HUD Pushes Local Reforms While Rural Markets Show Growth

The Department of Housing and Urban Development released recommendations this week urging state and local governments to reduce regulatory barriers that drive up housing construction costs, according to Inman's May 21 report. The guidance comes as the nation's housing inventory gap persists, but independent analyses suggest the construction bottleneck extends beyond local zoning and permitting delays.

HUD's recommendations focus on streamlining approval processes, reducing impact fees, and eliminating restrictive zoning that limits housing density. The department argues that regulatory complexity adds months to construction timelines and thousands of dollars to project costs, making new housing less viable in many markets.

However, Zillow and Realtor.com analyses cited in the Inman report identify additional supply constraints that federal policy cannot directly address: mortgage rate lock-in effects keeping existing homeowners from selling, stretched consumer budgets limiting buyer demand, and tariff-driven material cost volatility affecting construction economics.

Insights from HavenScore data

While HUD focuses on construction barriers in major metropolitan areas, HavenScore data reveals that some of the strongest housing market performance is occurring in smaller communities that may face fewer regulatory obstacles. Among the top-performing ZIP codes by HavenScore's growth-weighted methodology, several rural and small-city markets are posting double-digit annual price appreciation.

Ogallah, Kansas (ZIP 67656) leads with 16.4% year-over-year growth and a HavenScore of 71. This Trego County community of fewer than 1,000 residents demonstrates how markets with simpler regulatory environments can still achieve substantial price momentum.

Kansas City, Missouri's ZIP 64120 shows 14.6% annual growth with a HavenScore of 78, representing a more urban market that has managed strong performance despite potentially greater regulatory complexity. The ZIP covers parts of Kansas City's urban core, suggesting that some metropolitan areas can achieve growth even within existing regulatory frameworks.

Darden, Tennessee (ZIP 38328) in Henderson County shows 14.1% growth with a score of 70, while Harper, Iowa (ZIP 52231) in Keokuk County demonstrates 13.3% growth with a score of 72. Hillsgrove, Pennsylvania (ZIP 18619) in Sullivan County rounds out the top performers with 11.0% growth and a score of 70.

These markets share characteristics that may insulate them from the regulatory barriers HUD seeks to address: lower population density, fewer layers of municipal oversight, and development patterns that rely less on complex zoning approval processes.

Construction costs beyond regulation

The Inman report notes that while HUD's recommendations target local government barriers, construction industry challenges extend beyond regulatory compliance. Material costs have faced volatility from trade policy changes, labor shortages persist in skilled construction trades, and financing costs for developers remain elevated compared to pre-2022 levels.

Mortgage rate lock-in effects, identified by Zillow in the analysis, create a separate constraint on housing supply. Existing homeowners with mortgage rates below 4% show reluctance to sell and take on new financing at current rates above 6%, according to Freddie Mac Primary Mortgage Market Survey data. This dynamic reduces the existing home inventory that typically represents the majority of housing market transactions.

Consumer budget constraints add another layer of complexity. While HUD's recommendations could theoretically reduce new construction costs, buyer purchasing power remains limited by income growth that has not kept pace with housing cost increases in many markets.

Policy implementation challenges

HUD's recommendations require action at state and local levels, where implementation faces political and practical obstacles. Local governments often rely on impact fees and lengthy approval processes to manage development impacts on infrastructure and services. Reducing these requirements without alternative funding mechanisms could strain municipal budgets.

Zoning reform faces resistance from existing residents concerned about neighborhood character and property values. Even where local officials support streamlined development processes, community opposition can slow or block implementation.

The effectiveness of federal recommendations also depends on coordination between multiple levels of government. State governments would need to modify enabling legislation in many cases, while local governments must revise ordinances and retrain staff on new processes.

Market dynamics in smaller communities

The strong performance of rural and small-city ZIPs in HavenScore data suggests that regulatory barriers may be less binding in these markets. Lower development costs, simpler approval processes, and available land reduce many of the constraints that HUD seeks to address in larger metropolitan areas.

However, these markets face different challenges that federal policy may not address effectively. Limited local employment opportunities, infrastructure constraints, and smaller buyer pools can limit long-term growth sustainability even where regulatory barriers are minimal.

The growth patterns in ZIPs like Ogallah and Harper may reflect pandemic-era migration patterns, remote work adoption, or other demographic shifts rather than fundamental improvements in housing supply dynamics.

Implementation timeline uncertainty

HUD has not specified enforcement mechanisms or timelines for implementing its recommendations. Without federal funding incentives or regulatory requirements, adoption will depend on local political will and resource availability.

Previous federal efforts to encourage local zoning reform have achieved limited success, suggesting that voluntary guidance may have minimal impact without stronger incentives. The Biden administration has proposed linking federal infrastructure funding to zoning reform in some contexts, but such approaches face congressional and local government resistance.

The housing inventory gap that prompted HUD's recommendations reflects decades of underbuilding relative to household formation, according to Census Bureau and HUD data. Addressing this shortfall will likely require sustained policy changes across multiple years and governmental levels, regardless of the specific regulatory reforms adopted.