Monday, February 26, 2024

Post 43: The Housing Crisis -- Details, Details, Details

 The first article in this Housing Crisis series contained a variety of statistics that illustrated the degree to which the housing industry is failing to meet the needs of a fairly broad swath of our society.  It should be pointed out, however, that the housing market is not completely dysfunctional.  Housing is being produced which meets the needs of certain segments of society perfectly well.  The problem is that those segments represent a minority of the population – and a share which is getting smaller and smaller since housing costs are rising faster than income.  To illustrate this disconnect, let me share one more set of statistics represented by the following chart.

Over the past 40 years, the average size of single-family homes being built by the housing industry has steadily gotten larger (up more than 40 percent over that time period) while at the same time the average household size has steadily gotten smaller (down almost 10 percent).  To some extent, this reflects the growing affluence of the American family.  Unfortunately, the growth in household wealth has been concentrated in the top 10 or 20 percent of households, thus leaving the vast majority of middle class families struggling to afford the kind of housing options that preceding generations took for granted.  

The housing that is getting built is getting larger because developers and builders are giving up on the moderately priced segment of the housing market.  They are doing so because our cities, our financial institutions, and our social perceptions of “the good life” have systematically downplayed and disincentivized housing options that would have led to greater diversity and affordability.  Again, our current housing challenges are not the result of a single decision or trend, but rather the compounding effect of small thing, upon small thing, upon small thing.  The bottom line is that we have made building moderately priced housing more risky and less profitable.  It is no wonder that builders are shying away from that segment of the market.  

My goal with this post is to suggest ways to undo many of those small trends that have taken us in the wrong direction.  My comments are going to focus primarily on the needs of working class families who would like to own a residence with two, three or four bedrooms, and space (both inside and out) for kids and pets.  This is a segment of the population that I think has been poorly served by current housing options and yet their success is crucial to the success of our society in general – think teachers, tradesmen, mid-level managers, nurses, etc.  Many of my suggestions will apply generally to a wider variety of housing segments, but I won’t be discussing them in any detail for brevity’s sake.

Community Commitment

First, there needs to be a broad acknowledgement by cities, builders, community support organizations, and financial institutions that there is a housing problem and that a coordinated effort is required to address that problem.  Our current housing crisis is not going to be solved by clinging to the status quo.  

It is also important to acknowledge that the fundamental problem is the underproduction of housing, particularly at the lower-priced end of the market.  This is not simply a problem of lumber prices being too high, or mortgage rates going up, or inflation squeezing the middle class.  While all of those things might be true, they are out of the control of local communities and thus are simply a distraction from the real task of getting more housing built.

The reason that local commitment is so important is that some of the steps necessary to boost housing production will not be universally popular.  Change is hard, and counterproductive housing myths are widespread, which means that decision-makers are likely to be accused of “destroying the community” when in fact they are working to save it.  This is why the status quo is so powerful and why effective reform of the housing industry is so hard.

Fundamental Zoning Reform

The municipal use of zoning regulations became commonplace roughly a hundred years ago largely as a tool to address perceived damages to one class of land use caused by another class of land use, particularly in rapidly urbanizing cities.  One of the earliest examples is a 1908 ordinance in Los Angeles that prohibited wash houses (or laundries) in certain residential districts.  The presumed rationale was to protect the property values of the residential uses, although there was likely a racial component as well since laundries were typically operated by Chinese immigrants.

The first citywide zoning regulations were adopted by New York City in 1916 supposedly in reaction to the 1915 construction of the Equitable Building on Broadway – a 40-story office tower that loomed over adjacent structures restricting available light and ventilation, and supposedly overwhelming street and transit infrastructure.  Others have speculated that the regulations may have also been a way for swanky Fifth Avenue retailers to avoid being crowded out by rapidly expanding garment factories (and the hordes of low-class workers who ruined the Fifth Avenue ambiance). 

Zoning regulations have gotten much more complex over the years, but the underlying motivation and the eventual impact of the regulations remain a mixed bag at best.  There are undoubtedly strong public health, safety and general welfare benefits to be gained (e.g. preventing the proverbial smoke-belching factory in the middle of the residential neighborhood), but there is also a dark side to zoning that is too rarely acknowledged.  From the very outset, zoning was used to discriminate based on race and economic class.  Zoning has allowed us to use the municipal police power to carve out areas of the city where we can be surrounded by people who look and act the same way we do.  This is perhaps understandable given that our homes are in many cases our most valuable asset, and protecting that asset is consequently a high priority.  We have gone overboard, however, and we have convinced the general public that their investment can only be protected by maintaining highly homogeneous and unchanging neighborhoods.

