I wrote this for Scott's book review thing, but of course SSC crashed before it could be published. I am thinking SSC won't come back for a while, so I am putting it here. I hope this isn't too long.
I do hope others with book reviews for Scott's contest will put theirs on DSL also. I was really looking forward to reading all the reviews.
Zoning – friend or foe?I Zoning Rules!
I’ve always had a difficult time understanding why the US has a large homeless population and seemingly a large population with outsized housing costs. After all, the free market manages to provide the goods needed to the poor in other areas by simply providing less expensive versions of the goods that the middle class and rich buy. This works for food, clothing, and entertainment. Despite overly-dramatic stories of hungry children in the US, no one in the US is starving, naked, or even missing out on fun and games, absent extraordinary circumstances. So why is it that lots of people can’t find housing for less than 40-50% of their income?
My priors tell me that this has to be because government has artificially increased the price of housing so it is beyond the means of the poorest people. The main culprit in my mind has always been that zoning has caused this problem. But I never understood very well how zoning works in America, so I bought a bunch of books on zoning to educate myself. The best of the books I bought is Zoning Rules!, by William A Fischel. The author is an economist at Dartmouth College. The book both enhanced and diminished my priors, but certainly increased my knowledge.
Professor Fischel was also on the zoning board in his small town of Hanover, New Hampshire for ten years, chairing it for half of that time. Perhaps being on a town’s zoning board biases him in favor of zoning. But even more importantly, it gave him experience on the ground in how zoning works. He isn’t stuck in the ivory tower just developing theories of how zoning should work, but has worked in the nitty gritty zoning world of a small town. Although he has also created theories of how zoning should work. I think this practical experience greatly enhances the book.
II Land Use Background
Urban sprawl is in no way going to lead to starvation by decimating cropland. Urban areas took up only 3.2% of land area in the US in 2007. Cropland took 21.5%, forests 36.2%, and grassland 32.3%, so any changes in farmland will likely come from non-urban sources. Strictly speaking, this doesn’t mean urbanizing farmland isn’t a danger, if the particular land being urbanized is particularly good farmland. But it is unlikely that all the best farmland happens to be at the edge of cities.
Cities exist because they increase wealth. Workers in cities are more productive than those outside, and workers in large cities are more productive than workers in smaller cities. The reason city land is so expensive is because density creates wealth. But the densest cities are not the most wealthy. As cities become wealthier, the population uses some of that wealth to create more space for each person. It seems that a certain amount of sprawl is an inherent result of a city becoming rich. The densest cities are in the third world countries of Africa and Asia.
Land is a peculiar type of asset. It is not a thing that one creates and then uses until it wears out or becomes obsolete, such as a machine or a house or a patent. Land is simply a location. It can be improved on with a building or landscaping. Its value may increase or decrease based on its location, but the change in value is rarely the doing of the land owner. One could also argue that ownership of land falls squarely under the Proudhon slogan of “property is theft!,” since if you go far enough back in the ownership chain you find someone who just appropriated the land. No one created it. This last point is all me; Fischel never mentions Proudhon.
This leads to the theory of the land tax, as advocated by the adherents of the economist Henry George. Strict Georgists believe that all land belongs to the community, and so the “tax” on the land should be equivalent to the full land rental value. But even if you don’t go that far, a tax on land makes more sense than on other property since the value of the land has little to do with actions of its owners, and ownership itself is somewhat fraught. When land value quickly increases or decreases, it is usually because of activity that occurs in the area, and not because of actions of the land owners. It has been claimed that any such value increase should thus not belong to the land owners but to the community (for example, see the book Rethinking the Economics of Land and Housing). Land taxes are also more “efficient” than other taxes, since the owner cannot pass them on to others. A tax on other property may result in less maintenance of the existing asset and creation of fewer of those assets. But a tax on land won’t result in less land. Note that if there is a building on the land, a land tax only taxes the value of the land itself, so it doesn’t matter if the building is a palace or a dump; the land tax will stay the same.
