Can Backyard Cottages Unlock America’s Housing Crisis?

Image showing a backyard cottage or ADU

In a move to combat the state’s growing housing shortage, Arizona recently passed the “casita bill,” a legislation that permits the construction of Accessory Dwelling Units (ADUs). This initiative mirrors similar laws enacted in several other states, highlighting a growing trend. ADUs, also known as in-law apartments, casitas, or backyard cottages, are secondary homes or apartments located on the same lot as a primary residence. They can take various forms, such as stand-alone structures, home additions, or conversions of existing spaces like garages or basements.

The benefits of ADUs are particularly significant in today’s real estate market, characterized by limited housing supply and soaring home prices. By enabling the construction of these smaller, more affordable units, ADUs can help increase housing availability and provide more cost-effective living options, especially for multi-generational families. Their typically smaller size and simpler construction requirements make them less expensive to build compared to traditional homes. Additionally, ADUs offer homeowners the opportunity to generate extra income through rentals, potentially offsetting mortgage payments or property taxes.

However, the rise of ADUs is not without controversy. Critics point out several potential downsides. The initial expense of building an ADU, which includes permitting, construction materials, and labor, can be substantial and might not always be reflected in increased property values. The construction process itself can be disruptive, causing noise, dust, and increased traffic, which might disturb both the homeowner and neighbors.

There are also concerns about the broader impact of ADUs on community dynamics. Some residents worry that an influx of ADUs could change the character of established neighborhoods, leading to increased density, potential privacy issues, and alterations in the area’s aesthetic, possibly affecting existing property values. These fears are particularly pronounced in high-end neighborhoods where the addition of ADUs might not be welcomed. There is also concern that ADUs might be used primarily for short-term rentals, failing to alleviate the housing supply issue.

Despite these concerns, ADUs have the potential to enhance home values by adding living space, generating rental income, and making properties more attractive in the real estate market. However, factors such as construction costs, market saturation, and local regulations play a crucial role in determining the actual impact. The effect of ADUs on property values is likely to be more significant in regions with a tight housing supply or high demand for rental units.

Data from three western states—California, Oregon, and Washington—shows that the number of permits granted for ADUs has been very limited. Just under 85,000 permits were issued across these three states combined over the five years from 2018 to 2022. Additionally, homeowners’ associations (HOAs) often have regulations that limit or prohibit ADU construction, creating hurdles for homeowners. Other ordinances may restrict the size, features, building materials, and permitted uses of ADUs, further complicating their development. While the introduction of ADUs through Arizona’s “casita bill” and similar legislation in other states offers a promising solution to housing shortages, it is unlikely to significantly ease the supply constraint anytime soon.

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