To fix their housing shortage in 2024, cities and states should turn to market

States and cities considering housing supply reforms in the new year to combat worsening affordability should unleash the free market rather than rely on the Department for Housing and Urban Development (HUD) regulatory solutions. HUD’s recommendations tilt towards heavy-handed government interventions that lack thorough analysis and proven results.

A particularly egregious example is HUD’s latest assessment of Seattle’s Mandatory Housing Affordability (MHA) fund, which looks past historical context and unintended consequences while presenting a one-sided picture. While HUD singles out the “success” of the MHA by highlighting the creation of hundreds of new affordable units since its inception in 2019, it leaves out the thousands of units that were not built because of MHA. In that sense, the MHA has undone decades of progress from Seattle’s prior upzoning reforms that freed the market from government regulations.

To properly evaluate the MHA, one must go further back in time than the HUD assessment. The story begins in the mid-1990s when Seattle started to grapple with rising housing costs. As a political compromise that left most of the city restricted to single-family zoning, the city allowed moderately higher density around “urban villages” that comprised only about 16 percent of the city’s residentially zoned land. The idea was simple: Increase supply within the urban villages by replacing older single-family detached residences with new generally four-unit townhomes.

The results were telling: Over the following two decades, mostly small-scale builders constructed 18,000 new townhomes — just imagine the potential had this policy been applied more broadly. While the new units were market-rate, they greatly expanded opportunities for homeownership and wealth building: From 2012-2020, 42 percent of townhome buyers had moderate incomes. Crucially, these new homes freed up older homes to those of more modest means through a process known as filtering.

Against this backdrop, Seattle’s bureaucrats snatched defeat from the jaws of victory and decided that they could provide even more affordable housing than the market. They settled on a carrot and stick approach through the MHA. In exchange for moderately higher density, builders could either designate a certain number of units as income—restricted or opt out by paying a hefty fee. The city would then use the fee to fund affordable housing elsewhere.

The results, however, have been underwhelming. While it is true that the MHA has generated additional funds, it has not generated “a significant number of affordable housing units” as HUD claimed. Rather, the MHA has funded only a total of 1,178 affordable units over four years. At this pace, Seattle is on track to add about 3,000 affordable housing units over the next decade, far short of its goal of 20,000 affordable units and the at least 15,000 townhomes the market was on pace to build.

Even more telling is that, because of the MHA, Seattle is now building fewer housing units than before — although this is ignored by HUD. Multiple studies found major declines in permit activity over the four years following the implementation of MHA, which may have cost the city between 3,200 to 9,000 new units.

Fewer housing units also mean higher housing pressures for Seattle residents. Sure, there will be a few lucky ones that will live in the new affordable units, but primarily lower- and middle-income households will bear the brunt. Housing costs will rise and there will also be far fewer opportunities for homeownership and intergenerational wealth-building. By the end of 2022, MHA had only funded 30 for-sale condominiums.

But that is not all. Compared to large firms with big staff, small firms that primarily build townhomes cannot navigate the rules that the city admits are “large in scope and complex.” But the alternative of paying the MHA fee is not much better. A survey by the Master Builders Association of King and Snohomish counties finds that for an average four-unit townhome project the up-front fee can be as high as $130,000. No wonder that small-scale, local and often demographically diverse builders are closing.

The case of Seattle offers two lessons: Implementing an affordability mandate was an utter failure, while allowing moderately higher density without strings attached was a clear success that should be expanded to more areas of the city. Seattle also offers a warning to those pondering the appropriate role of the federal government in state and local housing reform: It confirms that HUD’s distrust of market forces clouds its assessment of regulatory best practices. These efforts are better left to the competition of ideas and the laboratories of democracy.

As more states and cities contemplate housing regulatory reforms in 2024, let’s hope they follow the evidence, rather than HUD’s flawed recommendations.

Tobias Peter is an American Enterprise Institute senior fellow and co-director of the AEI Housing Center.