The end is near, folks. The bridges are being drawn up. The ladders are being lifted.
The “Last No in Housing” has arrived in Fishers and Carmel, Indiana, with more cities likely to follow. It is very popular. Fishers passed it with a unanimous vote and applause from local citizens.
A century ago, in Village of Euclid v. Ambler Realty Co., the Supreme Court effectively ruled that apartments could be treated as a nuisance. Cities across the country got to the business of denoting the very limited sections of their jurisdictions where apartments, hog rendering plants, and sewage treatment facilities could be located, and reserved the remaining 80% or so of the land for single-family homes.
Eventually, by the end of the 20th century, New York City, Boston, San Francisco, and Los Angeles (the Closed Access cities) and their suburbs ensconced themselves so thoroughly in zoning regulations that they lost the ability to grow. New households in those cities require other households to be regionally displaced to make room for them.
Many of those displaced families moved to places like Florida and Arizona. Those areas shared the national Euclidean fear of apartments, but enough families could use post-New Deal federal mortgage programs to buy their own single-family homes out in the suburbs.
By the turn of the century, the flood of housing refugees from the Closed Access cities became too much for places like Florida and Arizona to keep up with. To stop that problem, the post-New Deal federal mortgage programs were rolled back.
That thumb plugged the dike for a decade. Migration flows to Florida and Arizona declined. Builders stopped building entry-level single-family homes in the suburbs.
When housing construction collapsed everywhere, rent inflation started to rise everywhere. Families stopped moving as much. Families that did move now frequently needed investors to rent the homes to them. Apartments, being nuisances, were not able to meet the needs of millions of new renter households. So, initially, after 2008, investors started to buy single-family homes.
That reversed after about 2014. New homebuyers started to outbid investors for existing homes. But existing home prices were still too low. Builders couldn’t compete, and so the construction of new entry-level single-family homes remained very low. Families have responded by slowing household formation. Finally, in the past few years, prices of entry-level single-family homes have recovered far enough to allow builders to compete with new homes. In the last couple of years, it looks like we might be turning the corner where new demand for housing leads to new homes again rather than to rent inflation.
The new homes still must be built for investors as rentals, because the roll-back of post-New Deal mortgage programs remains intact. So, now, a new market that never existed beyond small niches has suddenly become important. New neighborhoods of single-family homes built as rentals.
Apartments are limited because they are treated as nuisances. Single-family homes for owner-occupiers are limited by hamstrung mortgage markets. The reason single-family rental homes are suddenly being built by the hundreds of thousands is because they are the only remaining legal form of additional housing.
Shelter is important. It is a human need. Families will pay whatever it takes. So, the way housing markets since 2008 have functioned is that rents have risen until prices were pushed high enough to make the last legal form of housing feasible. We are there.
This is increasingly becoming the case across the country. Rentals are intruding into the suburbs.
And, so, cities like Fishers and Carmel are carefully placing one last straw on our housing camel’s back. They passed new ordinances that limits the number of rental homes to 10% of the homes in a given neighborhood. Other cities are expected to follow.
As I mentioned above, homeowners have been the marginal net buyers in recent years. At the Fishers town meeting, echoing this, Chris Pryor, chief advocacy officer for the Metropolitan Indianapolis Board of Realtors, noted that “institutional investors have sold more homes over the last two years than they have purchased. This is a trend that is likely to continue.”
I expect institutional investors to increasingly move to building or buying new neighborhoods while homeowners buy both new and existing homes.
This all means that renters might start filing into Fishers and Carmel, and Hamilton County, where they are located, in defiance of the spirit of zoning laws that limit apartments.
Not by accident, wealthy Indianapolis suburbs tend to have homeownership rates above 80%. Marion County (home of Indianapolis), by contrast, has a homeownership rate of about 61%.
James Briggs, at the Indianapolis Star notes a seeming dissonance in Fishers’ stance.
“There are a lot of people who are renting, who want to buy, and they just can’t find homes for sale,” (Fishers City Council President Adam) Aasen said, per IndyStar. “When they do find reasonably priced homes ... they’re outbid by a corporate investor who wants to turn it into a rental.”
But, also, as Briggs notes, “proponents of single-family rental caps say homeowners take pride in their properties while renters neglect them, causing houses to fall into disrepair and dragging down neighborhood values.”
