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Navigating New Urban Realities: Zoning, Housing Affordability and Insurance

By DJ Falkson
Posted on Emerging Issues

The U.S. faces a growing crisis of housing affordability. Homeownership and rental costs have skyrocketed in recent years, making it increasingly difficult for many Americans to secure affordable housing. Home insurance costs have contributed to unaffordability, as insurers have seen steep losses and filed for significant rate increases while tightening underwriting guidelines. These issues are intricately linked to zoning laws and urban planning policies that have shaped the built environment for decades. As municipalities grapple with these challenges, the insurance industry must also adapt to the changing landscape. 

This article explores the historical context of zoning in the U.S., examines recent changes in major cities and discusses the implications of these changes for the insurance industry. By understanding the connection between zoning, housing affordability and insurance needs, actuaries and insurance product managers can better prepare for the challenges and opportunities ahead. 

Overview 

Zoning codes, which dictate land use and building density, have significantly shaped the landscape of American cities and continue to do so today, often with harmful impacts. Restrictive zoning laws and local resistance to new construction have led to a significant undersupply of housing nationwide, driving up prices and making it harder for low- and middle-income families to find affordable housing. Single-family zoning pushes new construction into areas that are vulnerable to natural disasters. If it’s illegal to densify existing neighborhoods naturally, then necessary new housing will be constructed in the wildland-urban interface (WUI). The expansion of suburban sprawl into these areas prone to wildfires and severe storms has led to higher insurance costs. This sprawl also increases car dependency and traffic congestion, as well as contributing to environmental degradation.  

As many cities reconsider their zoning policies to allow for greater density and reduced reliance on automobiles, the insurance industry must prepare for the ripple effects by adapting to new risks and opportunities. Increased density can lead to more walkable, sustainable communities that address housing shortages, reduce environmental impact and enhance urban livability. Higher density correlates with reduced sprawl and lower automobile ownership, as residents of dense urban areas are more likely to use public transit, walk or bike, reducing car dependency and traffic congestion.13 As certain cities relax zoning and promote public transit, some inhabitants may choose to go without a car, gradually affecting car insurance demand over time. Consequently, the need for auto insurance may diminish in specific urban areas, while demand for other types of coverage, such as liability and property insurance for multi-family housing units, is likely to increase. Additionally, the rise of micromobility options, such as electric scooters and bikes, and the expansion of public transit systems like buses and light rail, will create new insurance needs and opportunities for coverage in these areas. Conversely, the risks associated with sprawl, such as higher exposure to natural disasters, will continue to impact insurance models and pricing strategies.  

Historical context of zoning laws in the U.S. 

Zoning laws in the U.S. date back to the early 20th century, with significant developments occurring in New York City and Berkeley, California. New York City introduced the first comprehensive zoning ordinance in 1916 to separate incompatible land uses, such as industrial facilities from residential neighborhoods, to protect the health and safety of residents. Berkeley was the first city to enact single-family zoning, and at the time this regulation had an explicit exclusionary intent to maintain neighborhood character and racial homogeneity.14 

To promote the adoption of zoning laws nationwide, the federal government introduced the Standard State Zoning Enabling Act (SZEA) of 1922. This act enabled states to develop zoning laws and devolve the power to municipalities, facilitating widespread implementation of zoning regulations. The SZEA provided a model for states to follow, encouraging uniformity and standardization in zoning practices. Early zoning faced challenges that led to significant legal battles. One notable case was Euclid v. Ambler (1926), where the U.S. Supreme Court upheld the constitutionality of zoning laws. This landmark decision validated the use of zoning as a tool for urban planning, setting a precedent for future zoning regulations across the country.  

From redlining to exclusionary practices 

In the post-war era, policies favored (and often required) single-family homes and large lots, encouraging the development of sprawling suburban neighborhoods. The Federal Housing Administration (FHA) and the GI Bill provided financial incentives for homeownership, which further fueled suburban growth. However, these policies were not equally accessible to all. The FHA engaged in redlining, a practice that denied mortgages and insurance to residents in predominantly minority neighborhoods, exacerbating racial segregation and economic disparity. 