The biggest problem of a land tax is its administration. How do assessors break out the value of a parcel of land from whatever improvements are made on that land? The gold standard for determining the value of any real estate is through an arm’s length sale of the property in a free market. The value is whatever someone is willing to pay for it. But land is rarely sold separately from its improvements, so it is very difficult to determine the true value of the land. Despite these issues, Fischel states there have been studies of cases of separate land tax that indicate it does encourage investment. In Pennsylvania it has been relatively common to have a higher tax rate for the land portion of the real estate than the building. But Fischel says it is becoming less common recently, presumably because of the administrative difficulties.
III Zoning Background
Land use planning in the US is commonly called “Euclidian zoning.” This is not because of some geometric methodology of zoning, but because of the seminal SCOTUS case on zoning in 1926, Euclid vs Ambler. Euclid is a suburb of Cleveland. The town wanted to divide its land area into regions, and distribute various residential uses (single family homes, apartments) and industrial usage within these regions, as well as provide other rules on area, dimension, and alignment of buildings. Euclid won the case, and most other communities in the US adopted similar rules over the next 10-20 years.
Zoning doesn’t allow personal differentiation of usage (say giving Mr Smith rights that Ms Adams doesn’t have), but does allow to differentiate usage by region. Zoning does allow grandfathering of buildings that were in place when the zoning rules were enacted, which will tend to favor older residents over newer ones. Zoning also allows zoning boards to give variances in certain cases, which gives more power to the politically powerful, and may encourage corruption.
Fischel talks about two cities that are on opposite sides of the zoning continuum. One side is Houston, which has no zoning rules at all. Fischel states that this has resulted in lower housing prices in Houston. He is surprised that Houston voters has consistently voted against zoning (6 referendums), since home owners presumably dominate voting in Houston as everywhere else, and home owners want the value of the homes to increase. Houston does have some land use rules, such as off-parking requirements and historic preservation districts, but not the full spectrum of Euclidean zoning of other cities. Houston also has many private covenants that mimic zoning for small areas. The industrial areas in Houston are separate from residential areas despite the lack of zoning.
Fischel wonders why Houston’s voters have rejected zoning so many times. One of his theories is it because the city of Houston is so large geographically – it continues to annex new areas around it. Individual sections of Houston might have agreed to zoning in the past, to keep out the parts of the metropolitan area they don’t want in their area, but as part of a very large city they don’t want the government to have this power. Of course now Houstonites are aware of their singularity of being the “no-zoning” city, and may be against it just for city pride.
The other side of the continuum is Portland, Oregon. Portland Metro can set zoning for the entire metropolitan area, and the area outside the metro is zoned agricultural by Oregon, so development is not allowed there either. Therefore the usual developer scheme of leap frogging over zoning rules into areas outside those rules don’t work in Portland (although Fischel never mentioned that Portland is on the border with Washington, so why don’t developers leapfrog there?). This apparently has held back some growth in Portland. Portland’s housing prices are above average for a region of its size. Land prices just outside the Metro (where no development is allowed) are dramatically lower than inside the Metro.
Several national laws have complicated the zoning laws in the US.
1) National Environmental Policy Act (NEPA), the Clean Water Act, and the Endangered Species Act all give activists veto power over development in some cases.
2) Wetland requirements may allow additional vetoes.
3) Flood insurance regulations require local zoning rules in some cases.
4) Fair Housing Act and Americans with Disabilities Act.
5) Also local laws such as historic districts may also allow veto power over development.
These and other laws often give those opposed to development a double-veto power. Even if the zoning rules don’t stop the development, often these other laws will.
Alternatives to zoning include nuisance laws and private covenants. Presumably before zoning became popular, if say a rendering plant was planning to move next door to your house, you used the nuisance laws to keep them away. Private covenants work well for brand new developments where each new resident has to sign a contract before they move in. However for older communities private covenants don’t work as well because it only takes one nay-sayer to nullify the rules. It is hard to know how well nuisance laws worked before zoning existed. Urbanization was much lower 100 years ago, so it probably isn’t equivalent to today’s world anyway.
