Deregulation Can Fix the Housing Crunch

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Loosening regulatory constraints could be the key to solving America’s housing shortage.

As the Federal Reserve continues to cut interest rates, many are hoping that lower mortgage rates will ease the housing crisis. While cheaper borrowing costs may help potential buyers, this only addresses the demand side of the issue. The real challenge lies in the supply of housing, which has been severely constrained by excessive regulations.

The Real Issue: Not Enough Homes

The U.S. faces a structural housing deficit, with new home completions falling drastically short of historic averages. From 1968 to 2006, builders completed approximately 1.1 million single-family homes per year. However, since 2007, that number has plummeted to about 765,000 units annually, according to Moody's Analytics. Population growth has continued, but housing construction has lagged behind, leading to a shortage that has driven prices higher and made affordability a major concern.

Regulatory Barriers Block Construction

The slowdown in construction is largely due to rising materials costs, labor shortages, and—perhaps most significantly—burdensome regulations. Zoning laws, land-use restrictions, energy efficiency codes, and permitting processes have made home construction more expensive and time-consuming than ever before. As The New York Times noted, these regulatory hurdles are significant drivers of the housing shortage.

Before the rise of stringent regulations in the 1970s, the textbook economic model held true: when demand pushed housing prices above construction costs, developers would build more homes, driving prices down. But now, in heavily regulated areas like New York City and San Francisco, housing prices have skyrocketed, while less-regulated cities like Houston and Dallas continue to build more homes at affordable prices.

Research backs this up. A 2015 study showed that regulations in cities like Manhattan and San Francisco can increase housing prices by 50% or more. Meanwhile, the National Association of Home Builders (NAHB) estimates that regulations account for nearly 25% of the cost of a new single-family home, with an average of $93,870 added to home prices due to red tape.

Delays and Bureaucratic Hurdles

The regulatory burden isn’t just about money—it’s also about time. In some cities, developers must wait months, or even years, to obtain permits. In New York, developers reported waiting a year just to meet with a bureaucrat to resolve a dispute over compliance with local building codes. Each layer of red tape adds delays and drives up costs, further slowing the pace of new housing development.

Even federal policymakers are starting to recognize the problem. The Biden administration has proposed measures to streamline historic preservation reviews and ease restrictions on manufactured housing. Meanwhile, the Republican-led House has held hearings on the impact of regulations on housing costs, with broad agreement across the political spectrum that something must be done.

Promising Deregulatory Moves

Some states and cities are already taking action. Minneapolis eliminated single-family zoning in 2019, allowing higher-density housing to be built more easily. Grand Rapids, Michigan, has relaxed its lot-size requirements, and Hawaii has followed suit by allowing more housing units per lot. Montana passed several bills last year to give residents more freedom to build on their property, bypassing restrictive local rules.

However, many areas remain resistant to change. Homeowners often oppose new development out of fear that it will alter the character of their neighborhoods, while some local governments continue to see zoning restrictions as tools for controlling growth.

Bipartisan Benefits of Deregulation

The benefits of deregulation are clear: it would lower housing costs, increase social mobility, and foster economic growth. As economist Bryan Caplan noted, both Democrats and Republicans have reasons to support this agenda. Democrats should welcome the potential for increased equality and sustainability, while Republicans should embrace the boost to free markets and economic opportunity.

Ultimately, solving the housing crisis will require a concerted effort to clear away regulatory barriers and streamline the construction process. While some progress has been made, much more remains to be done. Whether lawmakers—and their constituents—are ready to make those changes will determine whether the housing crunch continues or finally begins to ease.