The Oregon Office of Economic Analysis recently published a four-part economic assessment of the “Portland housing bubble.” Written by an economist named Josh Lehner, the assessment looks at a lot of data but misses the elephant in the room, which is how land-use regulation has affected Portland housing.
Housing prices have risen to pre-financial-crisis levels, says Lehner, and Portland’s rental market has an inordinately low vacancy rate. New construction of both single- and multi-family homes is mostly at the high end. Lehner looks at these facts with alarm, but it never occurs to him that there is a simple remedy: end all of the land-use restrictions.
Land-use regulation not only makes housing more expensive, it makes housing prices more volatile, that is, more prone to bubbles. This is because, when supply is limited, a small increase in demand translates to a large increase in price rather than an increase in supply. Conversely, a small decrease in demand translates into a large decrease in price.
This is exacerbated when an time-consuming permitting process makes it difficult for builders to quickly respond to changes in demand. Such permitting delays prevent builders from having houses on the market when demand increases, instead often having them available only when demand is decreasing.
In Portland’s case, the land inside the region’s original urban-growth boundary is basically all developed. Planners have made some additions to the boundary but imposed such onerous regulation that builders have all but given up hope of building in those areas. As a result, land prices have gone up, which is one reason why new homes are at the high end of the market–it doesn’t make sense to build small, inexpensive homes on expensive land.
Lehner misses all this, instead going into a discussion of whether Portland housing is affordable. He concludes that it is, mainly because it is no less affordable than it was at the peak of the boom before the financial crisis.
He needs to take a broader perspective. The American Community Survey says that, in 2006, which was the peak of the bubble, the median home price in the Portland urbanized area was almost $300,000, or about 4.4 times the median family income of just under $67,000 (tables B25077 for median home value and B19113 for median family income). By 2011, median prices fell to under $250,000, but since median family incomes were up to nearly $71,000, median prices were just 3.5 times median incomes.
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Since then, both housing prices and incomes have risen; census data aren’t available past 2012 when median prices were 3.7 times median incomes, but the ratio is undoubtedly higher now, meaning that home prices have risen faster than incomes. Where we really need to look to compare affordability is before the boom, not the peak of the boom.
In 1969, before Oregon passed its land-use laws, median home prices were just 1.6 times median family incomes. With the early imposition of those laws, prices rose to 2.8 times incomes by 1979, but fell to 2.0 times incomes in 1989 as a result of the 1980s recession. By 1999 they were back up to 3.0 times incomes.
Put another way, after adjusting for inflation, incomes in 1969 and 1989 were very close to what they are today, but home prices were less than a third of today’s prices in 1969 and less than half in 1989. There is no reason, other than artificial shortages created by land-use laws, that housing prices should have increased that much faster than incomes.
Lehner should also have looked at other regions of the country. In 1969, median prices were about two times median family incomes, plus or minus 0.5, everywhere in the country except Hawaii and Stamford, Connecticut. Since then, prices have risen, relative to incomes, only in places that have imposed land-use laws like the ones Hawaii passed in 1961 and Oregon passed in 1973.
As of 2012, median prices are 2.2 times median family incomes in Dallas-Ft. Worth, Houston, and Indianapolis, all regions growing faster than than Portland. By this measure, or by the measure of Portland’s own history, Portland’s 3.7 ratio is not at all affordable.
One of the other negative results of regulation-led home price volatility is that it leads to higher unemployment. When home prices aren’t volatile and are roughly equally affordable everywhere in the country, someone who loses their job in one city can sell their home and move to another city. When prices in some areas are highly volatile and some regions are much more expensive than others, the options for moving are more limited both because homes are more likely to be underwater and because at least some potential jobs will be in unaffordable regions.
Portland is going through another housing bubble, and it will continue to be afflicted by this home price volatility until the state and region relax its land-use laws. While these laws have imposed huge costs on residents and homeowners in the state, they have provided little benefit. It’s time to give up on the idea that the government has a right to control how people use their land.
“It’s time to give up on the idea that the government has a right to control how people use their land.”
Quite right, but how do we get back to the system of private contracts for land use in the form of restrictive covenants running with title?
And the real problem is not so much government control, but rather the insane level of micromanagement they engage in. I am working on plans for a 6 story condo development in Calgary, Canada. The city declares they have the right to tell me what color the building can be, what architectural style I must use, and what species of ornamental plants I must use.
I defy anyone here to tell me what is the meaning of:
“• Encourage the preservation of the special character homes, apartments and streetscapes of Mission;
• Support apartment redevelopment that is sensitive to the existing community character and the older architecture;
• Facilitate the provision of affordable housing;
• Encourage the preservation of buildings included on the Inventory of Potential Heritage Sites;
and
• Provide the opportunity for a broad mix of dwelling types.”
