The Housing Boom and Bust: Where Was Planning?

Lance Freeman's picture

It was the collapse of the housing bubble that triggered the current economic crisis.  As is the case in the aftermath of many calamities finger pointing abounds. There are an ample number of would be culprits. Take your pick; The Federal Reserve for keeping interest rates too low, mortgage brokers for pushing inappropriate loans, ratings agencies for blessing dubious securities, the list goes on.  A common criticism aimed at all of these culprits is that they lacked the foresight to see the inevitable housing bust. It was the housing bubble that camouflaged all of the bad decisions.

With few exceptions planning as a profession has been notably absent from any assignment of blame.  This is in some ways odd. Perhaps more than any other profession planning is about looking toward the future and taking actions to prepare for it.  And while the aftermath of the housing bust has concentrated our minds on the world of finance, it is in local housing markets where the housing bubble started.  Moreover, in many places the bubble was accompanied and abetted by a speculative building boom.  Certainly it should be within the purview of the planning profession to identify speculative housing booms.  Isn't gauging future housing demand relative to oncoming supply a fundamental responsibility of local housing departments? Finally, a study by Glaeser, Gyourko, and Saiz suggests that the ease with which new housing can be built, something planners heavily influence, affects the trajectory of housing bubbles.  More specifically, they found that during the 1980s housing bubble places where it was easier to build for the most part escaped the big run up in housing prices.  And during the most recent housing bubble of this decade they found that the rise and crash of housing prices happened over a shorter period of time in places where the housing supply could be increased more easily.  Their findings suggest the actions of planners do affect housing bubbles.

In sum, through their projections and forecasting planners should have been among the first to recognize the risk of a housing bubble in certain housing markets.  Furthermore, many of the standard tools used by planners such as zoning and control of the permitting processes have been shown to influence the course of local housing bubbles.  These arguments point to a need among the planning profession for introspection with the regard to the role planning played or did not play in the recent housing bubble and bust.  I'd also like to hear more from local planners who may have recognized a bubble in their communities and the action they tried to take in response. 

In the aftermath of the recent housing debacle it is not only economists that should be reviewing their profession's assumptions and actions.

Lance Freeman is an associate professor of Urban Planning at Columbia University.



More than introspection needed

Of course planning played a role in the housing boom and bust. In particular, Smart Growth planning creates scarcity and adds significant artificial costs to housing, and this was particularly obvious in Smart Growth states and cities. The bubble was not evenly spread across the country; it was most evident in places with strict growth management laws. One might suggest that most planners were aware-but-indifferent to the impacts because they did not affect them. The costs were paid for by others - homebuyers and developers. I hope Professor Freeman can facilitate a much needed introspection.

Lance Freeman's picture

Smart Growth and bubbles


I don't think Atlanta, Las Vegas, or Phoenix are exemplars of Smart Growth, yet these cities were surely part of the bubble. If a bubble is defined as a mania that drives a specific asset's value well above what would be expected in normal times, it is not clear to me why smart growth policies would play a major role in creating such a mania. Smart growth policies may affect the trajectory of the bubble once it occurs, possibly lengthening the process according to Glaeser et al., but smart growth would not necessarily contribute to a bubble. If smart growth restricts the supply of housing this would drive prices up. But this is a normal market reaction, not an inflation in prices due to a bubble.

Lance Freeman, Ph.D.
Associate Professor
Graduate School of Architecture, Planning and Preservation
Columbia University
400 Avery Hall
1172 Amsterdam Avenue
New York, NY 10027

super comment

Lance –

You are wise to challenge planners on this.

Unfortunately, I think too much of planning has viewed lending or investing approvals as strong signs of long-term project viability. I also think planners need to understand real estate finance and development to a much greater extent to be able look under the hood much more on development proposals.

The housing/mortgage crisis should also provide a much stronger FISCAL rationale for more diverse land uses and mixed-income projects. Many of the localities hit hardest by the housing downturn have been those who counted on homogeneous housing development to fuel their tax base. Those with more diverse property types should be more resilient when one sector declines rapidly. Of course most sectors are declining now, but the single family housing market (and in many places the condo market) were hit the hardest and first. This suggests that methods of fiscal impact analysis need to be revamped to consider long-term risk and uncertainty as well as short-term apparent payback.

I would urge some caution in reading too much into Glaeser et al’s piece. Much of it is based on the 1980s, a very different context than the recent crash, during/after which there was no widespread comensurate crash. And the more recent data does not capture the heavy losses in many markets following 2007.

In the recent bust, even in California, many communities with strongest growth controls or natural boundaries have held up *relatively* well, while more sprawling inland areas have seen much greater problems. And Las Vegas and Phoenix saw rapid development and large price increases simultaneously. Even Atlanta, where development was among the most rapid and perhaps least inhibited, while not seeing as large raw declines in prices, values have fallen down to 9 years ago, leaving a large share of homeowners with negative or very little equity. Moreover, easy development areas often have huge inventories of undeveloped lots and serious problems with vacant homes, something that isn’t always fully captured in housing price indices and that create long-term problems of various sorts.

I think the evidence is building that the parts of metropolitan areas hit hardest by foreclosures and associated problems were somewhat bimodally distributed– high-minority, often inner-city areas with high densities of subprime loans on the one hand, and areas experiencing rapid development during the boom, also disproportionately financed by subprime and high-risk loans. For an analysis that suggests this typology varies some across different metros see

-Dan Immergluck

Some thoughts

I think the Housing Boom and Bust has other systemic reasons which eludes the best economists of our time as well as the power of our government. That is why the Planners could not see it coming. The primary reason we are in the economic crisis is because we have imported over $12 Trillion Dollars of products from 2001 through 2008. This is equal to $120 Trillion Dollars of domestic economy if we would have produced these goods at home. Granted we buy almost $500 Billion of oil per year for which we have no choice, even then our economy could have added $80 Trillion of economic activity in the last 8 years.

That may be unrealistic due to global politics, even if we could have added a realistic $50 Trillion of domestic economy in the last 8 years by solving our trade deficit, we would have been OK. So, Planners would have a hard time figuring this out.

Beyond the scope of planners

I live and work in a bubble-prone area on the outskirts of Los Angeles County. Mr. Freeman is right. Gauging future housing demand relative to oncoming supply is a fundamental responsibility of local housing departments. However, in California, the State has decided to assume this responsibility - and they've decided that we simply do not have enough housing. We are mandated by the State to address "regional housing needs" through the provision of adequate sites, in our General Plan Housing Element. As a result, California cities are constantly figuring out how to maintain an adequate supply of land for housing, based on long-term projections. And as long as we do this, we will not have the ability to tinker with housing trends through management of available housing supply. Nevertheless, I argue that planners should never use the General Plan to temporarily restrict housing supply in response to real estate trends. The housing bubble occurred not because of housing oversupply, but due to other market/credit failures. Land use management cannot fix this. The best thing planners can do is maintain focus on long-term goals as directed by the community, and continue to recommend sound policies for implementation of these goals.

Previous Work on Subject

Ed Glaeser has compiled a considerable body of work prior to this piece on the relationship between planning/development controls and housing prices, for those interested:

Paul Krugman has written a bit on the topic as well, with some similar suggestions (it's perhaps worth noting when Krugman and Glaeser approximate eachother on policy points...). Here's an excerpt from a 2005 piece:

"And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble."

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