It has been estimated that 75 percent of all residentially zoned land in the country is restricted to just single family residences, one of the most expensive forms of residential development. [1]   Furthermore, typical zoning requirements allow just one residence per lot and mandate a minimum lot size that often ranges between 8,000 and 20,000 square feet.  This “large house on a large lot” approach to housing may have made sense 60 years ago when households were larger and land was cheaper, but it is out of date now and is a significant contributor to our housing affordability problem.

A backyard Accessory Dwelling Unit

Some cities are pushing back on restrictive residential districts by allowing an accessory dwelling unit in the backyard, an accessory apartment in the main structure, or duplexes (or triplexes) in districts that were formerly single family only.  The result is an increase in the housing supply, an increase in the variety of housing options available, and a new opportunity to build wealth for property owners.  The impact on the value of existing houses appears to be minimal, and may in fact be positive, particularly in neighborhoods showing signs of decline.

Smaller Lots

Midwestern cities, in particular, have a bias toward generously sized lots for residential development.  That is fine for affluent buyers, but for the production of moderately priced housing a large or even mid-sized lot is a waste of money.  Front yards and side yards, for example, have very little functional value aside from providing an aesthetically pleasing setting for the house itself and providing a minimal amount of acoustic and visual privacy.  Consequently, they should be reduced in size by a third or more.  Even rear yards are becoming less useful as household sizes decline and our social activities trend away from backyard barbecues.  

A Cottage Court Development

A lot size of 3,000 to 5,000 square feet per unit is possible with some careful planning, but cities tend to default to much larger minimums suitable for generic, bigger-is-better designs.  Another approach is to allow cluster housing or cottage courts in which small lots for each unit are offset with a shared common area for play structures or get-togethers.  The bottom line is that smaller lots can save tens of thousands of dollars in the final cost of each housing unit, and cities will reap a secondary benefit of greater tax-revenue-per-acre in the bargain.

Smaller House Designs

America is the land of “bigger is better” and that attitude is certainly celebrated throughout much of our society and social media.  Homes that receive the most notoriety seem to feature enormous kitchens, closets and bathrooms, not to mention the more traditional living spaces and rec rooms.  This trend, in my opinion, is not driven by family size (which is shrinking) or a desire to entertain lavishly, but by a need to mark our affluence and house all of the “stuff” that we have acquired – most of which we rarely use.  This is a generalization, of course, because some people with large houses do have large families or entertain frequently.  But it wouldn’t surprise me if at least half of the homes with 2- or 3-car garages can’t actually fit more than one car due to all of the accumulated stuff that has overflowed from the house into the garage.  The result, again, is that builders default to larger and larger designs and home buyers seem compelled to buy larger homes even if they end up with rooms that are rarely used.

Fortunately, there is somewhat of a counter trend forming that places more emphasis on a simple lifestyle and quality of design rather than on raw size.  At the extreme this shows up in trendy articles on “tiny houses” in which people live in just 200 or 300 square feet.  There is a more practical middle ground, however, in which a modestly sized home can keep prices to moderate levels while giving the occupants enough space to live a normal life.  The trend was started over 25 years ago by architect Sarah Susanka who wrote a book titled "The Not So Big House: A Blueprint for the Way We Really Live." [2]  Her primary point is that better design can lead to spaces which are more comfortable and more engaging given our lifestyles rather than simply defaulting to larger spaces.  The key is to design spaces that do double duty, are flexible enough to adapt to changing needs, and appear larger than they really are.

A modestly sized house is crucial for keeping costs reasonable, and good design is crucial for making a modestly sized house marketable.  A skilled designer can make small look cool.  The problem is that “good design” has often been reserved for only very expensive, custom designed homes.  What needs to happen is for good design to be applied to homes that are mass produced.  I’m not talking about an architectural masterpiece, but simply a home that is functional, adaptable and attractive.

Pattern Zoning

A relatively recent innovation known as Pattern Zoning can boost the production of moderately priced housing and incorporate several of the suggestions that I have outlined above.  This approach starts with pre-approved residential plans designed by an architect and reviewed by the community for compatibility with local needs and character.  These pre-approved plans are paired with a streamlined approval process for the issuance of a building permit that typically avoids any type of review by the Planning Commission, City Council or zoning variance board.

The advantages of Pattern Zoning include:

  • High-quality designs where the cost is covered by the city and eventually spread over many units;

  • Pre-approved review by the community so that the neighbors know exactly what to expect which reduces NIMBYism and other forms of community resistance; 

  • A streamlined approval process which can save builders months of time and thousands of dollars of soft costs; and 

  • A simplified, step-by-step approach which can attract non-traditional, small scale builders that can ramp up housing production, particularly in inner-city, infill locations that more traditional builders might skip.

