Reducing Housing Costs Through Regulatory Reform: A Handbook for Colorado Communities
Clarion Associates	© & Author Info

Abstract

Table of Contents

Introduction 1

Chapter I. Responding to Regulatory Barriers 5

Chapter II. How Land Development Regulations Can Affect the Cost of Housing 9

Chapter III. Regulatory Barriers in Colorado: Six Case Studies 23

Chapter IV. Overcoming Regulatory Hurdles 45

Chapter V. A User’s Guide: Tips And Advise For Community Implementation 57

Introduction

This report discusses how Colorado communities can best mitigate the extent to which land-use and other regulations sometimes drive up housing costs, and at the same time utilize such regulations to pay for and wisely manage growth. Two different, and potentially competing, public policy goals are at issue. On one hand is the pressing need for an adequate supply of affordable shelter for citizens of all income levels. On the other hand are the significant public benefits to be realized through regulations, including the protection of human health and safety, the provision of adequate public facilities for new growth, and the preservation of sensitive environmental and cultural resources. A local jurisdiction may need to perform a delicate balancing act to reconcile these different policy goals, which are not mutually exclusive, but which nevertheless sometimes work at cross-purposes.

The Shortage of Affordable Housing in Colorado. Colorado’s population is growing–quickly–and the demand for affordable housing continues to increase as well. From a 1990 population of 3.3 million, the state has reached a 1997 population of 3.785 million. Growth will likely continue at an average annual rate of 1.6 percent, with the population reaching 4 million in 2000 and over 5 million by 2020. (1) Housing construction has increased rapidly to shelter all these new residents. From 1990 to 1995, the total number of single-family residential building permits issued annually in the state almost tripled, from 10,095 to 28,748. Multi-family building permits issued annually over the same period increased from 1,802 to 10,795. (2)

And yet, despite all the new construction, Colorado continues to have a shortage of affordable housing. Median sales prices of single-family homes have risen dramatically, with the metro Denver area, Summit County, and Fort Collins seeing the greatest increases. Income growth, while strong, has not kept pace with rising home prices. Fort Collins illustrates the problem: The city grew from 88,000 in 1990 to 103,000 in 1996. Over the same period, the median income for a family of four rose from $37,000 to $47,800, an increase of about 30 percent, yet the cost of housing has jumped 49 percent over the same period. The 1996 median home sale price was $136,367. (3)

Certain populations are being hit especially hard by rising home prices. Housing costs for 40,000 elderly households have increased, on average, to more than 50 percent of income. Young families increasingly are unable to move out of the rental market and purchase starter homes. A working family making $20,000-$25,000 per year qualifies for a mortgage on a $80,000 home, yet very little housing exists in that price range in the major population centers in Colorado. Rents are increasing as well. From 1990 to 1994, rents increased 26 percent in Boulder County, 31 percent in the metro Denver area, and 46 percent in Douglas County. (4) In 1990 almost 80,000 Colorado residents paid more than 50 percent of their income to rent a home; today, that number is estimated at over 146,000. (5)

Everyone in the state ultimately is affected by rising home prices. Notes one senior Colorado official: "It’s not just finding affordable housing to help poor people. It’s to make sure there is affordable housing to keep the economy healthy so that companies and workers can come to Colorado and stay here." (6)

Recognizing Regulatory Barriers to Affordable Housing. "Excessive" and "unnecessary" regulations often are targeted as the prime culprits behind the shortage of affordable housing. Without question, regulations can add to the cost of housing. Zoning ordinances, building codes, various fees and charges, growth limits, and environmental protection ordinances each can add hundreds–and, potentially, thousands–of dollars to the cost of an average new home. All together, the net effect of regulations can make an otherwise affordable house unaffordable. A 1997 report found that regulations–building codes, impact fees, use taxes, etc.–contributed approximately $11,000 to $13,000 to the price of new homes in the $150,000 to $160,000 price range in the Denver metro area.(7) And the cost of complying with regulations keeps going up, as more rules and restrictions are implemented, preventing new homes from being affordable, and keeping more and more people out of the home-buying market. According to a 1994 report by the National Association of Home Builders (NAHB), each additional $1,000 in costs on a $125,000 house knocks 10,000 potential buyers out of the market for that house.(8)

