Smart Growth and Housing Affordability – Round Three

Todd Litman's picture

I would like to expand an ongoing debate between Reason Foundation policy expert Samuel Staley and me concerning land use policy impacts on affordability and economic stability to include two additional issues: household economic resilience and wealth accumulation.  

Background: Last month I posted a blog pointed out that smart growth can increase overall affordability by reducing total housing development costs, reducing public service costs and reducing transportation costs, while Staley argued that smart growth policies reduce housing affordabilty and so helps cause the global financial crisis. I responded with another blog that critiquing Staley's analysis (pointing out that correlations between urban growth boundaries and higher housing costs can be explained by the fact that they are generally implemented in areas with rapid growth where land prices are increasing), and provided additional evidence of smart growth economic savings and higher home foreclosure rates in sprawled areas. Staley responded with a defence of his analysis but failed to respond to any other points I had raised, particularly the higher transportation costs of sprawled locations which offset any housing cost savings.

I believe that lower-density, automobile-dependent residential development is even more harmful than indicated in these previous discussions because it exposes households to financial risks and reduces their real estate equity, both of which contributed to the current economic crisis. Put more positively, smart growth helps increase household economic resilience and long-term wealth. This debate concerns the trade-offs households make between cheaper housing and higher transportation costs at the urban fringe and their long-term economic impacts.

First, let's consider the financial risks to households of choosing an automobile-dependent home. Staley's evidence indicating that smart growth areas have higher foreclosure rates is based on highly aggregated data (entire urban regions). More fine-grained analysis, within urban regions, shows much higher foreclosure rates in sprawled location than more central locations. The figure below illustrates this pattern for the city of Houston. Similar patterns are found elsewhere.



 Houston Region Housing Foreclosures

Houston region housing foreclosure rates are much higher at the urban fringe,

indicating that sprawl increases household financial risks. (Houston Chronicle)


These higher foreclosure rates can be explained by the additional financial risks associated with automobile dependency. In urban fringe locations, every adult must own an automobile and drive high annual miles. As a result, they are vulnerable to common economic risks: a major vehicle failure or crash, fuel price spikes, a disability, or reduced household income (such as the loss of a job). In contrast, residents of more accessible locations with more diverse transportation systems can respond by reducing their vehicle ownership and relying more on walking, cycling and public transportation, saving thousands of dollars a year. A more accessible location also improves access to well-paying jobs and education opportunities. Households in smart growth locations are therefore more economically resilient. This is particularly important now that so many households are experiencing financial turmoil.

The Institute for Location Efficiency has extensive information on the additional financial costs to consumers of more automobile-dependent, sprawled locations and the savings that they can gain from improved accessibility. They predicted for years that homes in more accessible, multi-modal locations are more financially secure, the current foreclosure crisis has proven that theory.

Second, consider the impacts of automobile dependency on long-term household wealth generation. Motor vehicles depreciate while houses tend to appreciate and so build household wealth.

For example, imagine that a household must choose between a suburban house with a $12,000 annual mortgage and $12,000 annual transportation costs, or an urban house with a $18,000 annual mortgage with only $6,000 in annual transportation costs. Both total $24,000 in combined housing and transportation costs, so they are economically comparable in the short-run. However, money spent on housing builds equity while money spent on motor vehicles does not. As a result, over the long run the urban location provides the household with 50% more equity, probably even more since rising future fuel prices and changing consumer preferences are likely to cause urban housing to appreciate much more than suburban housing during the next two decades. As a result, a typical household is likely to be a hundred thousand dollars wealthier in a decade if they choose a smart growth location over automobile-dependent sprawl.  

These give additional support to my previous argument that smart growth is economically superior overall. I am not suggesting that suburban development be prohibited, but it is economically wasteful and cruel to lower-income households to continue public policies that encourage sprawl and discourage smart growth, such as restrictions on development density and multi-family housing, minimum parking supply and setback requirements, and public subsidy of urban fringe infrastructure expansion. Development fees, utility fees and municipal property taxes should reflect the higher costs of providing public services (roads, utilities, emergency response and school busing) in urban fringe locations, so fees and taxes are lower in smart growth locations.


I appreciate comments on this analysis. 