Redlining created restrictive boundaries that prevented minorities from accessing the same financial opportunities as white Americans. Although the Fair Housing Act of 1968 later banned explicit redlining, many commentators believe that exclusionary zoning practices continue to perpetuate the legacy of redlining to this day.15 This is because exclusionary zoning restricts where people can live based on economic status, which often correlates with race. Zoning codes, originally designed to separate different types of land uses, have shifted towards enforcing arbitrary rules that often stifle development and opportunity, maintaining segregation and limiting housing affordability. More affordable housing types like duplexes and apartments are explicitly banned in much of the land in cities and suburbs.  

Modern zoning, at its worst, has become more of a tool to restrict development than to encourage it. Expensive and time-consuming permitting and variance application processes can dissuade development.16 Increased administrative costs are passed on to homebuyers and renters, a distinct inflationary pressure. Communities have also weaponized zoning to block new developments, a phenomenon commonly referred to as NIMBYism (Not In My Back Yard). This resistance to new housing has contributed to the significant undersupply of housing, driving up prices and creating scarcity, homelessness and overcrowding. 

Understanding the historical context of zoning is crucial for addressing today’s housing affordability crisis and planning for future urban development. For insurance professionals, recognizing the impact of past redlining practices on current market dynamics is essential for developing equitable and effective insurance products. The property risk landscape is often informed by the location and quality of housing, which in turn is dictated by zoning codes and the legacy of redlining. Insurers must be aware of this history as regulators increasingly look to validate risk cost models for bias, ensuring fair and unbiased practices in the industry. 

Zoning elements and their impact on the built environment 

Zoning regulations have played a crucial role in shaping the built environment and, by extension, the patterns of housing and transportation in the U.S. Single-family zoning, minimum lot sizes, parking minimums and bulk regulations have each contributed to the current landscape in significant ways. 

Single-family zoning: This restricts large areas to single-family homes only, severely limiting the availability of more affordable housing types like duplexes, triplexes and apartment buildings. Housing costs are driven up by the limited supply, contributing to the affordability crisis, which in turn raises home insurance costs as property values increase.  

Minimum lot sizes: Mandating minimum lot sizes for homes further restricts the number of houses that can be built in a given area, exacerbating the issues of low density and high housing costs. Larger lot sizes mean fewer homes and higher prices, making housing less affordable. This restricts the overall housing supply and increases the cost of available properties. 

Parking minimums: Requirements for a specific number of parking spaces in new developments increase construction costs and reduce the land available for housing or community spaces. Parking lots and structures dominate landscapes, contributing to urban heat islands and costly flooding while reducing green spaces. Higher construction costs and land dedicated to parking limit the space available for additional housing, exacerbating housing shortages. 

Bulk regulations: Regulations, such as height restrictions and floor area ratios, limit the amount of usable space within buildings. Even in areas where denser housing is permitted, these regulations can prevent the construction of sufficient housing units to meet demand, driving up rents and property prices. This affects housing affordability by restricting the supply of housing units in high-demand areas. 

Challenges of Suburban Sprawl and Benefits of Dense, Walkable Neighborhoods 

Residents in sprawling suburbs often face challenges accessing amenities and services without a vehicle, increasing reliance on cars for everyday needs. This reliance contributes to traffic congestion and longer travel times, and people can spend significant time in traffic. This not only reduces quality of life but also increases carbon emissions, contributing to climate change. Sprawl also paves over vast areas for parking lots and roads contributing to habitat destruction and increased stormwater runoff. This extensive land use is inefficient and environmentally damaging, with higher per capita resource consumption compared to denser urban areas. The COVID-19 pandemic exacerbated these issues, as it accelerated migration from urban to suburban areas. People sought more living space and adapted to remote work, increasing demand for suburban housing, pushing up prices and worsening the housing affordability crisis. 