A "regulatory barrier" to affordable housing is defined by the U.S. Department of Housing and Urban Development (HUD) as:

The idea of "regulatory barriers to affordable housing" has been extensively publicized, and politicized. The issue was of so much concern to Republican Jack Kemp during his tenure as HUD Secretary that he regularly showed audiences a flow chart demonstrating how various regulations can add $40,000 to the price of an average new home in Orange County, California. Regulatory barriers threaten our very way of life, believed Kemp, who claimed that "government rules and red tape are regulating the [American] dream out of existence." Kemp commissioned a highly publicized report on the topic in 1991. Other conservative organizations also have embraced the issue as an example of government run amuck. The Heritage Foundation, for example, a conservative think tank, issued working papers publicizing Kemp’s efforts and complaining how "excessive regulation" undercut the expansion of the housing supply triggered by Ronald Reagan’s economic policies. Affected industries such as NAHB have conducted their own extensive research and produced volumes on the subject as well.

Specific estimates of the costs of regulatory barriers vary widely. Kemp’s report concluded that regulations add approximately 20 to 35 percent to the cost of a new home, while others have speculated the figure to be as high as 50 percent. Such figures often, however, represent mere guesses and frequently are not substantiated with actual data from builders and local governments. The most methodologically sound studies indicate that regulations of all kinds contribute anywhere from seven to 20 percent of the cost of an average new home, depending on a large number of highly fluctuating variables, including the strength of the local real estate market, whether the jurisdiction has enacted growth controls, the community’s fee system for new development, and the cost of land. Non-regulatory factors–including the cost of lumber and other building materials, land costs, and interest rates–also can constitute a significant percentage of a home’s final sales price.

Beyond simply raising housing prices, regulatory barriers can have other economic consequences for a community. A lack of affordably priced housing in one community can force local employees to seek housing in other communities, aggravating both traffic congestion and air pollution problems. A community’s economic development efforts suffer, also, when potential employers who worry their workers will have no place to live choose to locate their businesses elsewhere. Lack of a diverse housing stock leads to limited diversity within the population. And a homogeneous housing stock within a city drives population out into the suburbs, creating additional stress on the natural environment and agricultural lands.

Appreciating the Value of Land-Use Regulations. Yet, despite high costs and other troublesome issues associated with regulations, municipalities (and also states and the national government) continue to restrict the means by which land is developed and the types of houses that are built. This should not be surprising, since there are abundant valid and rational reasons for adopting regulatory tools. Growth management tools such as urban growth boundaries ensure wise, measured growth. Impact fees raise money to pay for the infrastructure needed to support that growth. Zoning restrictions keep property values high by separating incompatible land uses, such as heavy industry and residences. Resource protection laws ensure clean air and water and also protect important environmental and cultural resources, such as open space, agricultural lands, wildlife habitat, and historic buildings. Building codes benefit human health and safety by ensuring structurally sound buildings.

In sum, economic costs would increase and quality of life would significantly decrease in the complete absence of land-use controls. The best regulatory systems attempt both to achieve sound regulatory goals and also maintain a healthy economy, which includes a diverse, affordable housing stock. As Professor David Godschalk has noted, "The hallmark of growth management is its balance among competing objectives. This is not only a goal of government. Few homebuyers would be interested in cheap houses without roads, water, sewers, parks, and other urban amenities."

Thus, land-use regulations, in particular, should not be unfairly singled out for criticism as "unnecessary" impediments to affordable housing, because: 1) the regulations have significant policy benefits; 2) the broad-based political support for land-use regulations ensures that complete deregulation will never happen, and 3) even complete deregulation would not guarantee universal access to affordable housing–the problems of poverty and homelessness run much deeper than unnecessarily strict land-use controls.