The key, of course, is developing a variety of pre-approved plans that the community views positively, that builders think will sell, and that fit the sizes and types of building lots available in the neighborhoods where the zoning will be applied.  The net result can be an increase in the production of modestly priced, “missing middle” types of housing in close-in locations that most communities desperately need.

Streamlined Financing

Many modestly priced residences are rented, but there are advantages for the community if our society can figure out a way to expand the range of households that can become home owners.  Home ownership is an important path toward wealth building for middle income families and it tends to build a higher level of commitment to the community in general and local neighborhoods in particular.  Unfortunately, the process of purchasing a home is complicated and expensive – two characteristics which are often the death knell for aspirations of home ownership.

Purchasing a home is different than purchasing almost anything else.  It is a highly standardized process for buying a highly variable product, and it is the most expensive thing that most families will ever buy.  Purchasing a home almost always involves obtaining a mortgage that covers the vast majority of the cost, and the financial institutions that issue mortgages typically sell those mortgages so that they can be securitized and resold to investors.  This process frequently involves either Fannie Mae (the Federal National Mortgage Association or FNMA) or Freddie Mac (the Federal Home Loan Mortgage Corporation or FHLMC) which have strict rules on what types of mortgages they will purchase.  These rules are the tail that wags the proverbial mortgage dog and nearly every institution that issues mortgages follows those rules as closely as possible.

Since the buyer of the home and the home itself can vary widely from case to case, many of the rules are designed to make sure that the purchase is done legally, that the buyer is likely to be able to repay the mortgage, and that the home is likely to last for the duration of the mortgage.  Compliance with each rule has to be documented by the mortgage issuer in order for the mortgage to be deemed “compliant” with Fannie Mae/Freddie Mac rules.  Each step in the process involves either some company certifying that the rule has been met (and charging a fee for doing so), or it involves the buyer or seller paying money to cover some part of the transaction cost.  Taken as a group, these are known as “closing costs” and frequently end up being 3 to 6 percent of the value of the mortgage – or typically thousands of dollars.

While there is a logical reason behind each step and each fee, the process feels bloated and antiquated to first time buyers.  It is ripe for what tech people call “disintermediation” which is just a fancy word that means getting rid of the middle man.  Virtually all of the records that need to be documented as part of the process are now computerized which means – at least in theory – that record checks should take seconds instead of hours or days.  The devil is in the details, of course, and many records may not be easily accessible due to privacy restrictions, but streamlining of the process seems inevitable.  As evidence, look at the growing number of companies such as Rocket Mortgage or Quicken Loans that have moved the entire process to the internet.  Even Fannie Mae and Freddie Mac (under pressure from the Biden administration) are realizing the need for change.  Fannie recently announced that it would expand the use of an attorney-opinion letter which is a simpler and cheaper alternative to a full blown title search. [3]

The bottom line is that making housing affordable must include simplifying the process of buying and selling so that it is both faster and less expensive.  If the IRS can devise a way for millions of taxpayers (those with the most straightforward returns) to calculate, file and pay their taxes online, then surely the mortgage industry can figure out how to simplify the process of buying and financing a home.

A New Form of Ownership

Some discussions of housing make it sound like owning a home in the traditional sense is a universally good thing that every household should aspire to.  That is flat out wrong.  Many households are better off renting, and the percentage that are better off renting is probably larger than most people would think.  Successfully owning a home requires both financial and locational stability, as well as a commitment to the community.  If your job is insecure or you are thinking about moving to another city in a year or two, then buying a house is likely to be a financial drain rather than a financial windfall.  And if you have no commitment to your neighborhood, then owning a home is likely to be frustrating and annoying.

The transaction costs of buying or selling a home are high enough that even in a market where housing is appreciating in value, owning a home is unlikely to contribute to an increase in total wealth unless it is kept for at least 3 to 5 years.  It takes roughly that long for the gradual increase in equity to cover the closing costs associated with selling (and potentially buying a new home elsewhere).  On top of that, selling in less than two years may trigger a capital gains tax issue.

First time home buyers, particularly those that are stretching financially to do so, are likely to be surprised by the unexpected costs and expectations that come along with home ownership.  A renter can call the landlord when the water heater breaks or the roof leaks, but a homeowner has to deal with those unexpected expenses themselves.  According to a recent survey, only 44 percent of American households say that they could pay for a $1,000 unexpected expense using their savings. [4]  This means that most of the remainder would have to take on debt (credit card, personal loan, or borrowing from family and friends).  Adding more debt, of course, can quickly spiral out of control if the household budget is shaky to begin with.

Not only does a homeowner have to deal with emergencies, but the neighbors are going to expect the grass to be mowed, the landscaping trimmed and the house to be kept painted – all of which cost money beyond the monthly mortgage payment.  Shirking your responsibility to the community is likely to result in angry neighbors and a visit from the local code enforcement officer.  All of this can turn the experience of home ownership from a dream into a nightmare.

