Starter Homes Live in Texas, Die in Arizona

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Happy Tuesday, and welcome to another edition of Rent Free. This week's stories include:
A win for starter homes in Texas…
…and a defeat for them in Arizona
A new constitutional challenge to affordable housing fees in Denver
A veto of a rent-recommendation algorithm ban in Colorado
After suffering a near-death experience last week, Texas' Senate Bill 15, a.k.a. the Texas Starter Homes Act, has passed the Legislature and now goes to Gov. Greg Abbott's desk.
The bill would prevent larger cities in larger counties from requiring that homes sit on lots larger than 3,000 square feet in new subdivisions of at least five acres.
Proponents argue the bill will enable the construction of more inherently affordable owner-occupied housing in cities that currently require much larger minimum lot sizes.
"Texas is the first state to take seriously the idea that a basic starter home, without any subsidy, is usually affordable to people making average or below average incomes, [and] should be available throughout the state," says Salim Furth, a researcher at George Mason University's Mercatus Center.
Minimum lot size bills have been one of the more controversial and less successful YIMBY reforms in state legislatures. Texas' bill is one of the first to make it over the finish line.
The initial version of S.B. 15 would have capped minimum lot sizes at 1,400 square feet, which mirrors unzoned Houston's minimum lot sizes.
That version passed the Senate back in March but was watered down in negotiations between the House and Senate during last-minute considerations of the bill.
The legislation survived an effort by Texas House Democrats to effectively gut the legislation.
Rep. Ramon Romero Jr. (D–Fort Worth) briefly succeeded in amending the bill to only require that cities create a starter home zoning district with the smaller minimum lot sizes. The amendment would not have required cities to actually apply this new zoning district to existing land or to new subdivisions.
This would have effectively made S.B. 15 a voluntary paperwork exercise.
Romero, who also briefly managed to kill S.B. 15 via a procedural move in the House earlier in May, has criticized the idea that allowing smaller homes on smaller lots would yield more affordable homes.
"It's already been proven that just because you have smaller (homes) does not immediately equate to more affordable (homes)," he said to The Texas Tribune last month.
(One study of minimum lot size reductions in Houston, Texas, facilitated an "unprecedented" increase in the rates of infill housing construction in single-family neighborhoods.)
That gutting amendment was stripped out of the bill in last-minute negotiations between the House and the Senate, meaning that S.B. 15 will have some teeth, provided that Abbott signs it into law.
While the bill does not apply to existing residential areas, Furth says it will provide developers a lot more flexibility when constructing new subdivisions, where most new housing in Texas is being built.
"Most single-family home production in Texas is done in non-residential or extremely large lots. A normal Texas subdivision is going to be five-plus acres, and maybe 100 acres," he tells Reason. "This will allow [builders] to include small homes in that mix and make sure there's a variety of price points and variety of styles."
Meanwhile, in Arizona, a near-identical Starter Home Act is effectively dead in the Legislature.
Similar to Texas' S.B. 15, Arizona's S.B. 1229 initially would have prevented cities from requiring homes in new five-acre-plus subdivisions to sit on lots of 1,500 square feet or more. It also would have prohibited cities from dictating home designs and aesthetic features.
As in Texas, the bill was amended to raise its minimum lot size cap to 3,000 square feet. That helped get the legislation out of the Senate on a 16–13 vote, with Republicans and Democrats on each side of the vote.
Two House committees also approved the bill in March and early April. But it then stalled over what proponents say was persistent opposition from the Arizona League of Cities and Towns and Gov. Katie Hobbs' office.
Hobbs vetoed a very similar starter homes bill last year, citing concerns that that bill didn't explicitly carve out areas near military bases or explicitly include fire safety standards.
The governor's concerns were incorporated into S.B. 1229. Yet the League, a taxpayer-funded association that lobbies on behalf of local governments, still opposed the measure's limits on local land use regulation.
The League had pushed for amendments to S.B. 1229 that would have dramatically limited its scope by imposing price and income limits on new starter homes and requiring that buyers live in the homes for 15 years.
These demands were a nonstarter with proponents of S.B. 1229, and negotiations on a compromise measure broke down earlier this spring.
"Our last meeting was about an hour and a half in the governor's office. I could tell [the governor's staff] were not going to come over to our side at all. They were literally letting the League [of Cities and Towns] run the table," Sen. Shawna Bolick (R–Phoenix) tells Reason.
With the threat of Hobbs' veto hanging over S.B. 1229, the bill was never brought up for a floor vote.
Despite the failure of the starter homes bill, Arizona did pass a handful of other housing reforms. That includes House Bill 2928, which expands last year's statewide legalization of accessory dwelling units in cities to unincorporated county land as well. The state also passed a bill allowing for third-party plan reviews of single-family projects.
