Here is Wikipedia's definition of exclusionary zoning:

Exclusionary zoning is the use of zoning ordinances to exclude certain types of land uses from a given community, especially to regulate racial and economic diversity. In the United States, exclusionary zoning ordinances are standard in almost all communities. Exclusionary zoning was introduced in the early 1900s, typically to prevent racial and ethnic minorities from moving into middle- and upper-class neighborhoods. Municipalities use zoning to limit the supply of available housing units, such as by prohibiting multi-family residential dwellings or setting minimum lot size requirements.

This is a common way to think about it. Prohibiting multi-family residential is a way to try and keep renters away. And mandating minimum lot sizes is a way to ensure that lots don't get subdivided and that nobody builds homes of, you know, lesser value.

It's more or less a way of setting a minimum bar, which is why the term exclusionary zoning is used. If you don't meet this minimum bar, you are excluded.

Many of you will know my views on this (related post, here). But for the purposes of today's post, consider this question: Should there also be an upper bound? In other words, should there be things like maximum lot sizes?

Manhattan Beach, California seems to think so, which is why when Rob DeSantis bought three adjacent lots in 2000 for $13 million and proceeded to build a 12,640 square foot home -- one that is currently on the market for $150 million -- the City reacted by forming a "Mansionization Committee."

And ultimately they decided, through the passing of a new ordinance, that mansions of this fortitude should not be allowed in Manhattan Beach. It's just too much.

So it turns out that exclusionary zoning actually cuts both ways. You can be too poor for a particular community. Or, you can be too rich.

Here is a housing study that looked at housing supply -- in the US from 2000 to 2020 -- relative to median housing values. And here is the key takeaway:

What this chart is saying is that new housing is rarely added in cities with the lowest-value homes. The bar on the left represents municipalities whose median housing values are less than 50% of the metropolitan average. And this makes sense. If values are low there is likely little to no incentive to build. The math just doesn't work.

However, as home values increase, the incentive to build and the ability to finance new projects also increases, and that is what we see in the above chart. This also makes sense.

But something interesting happens in the highest-value cities -- housing supply once again starts to fall off. And it turns out that there is a bit of a sweet spot. Municipalities whose relative housing values are 110 to 130% of the metropolitan average actually produce the most overall housing. Any higher than that and things start to decline.

Why is that? The answer likely has to do with restrictive land-use regulations. The highest-value cities (and wealthiest suburbs) often have a lot of large single-family lots, as well as policies to ensure that this kind of built form doesn't change. This has the effect of both limiting supply and enshrining values.

So when it comes to housing supply, what you don't want are low-cost areas. But you also don't want the highest-value areas. What you want are areas that are doing well, but no so well that they start really restricting new entrants. This is what our industry often refers to as exclusionary zoning.

Now, one of the most common ways to respond to this problem is to develop an opposing policy, namely inclusionary zoning. But usually what this policy doesn't do is direct more supply to these high-value and low-density areas. Instead what it typically does is force the segment that is producing the most housing -- let's call it the 110 to 130% band -- to deliver more affordable housing.

It's a neat trick that sounds pretty cool, but it is not at no cost.

I just finished reading this article by Nellie Bowles about how San Francisco became a failed city. Here's an excerpt that relates to housing supply:

Consider the story of the flower farm at 770 Woolsey Street. It slopes down 2.2 acres in the sunny southern end of the city and is filled with run-down greenhouses, the glass long shattered—a chaos of birds and wild roses. For five years, advocates fought a developer who was trying to put 63 units on that bucolic space. They wanted to sell flowers there and grow vegetables for the neighborhood—a kind of banjo-and-beehives utopian fantasy. The thing they didn’t want—at least not there, not on that pretty hill—was a big housing development. Who wants to argue against them? In San Francisco the word developer is basically a slur, close to calling someone a Republican. What kind of monster wants to bulldoze wild roses?

Decades of progressive governance in San Francisco yielded a thicket of regulations—safety reviews, environmental reviews, historical reviews, sunlight-obstruction reviews—that empower residents to essentially paralyze development. It costs only $682 to file for a discretionary review that can hold up a construction project for years, and if you’re an established club that’s been around for at least two years, it’s free. Plans for one 19-unit-development geared toward the middle class were halted this year because, among other issues raised by the neighbors, the building would have increased overall shadow coverage on Dolores Park by 0.001 percent.

These are just two examples of San Francisco's exclusionary zoning problem, but of course, the city has other unfortunate things going as well. For the full article, click here.