In 1995, a typical home in the Boston metropolitan area could be had for about $165,000. Today, the same home would cost more than $714,000. For someone taking out a conventional fixed-rate 30-year mortgage, the monthly carrying costs (assuming a 10 percent down payment but excluding closing costs, taxes, and insurance) would have risen fourfold, from $1,029 to $4,181, leading to payments over the life of the loan totaling more than $1.5 million. Nationwide, the cost of housing in many cities had been rising faster than inflation through 2019, when the median sales price of the typical home in Boston was $491,900. Then, prices surged dramatically during the pandemic (driving the local price to $663,300 by mid-2021). That jump, combined with the subsequent increase in interest rates to combat inflation, drove the monthly payment on the median-priced home nationwide up 59 percent between 2020 and 2023, from $2,033 to $3,224—a sudden, severe price shock that has made housing affordability a problem not only on the high-cost coasts, but across the country. And it has become a political issue: in her first economic policy speech after the Democratic convention in August, Kamala Harris focused on housing affordability and production.
A Building Crisis
Data gathered by Harvard’s Joint Center for Housing Studies (JCHS) tell the story of how the affordability crisis has reached the ranks of the middle class. In many metropolitan areas, the annual income required to afford the median-priced home exceeds $150,000, about double the national median income of $75,000. Among renters, the number of cost-burdened households—those spending more than 30 percent of income on housing and utilities—in 2022 hit a record high of about 22 million, of which middle-income households represent an increasing share. Rental assistance, reserved for the lowest-income households, cannot keep up with demand: between 2001 and 2021, the number of assisted households increased by 0.9 million, while the number of income-eligible renter households rose by more than 4 million. And other cost burdens may increasingly affect everyone: in 2023 alone, home insurance rates nationally surged more than 25 percent as the number of billion-dollar climate change-related disasters grew.
The current housing crisis is broader than prior episodes, according to JCHS managing director Chris Herbert, Ph.D. ’97, who says, “For many years, housing affordability was really a problem of the poor.” Even when home mortgages became unaffordable for moderate-income earners—for example, as interest rates rose into the double digits in the early 1980s—rents did not rise in lockstep. The same was true during the housing bubble of 2006 and 2007: rents remained affordable, and home purchases by would-be first-time buyers could be deferred until the cost of borrowing moderated.
But after the Great Recession that began in 2008, he says, “Rents started to grow astronomically, faster than incomes, and we went from about 39 percent of renters cost-burdened in 2000 to 50 percent in the early 2020s.” In high-cost cities such as Boston, Washington, and San Francisco, people working year-round at decent jobs—making perhaps $50,000 a year—could no longer find a place to live that fit within their budget. Initially, says Herbert, this broadening of unaffordability into the ranks of the middle class was confined to rental properties. Homeownership remained within reach thanks to historically low mortgage interest rates.
During the pandemic, though, both housing prices and rents spiked. “We had an enormous demand for housing,” he notes, “and people weren’t spending money on anything else. Home became all-important.” Interest rates were low, and twenty-somethings who had been renting with roommates suddenly realized “they needed their own place to work from home.” They flooded into the market, pushing up prices of houses and apartments alike to new multiples of median income.
“Now, across the country,” says Herbert, “prices are five times income in places like Boston…and in the high-cost markets in California, they’re 10 times income.” First-time buyers are “wondering if they can save a 5 percent down payment” ($50,000 when the average home costs nearly $1 million, as it does in much of Greater Boston)—or worse, a $200,000 down payment to avoid having to pay monthly for private mortgage insurance. The rule of thumb parents once shared with adult children, that they could afford a house priced up to three times their income, remains no less true—but now it is a pearl of wisdom that makes the dream of homeownership seem unattainable.
Even “middle-class folks are struggling to find housing they can afford.” But should they receive government assistance, too? Bluntly, Herbert says, “We don’t have enough subsidy dollars to go around to help even the poor,” implying there is no way to subsidize out of the housing shortage. “And so, the question becomes, ‘Where should we devote our attention? Who’s most deserving?’”
“We can’t lose sight of the fact that people who are living in poverty, who are paying more than 50 percent of their income on housing, have very little left over to spend on everything else,” he continues. “‘The rent eats first,’ as the saying goes, so the level of deprivation among those households is extremely high.” For everyone above that threshold nevertheless struggling to pay for housing, the question becomes, “How do we get housing costs down?” Herbert asserts, “because we have to think that the private sector should be able to provide housing that people with decent jobs can afford.” So the problem is how to deliver more housing.