“The pro-rental cap theory is that investors are making housing unaffordable by bidding up prices and buying all the homes while simultaneously causing property values to fall by letting them go to hell.”
This seems like a contradiction, but it isn’t really, when you consider that the focus of suburbs like Fishers is to be relatively exclusive locations for homeowners. Both landlords and tenants are challenged by that.
As I noted in a recent post, homeowners want higher rental values and lower home prices. What Briggs has noticed is a standard issue “Erdmann Amendment to the Homevoters Hypothesis”.
Home voters want to buy into nice communities (that would have high rental values), but they don’t want to pay high prices. (And they aren’t motivated by windfall capital gains. They are motivated by the status quo and exclusion.)
And I should be clear, those motivations aren’t irrational. The concerns aren’t misplaced. But we need a social balance. We need to feel out where cities need to bend so as not to break. Renter bans in 2025 are well into breaking territory.
The sharp crackdown in mortgage access in 2008 served to make single-family zoning even more exclusive by blocking several million additional households from ownership. As you can see in Figure 1 this led to a sharp drop in single-family housing construction in metro areas like Indianapolis.
Single-family home construction never got as low as those nuisance apartments. But it moved to very low levels. This led to a sharp decline in household formation. For the first decade, foreclosures and short sales of single-family homes meant that new households were generally renters, and they were generally moving into single-family homes created by foreclosures and short sales.
For the second decade, new households were again homeowners, and renters have mainly been squeezing into a fixed stock of apartments and a shrinking stock of rental homes.
Figure 1
The result of this was that rent inflation has been highest in the poorest neighborhoods. (In Figure 2, 46218 is a zip code in Indianapolis with low incomes and 46037 is a zip code in Fishers.)
Figure 2
The same is true of home prices. (By the way, you can see here the devastating effects of the 2008 mortgage crackdown, which caused home prices in the 46218 ZIP code to decline 40% from very normal levels. The extra rise since then is due to the shortage of rentals.)
Figure 3
These patterns are very systematic across the metro area. Figure 4 shows real rent growth in zip codes arranged by starting rents (in 2017). The most affordable neighborhoods (generally with the most renters and the lowest incomes) have seen the most rent inflation.
Figure 4
The pattern in prices is even more systematically striking. This should be a flat line! This is one of the motivating premises behind my work here. This outcome is due, always and everywhere, to intensive housing shortages. Deviations this extreme point to extreme shortages, and you don’t exactly have to squint at Figure 1 to wonder if there is one.
Figure 5
Fishers “Councilor Todd Zimmerman said the city was taking a bold stand in the face of monied outside interests. ‘As a nation, if somebody doesn’t take a stand who will?’ Zimmerman asked. ‘At some point somebody has to take a stand when there is land being bought up by foreign and domestic entities who are taking away the livelihood and opportunity for people to build their wealth within their homes, within their families.’”
Local renters will have to find some other way to get housing. Exactly what that housing could possibly be is left as an exercise for the local electorate. Likely, those renters will also become “foreign entities” as far as Fishers and Carmel are concerned, as they will need to move to Marion County to legally have a dry spot to sleep at night.
As you can see in Figures 2 through 5, though homevoters like Councilor Zimmerman prefer high rental values, it is rental values in the parts of the city with the fewest amenities where rents are going up the most.
Because of cities like Fishers, values are being driven by scarcity, not amenities. Rents and prices are rising the most where families are being excluded to, not where they are being excluded from.
The renters who can’t set roots down in Fishers and Carmel are the reason housing costs in the poorest neighborhoods in Indianapolis are inflated. That might be what Fishers and Carmel want, but it comes at everyone else’s expense. The state legislature has debated whether to block these bans. They absolutely should.
First apartments were declared nuisances, then mortgage borrowers with default risk, and now single-family renters.
There’s only one nuisance left. The most nuisancy nuisance of all of them. Tents and shopping carts on the sidewalks and in the parks. That isn’t hyperbole. Hell, it’s not even a prediction. It’s a description of current conditions. And it’s going to get worse.
And the only way to get rid of that nuisance is to stop policing the other nuisances.
Fishers has just paved the last mile to hell. We can follow them in or we can turn the caravan around.
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