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Policy Report

Below-Market Housing Mandates as Takings
Measuring their Impact

24 pages, 779 KB
Printed Report
24 pages
Price: $10.00

Housing affordability has become a major issue in recent years. To address the problem, many cities have adopted a policy known as below-market housing mandates or inclusionary zoning. As commonly practiced in California, below-market housing mandates require developers to sell 10–20 percent of new homes at prices affordable to low-income households.

Many developers, however, argue that the program is in violation of the takings clause of the U.S. Constitution because it forces developers to use some of their property to advance a public goal. Nevertheless, in Home Builders Association of Northern California v. City of Napa (2001), the court ruled against the regulatory takings argument, saying that belowmarket housing mandates are legal because (1) they offer compensating benefits to developers and (2) they necessarily increase the supply of affordable housing.

This study investigates these claims in the following way: Section 2 discusses the history of regulatory takings and discusses why below-market housing mandates may be considered a taking. Section 3 investigates how much below-market housing mandates cost developers. Section 4 investigates econometrically whether below-market housing mandates actually make housing more affordable.

Our research indicates that the decision by the California Courts of Appeal is on shaky ground. Below-market housing mandates require developers to forgo substantial amounts of revenue and they provide little offsetting benefit. A mandate in Marin, California, for example, would require developers to forfeit roughly 40 percent of revenue from a project, and builders are offered almost nothing in return.

We can see how below-market housing mandates affect housing markets by using econometrics to analyze data of price and quantity for California cities in 1990 and 2000. Our regressions show that cities that impose a below-market housing mandate actually end up with 10 percent fewer homes and 20 percent higher prices.

For developers, inclusionary zoning has an effect similar to a regulatory taking. For society in general, affordable housing mandates decrease the supply of new housing and increase prices, which exacerbates the affordability problem.

Edward J. López is BB&T Distinguished Professor of Capitalism at Western Carolina University. Professor López's main area of research is in public choice and law and economics, with emphases on empirical models of creative expression, technological innovation, voting, political ideology, and political institutions.

Edward P. Stringham is a Research Fellow at the Independent Institute; President and Director of Research and Education at the American Institute for Economic Research; Kathryn Wasserman Davis Professor of Economic Organizations and Innovation and Deputy Director of the Shelby Cullom Davis Endowment, Trinity College; and editor of the Independent Institute book Anarchy and the Law: The Political Economy of Choice.

Thomas Means is a Research Fellow at the Independent Institute and Professor of Economics and Director of the Center for Economic Education at San Jose State University. Means is a former city council member and former mayor of Mountain View, California.

From Edward J. López
THE PURSUIT OF JUSTICE: Law and Economics of Legal Institutions
The Pursuit of Justice is a thoroughgoing analysis of the bureaucratization and politicization of the U.S. legal system and how the law works in practice rather than in theory. The book looks specifically at how decision makers in the law—judges, lawyers, juries, police, forensic experts, and more—respond to economic incentive structures.

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