The Effects of Litigation Risk on Homebuilding: Evidence from State Environmental Policy Acts

• In Event: Flood Risk, Insurance, and Housing Finance

Abstract

Since its enactment in 1970, 19 U.S. states have followed the example of the National Environmental Policy Act by passing State Environmental Policy Acts (SEPAs) that require environmental impact assessment of proposed government actions. Due to variation in statutory text and case law, the SEPAs vary widely in the legal standing they grant to challengers of proposed actions. Under some SEPAs, anonymous citizens have standing to challenge their local city council's decision to issue a building permit to the private developers of a new apartment building based on any perceived error in the substance of an environmental assessment. In other states, citizens are limited to challenging only the state government, and only on its having correctly followed prescribed environmental assessment procedures. This variation in scope and subjectivity of granted legal standing creates variation across states in a private development project's probability of being involved in costly SEPA litigation, which I exploit to evaluate the effect of threats of legal action on homebuilding. Using panel data from the U.S. Census Bureau's Building Permits Survey on new residential building permits issued in each state from 1960-2026, I employ a synthetic difference-in-differences framework to evaluate both the historical impacts of SEPA passage or revocation and the modern impacts of SEPA carve-outs for homebuilders. On the extensive margin, I find that the threat of legal action imposed by the passage of a far-reaching SEPA decreases permits issued for housing units in large multifamily building by 1.3 units per 1000 people, equivalent to (for example) approximately 1.03 million fewer of these units built in California from 1970-1999. I examine the robustness of this result by 1) looking at modern permitting behavior in reaction to a California carve-out law passed in June 2025; and 2) assigning treatment at the date of decision of the first SEPA case brought in a state against a private developer, as recorded in a popular online legal research database. From the same database, I use the cumulative number of SEPA cases brought in a state against private developers to evaluate this chilling effect of legal threat on homebuilding at the intensive margin.

Author

• Tommy Morgan, University of Tennessee (Knoxville)
  Presenting Author