Are Planners to Blame for the Mortgage Meltdown?

Randal O'Toole believes that in the search for blame for the mortgage and credit crisis, an obvious candidate is being overlooked: city planners.

"Subprime mortgages were only a symptom of the real problem, which is unaffordable housing. But what made American housing unaffordable? University of Washington economist Theo Eicher knows the answer: land-use regulation. As reported in the Seattle Times, Eicher has just completed a study showing that land-use planning is adding hundreds of thousands of dollars to the cost of homes in many states.

Eicher's research confirms my recent Cato policy analysis, The Planning Tax, which shows that growth-management planning has made housing unaffordable in a dozen or so states, particularly Hawaii, California, Florida, Maryland, Oregon, Washington, and most of the New England states. Meanwhile, housing remains pretty affordable in most other states, including the fast-growing states of Georgia, North Carolina, and Texas, because land-use planners have not yet seized power in those states.

Research by Harvard economist Edward Glaeser has shown that land-use regulation not only drives up housing prices, it makes them more volatile too - more prone to crashes.

Sadly, planning advocates are trying to convince legislatures and city councils in most states that don't have growth-management planning to pass such legislation and write such plans. Those plans not only deny the American dream of homeownership to low- and moderate-income families, they put the U.S. economy increasingly at risk of a Japanese-style crash."

Full Story: Land-Use Regulation and the Credit Crisis



Doesn't compute

Hmmm ... strict land-use planning = mortgage meltdowns. That's why it makes such perfect sense that the metropolitan areas hardest hit by the mortgage meltdown are such shining examples of thoughtful restraint on sprawl as Riverside County, CA; Clark County, NV; Maricopa County, AZ; and the Detroit and Cleveland metropolitan areas.

Or ... maybe not.

Meanwhile, the most heavily regulated places of all -- the likes of the city of San Francisco and New York City -- are amongst the relatively few places that are not experiencing plunges in value.

I almost feel bad attacking this argument by the Cato Institute; it's so weak that it makes me feel like a bully.

Jake Wegmann

Computation assistance

Well, there are numerous reasons for the current mortgage delinquencies. We could discuss lack of borrower knowledge, poor lender underwriting, bad buyer psychology, exotic mortgages, local unemeployment in some of the areas you mentioned, speculative "investment" in rental/second housing for flippers, or a number of other things.

But, relevant to this article, let us take the case of Stockton, CA. By way of background, it is the foreclosure capital of the nation right now. I see you forgot to mention it on your list. But, it is one of the places that is relevant to this discussion and gives at least some credence to O'Tool's point.

Why is Stockton in its current position? On the surface, lots of people overpaid for their houses with mortgages they couldn't afford. But why did they do that? Many were priced out of the Bay Area (or even Sacramento), where most of them commuted to work. Why were they priced out? Lots of reasons including physical constraints on housing construction, but more importantly, regulatory constraints on new supply. So, they were pushed out of an area that articially created a higher than would have been price and bought in Stockton. Now, was it still their fault they paid $500,000 for an average house in Stockton with a crazy mortgage - of course. But, I think O'Tool is showing how one could relate a set of growth management policies with the mortgage delinquency in some areas. I'm not defending him or those that did financially imprudent things. But, in some way, it can at least be partially attributable to a root cause of this.

Don't worry about being a bully. The argument may not be quite as weak as you think and yours might not be quite as strong as you think.


Is in its current position because there are a bunch of houses that don't relate to a city, and the market recognized that.

O'Tool makes a real stretch here. If anything, it is the unnatural and inappropriate obsession with homeownership advanced by outfits like Cato that caused the mess.

Supply for demand in Bay Area - not the regulation.

But why did they do that? Many were priced out of the Bay Area (or even Sacramento), where most of them commuted to work. Why were they priced out? Lots of reasons including physical constraints on housing construction, but more importantly, regulatory constraints on new supply. So, they were pushed out of an area that articially created a higher than would have been price and bought in Stockton.

Can't take the time to locate the paper just now, but the work has already been done to refute the (lack of) supply-side argument.

That is: "golly, if only there was enough supply, we'd have no problem!!!!!!". There are only so many sites for new housing, and even fewer for large-lot single-family detached. There is land taken away by the market for open space that doesn't count. Infill construction rates are still single-digit.

The fact is that human population growth, topography, and retention of open space combined with the climate and high-tech jobs, create more demand than supply. Period. I miss the climate, but I don't miss the people, people, people, people everywhere.