Zoning that is explicitly racist was deemed illegal by SCOTUS in 1917. This was even before Euclid, but Euclid did not reverse that piece of zoning law. This was based on the 14th Amendment, seemingly because the law preventing Whites to sell to Blacks interfered with Blacks’ right to own property? Even private covenants to restrict by race were deemed illegal by SCOTUS in 1948.
Fischel has various theories about why zoning became very popular in the ‘20’s and ‘30’s, and then even more restrictive in the ‘70’s.
1) The rise of the cargo truck in the ‘20’s made it much easier for industry to invade the area of residences. Before trucks were widely available, heavy industry needed to be close to railroad spurs to have access to supplies. Once trucks became ubiquitous, industry could be anywhere there was a road. Therefore, residents could not escape industry simply by moving away from the railroad. Secondly, buses made it easier for apartment dwellers to live in the areas previously inhabited by only single family housing.
2) The ‘70’s brought very high inflation, including housing inflation. Suddenly one’s house was a very important asset for the future, and maintaining the value of the house became imperative. Municipal zoning to keep out bad influences was seen as the way to do this.
Fischel also talked about why zoning has become above all about protecting the value of single family houses.
a) Increasing home ownership in the US means a lot more people are interested in home values.
https://dqydj.com/historical-homeownership-rate-in-the-united-states-1890-present/b) A residence is quite often the largest investment individuals own, so the financial risk is that much greater.
c) In the 1920’s, transportation options gave many people the ability to live far from where they worked. Therefore, they voted where they lived, but not in the municipality where they worked. Furthermore, it was more beneficial to keep out the annoyance of industry and lower class workers from one’s own residence when you didn’t have to live close to work.
IV Normative discussion
Fischel thinks that zoning and the real estate property tax is overall a net good. The theory is that if zoning and the tax results in a reasonable weighing of development costs and benefits to the community, then that is a good thing. He is in favor of what he calls “good housekeeping” zoning, which keeps incompatible uses separate. This is something like a loud scrap metal operation being incompatible with nearby residences. What he thinks have gone too far are the broad based growth control zoning laws, which keeps almost all development out of municipalities.
Zoning increases home values by making homes in the area more pleasant to live. This works under the “good housekeeping” model of zoning. However, the anti-growth model of zoning has become more prevalent in the US, especially in California and Northeast, which greatly restricts new development, both industry and residences. This increases home values even more than the good housekeeping model because it restricts the supply of housing. However, while the housing stock becomes more valuable, the undeveloped land becomes less valuable, so the aggregate value of the land is lower than under good housekeeping. Fischel believes the good housekeeping model will maximize the land value in any given municipality, and he implicitly believes this is the best result. He includes a nice graph that illustrates good housekeeping rules creating the greatest aggregate value (pg 325), but he doesn’t provide any evidence that this is true.
Fischel claims that property tax without zoning doesn’t work very well. His example was less than convincing. He gave an example pre-zoning where rich people could simply avoid high property taxes by moving elsewhere, and selling their houses to developers that would build lesser valued apartments, which harmed the city. Whereas with a zoning law, the city could disallow the building of apartments and thus avoid the decrease in tax. The first problem with this case is if the apartments were a lower value than the single family house, why would the developer do this in the first place? The second issue is even if this did work economically, it appears that zoning results in more single family housing and fewer apartments than makes sense economically. This may help the city with its revenue issues, but adds the society-wide problem of not providing enough lower income housing.
Fischel states that the benefit of zoning is that it “makes for more efficient provision of local services and better neighborhoods.” I think part of this is that it makes it more difficult for residents to shop for cheaper property taxes by moving to new communities by making them less able to sell off their properties for development when they leave. But also because it is similar to private covenants in that potential property owners can move into communities that have the kinds of rules they desire. Theoretically homeowners can pick the laws they want to live by. I am not sure if this is really a thing in the US, but it makes good sense in theory.
