Gee, Krugman’s Graphs Look Like the Antiplanner’s

Comparing housing prices in Los Angeles with those in Atlanta using a graph very similar to those used by the Antiplanner, Paul Krugman remakes the point that the United States did not have one housing bubble: it had many. And, he adds, the bubbles were caused by land-use regulation, while places that did not have government constraints on land did not have bubbles.

The Economist makes the point, previously made by the Antiplanner (on p. 115 of Best-Laid Plans, that volatile housing prices reduces mobility and increases unemployment rates. When home prices drop and homebuyers find themselves “underwater,” some won’t leave even for better jobs elsewhere because they can’t afford to lose the house.

Unfortunately, most of the people who commented on the Economist article conclude that this means people are better off renting than buying. This may be true if you live in a region infested by smart-growth planners. But in relatively free housing markets, buying remains better for most of those who can afford the down payment — not because of the economic return you get from buying but because homeowners enjoy a higher quality of life.

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14 thoughts on “Gee, Krugman’s Graphs Look Like the Antiplanner’s

  1. C. P. Zilliacus

    The Antiplanner wrote:

    > Unfortunately, most of the people who commented on the
    > Economist article conclude that this means people are
    > better off renting than buying.

    People making those comments have not lived in an all-rental garden apartment complex, such as those that are common in the Maryland suburbs of the District of Columbia. These garden apartments seem to be loved by planners and the Smart Growth industry, though I suspect strongly that most planners and Smart Growth advocates do not themselves reside in garden apartment complexes.

    In addition to crime, those apartments are frequently ravaged by large fires, “displacing” their occupants.

    Some recent examples from Maryland are here, here, here, here, and here.

  2. peter

    I think you completely missed the point of Krugman’s blog post. He was saying that there was a bubble in some parts of the country but not in others, so the Fed’s use of average housing prices nationwide in its analysis helped it ignore the bubble. He did not say that “smart growth” caused the bubble.

    In fact, he made exactly that point in the very next post on his blog:

    http://krugman.blogs.nytimes.com/2010/01/06/desert-bubbles/

    He says: “Oh, and someone will surely raise the claim that this shows that you mustn’t have “smart growth” policies because they cause housing bubbles. Can I say that this is deeply stupid? On one side, we’re supposed to believe that markets are efficient and wonderful; on the other, we’re supposed to believe that anything which constrains buildable land — which, you know, sometimes happens for entirely natural reasons — will send markets into wild irrational swings. Those poor, fragile, omnipotent markets, able to handle anything except mild government intervention …”

  3. t g

    Mike,

    I’d agree about the mechanism (monetary expansion), but I wouldn’t put all my eggs in the credit basket.

    It looks like cities with high capital gains (and as far as I can tell, home sale profits are not generally included in capital gains) experienced the greatest home price increases. Monetarist theory would claim that gains made off the stock market from the late 90’s were channeled into real estate, on account of higher returns. (“Inflation is always and everywhere a monetary phenomenon.”)

    Unfortunately, the IRS data on capital gains costs a hefty sum, and I have yet to find data available on cap gains anywhere else. If you look at down payments though, they tracked well with rising prices in the most expensive cities. That is, through the boom, down payment rates were increasing in cities like Seattle, Portland, San Fran, etc.

    For down payment rates, please see: FHFA Table # 16, Column H, Loan to Price Ratio by city.

    If anyone knows where to get data on capital gains by city, please shout out.

  4. Owen McShane

    Mike,
    If low cost credit was the cause of the housing bubble then New Zealand would not have had a bubble.
    Because of our ongoing problems with inflation credit was always expensive in NZ with mortgage rates of 8 – 10% right through the bubble period.
    And our bubble was serious. New Zealand became one of the least affordable housing markets in the world and the Governor and Chairman of the Board of the Reserve bank attributed this to excessive land regulation and compliance costs and to Smart Growth in particular.
    We are the classic “counterfactual” in this case.

  5. msetty

    It’s interesting how certain people commenting on this blog insist on attributing the housing bubble to “Smart Growth” despite mountains of evidence that many other factors were at work.

    For example, please explain how housing bubbles occurred in the same period not only in the Coastal U.S. such as California or Massachussetts, but also Florida, Australia, New Zealand, and Great Britain.

    In California, the most severe housing bubbles on a percentage basis occurred in inland areas such as Stockton, Modesto, Riverside, San Bernandino, Victorville and other areas that had no substantive growth controls, land shortages or other factors under the direct control of “gummit.” In these same places, housing prices have also tumbled by the highest percentages.

  6. C. P. Zilliacus

    MSetty posted:

    > It’s interesting how certain people commenting on this
    > blog insist on attributing the housing bubble
    > to “Smart Growth” despite mountains of evidence that
    > many other factors were at work.

    I agree with you that Smart Growth is not the only cause of the 2001-2007 housing bubble (!) – but I do assert that things like urban growth boundaries, at least in some parts of these United States, made the problem much worse.

    Though in my comment above, I was speaking of the love that certain local government planners (and the policymakers that oversee them) have for massive rental garden apartment complexes, in particular in the two large Maryland suburban counties of Washington, D.C., both of which have practiced Smart Growth (since before the term was invented) including efforts to “preserve” rural land and rural viewsheds.

  7. Dan

    I do assert that things like urban growth boundaries, at least in some parts of these United States, made the problem much worse.

    Have you published these findings in the empirical literature? They would make an excellent addition to the knowledge, as they don’t appear as robust findings in the literature at all. It is your moral and ethical duty to right this seeming wrong.

    Please let us know who picks it up.

    DS

  8. C. P. Zilliacus

    Dan wrote:

    > Have you published these findings in the empirical
    > literature? They would make an excellent addition to
    > the knowledge, as they don’t appear as robust findings
    > in the literature at all. It is your moral and ethical
    > duty to right this seeming wrong.

    This is not an academic exercise, but a political one, so the changes that are needed are at the ballot box, though given how slowly things grind along, it would probably take several four year terms of the bodies of elected officials to make and implement the needed changes.

    But it would seem that there’s a problem when the mean price for a single-family detached home is beyond $600,000, as it is in many of the usual-suspect places on both the Atlantic and Pacific Coasts.

  9. peter

    If smart growth restrictions on the construction of housing caused a shortage in the supply of housing, which in turn caused prices to increase, then why is it that there was a boom in housing construction during the last bubble, even in places with restrictive land-use regulations?

    Like msetty pointed out above, some of steepest increases in housing prices were in places like Riverside, where housing construction increased substantially during the housing bubble.

  10. Dan

    CPZ,

    I’m not sure how your text addresses my assertion that your claim of urban growth boundaries, at least in some parts of these United States, made the problem much worse is supported empirically. Perhaps you were replying to something on a different thread and pasted here in error?

    DS

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