The White House on Monday announced a package of reforms designed to address the shortage of housing in the United States.
“Fewer new homes were built in the decade following the Great Recession than in any decade since the 1960s,” the White House noted. That has led to a serious shortage of housing in many parts of the United States.
Now the federal government is going to start using financial incentives—specifically, Department of Transportation grants—to encourage local governments to reform their land use regulations. That’s important because a patchwork of local regulations has prevented developers from meeting market demand for housing, especially over the last 15 years.
The Biden Administration is also looking to increase production of manufactured homes, which can be significantly more affordable than conventional homes built on-site. The US produced just 106,000 manufactured homes in 2021, fewer than a third of the 362,000 homes produced 25 years earlier, and barely one-fifth of the 492,000 homes produced back in 1971.
That’s partly due to regulatory barriers; some local governments explicitly ban manufactured homes from many areas. It’s also because federal policies discourage lenders from offering buyers of manufactured homes the same favorable financial terms available to most purchasers of conventional homes.
Most housing regulations are set at the state and local level, so there’s a limit to how much the federal government can do to promote housing production. But Emily Hamilton, an economist and housing expert at the Mercatus Center, told me that the Biden plan “covers many of the areas where the federal government has the potential to improve housing affordability.”
Paying cities for better housing policies
America needs more housing, but a lot of voters don’t want any constructed near them. And a lot of housing regulations are set at the local level, where local activists can easily block new projects. The result: systematic under-production of housing in many areas.
States have been struggling with this problem for decades. Last year I wrote about California’s plan to force municipalities to allow more housing construction. New Jersey has its own legal framework requiring cities to accommodate housing construction and offering developers legal remedies if cities don’t meet their obligations. Other states have similar laws.
But cities that don’t want to cooperate can be endlessly creative about finding ways to stymie housing production.
“Local governments have many tools available to them to make it difficult or expensive to build,” Hamilton told me in a phone interview. California, for example, has had to repeatedly update its laws to foil the delaying tactics of intransigent local governments.
It would be counterproductive for the federal government to get directly involved in these fights. Land use policy has traditionally been a state responsibility, and as a result laws vary from state to state. A one-size-fits-all federal policy wouldn’t make much sense, and the federal government is unlikely to be nimble enough to deal effectively with foot-dragging municipalities.
So the Biden administration will use carrots rather than sticks. According to the White House, the Department of Transportation will “reward jurisdictions that have put in place land-use policies to promote density and rural main street revitalization with higher scores” in applications for three Department of Transportation grant programs worth a total of $6 billion.
Tying transportation funding to land use policies makes sense because the two issues are inherently connected. If you build a new subway station in a neighborhood zoned for large lots and single-family homes, few people will live close enough to use it. So any time a local government invests in transit, it makes sense to also change the law to allow denser development.
This strategy—rewarding cooperative cities rather than punishing uncooperative ones—may help to address the problem of local governments finding creative ways to undermine housing production. But it doesn’t eliminate it entirely. There’s still a risk that local governments will liberalize their rules on paper but still find ways to block actual housing production.
This is why Hamilton believes federal rules should focus on outcomes—like total units permitted—rather than formal policy changes by local governments. In her view, local jurisdictions should get credit for reforms only after developers have broken ground on new projects.
“Instead of rewarding localities for promising to permit more housing eventually or for adopting policies that may not result in more housing construction on the ground, Congress could instead adopt a competitive grant program that ranks localities according to their housing market outcomes,” Hamilton said in testimony before Congress last year.
Better financing for manufactured homes
In many areas, the most affordable type of housing is manufactured homes. Centralizing production in a factory allows companies to take advantage of economies of scale and employ less skilled workers for some parts of the manufacturing process. As a result, a manufactured home tends to be much cheaper, per square foot, than a conventional stick-built home.
Manufactured homes are frequently called “mobile homes” or “trailer homes,” but that’s misleading. While manufactured homes are shipped to a lot for installation, most are placed on a permanent foundation and designed to never be moved again.
But as Matt Yglesias explained in an excellent article last year, the law puts manufactured homes at a systematic disadvantage. One federal rule requires manufactured homes to have a chassis that stays attached to the home even after it is placed on a permanent foundation. This not only drives up the cost of manufactured homes, it also has perverse regulatory implications. The chassis requirement makes it easy for hostile local governments to regulate them as if they are actually mobile homes, which are often subject to more onerous regulations.
Even worse, the fact that they’re theoretically mobile means that manufactured homes are often not eligible for conventional 30-year mortgages. Instead, they have to be financed with chattel loans that tend to have shorter terms and higher interest rates.
These factors have contributed to a dramatic decline in the manufactured home industry in recent decades. Manufactured home shipments peaked back in 1973 with 581,000 homes sold. In 2021, the industry sold only 106,000 homes, in spite of today’s much larger population. There’s room to build a lot more manufactured homes if the legal environment were more favorable.
The best reform here would be to repeal the chassis rule and require lenders and local governments to treat all permanently-installed housing the same. The Biden Administration isn’t going that far—perhaps because it would require an act of Congress.
But the White House is taking an important step in that direction. The Federal Housing Finance Agency oversees Fannie Mae and Freddie Mac, government-sponsored enterprises that underwrite many conventional mortgages in the United States. The Biden Administration says it will encourage these companies to underwrite mortgages to purchase manufactured homes. That should make manufactured homes more affordable and encourage greater production of them.