How to Make Housing Affordable: (Part 2)

The Hidden Costs of Minimum Lot Sizes and How Small Changes Create Big Housing Wins

When we talk about housing affordability, minimum lot size requirements don't usually grab headlines. Yet, a simple change to the text in a local policy can reduce housing costs by 20% - 40% - before considering any subsidies - while still maintaining single-family homes as the predominant housing type.

Reducing minimum lot sizes is not a panacea to provide immediate relief to all of our lowest income households. But it is a very simple adjustment that can reduce the average cost to buy a new home by $100,000 or more. These changes can make the difference between a middle income household becoming a homeowner tomorrow, or continuing to rent for the next decade.

Seemingly minute and technical zoning rules can quietly drive housing costs to unsustainable levels for a majority of households.

The Triple Cost Burden

Minimum lot sizes create a cascading effect that multiplies housing costs:

Land Costs: Larger required lots mean fewer homes can be built on the same amount of land, driving up the per-unit land cost. If land costs $100,000 per acre, there is a meaningful difference between the cost of a 20,000 square foot minimum lot area and a 3,200 square foot minimum lot area. But this is just the beginning.

Infrastructure Costs: Bigger lots require more linear feet of streets, sewers, water lines, and utilities per home. If a developer must build a new street with underground infrastructure, this adds roughly $1,300 per linear foot of lot width. This means a lot with 75 feet of lot frontage/width requires an investment of around $97,500 for infrastructure. Meanwhile, a lot with a 32 foot frontage requirement will only add $39,000 of infrastructure costs.

Housing Investment Requirements: Perhaps most importantly, when land costs are high due to large lot requirements, developers must build expensive homes to justify the land cost. Few people will build a $200,000 house on a $100,000 lot. Instead, the cost of a home is often at least four or five times the cost of the land. This is why nearly every home built on expensive land is priced at $450,000 and up.

These overlapping dynamics effectively prohibit affordable housing in most neighborhoods. Our analysis of several counties in Michigan indicates that more than 95% of all vacant residential land has zoning standards in place that effectively make homes illegal to build for anyone earning less than $130,000. Meanwhile, median household income across most of those counties is typically somewhere between $65,000 and $80,000.

Examples:

Many community leaders really struggle to imagine a single family neighborhood with 3,000 square foot lots (or smaller). We often work with communities where the smallest permissible lot size is 7,500 to 10,000 square feet and they just don’t believe that smaller is possible.

What local officials and planning commissioners often miss is that they have these smaller lots in their communities already, and it's typically in the neighborhoods that were built pre-WWII. Nine times out of ten, these neighborhoods are highly sought after among first time home buyers and retirees alike, because they tend to be close to the local main street district and have been well cared for over time.

This neighborhood in the Heritage Hill neighborhood of Grand Rapids MI has a pattern of lots that are generally 50’ x 132’. Some are a bit more narrow, or a bit shallow, but 6,600 sq ft is the typical average.

At the street level, the neighborhood feels very consistent and ‘put together’. The homes are all well cared for despite being over 100 years old.

But if you look closely, some of the homes are on lots that are just a little bit larger than the actual homes themselves. They have very small side and front yards, and just 10 - 15 feet of space in the back yard. Remember, this might not be the option that YOU would choose, but we cannot allow our own personal preferences to dictate the choices of everyone else in the community. Someone is clearly enjoying living in these homes enough to continue to maintain them quite well.

Why are these lot sizes so different?

Well, before there were overly restrictive zoning standards in place, local homeowners had the ability to subdivide their properties. If they didn’t use their backyard or side yard, they had the ability to split their property and allow someone else a shot to live in the community as well.

At one point in time, all of the lots in this part of the neighborhood were platted at roughly the same time and had similar dimensions. But, over time, community needs changed and power was given to individual homeowners to make decisions that were best for them in the moment.

Today, most communities attempt to freeze the status quo in amber, locking in the historic averages to apply to all properties equally and forever. And yet, neighborhoods are an organic outgrowth of changing human needs and conditions. What works for one generation might be unworkable for the next, and this is the state we find ourselves in now.

