Easy credit fed the flame of the recent housing bubble. But, as a paper published today by the Cato Institute shows, the flame that inflated the bubble was first ignited by anti-sprawl plans that created artificial housing shortages in many American cities and states. If planning had not boosted median housing prices to several times median family incomes, few homebuyers would have had to resort to sub-prime mortgages.
Click to download the report.
The Cato paper shows that a housing bubble really only took place in a dozen or so states. In the remaining states, increases in housing prices were relatively modest. For example, from 2000 to 2006 prices in California and Florida grew by more than 130 percent, while prices in Texas grew by only 30 percent.
The paper also shows that, with a couple of exceptions, the states that saw the biggest bubbles were states that had passed growth-management planning laws. With one exception, every state that has passed such a law also saw big housing bubbles.
The exceptions were New York and Nevada (where prices grew without a growth-management law) and Tennessee (where prices didn’t grow in spite of a 1998 growth-management act). New York prices only grew in the New York City area, which is surrounded by states and suburbs that have growth-management laws and plans. Nevada prices grew because Las Vegas has literally run out of private land; it is surrounded by federal land and federal land sales have not kept up with growth. Tennessee’s prices haven’t grown because regional growth-management plans included lots of vacant land in their urban-growth boundaries, so there is, as yet, no shortage.
Americans want to live in single-family homes. Anti-sprawl restrictions increase the price of such housing. But people will go to great lengths to achieve the American dream of homeownership, including bidding up the price of scarce housing and taking out various sorts of sub-prime mortgages to pay for that housing.
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The lessons should be clear: If more states pass growth-management laws, the next bubble will have even more detrimental effects on our economy. Instead, states that have passed such laws should begin to repeal them. Cities that have written growth-management plans should expand or eliminate their urban-growth boundaries, eliminate impact fees, reduce the time and red tape required to get subdivision and building permits, and remove other planning obstacles that prevent home builders from meeting the demand for housing.
In the last six months, the Antiplanner has prepared detailed studies of anti-sprawl planning in Oregon, California, and British Columbia. One consistent finding is that housing prices increase when cities get control of the rural areas that surround them. Growth-management planning is one way, though not the only way, for that to happen.
If developers can subdivide and build on land in rural areas, cities have to offer a low-cost, growth-friendly environment in order to attract development (and the resulting tax revenues) within their borders. But if cities can prevent development outside their borders, they have no incentive to maintain growth-friendly policies, and so they will hike impact fees and take other actions that make housing unaffordable.
Speculations that regional governments can keep housing affordable are unfounded. In fact, because those regional governments are likely to be controlled by the cities, such regional governments practically guarantee that housing will become unaffordable.
Of course, existing homeowners benefit when housing prices rise. But the costs to society as a whole are much greater than these benefits. First, many homes sold each year are new, and no one benefits from artificially high prices for these new homes. Second, not all existing homeowners benefit: those who want to buy a larger home, for example, will face the same obstacles that confront first-time homebuyers. Third, there is an equity problem because existing homeowners tend to be wealthier than homebuyers, so anti-sprawl planning effectively taxes the poor and gives the money to the rich.
The saddest thing is that many of the states and cities with growth-management plans consider themselves “progressive.” In truth, they are extremely regressive as they favor wealthy homeowners and penalize low-income families and first-time homebuyers. As the head of the Northern California Home Builders Association, Joseph Perkins (who happens to be black) puts it, “smart growth is Jim Crow.”
Russians say that Americans don’t have real problems, so they make them up. Urban sprawl is one of those made-up problems. In fact, the costs of sprawl are far outweighed by the costs of anti-sprawl planning. Cities should stop doing such planning and states should repeal laws that give cities control over the surrounding areas outside their borders.
The Cato paper estimates that anti-sprawl plans effectively imposed a $250 billion tax on homebuyers in 2006, and 93 percent of that tax was in just eleven states, all of which (except New York) have growth-management planning laws of one sort or another.
As I have said numerous times here, Randal, this disagrees with the literature that has studied the evidence.
Ah, well. We know you must keep repeating the same tired canard – after all, if you say it enough, it becomes true, right?