Regs too

Why would you acknowledge that physical constraints to supply increase housing prices, but regulatory constraints don't? Surely, the house shopper and/or seller is not able to distinguish which one is more important in the meteoric home price rise? They just know there is a lack of supply. Your argument makes no sense.

I've seen lots of papers that try to "refute" this basic fact and they are all very weak. They are all just the opposite of O'Tool - concluding something through research that they already advocate.

We all know demand was a big factor in the Bay Area - stock option wealth, economic growth. But, house price growth continued, even accelerated when the local economy stagnated/declined in 2001-2002. In fact, commercial rents/prices declined severely during this time. Class A office/R&D rents declined more than 50% in many submarkets. Yet, you still had to fork over $700,000 for a modest house in Sunnyvale. When local economic conditions suffer and you have related job losses and commercial real estate price decline, you should also experience house price declines, albeit at a lag. We never saw this in the Bay Area. This is precisely the result of restricted supply (physcial and regulatory).

Also, if you are looking for a paper, read Cervero's work on all the physcially developable land in Contra Costa County that was not developed due to regulation/entitlements.

The additional net effect of these restrictions is that it drives up land prices so high, it makes new development economically difficult even with the high house prices. Competition is squeezed out.

The central valley of California has vast amounts of land, yet those areas also experienced a tremendous rise in house prices. Almost all of this occurred when CA was experiencing only modest population and economic growth (mostly international immigrants). Domestic migration was showing as an outflow the last few years.

Regulation and Housing Prices

Did regulation cause the dot-com bust? Speculative bubbles followed by busts have happened ever since the tuplip bubble of the seventeenth century and the Lousiana bubble of the eighteenth century. I presume that Cato Institute thinks the Lousiana bubble was caused by too much government regulation of development in Louisiana during the 1710s.

Contrary to O'Toole's often-repeated claim that government regulation has pushed up prices by limiting the supply of suburban housing, it seems that an oversupply of suburban housing was built during the recent housing bubble. A recent article in the Atlantic Monthly points out

"according to U.S. Census data, there will be about 4 million more households with children in 2025 than there were in 2000. But more than 10 million new single-family homes have already been built since 2000, most of them in the suburbs."

The same article points out that housing in walkable neighborhoods sells for a large premium over housing in conventional suburbs:

"Twenty years ago, urban housing was a bargain in most central cities. Today, it carries an enormous price premium. Per square foot, urban residential neighborhood space goes for 40 percent to 200 percent more than traditional suburban space in areas as diverse as New York City; Portland, Oregon; Seattle; and Washington, D.C. It’s crucial to note that these premiums have arisen not only in central cities, but also in suburban towns that have walkable urban centers offering a mix of residential and commercial development. For instance, luxury single-family homes in suburban Westchester County, just north of New York City, sell for $375 a square foot. A luxury condo in downtown White Plains, the county’s biggest suburban city, can cost you $750 a square foot."

This comparison shows clearly that the government regulation that has done most to drive up housing prices is not regulation to preserve open space and farmland, which limits the supply of conventional suburban housing. The truly destructive regulation is conventional suburban zoning, which limits the development of denser walkable neighborhoods.

O'Toole always claims that smart growth drives up housing prices, and this is pure ideological blindness. Smart growth is exactly what we need to loosen suburban zoning around transit lines and to drive down the cost of the most scarce and expensive housing by building more housing in walkable neighborhoods.

Charles Siegel

Focusing on comment headlines.

Why would you acknowledge that physical constraints to supply increase housing prices, but regulatory constraints don't?

Apologies. I will ask the webmaster to allow more characters in the titles of comments. In the meantime, I have asked my headline editor to scrutinize my headline writing, esp. on Monday mornings when insufficiently caffeinated.

Nonetheless, consider my comment headline to read: Supply for demand in Bay Area - not SIMPLY the regulation. There.

Now, again, when I find the paper, I'll pass on the analysis that shows that even if all the vacant parcels in the (IIRC) 7-county Bay Area were built upon at current res type distributions, there would be no: 1) adequate supply for demand, 2) appreciable drop in prices.

Areas in CA enacted certain growth controls on purpose, as infrastructure and natural systems do not exist to mitigate human population externalities. Rampant growth has consequences, so it was slowed. Limiting rampant growth has consequences too.

Both cannot be considered in isolation, but O'Toole-type arguments can only consider the financial side to have any play. Considering both sides means the argument suddenly lacks cogency.

