The Housing Fix Hiding in the Backyard
By Daniel Kaufman
The Washington Post ran a piece this week about families building small homes in their backyards so grandparents, parents, and grandchildren can live on the same property. It was framed as a human interest story. I read it as a market signal, and it is one of the most important ones in American housing right now.
Here is what is actually happening. Twenty-four states have now passed laws enabling accessory dwelling units, the industry term for backyard cottages, converted garages, and basement apartments. Eleven of those states acted in just the past two years. That is not incremental policy drift. That is a structural unlock of land that has been legally frozen for decades.
We Zoned Ourselves Into This Crisis
For most of the postwar era, roughly three quarters of residential land in this country was zoned for one house, one lot, full stop. It was illegal to add a second unit on property you already owned, on land you already paid for, with infrastructure already in the ground. Think about that from a development economics standpoint. The most expensive inputs in housing are land, entitlement, and horizontal infrastructure. ADUs require almost none of the three. The land is paid for. The sewer line is in the street. The neighborhood already exists.
We did not have a housing shortage because we ran out of land or lumber. We had a housing shortage because we made the cheapest form of new housing illegal in most of America. The current wave of state preemption laws is simply governments getting out of their own way.
The Multigenerational Angle Is the Real Story
The Post piece highlighted something the industry has underweighted. In California, the state with the longest ADU track record, surveys consistently show about three in ten ADU owners house a family member in the unit, while about four in ten rent to outside tenants. One Maryland contractor in the article said nine out of ten of his ADU builds are for family, usually aging parents or adult children who cannot afford to launch.
This tracks with the demographic data. Multigenerational households have roughly doubled since the early 1970s, now covering more than 60 million Americans. That is not nostalgia for the old country. That is arithmetic. When the median home price in a metro requires an income the median household does not have, families pool resources. The backyard cottage is the physical expression of a balance sheet decision.
I have spent 25 plus years building housing, and I will tell you what this really represents. It is caregiving infrastructure, workforce housing, and generational wealth transfer, all wrapped into 600 square feet behind a single family home. The grandmother in the ADU is not paying for assisted living. The 27 year old in the garage apartment is saving a down payment instead of burning rent. Both are relieving pressure on a housing market that has failed them.
Where the Model Still Breaks
I am bullish on the trend, but I am a lender and developer, not a cheerleader, so let me name the friction.
Financing is the bottleneck. Most homeowners cannot get a sensible mortgage product to build a $250,000 to $350,000 unit. The same Maryland contractor was blunt: if you pencil it as a rental, the payback period often does not work. Fannie and Freddie are starting to let ADU rental income count toward borrower qualification, and new construction loan products are emerging, but the capital markets are years behind the zoning reform.
Local governments still play defense. States can preempt, but municipalities have a long history of complying on paper while killing projects with sprinkler mandates, parking requirements, and setback games. Washington State's approach, which wrote height parity, setback parity, and street improvement prohibitions directly into law, closed the loopholes California left open. That is the template.
The data is a mess. Huge numbers of ADUs are built without permits, and the Census counts some as part of the main house and some as separate households. Anyone quoting precise national figures is guessing. As an investor, I treat the official numbers as a floor, not a ceiling.
What I Am Watching
The states that get financing and code enforcement right will pull housing production forward without bulldozing a single neighborhood. Even modest homeowner adoption would add millions of units nationally, in exactly the locations where jobs, schools, and transit already exist. That matters enormously in the Sun Belt markets I have been writing about, where affordability is eroding fastest and where the Southern Squeeze is pushing working families out of the metros their labor supports.
The backyard was never empty. It was just illegal. That era is ending, and the developers, lenders, and policymakers who understand what that means will be the ones who build what comes next.
Daniel Kaufman is the founder of Kaufman & Company, a private investment and development firm active in workforce housing, resort real estate, private credit, and infrastructure across the Mountain West, Texas, Florida, and the Northeast.