How ‘Smart Growth’ hurts the poor and racial minorities

Published December 1, 2001

America’s commitment to providing home ownership opportunities for all confronts a serious challenge as more and more entry-level home buyers are priced out of the market by poorly conceived “smart growth” initiatives.

Those initiatives, which attempt to limit a community’s growth and development through such regulations as growth boundaries, down zoning, impact fees, prohibitions, and set asides, have the effect of raising home prices and discouraging home ownership among low-income buyers. As a result, smart growth initiatives will reverse one of America’s greatest public policy successes: the highest home ownership rate in our history.

Until World War II, fewer than half of all American families owned homes. But postwar prosperity pushed the home ownership rate to a record 55 percent in 1950, and above 60 percent by 1960. Since then, the U.S. home ownership rate has been inching its way up to a record 67.7 percent in late 2000.

Benefits of home ownership

Among its many benefits, home ownership offers households the opportunity to accumulate wealth. As monthly mortgage payments reduce the debt and as the value of the home rises, home owners generally experience an increase in the value of their equity–the difference between what the house is worth and what is owed on it. Counting the home and all other assets, the median net worth of the American home owner in 1998 was an impressive $132,100, compared to only $4,200 for the renters.

Home equity is particularly important for home owners of modest incomes. For home owners with incomes between $20,000 and $49,000, home equity accounts for between 40 and 45 percent of wealth . . . and as much as 65 percent for those with incomes below $20,000.

Smart growth threat

Postwar economic prosperity has played a major role in fostering higher rates of home ownership, but this achievement now confronts regulatory obstacles rising from the “smart growth” movement. Although smart growth strategies vary significantly from place to place, and from one advocate to another, at their core is the goal of preventing or slowing suburbanization by limiting the amount of land available for new construction.

Recognizing that a growing population needs a steady flow of new housing units each year, some smart growth advocates seek to save land by directing the needed new construction into higher-density developments, such as high rise apartments or town houses. Such developments use much less land than what most households would prefer–the ideal being a single family, detached house on a lot of an eighth to a quarter of an acre or more.

But some more extreme growth-control advocates want to discourage all growth, regardless of density, in order to preserve their neighborhoods exactly as they are. They support policies that discourage or severely limit any new construction.

Growth boundaries and zoning

Policies typically adopted by those wanting to guide growth into more compact forms usually involve a “growth boundary” and/or more rigid zoning requirements that define where growth can occur and where it cannot, and often mandate smaller lot sizes. By restricting the amount of land available for development, growth-guiding policies indirectly raise the price of homes by rationing the supply of land.

At the other extreme, policies designed to reduce or discourage growth generally raise home prices directly, through such techniques as requiring large lots, high fees, or costly amenities.

By raising home prices, smart growth policies force households of modest means into smaller units, or out of the community altogether. In either case, the burden is largely born by entry-level home buyers and other households with low to moderate incomes. To the extent that such policies become more commonplace in American communities, the rate of home ownership will likely fall as more and more moderate-income households are forced into the rental market.

Portland experience is telling

Portland, Oregon, for example, imposed a rigid growth boundary around its metropolitan area in 1979. When drawn, the boundary included substantial areas of undeveloped land, but by the early 1990s much of that land was built upon and the boundary imposed a significant constraint on land available for new construction.

Land costs soared, and by the mid 1990s home prices in Portland had surged ahead of the national average. Home ownership rates in Portland bucked national trends, falling during a period of time that saw the national home ownership rate rise to record levels.

As home price surveys conducted since 1991 reveal, Portland was one of the most affordable communities for housing at the beginning of the decade, but by late 2000 it had become one of the least affordable. Its affordability index plunged by 60 percent in roughly a decade. Indeed, while affordability nationwide increased, Portland’s affordability index fell faster and farther than that in any other large metropolitan area.

Who suffers?

Most hurt by escalating home prices are those who are not yet home owners: Americans with household incomes below the median, and racial minorities. As of the third quarter of 2000, 81.7 percent of households with incomes at or above the median were home owners, whereas only 52.2 percent of those with incomes below the median owned homes. Because most smart growth strategies “work” by raising home prices, households with incomes below the median–already under-represented as home owners–will bear the brunt.

On average, minority households have lower incomes than white households. In 1999, the median income for black households was $27,910, and $30,735 for Hispanic households–compared to $42,504 for white households.

Minority households have quite a bit of catching up to do before they even come close to achieving home ownership parity with non-Hispanic white households. Although the overall home ownership rate in America reached a record 67.8 percent last year, this rate reflects an ownership rate of 74.3 percent among non-Hispanic whites, but only 46.8 percent for black Americans and 46.7 percent for Hispanics.

In recent years, Hispanic and African-American home ownership has been rising at approximately double the rate of non-Hispanic whites. Smart growth’s higher housing prices will therefore fall hardest on Hispanic and African-American households.

The housing cost increases that accompany smart growth policies would relegate thousands of minority and other modest-income households to permanent renter status.

History could well show that shortly after ending red-lining, which suppressed minority home ownership rates, cities began green-lining, through the imposition of growth areas, with virtually the same effect. There is much more at stake here than urban planning.

Wendell Cox is a senior fellow of The Heartland Institute; a consultant to public and private public policy, planning, and transportation organizations; and a visiting professor at a French national university. He can be reached at 618/632-8507, or by email at [email protected]. Dr. Ronald Utt is a senior research fellow studying housing, transportation, federal budgetary matters, and privatization issues at The Heritage Foundation. His email address is [email protected].