“Into the 1960s, building was lightly regulated almost everywhere.” That changed between the 1960s and the 1990s.
Housing prices have been rising faster than incomes for decades. Between 1995 and 2022, as median national household income increased 2.2 times, from $34,080 to $74,580, the median home sales price rose 3.3 times, from $133,900 to $437,700. But America’s housing affordability problem has now reached levels not seen in 35 years, choking opportunity for young people and the middle class, and threatening homelessness and privation for the poor (see “The Homelessness Public Health Crisis,” May-June). Sharply higher mortgage interest rates that raised the cost of borrowing, combined with a lack of supply—the nation is thought to be short three to six million units of housing—have fueled these steep price increases.
That problem has been building for more than a decade, and even if interest rates and home prices fall, there will still be a shortage of housing in the most economically vibrant areas where it’s most needed. The “dearth of housing, and particularly of affordable housing,” Atlanta Federal Reserve Bank president Raphael Bostic ’87 said recently, “is a vexing, incredibly complex puzzle.” Solving it should engage everyone, not just those struggling to make the rent or mortgage payment. The crisis has spread geographically beyond booming coastal metropolises like New York and San Francisco, and also up the income spectrum. Even homeowners—whose equity in their houses has swelled to near-record levels—should be concerned, because the high price of housing has wide effects, constraining economic growth, exacerbating inequality, restricting mobility, and harming the environment.
Among economists and housing experts, there is a broad consensus about the reason for the fundamental problem of insufficient supply: mostly, local land-use regulation and zoning. Adjusting for inflation, the cost to build a house today is about the same as it was 40 years ago. But inflation-adjusted prices have nearly doubled because there is not enough buildable land to satisfy demand. “We can’t make more land,” Herbert points out, “but we can make better use of it by increasing the density of housing…putting four units on a lot instead of one. So zoning reform gets a lot of attention as a means of increasing housing production.”
The Case for Regulatory Reform
Housing is a market like any other, driven by supply and demand. But as Glimp professor of economics Ed Glaeser explains, demand for housing is shaped not simply by space to live, but by demand in particular locations—as near as possible to the heart of economically vibrant cities like New York or San Francisco. “It’s hard to fix demand,” he says, “and there is nothing wrong with the fact that people want to live in places like Boston, with its knowledge-based economy, relatively good private schools, and other amenities.” But when robust demand confronts “essentially, inelastic supply, with an almost complete inability to add significant amounts of new housing stock, that’s where you get an affordability problem. And that’s what’s happened, first on the coasts, starting in California. And it has hit wider and wider swaths of America as incumbents, essentially, make it difficult to build.”
Glaeser first witnessed the extraordinary power of local residents to stop construction projects while serving on Harvard’s Physical Planning Committee in the 1990s. Plans for an art museum along the Charles River in Cambridge were derailed by a single resident who organized neighborhood opposition. It was a classic case of NIMBY politics (Not In My Backyard), one that plays out across the country as residents protect the status quo in their neighborhoods. Glaeser soon began thinking and writing about the impact of NIMBY politics on housing affordability, exploring its broader economic effects. For example, single-family zoning laws—one house per lot—predominate in the residentially zoned areas in many American cities and surrounding communities. They effectively constrain the supply of new housing, precluding the possibility of greater urban density, by preventing construction of multiple homes, apartment buildings, and residential towers. What is needed in American cities, argue Glaeser and others who study the housing crisis, is a relaxation of land-use regulations and zoning laws.
In fact, Glaeser and Joseph Gyourko, a professor at the University of Pennsylvania’s Wharton School, identify restrictive regulations as the primary driver of constrained housing affordability and availability in urban areas. Cities with fewer land-use regulations, they showed in a 2017 paper, tend to have more elastic housing supplies, and consequently lower housing prices. Conversely, areas that have adopted more stringent regulations have experienced higher and more volatile prices.
