Inclusionary Zoning: why it does not work

This week the South Carolina Senate held a public hearing before a Judiciary subcommittee to consider legislation to allow South Carolina cities and counties to impose Inclusionary Zoning on home builders and developers.  Inclusionary Zoning is a regulation where government mandates that private home builders and developers sell or rent some homes at below-market prices without any financial participation from government.
Your Home Builders Association opposes Inclusionary Zoning because it does not work.  In fact, it makes the affordable housing problem worse.  We described the problem in a letter to Greenville Mayor Knox White.  The Greenville City Council adopted a resolution in support of the Inclusionary Zoning legislation and actively lobbied for its passage.  We also shared the letter with the rest of City Council, Greenville County Council, and the legislative delegations from Greenville, Pickens, and Laurens counties.  You can read the letter below.  Click here to read our policy paper on Inclusionary Zoning.

April 17, 2017

The Honorable Knox White, Mayor
City of Greenville
206 South Main Street
Greenville, SC 29601

Via Email:

Dear Mayor White,

I would like to provide you with some additional research and information on inclusionary zoning and why, in almost all cases, this regulation worsens the affordable housing problem in the communities where it has been implemented.

Attached is our policy paper on the subject. In addition, I have outlined below why an inclusionary zoning regulation would contribute to the affordable housing problem in Greenville, rather than improve it.

Scenario 1
Assume that an inclusionary zoning ordinance in the City of Greenville will require 10 percent of all housing units constructed to be below market prices. Assume also that 400 housing units are constructed in a year in the city (consistent with current activity and about 8 percent of the total new homes constructed in Greenville County). The result would be 40 new below-market housing units constructed in the city as a result of an inclusionary zoning ordinance.

However, we must assume that the developer will pass the lost profit on in the form of an increase in the prices of the remaining 90 percent of their development that is being sold at market-rate prices.

The average price of a newly-constructed single-family home in the Greater Greenville area is approximately $270,000. The average home builders’ net margin is about 5 percent. That is their profit. Some are more profitable. Others are not. That is an average.

Therefore, the home builder will need to increase the prices of the remaining 90 percent of market-rate housing units by $15,000 each.

  • $270,000 x 5% = $13,500 (average price times 5% net margin is the home builder’s profit per housing unit priced at $270,000)
  • $13,500 x 400 / 360 = $15,000 (average profit times total housing units produced, divided by market-rate housing units produced is the price increase on each market-rate housing unit)

According to the National Association of Home Builders’ Priced Out Effect study (, a $1,000 increase in the cost of a new home in Greenville, South Carolina, prices out 520 households from purchasing a new home. Therefore, that $15,000 increase in the price of a new home, the result of an Inclusionary Zoning Ordinance mandating that 10 percent of the project be sold at below-market prices, will price out 7,800 families from purchasing a new home as a result of the ordinance—PER YEAR.

The hypothetical ordinance would produce 40 below market housing units, but will cause an increase in the demand for below-market housing units by 7,800 households. And this only assumes that the net profit from the 10 percent of housing units that are below market is $0. If the city demands that the price be less than break even, which is likely, the priced-out effect is even worse.

Granted, I am applying the Priced Out data, which is a regional statistic, to the City of Greenville. However, I believe it fairly describes the cause and effect of an Inclusionary Zoning ordinance.

Scenario 2
The above example assumes that the ordinance regulates the end price of the house. However, some ordinances have regulated the end price of the lot. That method is even worse for affordability.

The lot cost is a combination of raw land cost plus development and infrastructure costs, as well as marketing, commissions, and carrying costs (debt), plus profit. Below is how the final lot price is often determined:

  • Land cost of $15,000 per lot ($60,000 per acre divided by 4 units per acre)
  • Infrastructure and development costs have risen dramatically and are now typically $25,000 per lot
  • The result is a $40,000 lot in hard acquisition and development costs
  • Therefore, a 30-lot subdivision would cost $1.2 million
  • Add risk, carrying cost, overhead, desire for a profit, and the $1.2 million in hard costs is typically grossed up using a 1.5 multiplier. Therefore, the retail price of the lot will be $60,000 lot.
    • The gross margin is $20,000 per lot from which comes business overhead (city license fees, office cost, employee salaries, insurance, utilities, transportation, etc.). That overhead number is about 10% of revenue, or $6,000.
    • Then there are the additional costs like sales commissions, marketing expenses, and interest expense.
    • The absolute best outcome for the developer is 10% net profit on the lot, but usually it is less.