For more information see: 

Danielle Arigoni (2001), Affordable Housing and Smart Growth: Making the Connections, Subgroup on Affordable Housing, Smart Growth Network ( and National Neighborhood Coalition (

Scott Bernstein, Carrie Makarewicz, Kara Heffernan, Albert Benedict and Ben Helphand (2004), Increasing Affordability Through Reducing the Transportation and Infrastructure Cost Burdens of Housing, Atlanta Neighborhood Development Partnerships (; at

CTOD (2009), Mixed-Income Housing TOD Action Guide, Center for Transit Oriented Development (CTOD) for Reconnecting America, the Center for Neighborhood Technology (; at

Peter M. Haas, Carrie Makarewicz, Albert Benedict, Thomas W. Sanchez and Casey J. Dawkins (2006), Housing & Transportation Cost Trade-offs and Burdens of Working Households in 28 Metros, Center for Neighborhood Technology (; at

Barbara Lipman (2006), A Heavy Load: The Combined Housing and Transportation Burdens of Working Families, Center for Housing Policy (

Todd Litman (2005), Understanding Smart Growth Saving, VTPI (; at

Todd Litman (2006), Smart Growth Policy Reforms, VTPI (; at 

Todd Litman (2007), Transportation Affordability: Evaluation and Improvement Strategies, VTPI (; at

Arthur C. Nelson, Rolf Pendall, Casy Dawkins and Gerrit Knaap (2002), The Link Between Growth Management and Housing Affordability: The Academic Evidence, Brookings Institution Center on Urban and Metropolitan Policy (; at

STPP (2003), Transportation Costs and the American Dream: Why a Lack of Transportation Choices Strains the Family Budget and Hinders Home Ownership, Surface Transportation Policy Project ( MWCOG (2005), Toolkit for Affordable Housing Development, Metropolitan Washington Council of Governments (, Publication Number: 20058254; at

Todd Litman is the executive director of the Victoria Transport Policy Institute.



Spot On

As usual, a very good analysis of the data. One additional cost of sprawled area...roads don't pay fees or taxes. When a larger percentage of your land is covered by pavement, not only does it cost money to maintain, but it also displaces other property owers who would be paying taxes. Roads also generate a majority of the stormwater runoff and the roads dept certainly does not pay stormwater fees to the sewer agency (at least they don't where I live).

If more costs were localized (either by individual fees or footed by the local government) rather than funded by the state or the federal government, it would be much easier to see the true cost of your lifestyle.

Other Explanation

"These higher foreclosure rates can be explained by the additional financial risks associated with automobile dependency."

While correlated, I doubt there is causation. Homes in exurban locations and far sububan locations tend to be cheaper than homes is closer in locations, resultingly, those who buy those homes tend to be younger and poorer than their counterparts buying homes closer in. When tough economic times hit, guess who gets hit first... folks who are younger and poorer. Throw in speculators (as they tend to buy where houing is cheaper) and "exotic" mortgages to people who, unfortunately, have no business owning a home, and walla, higher foreclosure rates. These same people would have higher foreclosure rates if they had bought homes closer in as well because it really has more to do with demographics than with auto dependency.

I actually think you hit the nail on the head with this line form your previous post:

"Restrictions on growing outward do not reduce affordability if there are no restrictions on growing upward: it is the combination of the two that drives up housing prices."

I view pushing smart growth as a bit like putting the cart before the horse because smart growth regulations always seem to be layered on over the existing regulatory framework which presents plenty of restrictions on growing upward. When, this happens you get the worts of both worlds (ala California), and it makes "smart growth" a convient target for O'Toole and others (because the enaction of it does end up driving unafforability even if that is a result of previous regualtory barriers in place). I always thought that was an interesting study that others might be interested in regarding the potential for infill development in CA (or the lack thereof, depending on how you view it):

Also, are there any studies out there showing the real costs of proviing public services in surbuban locations versus infill locations? I mean, I can understand the reasoning, but is it true? Most urban water and sewer systems are ancient and poorly maintained, so wouldn't they need expensive upgrades compared to "new" development (especially if they were to serve more residents). Also, is there anything about supporting the extensive public bureaucracy bloat that comes with politically managed cities compared to suburban government? The City and County of San Francisco has a $6.5 Billion dollar budget for 800,000 residents... $8,125 per person, and the services here aren't all that spectacular (although better in some areas than others)... there's got to be some economic considerations there for the tax burden?

Flys in the Ointment

I believe you have some serious flaws in the second to last paragraph which affect your underlying conclusion and ultimately the value of your support for UGBs or these aspects of smart growth. I understand what you are trying to do, but your figures are guesses with assumptions and they are flawed. Let's take a smart growth place like the Kentlands or somewhere like that - suburban infill, possibly new urbanist compared with a more suburban place like Pleasanton, CA, Plano, TX, Katy, TX or Gaithersburg, MD. People living in the infill location most likely still have/need cars, they simply use them a little less. But, the highest costs of auto transportation are typically ownership/fixed and not variable. So, you might save some variable costs by living in a smart growth location, but not half as you suggest ($12,000 vs. $6,000). The other flaw is assuming that the smart growth location increases its property value at a faster rate than a "sprawl" location. I think, holding other factors constant, this is flawed. Over long periods of time, house prices increase at roughly the rate of inflation (slightly less, actually), but while there are always temporary dislocations, house prices correlate most closely to area incomes. (Also, see Ricardo's explanation) So, growth controls may drive up the smart growth house, but would also drive up the sprawl house, if both were subjected to the same regulatory environment. In short, you don't "build up equity" as you say, any faster in a smart growth location, all other things equal. Thus, the conclusion is that it is actually cheaper for households to pursue cheaper, fringe/sprawl locations over smart growth locations if cost is the primary motivation. I think the evidence of this has been borne out in the last boom if you look at suburban growth.