Purpose of this Report. This report concentrates principally on the impacts on housing costs caused by local land-use regulations, defined broadly to include infrastructure financing mechanisms, zoning and subdivision controls, building codes, permitting and procedural rules, and resource protection ordinances. True, regulatory activity is also driven from the federal and state levels. National statutes such as the Clean Water Act and the Endangered Species Act, and state legislation such as zoning enabling acts and building codes, all can be significant factors affecting the time and expense needed to complete a housing project. Yet, in many cases, the regulatory factors that can contribute to rising housing costs are matters of local concern, including zoning restrictions, building codes, impact fees, and local procedures for processing development applications. This report seeks to show how to promote affordable housing by reducing these local regulatory barriers while still accomplishing valid land-use and planning goals.

Structure and Contents. The report is arranged into five chapters. Chapter I examines the major studies of the issue of regulatory barriers to affordable housing, including the 1988 Rouse Report and the 1991 Kemp report, the federal legislative and administrative measures taken in response to those reports, and also individual state and local responses.

Chapter II provides an overview of a variety of ways in which land development regulations can drive up the cost of housing unnecessarily, based on national reports and Colorado experiences. Regulatory costs are discussed in relation to other housing costs and several national case studies are presented.

Chapter III describes the impacts that land development regulations have had on affordable housing in six Colorado communities. Drawn from both the Front Range and rural areas of Colorado, these case studies cover a diverse range of topics, from large-lot zoning and impact fees, to building code modifications and streamlined development processing. The methods being used to offset potential impacts are addressed, as well.

Chapter IV outlines a variety of regulatory reform techniques that local governments can use to attempt to reduce barriers to affordable housing. Finally, Chapter V is structured as a "user’s guide," and presents tips and step-by-step guidance for communities interested in analyzing the impacts their land development regulations may have on the provision of affordable housing.

How Land Development Regulations Can Affect the Cost of Housing

Regulatory Tools That Can Act as Barriers to Affordable Housing

Zoning and Subdivision Controls

Overcoming Regulatory Hurdles

Experience across Colorado and the US makes clear that the most effective long-term approach to regulatory reform to reduce housing costs is not blind deregulation, but rather selective modification or streamlining such that regulations still accomplish their goals without unnecessarily inhibiting the production or maintenance of affordable housing. Regulations that contribute unnecessarily high costs to housing development should be priority targets for reform. But, as documented earlier in this report, it is important to remember that numerous factors that can substantially contribute to housing costs are non-regulatory in nature, especially the costs of land and building materials and the availability of investment capital for potential homebuyers.

A variety of techniques may be used by local governments to reduce housing costs through regulatory reform. These are addressed below, including Colorado examples where possible. Many strategies are drawn from the local responses described in Colorado studies above. While recognizing that meaningful reform can take place at the federal and state levels, this chapter concentrates on reforms to be undertaken by local governments.

Five general types of tools are discussed, related to the five principal types of regulations mentioned above: reforms to infrastructure financing mechanisms, changes in zoning and subdivision controls, reforms to building codes and construction requirements, streamlining of development permitting and processing, and changes in resource protection requirements. Some additional techniques not falling within these categories also are discussed. Table 4 summarizes these techniques.

A User’s Guide:
Tips And Advise For Community Implementation

This report provides a good basis for assisting Colorado communities and their decision-makers in assessing the nature and scope of regulatory barriers to affordable housing. As shown, while local land use regulations can play a role in driving up local housing costs, by no means should they be indiscriminately scrapped. In addressing the role regulations may play in aggravating a housing affordability problem, a community’s goal should be selective and thoughtful modification to ensure that goals embodied in zoning and other land use standards are preserved.