If 3 of the lots in the 30-lot subdivision must be sold for $20,000 each in order to produce a house affordable to a buyer earning between 80 percent and 120 percent of median income, the lost $20,000 in cost (the lot cost is $40,000) and the lost mark up of 20,000 per lot, will be added back to the remaining 27 lots.

  • Therefore, the developer’s lot cost for the market-rate homes is $44,444 ($1,200,000 / 27 lots)
  • The retail price of the lot will be $66,666 ($44,444 x 1.5 = $66,666)
  • A difference in cost of $6,666 per lot that will be paid by the market-rate buyers in the subdivision

Therefore, the developer will sell the remaining lots to builders at $66,666 rather than $60,000.

In any final product, the lot is typically 17 percent to 20 percent of the cost of the home. To keep it simple, assume the builder uses a 20 percent value for the lot. Therefore, the builder will build a house that is five times the price of the lot.

When the lot cost increases by $6,666, that means the $6,666 increase in the lot will magnify into a $33,330 increase in the final price of the house. This is how it looks on paper:

  • $60,000 lot x 5 = $300,000 house price
  • $66,666 lot x 5 = $333,330 house price

With this lot-price control method, the city will have priced out of homeownership 19,314 families in the Greenville area.

You will understand from this analysis why the Home Builders Association has concluded that inclusionary zoning does not work. It, like many other government regulations on the housing industry, such as zoning and rent control, often make us feel like we are doing something constructive when we are, in fact, making the problem worse.

The study by the National Association of Home Builders that we reference in our policy paper has been applied to the Greenville area in the attached graphic. It demonstrates that housing in our community is nearly $70,000 more expensive as a result of regulation. As a result, less than 10 percent of all housing units built today are sold for less than $200,000. Just 17 years ago, 90 percent of all housing units were sold for less than $200,000. Inflation alone does not explain that increase in housing prices.

Our recommendation is that the City of Greenville and Greenville County work with the industry that produces housing to develop a meaningful housing policy for our community that will actually meet housing demand for all of our community’s citizens.

Home Builders Association of Greenville, SC, Inc.
Michael E. Dey
Executive Vice President and Chief Executive Officer

Greenville City Council
Greenville County Council
Legislative Delegations of Greenville, Pickens, and Laurens counties

City has $5.5 million surplus, considers $2 million for affordable housing

From The Greenville News:

Going into the year, the city of Greenville knew its financial outlook would be bright, but as the budget forecasts now become more hard and fast, the city finds itself with millions of dollars of extra tax money to spend.

Now, it’s a matter of where it should go.

The city has a $5.5 million surplus in its main fund that is supported by property taxes, and it has millions more in special, tourism-related tax funds that are all swelling along with the city’s growth.

A few priorities appear to be emerging, chief among them a proposal to set aside $2 million of the surplus to pay for efforts to provide more affordable housing, particularly near downtown where real estate prices have skyrocketed.

“If we can invest money in other things, if we can assist in the development of large projects like a baseball stadium, like parking garages to help other entities come in, then there needs to be a return on the investment for those who have not had an opportunity to be a part of the economic rise,” City Councilwoman Lillian Brock Flemming said.

The $2 million figure is one that Mayor Knox White said he supports, as does Councilwoman Jil Littlejohn, who along with Flemming has spearheaded an affordable housing strategy study that is nearing its completion.

There is more.

In special funds related to hospitality and hotel stays, the city has more than $5 million in surplus, which by state law must be spent on tourism-related efforts.

The surplus amounts come as the city budgeted conservatively with a suspicion that tax revenue might exceed expectations, City Manager John Castile said.