It hasn’t always been this way. “For most of U.S. history, local economic booms were matched by local building booms,” they wrote. “Into the 1960s, building was lightly regulated almost everywhere.” That changed between the 1960s and the 1990s. In Manhattan, for example, 13,000 new housing units were permitted in the year 1960 alone, “nearly two-thirds of the 21,000 new units permitted” during the decade of the 1990s. Predictably, says Glaeser, “Places that don’t build a lot are expensive” (see “Mugged on Park Avenue,” July-August 2004). Gyourko has since quantified just how much regulation has inflated the value of a median one-acre lot in various U.S. cities: $1.6 million in San Francisco; $600,000 in New York City; $700,000 in Seattle; and $800,000 in Los Angeles. The list goes on. In the cities that are engines of American economic growth, housing prices soon outpace wages when regulatory barriers hinder new construction.
“People used to move to higher-income states,” Glaeser continues. But middle-class migration stalls when housing becomes unaffordable. “The tragic part,” he says, “is that we’re both making America less productive—by not enabling people to move to places like Boston or Silicon Valley, which are among the most productive places in America—and ensuring that lower-skilled people, people who are less fortunate, can’t afford those places.” Denying them the economic opportunity afforded by mobility “just feels profoundly wrong,” he adds, “as well as being probably inefficient” (see “Immobile Labor,” January-February 2013). By excluding lower-paid workers from high-wage cities, the downstream effect of high housing costs is greater inequality.
The Violin, the Viola, and the Cello
At their best, zoning’s trio of regulations—controlling the use of land, the form of buildings on the land, and their density—are like the “violin, the viola, and the cello,” says Williams professor of urban planning and design Jerold Kayden, founding director of the Master in Real Estate Program at Harvard’s Graduate School of Design. Kayden has been writing and speaking about the history and impact of zoning on real-estate development for decades. But zoning, he points out, can be misused. In 1986, he and the late Harvard Law School professor Charles Haar summarized the successes and failures during the 70 years since New York City enacted the first comprehensive big city zoning ordinance. They argued that while zoning “helped establish the principle that the interests of property owners must yield to those of the public,” it had failed to produce the “high quality living and working environments” to which its proponents aspired: “Many of our suburbs are little more than sterile bedroom communities.” Further, they wrote, “When a town allows only single-family housing on minimum one-acre lots, it does not take a real estate expert to understand that low-income families will not be able to live there.”
Although the power to zone lies with states, it remains subject to the requirements of the U.S. Constitution. Its constitutional validity was established by a 1926 Supreme Court case, Village of Euclid v. Ambler Realty Co. The Court ruled that “If they are not arbitrary or unreasonable, zoning ordinances are constitutional under the police power of local governments, as long as they have some relation to public health, safety, morals, or general welfare.” The Court inveighed against apartment houses. In residential areas zoned for single-family use, the six-member majority wrote, “Very often the apartment house is a mere parasite, constructed in order to take advantage of the open spaces and attractive surroundings created by the residential character of the district.” When followed by others, they bring noise, traffic, business, and cars; interfere with the circulation of air; and monopolize the sun, “until finally, the residential character” of the district [is] “utterly destroyed. Under these circumstances, apartment houses, which in a different environment would be not only entirely unobjectionable but highly desirable, come very near to being nuisances.”
Zoning remains divisive. It has pitted people who support housing initiatives against those who advocate for issues such as environmental protection and historic preservation—all three traditionally progressive causes (see “Origins of the Urban Housing Crisis,” September-October 2022). Kayden describes the dilemma as “the difficulty of holding two opposing values in mind—it creates a tension” that forces people to choose between compelling priorities.
In some places, this tension has of late evolved into a backlash against NIMBYism, coalescing into a pro-housing YIMBY movement (Yes In My Backyard), which encourages housing construction, opposes limits on density, and promotes public transportation. New York City proponents hope this new urban politics will help carry an initiative called “City of Yes,” which includes as one of three goals the creation of more housing in every neighborhood. The executive director of the department of city planning, Edith Hsu-Chen, M.U.P. ’97, hopes that eliminating parking mandates for new housing, extending tax breaks to developers, promoting office conversion to residential use, and re-legalizing “Fonzie Flats” (small apartments, such as those above a garage, also called accessory dwelling units) will help ease the city’s acute housing shortage—if the proposal passes. Elsewhere around the country, says Kayden, “The notion of single-family zoning, which has been at the center of residential zoning in the United States, is now being reconsidered.”
The End of Single-Family Zoning?
In 2019, Minneapolis responded to its housing crisis by becoming the first major American city to eliminate single-family zoning. In 2021, California followed suit. Overriding local ordinances, the state now allows single-family lots to be converted into multiple units, or even apartment buildings—but only by owner-occupants, not developers. Although additional restrictions render that law largely “toothless,” says economist Rebecca Diamond, Ph.D. ’13, state or regional legislation is probably the most effective means of addressing the housing crisis.