And I second Charles' implicit endorsement of Leinberger's article in The Atlantic. Not perfect, but a good wake-up call.



Got it

Dano, thanks for the clarification on the comment title - agree with that. I do disagree with the whole concept of slow growth though. I think it's silly. Charles' comment mentioned open space presevation policy, but slow growth wouldn't protect open space in the long run. Rapid growth does have consequences, but most of those can be mitigated since its primarily lagging infrastructure.

Charles, I think you have twisted the point a bit. The critique here is not that government causes all bursting asset price bubbles. The point is that some public policies made "for-sale" housing higher priced than it would otherwise would have been, thus prompting homeowner wannabees to stretch on mortgages. Notice, I'm not suggesting force, only prompt. They still made bad decisions. This is where the O'Tool logic breaks down.

The Leinberger article doesn't do much for me except to show how an urban planning professor who stands to gain from his walkable real estate developments wants to portray exurban sprawl as the next slums. Anything can happen, but I think in his mind it is more wishful thinking than future prediction. I don't see how this story provides anything for this particular debate.

Your display of the price gradient in regions is lacking because all regions have that - the issue is that all of the prices in the aggregate of the region are higher due to growth control.

Got open space.


Aside, but relevant: today I'm reading an older article I'm just getting around to - The Future is Drying Up, wherein the Las Vegas water manager states:

    I asked if limiting the growth of the Las Vegas metro area wouldn’t help. Mulroy bristled. “This country is going to have 100 million additional people in it in the next 25 to 30 years,” she replied. “Tell me where they’re supposed to go. Seriously. Every community says, ‘Not here,’ ‘No growth here,’ ‘There’s too many people here already.’ For a large urban area that is the core economic hub of any particular area, to even attempt to throw up walls? I’m not sure it can be done.” Besides, she added, the problem isn’t growth alone: “We have an exploding human population, and we have a shrinking clean-water supply. Those are on colliding paths. This is not just a Las Vegas issue. This is a microcosm of a much larger issue.” Americans, she went on to say, are the most voracious users of natural resources in the world. Maybe we need to talk about that as well.

that I think gets at the core of the issue.

Pure economics differs from ecology (I studied both grad-level urban ecology and urban econ) in that economics infers infinite substitutions, but ecology does not. Thus ecological economics. Anyway, open space has both hedonic and ecological value. Preserving it gets reflected in Ricardian rent. But that's the price you pay. One day, hopefully, it will become a clear market signal to compel action, namely: reduce the birth rate or pay the price.

Best regards,



Different topic, but I'm with you on that. I do agree that we'll need to do something as a society to mitigate population growth and human activity, in general. I'm not even opposed to the end results you guys describe like preserving open space and valuable farmland, reducing pollution, reducing natural resource use per capita, and creating a smaller footprint on the earth.

I think our differences are primarily in how we would accomplish this. I'm pretty sensitive to restricitions on freedoms and the law of unintended consequences even if it is meant for public good. I would prefer judicious use of market mechanisms and signals as opposed to targets, resolutions, boundaries, moratoria, etc. I think you can accomplish much more via the former without the unintended consequences. That is why in this case I am somewhat sympathetic to what O'Toole is discussing. I think he has a point that some of the growth management methods that many governments have used have had unintended consequences. Hopefully, we can enact policies that provide environmental benefits while still retaining individual freedoms to the greatest extent possible.

Agreed, esp. over a frosty beverage

I think our differences are primarily in how we would accomplish this. I'm pretty sensitive to restricitions on freedoms and the law of unintended consequences even if it is meant for public good. I would prefer judicious use of market mechanisms and signals as opposed to targets, resolutions, boundaries, moratoria, etc.

My general rule is: if our ideologies would discuss this over a few cold ones, we'd figger out some more common ground. Having an environmental management perspective, signals, metrics, targets, boundaries, etc are all in the toolkit.



Appropriate Government Regulation

"I would prefer judicious use of market mechanisms and signals as opposed to targets, resolutions, boundaries, moratoria, etc."

These two methods of regulation are appropriate in different cases. To give an extreme example of each:

It obviously makes sense to use pricing to control co2 emissions (eg, a carbon tax or cap-and-trade). We would create gross economic inefficiencies if govenrment simply created a target or boundary emission for each industry.