The city maintains a 20 percent reserve fund — 5 percent more than is required by law — and anything after that is considered surplus. The reserve helps the city maintain its AAA credit rating, which lowers the cost to borrow money.

The city will still borrow some money, mainly $2.7 million to pay for improvements on Verdae Boulevard.

However, $1.7 million that was to be borrowed from the city’s storm-water project fund to help pay for a $25.6 million move of its public works facility will be covered through the general fund surplus instead.

The city still will devote about $5 million of money in cash from the storm-water fund for the public works move, but Councilwoman Gaye Sprague — who voted against borrowing money from the fund and lobbied for an exception that the city re-evaluate the method if a surplus emerged — said that the cash amount devoted will remain and is appropriate.

The City Council will vote on Monday to borrow the money for the fire station, but $1.7 million in borrowed storm water money won’t be a part of it, which will leave $3.8 million in general surplus.

The $2 million for affordable housing would come out of that surplus, and White said it could be used to amplify city efforts to buy land and set it aside for affordable housing and to partner with the private sector in those efforts.

The affordable housing study, which over the summer has involved members of the community from various backgrounds, will wrap up this fall and will offer strategies that the mayor said will guide how the money would be spent.

“We have the strategy part under way now with the consultant study, but at the end of the day we’re still going to need a commitment of funds,” White said.

At the same time as the affordable housing is being done, another ongoing consultant plan for a $12.9 million park on the west side of downtown will factor in affordable housing for the community surrounding it, which faces gentrification pressure as the park gets closer to becoming a reality.

The city has at least $3 million in valuable land it owns to set aside, White said.

“We’re putting money aside, but the strategy will tell us how to get the best bang for our buck,” he said.

The commitment of surplus money should involve the council getting together and setting priorities for how the money should be spent before committing to any one cause, Sprague said.

Councilwoman Amy Ryberg Doyle said that the city should use the money to focus on items that were cut during budget discussions earlier this year, such as road projects and fixing aging fire stations.

“We should look at the business that we are in and do it better,” Doyle said.

For the other special funds, the city will now have to figure out how to prioritize money that has been growing each year.

The city will have about a $4 million surplus in its hospitality fund, which comes from taxes levied on prepared meals and is devoted to tourism-related projects that will run through a new application process.

The city’s accommodations tax likewise has to be devoted to tourism efforts. The accommodations tax money collected through the state is administered through an advisory committee, which the city will ask to be reconvened to consider a new round of applications for its $674,663 surplus.

A portion of the accommodations tax collected by the city — with a $372,263 surplus — isn’t subject to a committee.

The state accommodations money must be spent within two years of receipt.

More surplus remains from other sources, such as the parking fund, which has $3.8 million available. That money will likely be set aside to help fund new parking in the West End that should materialize during the next year, White said.

FHFA Adopts Affordable Housing Goals for Fannie Mae, Freddie Mac

The Federal Housing Finance Agency (FHFA) announced today it has adopted a final rule establishing single-family and multifamily housing goals for Fannie Mae and Freddie Mac for 2015 through 2017.
The final rule sets identical benchmarks for Fannie Mae and Freddie Mac in all categories and for the first time it establishes goals for rental units affordable to low-income families in small (5- to 50-unit) multifamily properties.
“The single-family goals advance the Enterprises’ (Fannie Mae and Freddie Mac) mission to provide access to credit for creditworthy borrowers and provide liquidity to the U.S. housing market while operating in a safe and sound manner,” FHFA Director Mel Watt said in a press statement. “The multifamily goals will create rental opportunities for those who need affordable housing. Together, these goals establish a solid foundation for affordable and sustainable homeownership and rental opportunity in this country.”
NAHB previously sent comments to FHFA on the 2015-2017 housing goals, stating that the we believe that the goals are set at an appropriate level in the single-family area. On the multifamily side, NAHB expressed support for FHFA’s proposal to establish a low-income, small multifamily goal and generally agreed the goal levels as recommended for multifamily in 2015-2017 were appropriate.
The final rule will become effective 30 days after publication in the Federal Register.