Housing affordability is often discussed in terms of mortgage rates, monthly payments, and list prices. Jay Knight believes the conversation starts much earlier. The veteran land developer argues that rules governing what can be built, where it can be built, and how long approvals take have become some of the most significant forces shaping housing affordability.
Knight’s new book, Zoned Out: How Cities and Counties Make Homes Unaffordable, examines how restrictive zoning, land-use regulations, and lengthy approval times increase the cost of carrying land, adding a force working against affordability before projects even break ground.
In addition to the anti-development sentiments preventing reforms that could facilitate more construction and quicker timelines, Knight suggests there is often a fundamental misunderstanding of what housing affordability is. Affordability, Knight argues, is not subsidized, Section 8, or income-restricted homes. Instead, an affordable home is one that a municipal employee can purchase using their own salary.
In a conversation with BUILDER, Knight discussed the central principles of his new book, the underlying problems impacting housing affordability, reforms gaining traction on a local level, and why he is cautiously optimistic about the path forward.
Why do you think zoning and regulations are often left out of the conversation about housing affordability?
Jay Knight, author of Zoned Out: How Cities and Counties Make Homes Unaffordable
Politically, it is not popular. What is popular is to be anti-development. We find that over the last twenty years, anecdotally, the people who were the loudest opponents of zoning and development are now the ones who sit on those boards. My experience, and the experience of the industry leaders I am talking to, would suggest that even if you do get approvals, now you get so many conditions that it makes home unaffordable.
The processes were getting worse, the requirements were getting worse, but it was getting worse in the early 2000s. In 2008, we had the Financial Crisis. All of a sudden, building lots were available for just pennies on the dollar. Everything was super cheap from about 2008 to 2015. Then we had incredibly low mortgage rates. The affordability hid the fact that all these restrictions had been added and were accumulating during that entire period. In 2021, we had the supply chains getting bad because of COVID. Our costs went up about 40% in just the beginning of 2021. To add insult to injury, a few months later, mortgage rates doubled. Affordability then became a huge issue.
The home building business has been flat for about five years ever since we had that intersection of rising costs and rising interest rates. What we in the business community do is start assessing everything that we do. The land we buy, the houses we build, and we trim. Things that you could not change were zoning conditions. When mortgage rates were at 3%, it didn’t matter that the county required us to do 100 foot lots and 2,400 square foot houses, because everybody could afford it. When mortgage rates doubled and costs went up by 40% and we were stuck with no ability to answer the buying power of the people who would be our customers. In 2020, a police officer could buy a $400,000 house no problem. In 2022, that same income could afford about a $250,000 house. We did not have the ability to build it because our lot sizes and house sizes had been prescribed two years earlier during a zoning period.
What does a six month or year delay cost a builder and developer and how does this contribute to affordability challenges?
Zonings once took 90 days; now we budget a year and we feel fortunate if we get it done in a year. The cost of that delay is primarily opportunity cost in that if zonings happened every four months, then you could potentially zone three times as many properties per year.
The biggest one that we are working on right now is final plat delay. What happens on final plat delay is we have already completed purchasing the land, grading it, installing the sewer, water, curb, asphalt, and storm sewers. We will have millions of dollars on the ground that we are paying interest on. The municipalities now have created processes where it can take six months or up to a year to record that plat.
My business partner and I have a deal that we just completed development on. Our interest carry cost is $70,000 a month. If it takes eight months to record that plat, that means we have added $560,000 to our cost. That adds about $6,000 per lot to every building lot. That is just a cost to us. When we sell a lot, we calculate the margin against all of our costs. That $6,000 increase to our cost translates to about an $8,000 increase to the builder; they’re going to do the same thing and add margin because they have to stay in business. So it is going to cost the home buyer $11,000 or $12,000 additional to the house just so they can reimburse us for that interest carry. That delay is a real measurable cost impact on buyers.
What are the common reasons that people hold anti-development perspectives and what are some of the positives of development that people overlook?
The three primary things we hear are: increased traffic, overcrowding schools, and that if we build something smaller than the existing neighborhood it will drive the value of their houses down.