Suburban sprawl often leads to “stroads” — thoroughfares that try to combine the functions of streets and roads but fail at both. Stroads are wide, multi-lane corridors encouraging high speeds, like roads, but feature many access points and businesses along their edges as streets do. This design makes them particularly unsafe for pedestrians and cyclists due to the combination of fast-moving traffic and frequent intersections, increasing accident risks. Additionally, stroads are often lined with strip malls characterized by large parking lots and a lack of pedestrian-friendly infrastructure, making them unattractive and unsafe for walking or cycling. Transforming stroads involves reducing lane widths, adding pedestrian crossings, and incorporating bike lanes, enhancing safety, and making these areas more vibrant and economically productive.17 

Many cities are beginning to confront the supply constraints associated with traditional zoning regimes. Urban planners and pro-growth policy makers are increasingly prioritizing dense, walkable communities filled with mixed-use development. These communities reduce reliance on cars, lower carbon footprints and preserve green spaces. They also enhance livability by providing residents with better access to amenities, public transportation and parks. By offering a variety of housing options, these neighborhoods can be more inclusive and affordable. Dense, walkable neighborhoods can support a higher concentration of businesses and services, which can thrive due to increased foot traffic. These communities can foster a sense of community and social interaction, as people are more likely to walk and engage with their surroundings. The shift towards such neighborhoods reflects a broader trend towards sustainable urban development that prioritizes environmental health, economic vitality and social well-being. 

Implications for the insurance industry 

The evolving landscape of urban development, driven by changes in zoning policies, has significant implications for the insurance industry. As communities shift toward higher density, mixed-use and walkable neighborhoods, insurers must adapt their products and models to address new risks and opportunities. Additionally, insurers should closely monitor state and local jurisdictions that implement zoning reforms and relax construction restrictions. By staying informed of these changes, insurers can strategically adjust their marketing efforts to capture the growth in insurance needs unlocked by such developments. This proactive approach will enable insurers to capitalize on the expanding market for diverse coverage options. 

Property insurance: The continued growth of suburban sprawl into areas prone to natural disasters has significant implications for the insurance industry. Expansion into wildfire-prone areas in states like California and Colorado increases the risk of catastrophic losses from wildfires. Similarly, suburban expansion into hail-prone regions in the central U.S. increases exposure to severe weather events that may have previously only hit agricultural buildings, driving up insurance claims and costs. Relaxed zoning that allows more building closer to urban cores may relieve some of these sprawl-driven pressures. 

In addition to relief from geographic and weather-driven pressures, zoning changes may significantly shift the countrywide mix of housing, affecting loss propensity. With the removal of single-family zoning, which allows the construction of more multi-family housing, risk profiles will change. There will be an increase in renters and condominium policies relative to homeowner’s policies. Additionally, as duplexes, triplexes and fourplexes become more common in previously single-family home areas, insurers should ensure they have appropriate products for landlords and renters of these property types. 

If zoning is relaxed and building becomes easier, the average age of properties will decrease. New properties tend to present better risks for insurers because they adhere to modern building codes, utilize improved materials and construction methods, and incorporate advanced safety features such as seismic-resistant design, fire-resistant materials, smart sensors and energy-efficient systems. Additionally, newer roofs and other infrastructure components reduce the likelihood of damage or defects. This can result in lower maintenance costs and fewer claims, making these properties more favorable for insurers and promoting a healthier insurance market. Insurers should ensure that their risk cost models and underwriting strategies are forward-looking, allowing them to capture this growth of newer, less risky buildings. 

Auto insurance: Continued suburban sprawl has led to increased driving as people migrate to less dense areas, resulting in higher traffic congestion and more accidents as well as depressed auto insurance profitability. However, if municipalities turn towards density, the reliance on personal vehicles decreases. Consumers who choose to own a car but drive less may be more attracted to usage-based or pay-per-mile insurance options that promise lower rates with less driving. Over the long term, reduced reliance on personal vehicles may mean a significant shift in the revenue makeup of the industry. 

Commercial auto insurance needs may shift as ridesharing, car-sharing, and delivery services continue to grow. Insurers must develop new products tailored to these emerging markets. 

