The best zoning for residential use is:
- More permissive, allowing higher density construction. (51%, 24 Votes)
- More restrictive, limiting the number of units and height allowed. (49%, 23 Votes)
Total Voters: 47
Prospective low-income homebuyers face mounting barriers to homeownership, but even middle-class homebuyers are facing the brunt of coastal metropolitan markets, particularly here in California.
Rapidly rising home values are one element offering a glaring barrier to homeownership. A mid-tier home in San Francisco begins at $858,000 as of April 2021 and includes values up to $1.4 million.
With higher home prices comes the need for larger down payments. While some prospective buyers have the bank of mom and dad to rely on to meet minimum down payment requirements, many more do not have access to generational wealth. Instead, they need to set up a savings account and reduce extra expenses until they have at least 3.5% of the home price saved up, preferably more. This translates to an amount of over $171,600 for the very bottom of the mid-tier home price range in San Francisco while meeting 20% down.
A third obstacle prospective homebuyers need to navigate through is restrictive zoning which has the potential to add more to the price of land due to supply side regulations – a so-called zoning tax. A working paper published by the National Bureau of Economic Research (NBER) finds that the median zoning tax per quarter acre in San Francisco adds a whopping $409,706 to the price of a home.
Other California metros represented in the study include:
- Los Angeles, where restrictive zoning adds an additional $198,769 to the price of a typical home;
- San Jose, where zoning adds $111,793 to the price of a home; and
- Riverside, where zoning adds $32,771 to the price of a home.
With the median zoning tax topping $400,000 for San Franciscan owners, these supply-side costs are almost four times the San Francisco median annual household income of $112,000 in 2019, according to the U.S. Census.
The NBER working paper indicates that price impacts in the big west coast markets are the largest in the nation.
Zoning and its impacts
Prices are already high in places like San Francisco and Los Angeles. But here, governments prevent developers from building more housing to accommodate growing demand. The result is more price increases.
Achieving homeownership is a struggle for the middle class, let alone lower-income prospective buyers, due to supply-side regulations, such as:
- parking restrictions;
- permitting costs and wait times;
- land use regulations; and
- height restrictions.
These supply-side zoning regulations also impair multi-family starts. Rents go up, causing employers to consider other communities.
Contrasted with San Francisco’s high costs and restrictive zoning regulations, smaller inland markets such as Riverside and Bakersfield towards the south and Sacramento and Fresno towards the north boast the benefits of looser zoning restrictions.
While San Francisco’s population decreased by 1.7% from 2020 to 2021, the annual population increased in these lower-cost metros by:
- 0.8% in Bakersfield;
- 0.6% in Fresno;
- 0.6% in Riverside; and
- 0.4% in Sacramento.
In these less costly inland regions seeing population gains, less restrictive zoning has allowed more residential construction, thereby creating a more stable housing supply, attracting new residents.
Population growth is essential for a healthy and dynamic housing market. When the local population declines, agent fees are harder to obtain because there are fewer people buying and renting real estate. [See RPI e-book Real Estate Economics Chapter 21.1]
Making it easier to live in bustling cities will help Californians move to where the jobs are. Jobs return first and fastest to city centers. Those who withstand the prices of these coastal markets with their prices heightened by zoning restrictions and constrained inventory can find opportunities in employment, while enjoying the amenities a large metro area has to offer.
But without easing zoning restrictions, inventory will continue to lag, prices for homes and rentals will continue to rise faster than the pace of incomes and more people will leave for less costly horizons.
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