A major disadvantage of zoning that Fischel highlights is that increases in housing prices make it more difficult for Americans to re-locate to new areas of opportunity when they can’t afford to live there. This is especially the case in California and the Northeast, because of their stratospheric prices.
There have been studies that show that high prices in California and the Northeast are largely due to land use policies in those areas. A study by Gamong and Shoag showed that land use litigation in those two areas increased around 1970, about the same time that housing prices began to shoot upwards. I am not convinced by this study, since a lot of things changed in America around 1970, so such causation is far from definitive.
Fischel says that up until 1970 or so, different towns had different appetites for development, so if a developer was shut out of one place, he could just go to another town. Anti-development citizens in towns where the majority were pro-development couldn’t do much about it. But around 1970 exclusionary zoning became more uniform and stronger in the suburbs (to keep out both industrial and housing projects). He broke down the reasons for this as being supply side and demand side.
I. Demand (house owners):
1) Growing suburbanization of employment (industrial parks), which brought more of the lower class to the suburbs,
2) expansion of egalitarian principles, which in a backlash resulted in “neutral” policies banning all new development (growth management),
3) sudden growth of housing values, which upped the stakes,
II. Supply (people who facilitate home ownership, but also outside activists):
4) expansion of legal standing to opponents of development,
5) federalization of the environmental movement,
6) state legislation that established multi-layered review of many projects, so developers had to get approval from both municipal and regional authorities (double veto).
Fischel also thinks interstate highways, built largely in the ‘60’s and ‘70’s, were instrumental pushing many citizens into an anti-growth mode. These highways tore up neighborhoods and separated them from adjoining neighborhoods. Also the highways made the suburbs all the more accessible, and it was the suburbs that had the strongest zoning advocacy.
It is Fischel’s contention that these increased zoning rules greatly drove up house prices starting in the ‘70’s, especially on the West and East Coasts. But why these areas have more restrictive zoning than the inland areas is not easy to answer. Fischel references a couple of experts who believe either high employment diversity or education and quality of life in certain areas drive more zoning. He suggests that high tech in the West and financial services in the East may be responsible, but he is unsure. I am even less sure than he is by this explanation.
Fischel explains the high control of zoning in the Northeast as due to smaller, home-voter controlled governments there, especially the town hall governments in New England. California has larger governments, but initiative/referendum gives more power to voters. The voters focus more on home values, while the bureaucrats work more closely with developers and accept growth more easily. So more voting power leads to stricter zoning.
V Segue
As impressed as I was with this book, I did find some blind spots. Fischel mostly talked about lot size and restrictions on industry and multi-family housing. These issues are very important in discussing the constraints zoning places on all of us, but zoning is much bigger than that.
For example, he didn’t talk at all about who can live in a home. In Minneapolis, we have rules about unrelated persons living in a household. No more than 3 unrelated people can live in one household in three types of residential zoning, and no more than 5 unrelateds can live in a household in three other types. I suspect that in college I often lived in illegal households, since I often had many housemates, none of whom were related to me. I could never afford to live in my own apartment until I got my first professional job. Quite often it seems to me that affordable housing advocates complain about the rents for efficiencies or one bedroom apartments for the poor. But my belief is that when you are poor, you probably need to have roommates to afford housing. If you are looking for a place by yourself, you are living beyond your means. And it seems the zoning rules make it more difficult for the poor to live with roommates.
Another zoning issue is the constraints most zoning has on boarders in houses. I can’t find such a rule in Minneapolis’ very complex zoning statutes, but I know it is a rule in many cities that they can’t take in boarders to fill up an unused room. Renting as a boarder is another way for the poor to live relatively cheaply, but zoning laws make it difficult for the poor to find places to live.