That, she explains, is because “the downsides of building more housing—in terms of congestion, too many kids in your schools, too many cars on your streets, and expanded infrastructure—are borne at the local level. But the benefits are diffuse. If you build more housing in Palo Alto,” continues Diamond, the Class of 1988 professor of economics at Stanford Business School, “it’s probably going to make housing prices a little bit cheaper in many parts of the Bay Area, not just in Palo Alto. So, Palo Alto gets all of the negatives, and only a tiny share of the benefits. Palo Alto has no incentive to build more housing.”
States, on the other hand, can “internalize the benefits,” she says, “because they care about housing prices in Palo Alto, San Jose, San Francisco, and Oakland.” More recent legislation in California mandates deadlines for municipalities to propose plans for new housing that are compliant with state rules. If they don’t, local zoning is superseded by state minimum zoning requirements. “Developers have applied for massive skyscraper buildings in places like Santa Monica, Menlo Park, and Palo Alto,” Diamond reports, and these municipalities have gone to court to try to prevent the projects from getting built. The results of that litigation will determine how effectively the law increases the supply of new housing.
Diamond’s scholarship has quantified the economics of living in various high-wage U.S. cities. She has found that the cost of living, including housing, is indeed squeezing the middle class. “The really good jobs are increasingly geographically concentrated,” she says. High-wage cities such as New York and Boston pay college graduates a lot more than median-wage cities such as Cleveland. And although high-wage cities pay low-skill workers better, too, the premium is much less than that for highly compensated individuals—and not nearly enough to cover the high cost of housing. Low-wage earners, she says, spend such a large share of their budget on housing that little is left over for other types of spending, creating consumption inequality.
Recently, Diamond and Timothy McQuade, Ph.D. ’13, a professor at UC Berkeley’s Haas School of Business, have studied the impact of a zoning intervention being contemplated in Chicago. They built a model that incorporated data from the Cook County area surrounding the city, including all housing transactions and redevelopments during the past 30 years, and linked that to the zoning details of every housing unit. They could then ask, “What if we change zoning parameters on certain types of lots? What type of development would then get built?” In particular they wanted to know what would happen if they cut various kinds of red tape—the step-by-step permitting reviews and approvals involved in any project—or instead deregulated zoning—allowing triplexes (three units of housing per lot, a policy Chicago is currently considering) on lots previously zoned single-family only.
Their empirical results, as yet unpublished, were striking. They found that streamlined permitting had a negligible effect on generating new supply. Deregulating zoning, on the other hand, to allow triplexes on formerly single-family lots, led to more housing over time because the per-unit construction and development costs are vastly lower than for a single-family home.
“The downsides of building more housing”—congestion, too many kids in your schools—“are borne at the local level. But the benefits are diffuse.”
Under Chicago’s current zoning, Diamond explains, “Everything is close to maxed out in terms of how many units developers are allowed to build.” Adopting triplex zoning will not lead to massive new supply in the first decade, she cautions, because on many lots the value of existing single-family homes is too high to make replacement with multiple housing units cost-effective. But over time, as the current housing stock degrades, such a policy would help increase the supply.
Momentum for Reform
America’s housing problem can seem intractable, but reforms such as those being considered in cities like Chicago and New York—eliminating single-family zoning, allowing for residential uses in formerly commercial areas, legalizing accessory dwelling units, and removing parking mandates in cities well-served by public transportation—could help more Americans find affordable housing. At least seven states have adopted laws that pre-empt local zoning. Glaeser often points out that policies that enable urban growth by increasing density have both economic and environmental benefits: from lessened commutes, to reduced impact on the natural world, and lower energy, land, and resource consumption.
In remarks at Tulane in April 2024, the Atlanta Fed’s Bostic emphasized that housing is so foundational to family well-being and security that it transcends economics. But even though there is an “emerging public preference for regulation more favorable to housing production,” he said, a “national measure of the regulatory factors that influence home production” found that in many localities, land-use regulation has become more stringent over time. Given that the benefits of deregulation—bettering poor citizens’ lives, enhancing mobility, promoting equality, and increasing growth—are so compelling, solving the current housing impasse is well worth Americans’ collective efforts, and may well come to engage their support.
