America needs more starter homes

America has a housing problem. Inevitably, we millennials get the blame.

After years of delaying or skipping milestones — marriage, children, homeownership — for financial and cultural reasons alike, millennials (who are presently aged 25-40, i.e. not college kids) are finally ready and (maybe) able to buy houses. The trouble is twofold: There are only so many houses to buy, and four in five of the houses available aren't the right sort of house for most first-time buyers. Home construction has lagged demand for more than a decade; new house inventory is too big and too expensive; and real estate investors, who can often outbid ordinary buyers with cash offers above asking price, are snagging starter homes at record rates.

There's a simple solution to all of these connected woes: We need to make it feasible to build smaller, cheaper houses.

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And I do mean houses — single-family homes and townhouses or condos with private outdoor space — not apartments, tiny homes, granny flats, or trailers. Those all serve important needs, and we should make it easier to build them, too. But when the average American thinks of buying a first home (particularly now, after the COVID-19 pandemic so often confined us to our living spaces), the dream is not an apartment or trailer. It's a detached, semi-detached, or terraced house, purchased at an affordable rate, with at least a small patch of earth to use as you alone please.

That's precisely what American builders aren't much building. The average cost to construct a new single-family home (SHF) in the United States is about $300,000, and that's excluding the cost of the lot, driveway, and landscaping. Add those features — and you really can't do without the land, at least — and a new SFH in many locations ends up closer to $400,000, which gets you about 2,250 square feet with three bedrooms with two or three baths.

That's not a starter home. It's a 30-year mortgage bill of around $1,600 a month before taxes, insurance, utilities, and maintenance. It's also quite large. Certainly too large for a childless couple, and arguably unnecessary for the average American family of four, at least until the kids hit middle school and can cite puberty in their case for their own room. (The median existing SFH is only 1,600 square feet.)

Then why aren't builders building smaller, cheaper homes so Americans who need less can buy less? Some of it is rising materials costs. Some of it is about demand: Americans like big houses with lots of bathrooms. Undoubtedly some young adults want to jump straight to a house they can imagine keeping forever — skip the starter home, get to the good stuff. That's an interesting cultural conversation, and one I'm interested in having, but there's another reason, too, and one with a far clearer path to change.

That reason is municipal housing policy, particularly zoning rules and building codes. These laws desperately need reform.

Restrictive zoning makes housing more expensive. It limits what can be built where, and it sets minimum lot sizes as well as maximum and/or minimum building footprints (the footprint is the percentage of the lot the building covers). Minimums make it difficult for builders to deliver smaller, more affordable homes on smaller, more affordable lots, while maximum footprint rules constrain infill building in older areas. In my historic neighborhood, for example, there are lots as narrow as 20 feet with houses covering more than half the land. That would typically be illegal today. Duplexes and townhouses are naturally more affordable than SFHs while offering similar amenities, including private yards, but exclusionary zoning keeps them out of many American neighborhoods.

The Biden administration's infrastructure plan includes federal incentives (like tax credits) for localities willing to reform zoning laws to allow smaller lots and permit multi-unit buildings in neighborhoods now under a SFH mandate. Hopefully those incentives work.

Changing building codes may be a more difficult political challenge — not that zoning reform is easy — because the argument against it is so facile: What, you want people to live in unsafe houses? You want unscrupulous builders to cut corners and sell shoddy homes that hurt people?

No, obviously. But building regulation exists on a continuum, and many of the costs added by onerous building codes don't directly affect safety at all. A lot of it is high permitting fees, which correlate with less construction. "A three-bedroom house costs $60,000 more to build in Lake Elmo, Minnesota, than across the border in Hudson, Wisconsin," Minnesota Public Radio reported in 2019 from an interview with a builder named John Rask whose company works in multiple Midwest states. "Rask said Minnesota's bureaucracy accounts for a huge part of the 15 percent added to the sale price," MPR said.

That report noted a single permit cost $8,000 more on the Minnesota side of the border, where builders may have to deal with six or eight bureaucracies whose work in Wisconsin is handled by just one agency. These added costs make it impossible, builders told MPR, to complete a new home for $250,000 or less. Even $300,000 is a stretch. That incentivizes builders to go bigger, because those aren't starter home prices. People expect more for this kind of money. Moreover, expensive and complicated permitting is proportionally less of a burden with a big house — but we don't need more big houses.

You haven't heard about the epidemic of homes collapsing on people's heads in Wisconsin because there isn't one. Minnesota's maximalist regulatory approach isn't necessary. It makes affordable new construction incredibly difficult. It may complicate or outright preclude creative solutions like kit houses (which are actually available from a Midwest hardware chain for as little as $67,000 if you take advantage of the mail-in rebate). We can reduce these regulatory costs dramatically without putting people in danger.

Looser zoning rules, a laxer approach to lot and footprint sizes, and a leaner building code bureaucracy would make starter homes viable again. They are the smaller, cheaper houses we need.