The complexity of zoning laws themselves increases the cost of housing. I spent hours looking through Minneapolis’s laws, and I was only scanning them. I was wondering if this is only big cities with these extensive laws, so I looked at Richfield, a suburb of Minneapolis where my son lives (with three unrelated housemates by the way). It isn’t short – it would take hours to go through it. So not just big cities.
https://library.municode.com/mn/richfield/codes/code_of_ordinances?nodeId=APXBRIZOCO_S507PUDE_507.07DEThe hours I spent on Minneapolis laws gave me only a very low level understanding of how these laws work. Developers need to hire experts in the particular city’s zoning laws before they lower a spade into the ground, or even buy any property. If you are householder you may need to spend thousands to understand what changes you allowed to do. Or more likely, you will just make changes and hope the city doesn’t notice. Complex zoning laws separate citizens from their government.
One more issue that I suspect makes low income housing more difficult is all the construction methods and lot configuration rules. I don’t know enough about housing construction to make any judgments about the laws I read for Minneapolis, except to state that there are lots and lots of these rules. But my guess is that the requirements are written for middle class and upper class housing, and that it results in lower priced housing costing more than the buyers would pay absent zoning.
VI Remedies
Fischel lists three different problems with modern zoning regulations:
i) It segregates the population by income and class and race,
ii) It causes metropolitan areas to be more spread out than is efficient, causing too much commuting, housing consumption, and air pollution, and
iii) It inhibits American economic growth and equality by retarding the migration of people to high-productivity urban areas (this last is referring to the very high housing prices on the East and West coasts).
Interestingly none of these points are what I think to be the biggest problem of zoning: that it makes it very hard to find inexpensive housing. Lots of people are forced to buy more housing than they want. He talks about the extreme example in #3, but even there he is concerned more about the economic potential that is lost, and not the utility lost by the average person spending too much on a house or apartment. Nevertheless, many of the fixes he suggests do coincide with fixes for the problems I see.
When Fischel finally gets to the point of discussing remedies for the excessive use of zoning, most the discussion relates to changes in the legal landscape. One of the possible fixes is to bring back from the dead nuisance laws that in the old days were the fix when a large smelly industry set up shop next to a residential area. Before zoning existed, this was maybe the only legal way to keep incompatible land uses from being adjacent to each other. But the nuisance laws only kept out the most egregious of uses from residents; it did not work to keep all industry away from residences, or single family housing separate from apartments, both of which were strong inducements for voters to embrace zoning.
But the most common legal fix suggested for over-zoning is beefing up the “takings clauses” of the US Constitution and the state constitutions. When a community passes new zoning laws that restrict the usage of undeveloped land, they reduce the value of that land. This could be treated as “takings,” and subject the community to paying compensation to the owners of undeveloped land. Mostly the courts have not required this. These laws could be made stronger so the courts do take them into account, which would limit the amount of anti-growth zoning communities create.
Fischel pretty much destroys the option of strengthening the “takings clauses” for practical reasons. For one thing, almost all legislation creates winners and losers and thus makes is susceptible to “takings” lawsuits. Where do you draw the line as to what constitutes a compensable taking? The courts currently are pretty conservative in only applying this clause for extreme cases, which is probably the most reasonable approach. Secondly, how do you determine the value of these takings? The value of raw land is very specific to that particular case, so it is very expensive and subject to abuse to determine the reasonable amount in each case. Thirdly it is highly subject to moral hazard, where some developers and speculators would purposefully buy and develop land that they knew would be subject to upcoming legislation. Also owners of land that they mostly considered a nuisance would suddenly decide this land was valuable when anti-development laws were passed.
In my opinion, trying to fix zoning by adding more complex laws is not a good solution. Changing laws so that developers have more options in court is making the problem worse. Zoning is a major subset of the cost disease. It makes all development a lot more expensive. Developers have to jump a lot more hurdles, often having to pay for reports and development they wouldn’t have done otherwise. Anti-growth zoning also makes development more rare, so developers can charge more when they are done. All this is what makes it more economically reasonable to build luxury housing instead of low income housing.