Most important, the benefits from local land use regulations must be weighed against any adverse impacts on housing affordability. In some instances, a regulation’s community-wide benefit, whether it’s recouping the cost of public infrastructure investments or preserving locally cherished natural or cultural resources, may well outweigh the attendant impacts on the costs of housing. Ultimately, of course, that determination is for a community’s elected officials. In making such tough choices, however, those officials should have the benefit of full information.

Accordingly, communities interested in analyzing the impacts their local regulations may have on the provision of affordable housing can follow the approach presented in this chapter, which is intended to provide a community with the fullest range of information possible. In sum, the methodology that should allow a community to:

• Recognize typical regulatory hurdles in each of the categories discussed in this report;

• Generate estimates of the costs associated with the regulation using available local and other sources of information

• Account for countervailing community benefits; and

• Look at alternative regulatory approaches that remove barriers without sacrificing goals.

Perhaps the easiest way to tackle the issue of identifying and addressing regulatory barriers to affordable housing is to think of the process as answering the following series of questions:

• Is there an affordable housing problem in our community?
• What evidence of an affordable housing problem do we have in our community?
• Can we identify the primary, contributing factors to the problem of housing affordability in our community?
• What specific steps can the public and private sectors take to counteract the factors contributing to the housing affordability problem?

The remainder of this chapter discusses the above four questions in detail and suggests the appropriate vehicle for asking and answering them.

Endnotes

1. Projection by Colorado Division of Local Government, DOH Report 1997.

2. Colorado Housing Finance Authority report March 1996.

3. Colorado Division of Housing. Housing Colorado: A Guide for Local Officials. 1996. P.1-8.

4. Colorado Housing Finance Authority report March 1996.

5. Estimate by the Colorado Division of Housing. See Sanko, John. "Housing pinch squeezes middle class." Rocky Mountain News, Monday, August 18, 1997.

6. Larry Kallenberger, executive director of the Colorado Department of Local Affairs. Quoted in Sanko, John. "Housing pinch squeezes middle class." Rocky Mountain News, Monday, August 18, 1997.

7. Real Estate Market Trends, King & Associates, April 1997.

8. German, Brad. "Under Siege: What Regulations Cost Builders and Buyers." Builder August 1993: 46.

9. For purposes of this report, "affordable housing" means housing affordable to a family making 80 percent of the median income level in a particular community. A housing affordability problem exists when a household earning 100 percent or less of area median income cannot afford to rent or buy safe and sanitary housing in the market without spending a substantial portion (e.g., 30 percent) of its income. The report concentrates on reducing unnecessary regulatory costs to make all housing more generally affordable.

9. "Taming the Exclusionary Effects of Growth Controls." Zoning News, American Planning Association, September 1989.

10. Advisory Commission on Regulatory Barriers to Affordable Housing. "Not in My Back Yard": Removing Regulatory Barriers to Affordable Housing. Washington, D.C.: U.S. Government Printing Office, 1991. "Mandate to the Commission."

11. See Horowitz, Carl F. "Deregulating the Housing Market: What Congress Can Do." Backgrounder Update No. 177. The Heritage Foundation, April 10, 1992.

12. The Advisory Commission on Regulatory Barriers to Affordable Housing concluded that barriers add 25 to 35 percent to the cost of a new hoe. See "Not in My Back Yard": Removing Regulatory Barriers to Affordable Housing. Washington, D.C.: U.S. Government Printing Office, 1991. Anthony Downs estimated potential savings from deregulation to be 50 percent or higher. See "Regulatory Barriers to Affordable Housing." Journal of the American Planning Association 58 (Autumn 1992): 419.

Prepared for
The State of Colorado
Department of Local Affairs
Clarion Associates
1700 Broadway, Suite 400
Denver, Colorado 80290
303.830.2890

To obtain a copy of the final report, please contact:
Division of Housing
Department of Local Affairs
State of Colorado
1313 Sherman Street
Room 323
Denver, CO 80203
(303) 866-20333