Outdated Federal Regulations Constrain Community Revitalization

NEW YORK – A growing number of Americans want to live in walkable communities with housing and transportation choices, yet arcane federal rules are making it difficult to build housing in these sought-after locations, a new study by Regional Plan Association has found.

The study, “The Unintended Consequences of Housing Finance,” released in partnership with LOCUS, a program of Smart Growth America, shows that regulations created in the mid-20th century restrict commercial development in federally backed housing loans, greatly limiting the availability of financing for three- and four-story buildings that include both residential and commercial uses.

The rules were developed at a time when loans to commercial properties (such as stores or supermarkets) were seen as too risky to be tied to smaller-scale residential buildings. Today, however, mixed-use development is a hallmark of the walkable neighborhoods so many people seek. In a recent survey by Urban Land Institute, 50% of respondents said that walkability is either a top or high priority in where they would choose to live. Federal barriers to this type of development have remained in place despite the changing trends, and since private lenders typically adopt federal standards, these restrictions have extended beyond federally backed projects. As a result, these high-demand homes are in short supply.

The shortage of mixed-use housing projects only increases real estate prices, making walkable neighborhoods unaffordable and inaccessible for many Americans. The impact is especially pronounced in low-income neighborhoods. Since current rules limit commercial floor space to 15%-25% of total square footage or rental income, projects that do proceed need to be overwhelmingly residential, making them taller and bulkier than appropriate for some neighborhoods, especially in suburbs and small cities.

“For many decades, we’ve been living with a real estate financing system that favors single-family home ownership in the suburbs. But today, many Americans are interested in living in places with easy access to stores and services, where cars aren’t needed for every errand or trip to work,” said Christopher Jones, senior vice president of Regional Plan Association and the lead author of the report. “The persistence of out-of-date policies is bad for everyone, but it takes a particular toll on lower-income Americans by restricting the supply of apartments and driving up prices for those that are available.”

“By taking steps such as raising or eliminating caps on non-residential development within federal financing, we would be able to better meet demand for walkable communities,” said Christopher Coes, director of LOCUS, a program of Smart Growth America. “We hope the Obama administration will move forward and remove these unnecessary barriers to investing in urban areas, especially in low-income neighborhoods.”

The study can be viewed here. The research was made possible by the generous support of the Oram Foundation.