentence for each finding. I’ll cover each one of them.

“This report finds that density restrictions play a key role in limiting the multifamily housing supply.”

This is or should be axiomatic for every housing discussion. Unfortunately, it is not. The Bank’s clarion statement is helpful, although it’s unlikely by itself to overcome resistance to both density (more housing and people in the same space) and the notion that more supply has a salutary effect on price. The conclusion that allowing more units in the same space (density) means more units (supply) is something that shouldn’t have to be proven anymore.

“Relaxing density restrictions, either alone or in combination with relaxing maximum-height restrictions and allowing multifamily housing, is the most fruitful policy reform for increasing supply and reducing multifamily rents.”

Here is the next step in the syllogism. Allowing more density by upzoning – allowing 100 units per acre rather than 50 – means more supply and that means lower rents. The report says something else that might seem confusing. Simply changing zoning to multifamily might just mean a change in typology and mean taller buildings, but “unless there is a change to the number of units that can be built on any given lot, neither will increase the supply of housing.” The term Floor Area Ratio (FAR) is an important one here; a building can have more height, say five stories, but still have the same number of units as a 3-story building. The ratio of units allowed per lot needs to increase along with allowing taller apartments or townhomes.

“Adopting multifamily zoning or relaxing height regulations does not yield the same increase in multifamily units built or reduce rents unless either is combined with relaxing density restrictions.”

This seems like a restatement of the sentence above. But it is a refinement tying three things together, typology or use (multifamily), height, and density. The point is that if a jurisdiction wants lower rents, all three of these elements must be put into play; they work together. There has to be more density and that will require more height and lot coverage. Years ago, I was fighting the City of Seattle’s efforts to actually reduce density in multifamily zones by counting all sorts of floor space, like hallways and crawls spaces, toward lot coverage. To get lower rents, more supply is needed, that means density, and that likely means more efficient use of land, and that means taller buildings.

“Furthermore, Chapter 40B rarely substitutes for relaxing zoning regulations, particularly restrictions on multifamily housing.”

Chapter 40B is the bane of my existence, inclusionary zoning, a scheme that forces rent restricted units into new projects by offering incentives or mandates to developers to include them. It’s at best an inefficient way to create rent restricted housing, it boosts prices, and, in the end, is a kind of extortion. The incentive of 40B is flexibility on zoning rules in exchange for inclusion of rent restricted units. The Bank’s report concludes that 40B doesn’t help because there is little participation probably because the trade-off of lost rent isn’t worth the modest benefits offered. There isn’t a big increase in these units, referred to in Massachusetts as the Subsidized Housing Inventory (SHI) because there are few applications.

“Since it is unlikely that developers would submit such large numbers of applications, increasing the number of Chapter 40B properties and the affordable housing stock at a meaningful rate would involve making it less challenging for comprehensive permit applications to gain approval and making it simpler to build housing in general, even in areas where zoning regulations are relaxed and building multifamily housing is already relatively easy (emphasis mine).”

This is what I have said over and over again and quantified for Seattle’s inclusion mandate. Real incentives to include rent restricted units produce far more housing than inclusionary mandates.

“However, the law [40B] does complement relaxed zoning regulations by allowing developers to build more units than they could otherwise.”

I disagree with this assessment. The experience in Portland stands out. The city has seen permit applications fall because mandates for inclusion, even with bonus square footage, are simply too costly and risky. The notion that new developments must be squeezed might be good politics but it’s lousy economics. Local governments need to be pushed to make “it simpler to build housing in general.”

“Relaxing zoning regulations around public transit stops as required by recent reforms to Chapter 40A could result in greater housing supply and lower housing costs.”

This is good policy, perhaps as a transition to getting rid of zoning all together. But it has been a challenge to implement. Worse, what ends up happening as it has in California, is that changes in zoning around transit end up getting tied to all manner of things like forcing payment of prevailing wages, and in other cases, inclusion, rent control, and other expensive requirements. Allowing more height and density around transit is a good thing, but to make it happen, state and local governments often end up killing the Golden Goose with too many conditions to appease activists, unions, and others.

The study by the Bank backs up the idea that if people in this country want lower rents, then local government needs to lower or eliminate regulations and requirements that limit density. Density means more supply, and supply is the way of housing inflation. The authors are really smart people and they’ve done great work, but in a sense, their conclusions simply prove and validate what any logical person could figure out in less than a minute: when a needed product is scarce it gets expensive and avoid that, make more! What’s hard about density and supply as the solution to housing inflation isn’t the data or the math, it’s the politics.