Micromobility and public transit: The rise of micromobility options, such as electric scooters and e-bikes, as well as the expansion of public transit systems, may introduce new insurance needs. Coverage for theft and liability related to micromobility devices will become increasingly important. As cities revamp or expand their transportation networks with more buses, light rail and even subways, there will be increased needs for construction insurance to cover the building phase and operational insurance to cover these systems once they are in use. This includes liability coverage for accidents, property coverage for transit infrastructure, and workers’ compensation for expanded transit workforces. 

Commercial insurance: The shift towards mixed-use buildings reduces segregation between residential and commercial spaces and may include light manufacturing such as maker spaces. This trend creates opportunities for insurers to offer commercial property, general liability and small business package policies. Insurers may need to develop new commercial property policies tailored to the unique risks of mixed-use buildings, covering exposures like property damage, liability and business interruption for both residential and commercial tenants. 

Easier construction permitting will increase building projects, creating a need for more builders’ risk, construction liability and contractor’s policies. Builders’ risk insurance will cover damage to buildings under construction, while construction liability policies protect against claims of injury or property damage during the building process. Contractors will require specialized insurance for their operations and potential liabilities. Insurers must offer these policies to meet the growing demand and ensure comprehensive coverage for the expanding construction industry. 

Environmental and climate risks and community resilience: Denser, more walkable communities can reduce environmental impact and mitigate climate risks by decreasing reliance on cars and promoting sustainable practices. However, the transition period might see increased risks as infrastructure is updated and new buildings are constructed. Urban areas with higher density and mixed-use developments may exhibit greater resilience to natural disasters due to better infrastructure and community planning. Insurers can support disaster preparedness by offering products that incentivize resilience measures, such as flood-resistant construction and community-based risk reduction initiatives. Additionally, insurers can collaborate with municipalities to improve risk mitigation strategies, ensuring that new developments adhere to the highest safety and environmental standards. 

Understanding and adapting 

The insurance industry stands at a pivotal point as urban development shifts in response to changing zoning policies. By understanding these changes, insurers can adapt their products and models to address new risks and opportunities. Embracing innovation and promoting community resilience are essential for thriving in this dynamic landscape. Through these efforts, the insurance industry can contribute to the creation of sustainable, livable and equitable communities, benefiting both insurers and policyholders. This proactive approach will ensure that insurers remain relevant and effective in meeting the evolving needs of urban populations. 

Further reading 

Grabar, Henry. Paved Paradise: How Parking Explains the World. Penguin Press, 2023. 

Gray, M. Nolan. Arbitrary Lines: How Zoning Broke the American City and How to Fix It. Island Press, 2022.

Case studies: Minneapolis and Austin 

Minneapolis, Minnesota, became the first major U.S. city to eliminate single-family zoning in 2018 through its comprehensive plan, Minneapolis 2040. This plan allowed for the construction of duplexes and triplexes in areas previously zoned for single-family homes, aiming to increase housing affordability, reduce racial segregation and promote more walkable communities. The plan also included significant reforms such as eliminating parking minimums and encouraging higher-density development along transit corridors. 

From 2019 to 2022, the Minneapolis area saw a substantial increase in housing supply, exceeding targets with more than 20,000 new housing units added per year. The increased housing supply helped moderate rent increases, with Minneapolis experiencing only a 4% rise in one-bedroom rents since the start of 2020, compared to the national increase of 24% over the same period.18 

Austin, Texas, has implemented various zoning changes through its revised zoning code, known as CodeNEXT. This initiative aims to create walkable neighborhoods with access to public transit, reducing car dependency and promoting sustainable growth. Key changes include increasing housing density, eliminating parking minimums and encouraging mixed-use developments. 

Austin has seen a significant increase in apartment construction since the start of the pandemic. By the end of 2023, just over 26,700 new apartments were delivered in the Austin metro area, contributing to a 12.5% year-over-year decline in average monthly rents by December 2023. This was the second-largest rent decrease among major U.S. metros.19 ●

DJ Falkson, FCAS, is an actuarial director at Lemonade. He is a member of the Actuarial Review Working Group and its Writing Subgroup. 

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