So, here is the kicker: a UGB will just restrict supply in a high demand environment driving up the price of both types of housing. Better solution: price the external costs of transportation and development. In this way, the variable costs of auto transportation rise significantly. Ultimately, what you want is to make the delta between the variable cost of transportation between the two places greather than the delta in a typical mortgage payment between the two places. In that way, the smart growth location will win on a cost consideration and a UGB will be irrelevant and will not have the unintended consequence of artificially raising all land prices.

I think there is wide agreement on this concept (including Staley and the smart growth advocates) which is why I wonder why you keep arguing the point (see my last comment). Ask Staley if he is for minimum parking requirements, setbacks, minimum lot sizes, and public subsidy of infrastructure, and I guarantee he would say "no" -as I would. The free market and its supporters are not your enemy on this. You need only go (in the USA) to your local city council and their NIMBY supporters to see the defenders of this.

Re: cost savings from

Re: cost savings from reduced auto use: You are not considering transportation choices at the household level. It is true that in almost all living situations all members of a family must use a car some of the time, but with good transit they can share fewer cars between them. Also, the cost structure of ownership is probably more variable than you claim. Depreciation, fuel, and repairs and maintenance are all a function of mileage driven. Even insurance is to some extent variable since companies adjust your premium depending on your annual mileage. The only real "fixed" cost you incur is the capital depreciation from driving the car off the lot.

I don't understand your better solution. Are you saying that we should levy a per-mile tax on miles driven in fringe areas? Or tax cars owned by people living in those areas?

I say just adopt a federal carbon tax. That would fix a lot of the externalities in transportation and energy use decisions.

VMT fee

Yes, that is what I am suggesting - we should either privatize/lease roads or at a minimum charge a VMT fee based on weight and pollution characteristics of the vehicle or a VMT fee plus an increase in the gas tax. I believe this simple, but tough solution would give society far more benefit than any growth management concept.

Todd Litman's picture

Smart Growth and Housing Affordability

There is no doubt that households often make trade-offs between rent and transportation costs, that is a basic principle of urban economics. Contrarianplanner should read the literature I cite before criticizing my posting. Several studies show that residents of more accessible, multi-modal neighborhoods own fewer vehicles, drive fewer annual miles and spend 20-40% less per capita on transportation. See Lipman's "A Heavy Load: The Combined Housing and Transportation Burdens of Working Families," (, The Institute for Location Efficiency ( ), the Housing and Transportation Index ( ) and my report "Rail Transit In America" ( ).

While it is true that, if all factors hold constant, housing in both smart growth and sprawled locations should appreciate at the same rate, a number of trends (aging population, rising fuel prices, increasing traffic congestion, changing consumer preferences, increasing health concerns, see ) are making urban locations relatively valuable and so they are likely to be better investments during the next few decades.

I suspect that Ricardo's statement, "Homes in exurban locations and far sububan locations tend to be cheaper than homes is closer in locations" is inaccurate for this analysis. Although sprawled locations offer lower costs per acre of property, there are lots of cheap older homes available in existing urban areas. I doubt that it is true that overall, more lower-income households purchase suburban location homes; I suspect that at least as many lower-income households purchase older homes in urban neighborhoods. I would be interested in seeing any real data on this subject if available.

I do know that low-income households in automobile-dependent locations are vulnerable to all sorts of financial and health risks (fuel price spikes, vehicle failures, vehicle crashes, driving stress and inadequate physical activity) which can explain the higher foreclosure rates in urban fringe locations.

Todd Alexander Litman
Victoria Transport Policy Institute
"Efficiency - Equity - Clarity"

"studies show"

You don't need to propagate that myth here - this isn't CNN or MSNBC. Studies show whatever the author wants them to show. Having read a lot of the literature and done plenty of studies at think tanks and graduate school, I can tell anyone that anything can be sandbagged. It's all in the assumptions about your model, data sources, what you choose to include and exclude, what kind of regression you use. Anyone can pad an R squared to show anything or use least squares when logit would better. Or, have multicolinearity in their regressions. Besides, you and Staley both cite more of your own research than anything else. If you are going to cite urban economic theories, how about including the most elementary of all: if you restrict the supply of a good through an urban growth boundary, the price of that good goes up, all things equal. Isn't that what all this is about? So, one can cherry-pick their favored theories of urban economics?

If you are so sure that centrally located housing will rise much faster in pricing, just go buy it and put your money where your mouth is. The reality is that a study using past data will not accurately predict the future. It will depend on energy prices, public policy, and a bunch of other factors. What you are really suggesting is that you want these prices to rise faster spurred by your favored policies which is a self-fulfiling prophecy.

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