It obviously makes sense to have government set speed limits and to ban private development in national parks. I don't think you would want to replace these fixed "boundaries" with market mechanisms. You wouldn't want to say that you can drive up to 30 mph on residential streets without paying and that you can drive faster by paying an extra $1 per mile for each 10mph you drive above that. And you wouldn't want to say that you can build your house in Yellowstone if you pay a tax of $1000 per sq. ft. If you did those things, all the tech billionaires would have mansions in Yellowstone, and they would drive along the roads so quickly that they would terrorize all the ordinary tourists.

So, let's not be dogmatic and say that the market is always preferable to direct regulation. In fact, I think controlling sprawl is closer to the example of Yellowstone than to the example of global warming, and it makes sense to have urban growth boundaries to protect open space from development (even from development by the rich).

"I'm pretty sensitive to restricitions on freedoms and the law of unintended consequences"

Government regulations are likely to have unintended consequences, but individual actions are even more likely to have unintended consequences. Eg, when someone chooses to drive rather than take transit, he does not intend to create congestion and global warming. When people build sprawl houses, they wants to live out in the country; they don't intend to pave over the entire countryside and replace it with strip malls and parking lots.

Charles Siegel

My Take

I understand your point and in extreme cases, I agree of course. It's not like I'm suggesting if you pay enough money, you have license to kill someone.

But, you might consider being a bit more open about some market-related possibilities. For example, in your national park example, why let private development build when they have no property rights? Why not deed the land to TPL? If there is open space or land that is desired to be protected, why not buy it? Then, you can protect it from development forever, no matter how much money someone has to pay for it. There are lots of "sprawl-consequence" fighting alternatives like open space acquisition (outright, PDR, TDR) and pricing infrastructure appropriately, pricing impervious cover, and not subsidizing development. There are so many market-based options to exhaust that many governments have never given full due that we are not in a position to say whether or not we "need" growth boundaries, for example.

Public policy always has to balance individual and constitutional rights and freedoms vs. the public/social good. Where you believe that line is drawn defines your politics. I advocate policies which attempt to allow society to balance both freedoms and public good through some assemblance of a marketplace (where all costs are known and realized). I think your line is different than mine and I respect your opinion. So, I think in some respects, we just won't see exactly eye-to-eye on these matters. However, that should not stop us and the rest of society on finding some common ground on some issues even when we disagree.

Balancing Rights And The Public Good

If I see one of those methods working on a large scale and in a way that is fair, I will consider it. My take is that paying land-owners for not developing would mean that 1) land-use regulation would be so expensive that we could not do it adequately and 2) there would be huge unearned windfall profits for some landowners.

Do your methods only apply to the property rights of land owners, or do you want to apply them to all property rights?

Here is an example. I have a sound truck with a loud speaker on the hood, and I like to drive around in the middle of the night to inform people about my political opinions, but the city where I live has anti-noise ordinances that prevent me from doing this and waking people up in the middle of the night. Do you think that the city should not be able to violate my individual freedom of speech and my right to use my property as I see fit by passing that anti-noise ordinance - that instead it should pay me to purchase my right to use my truck at night?

This is not a matter of life and death, so it doesn't fall under the execption you mention. I presume you want the city to pay me, and I wish you would write them a letter telling them to do so.

This example illustrates a truism about individual rights that you seem to ignore: people have a right to use their property as they please unless they harm other people or the public interest. We all have a right to pass laws that prevent them from using their property in a way that harms us, and we should not have to pay them to refrain from harming us.

Charles Siegel

Regulation And Housing Price

I think you miss my main point: O'Toole complains about government regulation that prevents development of open space, but he doesn't complain about government regulation that prevents smart growth. Yet the comparative prices in the Leinberger article show that there is plenty of demand for housing in walkable neighborhoods.

Yes, I agree that he is exaggerating when he calls the suburbs the next slums, but it is true that infill is the next big development opportunity.

I am in favor of government policies that support much more construction of public transportation and much more construction of transit-oriented development. They should be as effective as the post-war policies that encouraged freeway construction and freeway-oriented development, but in reverse.

That is what we need to make our housing affordable again. And that is what O'Toole rejects without even thinking about it; he constantly criticizes smart growth on the grounds that it drives up housing prices by limiting development on open space, and he doesn't even mention the fact that smart growth also wants to promote transit-oriented development.

Charles Siegel

O'Tool's legal team...

Randall O'Tool doesn't believe planners are to blame for the sub-prime mortgage meltdown. He's only paid to formulate an argument to deflect attention from his ideological collegues who are rightfully to blame. If O'Tool were a lawyer, he'd represent OJ.

Blame Planners for All Your Problems!!!!!