A homebuilder in Denver is suing the city over what it says are unconstitutional affordable housing fees being slapped on two of its pending residential projects.
Denver's Linkage Fee ordinance requires residential projects of 10 units or less to either set aside units to be rented or sold at below-market rates or pay per-square-foot "linkage" fees.
When local builder redT Homes sought approval for two projects, a four-unit single-family home development and a two-duplex project, the city said it would need to pay linkage fees of $45,000 and $25,000 on each respective project.
A string of U.S. Supreme Court decisions has established that the Fifth Amendment protects property owners from having to turn over money or property when applying for a development permit, unless there's some nexus between those exactions and the actual impact caused by the permitted project.
Denver claimed when passing its linkage fee ordinance in 2016 that new development raises economic activity and, therefore, raises demand for work-force housing.
redT counters that its planned homes are making housing more affordable, not less, by expanding overall housing supply. By charging it an affordable linkage fee anyway, Denver is charging it for an impact it's not having. That, it argues, violates the Fifth Amendment's protections against "unconstitutional conditions."
redT Homes is suing Denver in the U.S. District Court for the District of Colorado.
"These affordable housing fees almost by definition fail" the Supreme Court's test for unconstitutional conditions, says David Deerson, an attorney with the Pacific Legal Foundation, which is representing redT Homes.
"A fundamental law of economics is that an increase in supply tends to lower prices. Denver can't force developers like redT Homes to pay fees to solve problems that not only are they not creating, they're already solving," he says.
A favorable federal court ruling for redT Homes could have major implications for housing development nationwide.
Like Denver, hundreds of jurisdictions have adopted similar "inclusionary zoning" policies that require housing developers to include below-market-rate units in their projects or pay in-lieu affordable housing fees.
And like Denver's linkage fees, a similar constitutional argument can be made that inclusionary zoning's affordable housing mandates take developers' property to mitigate an impact they're not having.
Developers and property rights advocates have periodically challenged inclusionary zoning laws in court, typically with little success.
In 2019, the Supreme Court declined to hear a challenge to Marin County, California's inclusionary zoning policy that the California Supreme Court had upheld. (The Pacific Legal Foundation also litigated that case.)
The Supreme Court's 2024 decision in Sheetz v. County of El Dorado established that fees and permit conditions imposed on whole classes of projects by legislatures must still have some connection to those projects' impacts.
The Sheetz decision was a narrow one. It didn't directly deal with inclusionary zoning. But it did widen the universe of permit conditions that can be challenged as "unconstitutional conditions."
Potentially, a new inclusionary zoning case with a new set of facts might pick up this Court's interest and result in a decision that puts some guardrails on affordable housing mandates and fees.
On pure policy grounds, inclusionary zoning acts as a tax on development, reducing production and raising costs. Ending these policies could unlock a lot of potential new projects.
Colorado Gov. Jared Polis has vetoed a bill that would have banned the use of rent-recommendation software.
Proponents of the bill argue that this software facilitates price-fixing among landlords by sharing nonpublic data on prices and vacancies between competitors.
Colorado, along with a number of other states and the U.S. Department of Justice, is currently suing rent-recommendation software provider RealPage for antitrust violations.
Polis said in a veto letter, posted online by Colorado Public Radio, that while he shares concerns that this software could be used to drive up prices, the measure was overly broad.
"We should not inadvertently take a tool off the table that could identify vacancies and provide consumers with meaningful data to help efficiently manage residential real estate to ensure people can access housing," said the governor in his veto letter.
"This bill may have unintended consequences of creating a hostile environment for providers of rental housing and could result in further diminished supply of rental housing based on inadequate data," he wrote.
The governor said he would prefer for state and federal lawsuits to play out. He said he'd be open to a future bill that made a distinction between collusive and noncollusive uses of nonpublic competitor data.
Read Reason's past coverage of the RealPage controversy here.
New York City's rent-stabilized housing stock is in increasing financial distress, thanks to rising operating costs and the city's suppression of rent increases. To remedy the situation, New York assembly member, and New York City mayoral candidate, Zohran Mamdani is proposing to remedy the situation by freezing rents.
Los Angeles Times covers the California Legislature's efforts to exclude urban infill housing from the state's notoriously burdensome environmental review process. Organized labor is cool on the effort, altruistically asking, "What's in it for us?"
The biggest opponents of a public housing redevelopment project in New York City? The [wrong link here] of multimillion-dollar homes nearby.
The Connecticut Legislature has passed a major housing bill that requires localities to zone for more affordable housing, increases density near transit stops, and pares back minimum parking requirements.
The post Starter Homes Live in Texas, Die in Arizona appeared first on Reason.com.