What I think is needed is a third category for describing a household’s relationship to their home.  We already have “renter” and “owner”.  What I would like to see more of is what I’m going to refer to as “co-owning”.  This third category requires the participation of a housing-focused organization – most likely a not-for-profit, community- or faith-based organization that is willing to partner with individual households.  There are already examples of this type of partnership around the country, but it needs to become far more widespread for it to have a significant impact on the housing affordability crisis.

The role of the co-owning organization is akin to the role of a traditional landlord, but with the profit motive of the landlord replaced by a mission to provide affordable housing, build wealth, and smooth the transition from renter, to co-owner, to traditional owner.  Ideally, the co-owning organization would acquire multiple housing units in close proximity and maintain an active partnership with the residents in order to facilitate a sense of community.  At the extreme, this is known as “co-housing” or “intentional communities” where people often share daily activities such as gardening, child care, or social get-togethers. [5]  From the perspective of affordable housing, the key advantages of a co-owning organization would be:

  • Reducing the financial impact of closing costs and down payments so that moderate income households could “own” housing without a huge up-front cost;

  • Building relationships with local lending institutions so that financing arrangements for first-time buyers would be less intimidating;

  • Developing a list of trusted repairmen, contractors, insurance providers, and similar local services that homeowners are likely to need; 

  • Assembling a shared pool of tools, ladders, and lawn care equipment so that each owner doesn’t need to buy their own;  

  • Providing short-term financial assistance to smooth over unexpected expenses at interest rates far below what a credit card or payday loan business would require; and

  • Facilitating the eventual sale of the residence if the household needs to move or wants to upgrade to a traditional ownership role.

In exchange, the organization needs to have a revenue stream to not only cover its costs but to also provide an incentive to expand its services.  This revenue stream might be a monthly fee like dues for a homes association, or a differential in the interest rate between what the organization borrows at and what it charges the individual household buyers, or an agreement to split any appreciation in property values.  Whatever the arrangement, the idea is that the co-owners split the financial benefits of owning a home while providing an opportunity for a moderate income household to not only have safe and sanitary living quarters but to also build equity and learn the ins and outs of home ownership.  

There are a dozen different ways this could be set up and there are a wide variety of functioning examples across the country.  The key to success is to make this a financial and social win-win for both the sponsoring organization and the occupants of the housing.  It should not be charity and it should not be government subsidized if it is to become common enough to really have an impact on the volume of housing being put on the market.


Solving the housing affordability crisis is both simple and complicated at the same time.  The simple part is that the fundamental solution is to build more housing, particularly at the moderately priced end of the housing spectrum.  Depending upon who you ask, the country is short somewhere between 3 million and 7 million housing units. [6]  The complicated part is that implementing the “simple” solution is going to require many different participants taking independent actions that will only be effective if other participants take complimentary or supportive actions at the same time.  Unfortunately, there is no coordinating entity that can force all of the necessary steps to take place.  There is no single agency or company that can solve the problem on their own.  There is no single invention that will save the day.  There is no single template that will work for every community.  And yet the problem is so crucial to the success of cities that it must be addressed despite the difficulties.

Although cities rarely get involved in actually building housing, they play a critical role in “setting the table” so that other entities can produce the housing that is needed.  In particular, cities need to build consensus among civic leaders that a problem exists that threatens the well being of the community and that change to the status quo is necessary to solve the problem.  Then, cities need to examine their zoning regulations to make sure that they promote the creation of diverse housing options with as streamlined an approval process as possible and examine their building codes to make sure that energy efficiency and life-safety requirements are not so stringent as to undermine the ability to produce moderately priced units.

Finally, cities need to motivate as many community participants as possible to take steps to solve the problem.  This includes financial institutions, nonprofit community organizations, state and federal agencies, utility companies, and builders that range from national corporations to mom-and-pop start-ups.  All of these players need to see that improving housing affordability is in their long-term best interest.


1. Nathaniel Meyersohn; “The invisible laws that led to America’s housing crisis”; CNN; August 2023;

2. Sarah Susanka; “The Not So Big House: A Blueprint for the Way We Really Live”; Taunton, 2008;

3. Andrew Ackerman; “Plan Aims to Cut Home-Buying Costs”; The Wall Street Journal; January 17, 2024.

5. Jeffrey Kluger; “Why Americans of All Ages are Coming Together in ‘Intentional Communities’ “; Time;

6. Josh Zumbrun; “How Severe is the Housing Shortage?  It Depends on How You Define ‘Shortage’ “; The Wall Street Journal; April 2023;

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