The U.S. lacks housing. Exactly how large the shortage is remains a matter of debate. For example, Freddie Mac economists last year estimated that due to costly, insufficient home construction over the past decade, the shortfall ranges from 900,000 to 4 million residences. NAHB economist Natalia Siniavskaia used historical data of normalized vacancy rates to estimate that the inventory shortage likely totals 1 million units. Her analysis calculated this total city by city, finding a housing deficit in both owner-occupied and rental housing in most, but not all, metro areas across the U.S.
The consequences of lean inventory and tight vacancy rates are higher costs for home buyers and renters. Consider the NAHB/Wells Fargo Housing Opportunity Index (HOI), a quarterly measure of the share of new and existing home sales that are affordable for a typical family. The most recent HOI finds fewer than six out of 10 home sales are affordable. Numbers are especially stark in some coastal markets—for example, roughly one out of 10 home sales are affordable for a typical family in Los Angeles and San Francisco.
Given this housing market environment, are there any signs that suggest improving trends for adding units and promoting housing affordability? In fact, there is: Median lot size for new single-family homes has been on a declining trend for 10 years of data. In 2007, the typical lot was 9,463 square feet. In 2017, median lot size declined to 8,560. Reducing home buyers’ spending on land, rather than housing, is one method to improve housing affordability.
Prior research on regulatory burdens for housing construction costs shows clear linkages between inefficient land use and development rules and higher construction and development costs. A 2016 NAHB research paper found that 2.2% to 11.7% of finished lot costs are due to rules that require certain land to be left undeveloped, thus requiring such costs to be embedded in those homes that are actually constructed.
Whether such cost factors are due to green space mandates, minimum lot size rules, or setback requirements, such exclusionary zoning practices are often at odds with true market demand for land associated with housing. For home buyers seeking a larger lot, the market should provide such options. But in many cases, these zoning rules are used to engineer politically desired density or other policy outcomes that interfere with actual market demand.
For this reason, the decline in lot size is a positive trend because it indicates that in markets experiencing volume growth in home building, there is success for builders and buyers with respect to adding more homes on a given amount of land. And given that the costs associated with land development are rising, as seen by the rising value of lots, such declines are a necessary part of the effort to improve housing affordability.
