Reforming Land Use Regulations and Housing Production

Zoning Code – A Rockford, IL Review

My last few posts have been focused on housing affordability at a national level along with the regulatory drivers of affordability. The last article in our affordability series, a guest piece by Carlos Martinez, focused on parking regulations and their cost implications on housing production. One article focused on the affordability of housing in my hometown of Rockford, IL.

Today, I will look at land use regulations, their impact on housing production and affordability, and I will use the 2008 City of Rockford, IL zoning code changes to bring key regulatory impacts to the forefront. While the ordinance pertains specifically to Rockford, the areas of focus are key cost drivers across many cities. Addressing them locally is necessary since land decisions are held at the local level. One would be wise to look at these same components in their community; assuming there is a desire to spur housing development if your market is stalled like ours.

Demand plays the major role in housing production. I can show we have demand. Of course, other factors play a role i.e., school quality and community safety, but even with these as challenges in Rockford, there is still an unmet level of demand. Why?

Land is one of three primary components of production in community economics. The other two are labor and capital.  Effective land use can provide substantial economic and social benefits while poor or punitive land use restrictions can be harmful to local economies. It is my belief the latter is at play in my community.

Given the current affordability crisis and the lack of housing production much has been written about land use regulations and their reform to spur housing production. Communities across the nation are reconsidering and changing their land use restrictions to address the shortage of housing units – affordable, workforce, and marker rate products. A cool tool to track zoning reform is the Zoning Reform Tacker from the Othering and Belonging Institute. There are two components to the Zoning Reform Tracker: the database, and the web map where one can visually see what changes are occurring across the United States. Near to me, in Evanston and Chicago, I can see that both have addressed accessory dwelling units (ADUs) in their zoning reforms.  

Source: https://fred.stlouisfed.org/series/PERMIT

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The above chart reflects total new U.S. permits for privately-owned housing units. This is both single and multi-family products. The upward trajectory over the past thirteen years is attributable to market demand, and in some cases spurred by regulatory land use reforms such as allowing greater density through height and lot minimum size changes.

To position the discussion on the Rockford Zoning Code, it is imperative to look at both anticipated housing demand and actual housing production.

Demand was predicted in a December 2020 Comprehensive Housing Market Analysis (CHMA) performed by the Department of Housing and Urban Development (HUD), Office of Policy Development and Research (PD&R). The forecast period was December 1, 2020, to December 1, 2023, and included Boone and Winnebago Counties. In this time period, despite declining population there remained demand for approximately seven hundred seventy (770) single family units and one hundred forty (140) multifamily units. At that time, ninety (90) single family units and forty (40) multifamily units were under construction. We haven’t yet met the demand goals.

The following chart shows permits for privately-owned housing units in both Winnebago and Boone Counties. Note: Data is not yet available for 2023 permits due to annual reporting cycles.

Source: https://fred.stlouisfed.org/series/BPPRIV017201

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The following chart shows housing production in the City of Rockford, IL over the past twenty-five years, including pre-adoption of the 2008 Zoning Ordinance (blue) and after (red).

Source: Carlos Martinez

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It’s worth noting 2008 is a pivotal year, and for that reason that’s where we start our Rockford zoning code (land use) review. Two drivers of production occurred in 2008: 1) the financial crisis, aka the great recession, triggered significant foreclosure activity and, 2) the City of Rockford passed its then new Zoning Code Ordinance (effective April 3, 2008).

It should also be noted that the CHMA mentioned above cited that forty percent (40%) of renters were living in for rent single family homes (December 2020) a result of the foreclosure crises. This has removed significant single family home inventory from homeownership, further reducing the single family for sale inventory.

While we can cite the 2008 financial crisis as a reason for the halt in new housing production, essentially killing demand, I must ask, why is the rest of the State of Illinois, Midwest, and Nation seeing upward trending in housing production since 2010 and we, within the City of Rockford continue to see a flat line in building permits and subsequent housing production? One could assume a lack of demand, but recent news reports and localized data shows clear demand, as did the CHMA above. Much of the demand seems to be due to the aging and obsolescence of existing building stock and new household formations – about 75 per year. And yet, we’ve built nothing substantial, and no real progress has been made towards the goal of 770 single family units or 140 multifamily units projected in the HUD CHMA. The report also notes that no large-scale multifamily product has been built since 2010. Why not?

