How Changing Zoning Laws Could Address Housing Market Shortages

Housing market shortages continue to roll across the United States. According to the latest report, we are short approximately 5.24 million homes across the country, a figure that is up 1.4 million from 2019. This has been exacerbated by pandemic-related labor and material shortages, but the core issue is that new household formation has long since overtaken new house construction.

To help tackle this issue, many lawmakers throughout the United States have started to use zoning laws as a way to enact large-scale change on this issue. If they’re used in a forward-thinking way, these zoning laws can proactively address market shortages and act as a tool to fight housing inequity and climate change.

City planners, housing advocates, and many others believe that these new laws are an essential step in creating more affordable and flexible housing in urban areas across the country. In this article, we’ll explain how these zoning laws work, and what impact we expect them to have on ongoing market imbalances and new opportunities for real estate investors and developers.

Reducing Single-Family Zoning

With rising housing costs outstripping wages in many parts of the country, lawmakers have turned to zoning laws and land-use bills as a way to counteract this trend and create more options for buyers and investors.

When areas are zoned for single-family homes only, it drastically limits how many homes can be built and how many individuals can be housed there. Instead of building up, builders are forced to spread out horizontally, creating more suburban areas. Over time, this creates higher carbon emissions as neighborhoods spread out and people have to drive into the cities for work. It also tends to drive out lower-income individuals who are rapidly finding themselves priced out of cities.

Incentivizing local officials to change these zoning laws is a major part of the current administration's proposed infrastructure plan, and we’re already seeing places like California take action.  

California’s New Zoning Laws

California recently passed laws that make significant changes to zoning rules, especially in its cities and other urban areas. On Sept. 16, 2021, Governor Gavin Newsom signed SB-9 into law, which includes such provisions as:

• Requiring cities to approve up to four housing units on a lot that was previously zoned single-family only
• Approving the splitting of single-family lots so they can be sold separately
• Giving local governments the power to block construction projects that pose a public health or safety risk

Following the state-wide passage of this law, cities like Sacramento have pledged to be the first in California to completely eliminate single-family zoning. These new laws immediately create more opportunities for homeowners, renters, and real estate investors alike. 

Zoning Laws vs. Opportunity Zones

Another legal mechanism that the federal government has used to create more equity and opportunities in housing is Opportunity Zones. This is an economic development tool that offers individual and group investors certain incentives if they invest in distressed areas that have been designated as Opportunity Zones.

Owning or investing in a property located within an Opportunity Zone offers a variety of benefits, including:

• The ability to temporarily defer taxes on property if the funds are invested in a Qualified Opportunity Fund
• Lessening your taxable gains the longer you hold a property
• Permanently excluding any appreciation on an investment that’s more than 10 years old

These are valuable incentives that could amount to significant tax savings, depending on how much you invest and how long you hold the property.

How Zoning Laws Can Impact Real Estate Investors

While there are many potential benefits from investing in a property located in an Opportunity Zone, the changes that offer the most benefit to real estate investors are coming in the form of new zoning laws.   

By cutting down on single-family zoning, local and state governments are helping to increase our national supply of housing. Additionally, many of these newer homes and units are condos and townhomes, which can offer more affordable investment opportunities for new and experienced real estate investors alike.

How PropStream Can Help You Take Advantage of These Opportunities  

Looking for a way to take advantage of these new opportunities being created by our local, state, and federal governments? PropStream can help.

With our multi-sourced market data, it’s easy to search for zoning under property characteristics by property type. Then, using the land location details, you can look through maps and other documents that will help you better evaluate the property.

Want to see how it works for yourself? Start your 7-day free trial today.