Common Pushback.

But doesn’t this destroy people’s property values???

Not in the slightest. The homes that are highlighted above in green have an average lot size that is less than ⅓ the size of the average lot in the neighborhood. And yet, the homes on standard lot sizes of around 6,500 to 7,500 square feet are currently selling in the mid-$400k to mid-$500k price range, with one home a block away currently listed for $998,000. I don’t think those sellers are at all concerned about a house on a small lot down the street.

Does this really make housing any more affordable???

While the typical home in this neighborhood now sells for close to half a million dollars, the homes on the smallest lots sell at an average price of $315,000, or about 37% less than the homes on standard size lots (the range of existing values among 7 homes on the smallest lots is from $265k - $415k). In some cases, the homes on smaller lots are a little bit smaller than the other homes in the neighborhood, but in many cases the houses are pretty comparable to the neighboring buildings, they’re just on less land.

If I wrote an article titled, ‘One Weird Trick to Reduce the Cost of Housing by 37%’, would you believe that the one weird trick is simply allow people to subdivide their lots?

Here’s another example of various lot sizes in close proximity within an established neighborhood. Notice how the smallest lots tend to be on the corners? These are the areas where the portion of a lot that was once the backyard can be easily divided into a separate parcel while still having its own frontage on the street for driveway access or on-street parking.

So how do we plan for these types of lots now?

The good news is that these lots are not difficult to plan for. And, since we’ve established that smaller lots DO NOT negatively impact surrounding property values, but they DO provide opportunities for much more affordable housing options in a neighborhood, these types of changes can be easy to code for as well.

Below is a cut-out from the Pattern Book my team created for Kent County to illustrate various types of housing, what they cost to build in the local market context, and how to code for them. For small lot homes, we recommend lot sizes ranging from 1,500 - 3,200 square feet with a minimum width of 24 feet and a maximum width of 40 feet.

Success Stories: When Cities Cut Lot Sizes, Housing Follows

Houston: The 72% Solution

Houston's experience offers the most dramatic example of lot size reform in action. In 1998, the city reduced minimum lot sizes in the urban core from 5,000 square feet to 1,400 square feet—a reduction of roughly 72 percent. In 2013, this policy was expanded to cover nearly the entire city.

The results have been transformative:

• Nearly 80,000 houses have been built on small lots made possible by minimum lot size reforms

• More than 1,000 small-lot homes were built in the first year after the 1998 reform, which applied only to a limited area of the city. By 2016, more than 25,000 small-lot homes had been constructed in Texas's Harris County. By 2016, more than 25,000 small-lot homes had been constructed in Texas's Harris County. Liberalizing Land Use Regulations: The Case of Houston | Mercatus Center.

Current Production Leadership: Houston became the #1 city in the country for new single-family home construction permits over the past year. In addition, Houston's 27,151 new permits exceed the total number of permits for the entire state of California Houston: 2013 Minimum Lot Size Reform & Land Prices

Durham: The Small Lot Code

In 2019, Durham NC introduced three key policy changes titled “Expanding Housing Choices”. The most transformative reform was the Small Lot Code, which allows new homes to be built on lots as small as 2,000 square feet, with specific requirements:

• Maximum 1,200 square feet of livable space

• Maximum 800-square-foot building footprint

• Maximum height of 25 feet (reformed in 2023 to allow 32-foot ridge)

• Smaller corner setbacks permitted

• Small Lot homes may also be duplexes and have detached ADUs

These changes have effectively reintroduced starter homes to Durham's market and created new opportunities for affordable housing development on smaller lots throughout the city's urban areas. While other nearby communities have had no new homes built for prices below $500,000 in recent years, the Durham Small Lot Code has enabled more than 150 new smaller homes priced for the local workforce.

An arrow in the quiver, not a silver bullet.

Zoning reform should always be considered one of several solutions, typically paired with improvements to local financing for builders and homebuyers as well as cost offsets or subsidies for the lowest income households. However, without meaningful zoning reform, every new housing option constructed will be more expensive than it needs to be. And the options that are built are likely to be mismatched to the real needs on the ground.