The person that is selling the piece of property that they are upset about has every right to develop their property the same as the person who sold the lot that their neighborhood sits in. What’s ironic is that so many of the people who come out in opposition were able to buy during that window from 2008 until 2021. In a lot of cases, it’s not likely that they could even afford to purchase the smaller homes that we are going to build. If a person got a 4,000 square foot home ten years ago for $400,000 and I am trying to build an 1,800 square foot home in a neighborhood next to them that is going to sell for $360,000 or $375,000. The house isn’t as big, but the cost per square foot is virtually double what they paid. I think it is just erroneous to think that if an apartment complex, a smaller home, or a larger home goes in that it affects my property. All that really affects my property value is schools. In Georgia, schools are not overcrowded. You can find isolated areas where schools are overcrowded, but for the most part school enrollment is flat and right now we are not even at replacement levels in birth rates. Schools are a non-issue.
What happens when we build neighborhoods and more people come is that you get more shopping, more dining, your emergency services get better. People are a good thing. People bring commerce and commerce brings a larger tax base.
With the traffic issue, we don’t build neighborhoods and then add water and people appear. We don’t invent the people. We serve the people who are either in that area or want to be in that area. Typically what we are doing when we build a neighborhood is we are helping move a commuter from one community to another. That has a net zero effect on traffic. Or, in most cases, we are taking a commuter who is already driving through the community from a more distant location and shortening their commute.
Are there any requirements that may have made sense in the past but no longer make sense today?
I don’t think limiting private property rights ever made sense. But, now with the way costs have exploded and interest rates have gone up. Mortgage rates are not bad in a historical context. The problem is they doubled at the same time costs went up 40% and it is going to take a long time to work through it. If the government would take their hands off density, minimum square footage of houses, minimum lot sizes, and architectural restrictions the builders and developers would solve this affordability problem. Then as wages grow, as mortgage rates stabilize, and costs are absorbed, then builders have all the freedom in the world to build large homes on large lots and they’d make more money. At least there would not be this affordability gap for young people waiting until they are 40 years old to buy a home.
When you put these minimum square footages, maximum density, minimum lot sizes, and architectural restrictions the municipalities have unwittingly driven the median price of homes up over $400,000. That has an impact on rent, too. If all I can do is build homes that carry a $400,000 plus mortgage, then the person who owns an apartment complex can charge whatever they want for rent as long as that rent is below the mortgage payment for a $400,000 mortgage. If we were able to build higher density, smaller homes, things that $62,000 a year salaries could afford, then it would put massive downward pressure on rent and affordability would go through the roof for all Americans.
If policymakers took just one idea from Zoned Out, what would you want it to be?
I think they should open every conversation about housing by giving the definition of affordable housing. An affordable home is one a municipal employee can afford to purchase solely on their salary. Then the rest of the conversation would reveal if they were serious about affordable housing or not.
The reason we tie it to municipal employees is because the municipalities would want to dictate what we could build. If it’s good enough for the goose, it’s good enough for the gander. The definition is the most important part. They also need to be aware of the way they are segregating people by income. They would never on their future land use map say people in this area have to earn over $200,000 and people in this area have to earn between $150,000 and $200,000 and people in this area have to be between $100,000 and $150,000 and household incomes can be less than $75,000 over here. If anybody showed up with something like that on a land use map, they would make national news because of the obvious way people are trying to segregate socioeconomically. But that’s exactly what they do when they state density.
Are you optimistic or pessimistic about the progress being made on regulatory reforms?
There are a lot of us engaged in the fight who were not before. We are not talking about things theoretically now. We are able to look back on the last five years and see how affordability has deteriorated. This is not just conjecture, we have evidence this is not working. The pendulum has swung. We are broken. I think it will swing back.
The federal government wants to say that it does not have authority to pierce home rules at the municipal level. It does. In Georgia, we have a Department of Community Affairs and there’s a similar department in virtually every state. They are fully funded by [the U.S. Department of Housing and Urban Development]. All of those organizations have authority over their cities and counties. As the conversation grows, we’ll find more people who want their kids to grow up and live within the same zip code. People will be concerned about birth rates not being at replacement levels. I believe the pendulum will swing back. I am cautiously optimistic.