DS
DanS,
Actually, the literature you cited agrees with my analysis. You quote Glaeser: “America is not facing a nationwide affordable housing crisis. In most of the country, home prices appear to be fairly close to the physical costs of construction. In some of the country, home prices are even far below the physical costs of construction. Only in particular areas, especially New York City and California, do housing prices diverge substantially from the costs of new construction.”
This is exactly what I am saying. Only a few places are unaffordable. Those places, for the most part, have growth-management planning. Glaeser, Paul Krugman, Randall Pozdena, and many other economists agree. You just don’t want to believe that your smart-growth fantasies can have any downsides.
Randal, you quoted the first bolded passage on the link. Would you mind quoting the others?
Thank you ever so much.
DS
Any time when you have reasonably free and functioning competitive markets (of any kind of product or service) with high and rising prices, that in of itself is a market signal to the producers in that market that they should be producing more of the product in question as they will earn profits if they meet the demand curve. What the housing markets in California, Florida, Boston, Portland, the UK, Sydney, et.al are doing is they are screaming at the top of their lungs that there should be rewards beyond the dreams of avarice for those who decide to work towards providing more housing. The biggest profits would come early, then profits would slowly become less and less as local housing markets would start to crawl their way towards their equilibrium – if they are allowed to. Eventually profits will complete their march towards zero.
So we need to ask ourselves, why isn’t this happening?
I had a school friend from long ago who worked as an accountant for a construction company for 15 years. In most places, the local home building and general construction industries are pretty competitive, hence the Antiplanners’ observation that in most of the U.S, home prices appear to be fairly close to the physical costs of construction, should hold true – and it does. In reasonably competitve markets (and all markets do differ in the nature of how competitive they are), the economic profit should be close to zero as competitors squeeze out any and all profits that are to be made.
This is all really simple econ 101: supply and demand.
Unfortunately most planners pretend to have skipped econ classes and only admit to the demand part. They intentionally restrict the supply and feign that the price increase is due to demand.
They are too stupid (or dishonest) to admit that their restrictions on supply are the reason that the demand is driving up costs.
Thanks
JK
From my link above:
And of course, prices have risen in particular areas far more than supply restrictions** (the little bit Randal “forgot” to include in his “analysis”); this is of course well known and explained on this site many times. Ignoring this reality is required to maintain certain ideologies.
DS
** Among the four types of local land use regulations, all have negative coefficients. In addition, all but zoning ordinances are statistically significant at the 5% level. These results suggest that development guidelines, incentive-based policies, and property acquisitions, all have reduced land development in the western United States. The coefficient on the zoning ordinance index, however, is insignificant at the 10% level. This may indicate that zoning ordinances affect the location of development, but not the total area of development. (pg 81)
Deep “analysis”, surely:
With one exception, every state that has passed such a law also saw big housing bubbles.
The exceptions were New York and Nevada (where prices grew without a growth-management law) and Tennessee (where prices didn’t grow in spite of a 1998 growth-management act). New York prices only grew in the New York City area, which is surrounded by states and suburbs that have growth-management laws and plans.
Again, as Glaeser says but Randal “forgets” to quote, folks build their houses then pressure local electeds to zone out the undesirables so their property values are protected.
Welcome to society, Antiplanner readers.
DS
By: Paul Krugman
Now for the economic geography. Last summer I suggested that when discussing housing, we should think of America as two countries, Flatland and the Zoned Zone.
In Flatland, there’s plenty of room to build houses, so house prices mainly reflect the cost of construction. As a result, Flatland is pretty much immune to housing bubbles. And in Flatland, houses have, if anything, become easier to afford since 2000 because of falling interest rates.
In the Zoned Zone, by contrast, buildable lots are scarce, and house prices mainly reflect the price of these lots rather than the cost of construction. As a result, house prices in the Zoned Zone are much less tied down by economic fundamentals than prices in Flatland.
By my rough estimate, slightly under 30 percent of Americans live in the Zoned Zone, which comprises most of the Northeast Corridor, coastal Florida, much of the West Coast and a few other locations.
Read the rest at:
http://krugblog.wordpress.com/favorite-columns/
Thanks
JK
Sure.
DS