And let’s not even get into the issue of a Building Code that has lost touch with safety and became another blunt leftist political bludgeon.
handy chart here, you can compare portland price v income against other cities. not really seeing a pattern myself, except that portland started the 80’s in a slump that defied the trend. then portland recovered in the late 80’s while the rest of the country saw declines.
i am just not seeing prices get crazy after the land use laws were imposed.
http://www.economist.com/blogs/graphicdetail/2014/02/us-house-prices
What’s wrong with a time-consuming permitting process? It’s a great way to block or delay stack-and-pack housing in your single-family neighborhood!
http://americandreamcoalition.org/?page_id=3299
“Be sure to attend the conference to gain the tools you need to oppose “stack-and-pack” plans in your city.”
I wonder if the “tools” taught at the conference are exactly the same time-consuming permitting processes?
“Land-use regulation not only makes housing more expensive, it makes housing prices more volatile, that is, more prone to bubbles.”
Argument from repetition. Proof by repeated assertion.
Not a single link to peer-reviewed evidence, or any evidence of this assertion for that matter.
Before Oregon passed its land-use Mandates, we had local control of the zoning in our neighborhoods and our property in Oregon.
We are now living with their poor land use policies, planning and urban growth boundary, that squeezes us into about 3% of the land.
Driving up the cost of housing.
“Driving up the cost of housing.”
Argument from repetition. Proof by repeated assertion.
Not a single link to peer-reviewed evidence, or any evidence of this assertion for that matter.
Supply and demand, cut the supply and prices go up.
You know what else correlates to the dates The Antiplanner has chosen? The money supply.
“In 1969, before Oregon passed its land-use laws, median home prices were just 1.6 times median family incomes. With the early imposition of those laws, prices rose to 2.8 times incomes by 1979…”
Yes, and in 1971, the US left the Bretton Woods system and went to a total, floating fiat currency. In 1969, thanks in part to the unconstitutional war in Viet Nam, gold was flowing out of the country, and the entire system was about to collapse. Look at the M2 and M3 in the linked graphs. Trough around 1969-70. Huge spike after 1971.
Hmm. Could an inflated monetary supply have something to do with increased housing prices? That is, are houses and real property subject to the effects of inflation?
“…but fell to 2.0 times incomes in 1989 as a result of the 1980s recession.”
And 1989 was the trough of the M1 (liquid) money supply, although the M2 (which includes savings, money markets, and other accounts) wouldn’t hit bottom until 1994.
“By 1999 they were back up to 3.0 times incomes.”
And another peak in the M2. People were parking their money in savings, money market, and other accounts, along with housing.
When the money supply is increased, the increased money is generally parked somewhere, whether it’s tech stocks, real estate, commodities, etc. An increase in the money supply in any sector (education, real estate, stocks) tends to result in inflated prices as those using the newly created money bid up prices.
Why is this hard for some to understand?
“Supply and demand, cut the supply and prices go up.”
Yes. Increase the supply of money, thereby increasing demand for real property, and prices go up.
Anybody remember “The Big Look”? I attended a meeting in Tillamook, where there was no available housing simply because the regulations on housing meant affordable housing couldn’t be built.
Oh, and we were promised that the legislature was going to relax rules. Name a politician who voluntarily gives up power and authority.
.
From the report:
” As demand continues to be strong in both the central city and in town centers across the region, the pattern makes sense. The hardest hit suburbs and exurbs are generally the last to share in the housing recovery, if at all yet.”
That is very surprising. Few want to live in crowded central cities, where there is crime and pollution and gangs and it’s hard to park and drive due to the congestion caused by light rail and streetcars.
And the brew pubs, which are the worst part of city life. I almost forgot that.
“The hardest hit suburbs and exurbs are generally the last to share in the housing recovery, if at all yet.”
Housing recovery? Ha. Yes, the bubble has been re-inflated in a few markets. Cities dependent on consumerism (like Seattle with Amazon, Microsoft, etc.) are feeling flush with newly created FRNS, and rents and housing prices are being bid up. Debt-financed consumerism isn’t sustainable, and these cities will eventually feel the effects…again. Meanwhile, suburb and exurb prices will experience a less precipitous decline. This is how the business cycle works, folks. Nothing new here except the amplitude of the effects.
Having lived close to downtown and in the burbs, I prefer to be away from downtown, away from the congestion, lack of yards, parking and privacy. I’d rather not be near shopping and live on a quiet street without traffic.
I don’t really care if others prefer to be downtown and I don’t care what the planners believe, I should believe.
There are a lot more choices in the burbs than in the central downtown area, the suburbs surround the tiny downtown core and expand out giving us many more choices.
Frank – The Municipal Governments in Portland – City, County, and Metro. Issue more bonds to suck up any excess capital, for Urban Renewal, and “Economic Development” spent to fund the developments government wants at the expense of what consumers need so that there is no money available to fund the expansion of private enterprise or increase the income base of individuals. Our workforce participation is just above 61%, and 20% of the workforce is “underemployed” working too few hours, or not able to find work in their chosen field.