Effective April 2008, the City of Rockford Zoning Ordinance changed regulations on minimum lot sizes, garage loading, changes in setbacks, façade and sidewall design, and minimum triggers for Planned Unit Developments (PUD) as well as other changes referenced in a memo (dated November 5, 2007) I sent to the city of Rockford. These changes added significant costs to a single-family house or multifamily unit. A copy of the memo can be found HERE. In 2007, that estimated cost was just over $18,500 per home $8,000.00 in added land costs and roughly $10,500.00 in added building costs. In today’s dollars, that cost is just over $28,000 excluding any increases in permit fees, engineering reviews, and sewer and water hook ups.

Excerpted from memo:

In that same memo, I expressed concerns about the changes adversely affecting the City’s #1 major objective, specifically, “Ensure that the zoning ordinance is not a barrier to economic growth and development.” I further outline the components and their potential effect on price of a home cautioning said changes may indeed become a barrier to future production. I don’t feel it beneficial to include all details of the memo within this post, so I encourage you to read the memo, again it can be found HERE.

The zoning code also had transitional language in hopes of aiding then existing platted and annexed properties already in the production pipeline at that time. This explains the slight bump in production when capital markets began to free up in 2010 and 2011; however, since production remains at significantly reduced levels and don’t even address the anticipated 75 newly formed households annually. For those who may believe those years leading up to the financial crisis were over production years, we only have to look at a longer period of production to see the trend has been a downward trend since the 1970s – chart follows.

Source: FRED

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Of course, the 2008 ordinance can’t be blamed for the downward trending prior to its enaction; however, we have a history of creating more restrictive land use regulations that have historically worked against density and increased sprawl, placing those costs on the developers and ultimately homebuyers and renters within the then new north and east side neighborhoods. I believe the impacts of the 2008 ordinance are “compounding” on the impacts of prior land use regulations. Additionally, new changes have also been enacted since the 2008 update. To be exact there have been eighteen amendments since the 2008 adopted ordinance. One large barrier for developers is the change in the PUD limitations, reducing mandatory thresholds, as the following comparison between the 2008 and 2017 ordinance shows.

2008 Ordinance Planned Unit Development (PUD) Thresholds:

2017 Amendment PUD Thresholds:

PUDs are often disliked by developers because they create risks such as the length of time it takes and the more complicated processes in place to get PUD approval from the local jurisdiction. These both add costs to housing units. In a PUD, standard zoning and rules about subdivisions don't apply. Additionally, according to real estate experts at Redfin, banks and mortgage lenders may use different standards when deciding whether or not to finance PUD housing.

While all the above focuses on Rockford, IL, these conditions are not uncommon in other communities. And since nearly seventy-five percent of currently zoned land is zoned for single family housing, these land use restrictions have significant control over not just the production of housing, but also the cost of housing. Multifamily regulations are even more restrictive. In a recent Yardi report, they cite that forty percent (40%) of multifamily housing development costs are attributable to regulatory burdens. Forty percent (40%)!

Other communities are hitting these well-intentioned ordinances head on and changing them to spur production. As mentioned above, the Othering and Belonging Institute at Berkley, online Zoning Reform Tracker, is a single online repository tracking such reform, reform we can learn from. If you are experiencing a lack of housing production, the questions should include is there demand, and if so, what is hindering that demand? Across board we can all cite construction and interest costs; however, are land use regulations contributing to that lack of construction activity? Additionally, if you are community like Rockford, where housing inventory is aging and its quality is deteriorating, how may we work to renovate those units and replace homes through infill where existing infrastructure exists? Perhaps that latter question is one left for another day.

Have thoughts or reactions? I’d love to engage in discussion so add them below.