If the laws were changed to allow developers and landowners to sue under the takings clause or nuisance law, that would mean more time spent in court and more cost added to each project. There would likely be more projects that could be built, but the prices required for these projects would increase once again. I guess it would give lawyers out there more opportunities for employment. :) But litigation increases do not add value to the world. This is also one more complication of government and laws that drives individual property owners and voters further from the government. It drives society away from both the free market and democracy.
However, another way to discourage over-zoning is to make houses less central to their owners. Fischel points out that zoning is mostly demand driven by home owners. This is totally rational behavior, since their houses are a substantial portion of most home-owners net worth. And being immovable assets, their value is greatly affected by events in their locality. Some of the suggestions to lower the value of the houses:
1) Reduce the mortgage interest deduction. This already has occurred with the latest tax reform that doubled the standard deduction, but could go much further. I think we should eliminate this deduction altogether.
2) Bring back the tax on gains of house sales. This would make it more like other investments.
3) Decrease other encouragement of home ownership such as mortgage regulations. It is my understanding that 30 year mortgages would not exist if the government didn’t support them.
4) Imputed rent on tax returns. That is, the amount of rent the home-owner would pay if someone else owned it would be considered taxable income. This would cause lots of extra work doing taxes, as each home-owner would have to file as if they were a landlord. Fischel says that Switzerland does this; I’d be curious how this works. Another down-side of this is the horizontal equity issues: should everything an individual does for himself be taxable if it is possible to get the service from an outside agency? Such as cooking one’s own meals, cleaning one’s house, even having sex with the other member of the household? :)
Other suggestions:
5) Perhaps disallow permanent easements against development in urban areas.
6) Ease back on the “double-veto” in development. This is where environmental concerns or other issues may deny development even if local zoning allows it. So anti-development activists can go to court using several different rationales. Developers will lose if they don’t win every battle. This also causes a lot of delay, which often costs the developer money, but is free to activists. IMO, this is a major component of the cost disease, but it is hard to know how to fix. Also, because these are generally state-wide or national laws, the Tiebout theory of variety in different communities is defeated.
7) Low income communities are often more accepting of development, since they place a higher value on more jobs than having a quiet community. State laws should be more flexible in allowing local variation. This is an extension of #6.
8) Less federal intervention in local zoning issues, such as with environmental laws implying that we are running out of farmland. Let the states decide. I think this is another “double-veto” issue.
9) Avoid rent control, which decreases rental housing and pushes more people into home ownership. He says this isn’t very common in the US now, but should be avoided for the future.
Lots of people have lots of complicated ideas for fixing zoning. Part of the reasons there are so many fixes is because there are also lots of conflicting goals. Fischel mostly wants to avoid the NIMBYism of anti-growth everywhere. Many want to ensure racial integration and income variation in every community. My goals are to allow the free market to create low income housing and any other types of housing that is demanded, but to hopefully allow small communities to live the way they want.
After reading this book, I don’t think my goals are contradictory. It is the over-arching federal and state and metropolitan area laws that insist that every community within their governing area have a certain grouping of population, with little variation. I think everyone would have a place to live if we let each community decide. We do need some nationwide and statewide environmental laws, since the environment bleeds across all geographic boundaries. I’m not sure how to reconcile such laws with community control. I would like to see various social engineering laws to disappear, such as laws mandating racial, income, etc. laws within each community.
VII Postscript
I sent an e-mail to Professor Fischel asking him about the other issues in zoning, such as unrelated persons living in a household, taking in boarders, construction methods, and the very complicated laws. I was pleasantly surprised when he responded, and with specific responses to my questions.
Fischel does not believe that these other issues have a significant effect on the amount of low income housing. He believes the anti-growth mindset resulting in large lot sizes and low density have caused most of these problems.
I respect Fischel’s much greater knowledge than me on zoning issues, but I still think zoning causes a shortage of low income housing from more than just the decreased density that it often requires. I did send him a follow-up e-mail suggesting that Houston style lack of zoning had a lot more upsides than downsides (in fact I don’t think he listed any such downsides in his book). Thus far I haven’t received an answer to this second inquiry.
