Congress Is Fixated On Easing Housing Laws—Here’s Why Red Tape Has Driven Up Prices

While Congress has momentum to pass laws to ease the housing shortage, it continues to debate which red tape to cut.

The House Committee on Financial Services examined a wide range of policies that could contribute to the increasing cost of building and securing a home in a hearing on Monday. It's fresh off passing a bipartisan effort at housing reform—the Housing for the 21st Century Act, which the House carried by a vote of 390-9 earlier this week.

Government regulations have had a notable cost for years. The National Association of Home Builders says regulations account for a quarter of the cost of building a new single-family home and almost 40% of a typical apartment development.

For the most part, committee Republicans and Democrats presented parallel versions of what those policies were, with little common ground. But their points of agreement point to the larger wave of rule changes being debated by governments around the country.

Zoning laws 'restrict the availability of homes'

Builders are being pushed into markets with less regulation, said Kevin O'Leary, the venture capitalist and TV personality. For example, he contrasted the easier zoning laws in Houston with the strict height constraints of Washington, DC.

States and regions compete for investment, and investment requires ease, he said.

"If you're given $2 billion to deploy, you have to find a state where you can get that money to work. You go for the path of least resistance," O'Leary said. "The harder it gets, the less I want to spend time fighting that fight."

Congress doesn't have direct authority over state and local zoning issues. Nonetheless, "there's no question it restricts the availability of homes," Brian Brooks, CEO of New York–based Meridian Capital Group and former acting comptroller of the currency, told the committee.

But it can alter laws around regulatory approvals of other kinds, which is something it should do, said Florida Rep. Byron Donalds, a Republican.

"If we're going to be smart about this, we examine all of the regulatory burdens—federal, state, and local—around constructing new housing," Donalds said. "It doesn't mean you have a wild west of no permitting, but there does have to be certainty in the environment. Because time is money."

Several states have put forward housing packages this year aimed at cutting regulations. State lawmakers from both sides of the aisle have pitched reforms in New Jersey, Pennsylvania, Utah, Florida, and Indiana.

The Dodd-Frank debate

For that reason, Republicans in particular have been critical of bank regulations. GOP lawmakers focused their energies on altering or rescinding the Dodd-Frank Act, which was enacted after the subprime mortgage crisis to regulate bank speculation in real estate.

But its rules have hamstrung small community financial institutions from investing in real estate, Brooks said. He called it an "overcorrection" that chased small lenders out of the market.

Stephen Moore, a conservative economist and adviser on the 2017 Tax Cuts and Jobs Act, warned that policies allowing homebuyers to acquire homes with less equity—such as lower down payments or longer-term mortgages—could backfire.

Those who had less equity in their homes were more likely to default during the Great Recession, he said. Acquiring a house and then losing it still leaves them worse off.

Divergent ideas about rising costs

Democratic lawmakers highlighted President Donald Trump's aggressive tariff policy, which has driven up the costs of some building materials. They also sought to defend the Consumer Financial Protection Bureau, a target of Trump's ire. More power to oversight agencies, unions, and higher wages would offset the rise in housing costs, they said.

They also questioned the proposed ban on institutional investors in the market. Since these firms represent a relatively small share of the market, they primarily serve as a "backstop" that enables homebuilders to build speculatively.

Later in the hearing, Illinois Rep. Sean Casten brought up what he called the "third rail" of the housing debate.

"Housing is both an expense, and we get political credit for bringing expenses down. And it's also an asset, and we get political credit for making assets more valuable," the Chicagoland Democrat said. "The math that we all know but we don't really like to talk about is that 66% of Americans own their homes.

"For most of those Americans, that's the majority of their wealth. And so it would be politically suicidal for any of us to go out and aggressively lower the cost or prices," Casten continued. "Supply, supply, supply—that's the lever that's politically possible for us."

"This is a conundrum, no question about it," Moore said.