But of course highway and traffic planners are ok!

Randall O'Toole's rhetoric:
Iraq? Blame Light Rail!
Health care? Blame Urban Planners!
Economy? Blame Density!
Terrorism? Blame Portland, Oregon!

Speculative Bubbles

Speculative bubbles are always the fault of government regulation. What caused the Dutch tulip bubble of the seventeenth century or the stock market bubble of the 1920s? To much government regulation.

If we just deregulated the financial industry completely, we would never have this sort of problem.

Charles Siegel

The War on Planning

I keep hoping that one day I will turn on CNN and Lou Dobbs will be screaming about "The War on Planning" in the U.S.

O'Toole is just ridiculous. The Sub-Prime Loans are a result of poor oversight by the SEC and other instuitions that are supposed to be better regulating the markets.

It is not about more or less regulation or more or less planning but priorities. If the priorities are properly established at the top then there is plenty of room for the free market to do it work. However if you throw out the planners or rule makers you get Enron, WorldCom, the Sub Prime Loan scandal and Los Angeles.

A New Job For Randall O'Toole

"And when Mr. McCain’s economic advisers do speak up about the economy’s problems, they don’t inspire confidence. For example, last week one McCain economic adviser — Kevin Hassett, the co-author of “Dow 36,000” — insisted that everything would have been fine if state and local governments hadn’t tried to limit urban sprawl. Honest."

So, I guess Randall O'Toole can get a job as one of McCain's economic advisors.

It is ironic that Hassett encouraged a speculative stock-market bubble (that had nothing to do with planning) by writing a book named "Dow 36,000" and now turns around and claims that speculative bubbles are the fault of city planners.

Charles Siegel

New O'Toole-like framing

That's comic gold, Charles.

I especially enjoy when certain ideologies use, say, Malthus or Ehrlich as examples that environmental predictions have never come to pass, so they must be wrong and everything's wonderful, and we can't listen to their argumentation, nor should anyone prop it up.

Using this same logic gives us that Hassett and Glassman must be wrong and everything's wonderful, and we can't listen to their argumentation, nor should anyone prop it up.

Such are the dangers of binary arguments such as the one implicit in what Charles quoted above.



The Problem with Comedy

The problem with comedy is that it needs a grain of truth to be funny. The City of San Buenaventura wants to bury the US-101 Freeway to reconnect their vibrant downtown with the beach. Now that's funny. O'Toole wasn't mentioned in the McCain article but apparently in some circles little details like the truth aren't necessary before lashing out with cruel personal invectives. Ahhh the joys of anonymity.

Luckily there is a connection that rescues the thread. "Dano" is quite the internet gadfly on the subject of Anthropometric Global Warming. Thus I direct the interested reader to the planner driven smoking gun Los Angeles: How Not to Measure #54. True comic gold and right in the lap of the planning community.

Back OT, plz. Mortgage crisis is the topic.

I'm not sure what linking to the realms of dead-ender climate change denialism has to do with mortgage meltdowns.

Unless we want to change the subject away from the fact that O'Toole can't find any facts to back "his" "analysis".



Don't Bring It Up Then

I stopped trying to convince O'Toole he was wrong on this point years ago. Sure housing prices are partially increased by planning restrictions but that is because neighborhoods protected by consistent public policy are worth more. O'Toole mistakenly believes that by busting planning covenants that prices go lower in some free market magic when they go lower because a tragedy of the commons occurs and steals a little wealth from everyone.

If you don't want you increasingly marginalized views of AGW to be discussed you need to stop bringing them up. If you want to even have them given fair weight you need to stop using language like "dead-ender climate change denialism." I linked the world famous and highly respected survey site because you mentioned the topic of AGW and I wanted to bring things back on topic by showing irrefutable evidence that planning policies are having a direct influence on the subject.

And let's not stop there with parallels. Both the urbanist planning community and the warmist alarmists want to exercise increasing top down control in order to further their respective agendas. And this is also one small aspect where O'Toole kinda gets something right. Planning requirements do increase housing costs. Things like adequate insulation, fire resistant roofing, even solar shadow compliance cost more than ignoring them. He's right but stupid to complain about these much like the hollow cries from the auto industry over pollution and safety controls. I'm all for internalizing costs but only after a connection has been established.

It is O'Toole

The article Krugman is referring to references the O'Toole assessment above. I think the connection between his book and the stock market bubble is equally or more loose than the connection between growth management and the housing price bubble.

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