The housing markets most affected by the subprime mortgage fallout are those with the toughest land use regulations, argues Wendell Cox.
"As we know from introductory courses in economics, scarcity raises prices. In a number of metropolitan markets across the country, excessive land use policies have been adopted, such as urban growth boundaries, huge areas recently declared off-limits to development, building moratoria, confiscatory and unprecedented impact fees, and excessively large minimum lot sizes.
These policies, often referred to as "smart growth," create a scarcity of land, artificially raise the price of housing, and, again, have increased the exposure of the market to risky mortgage debt. When more liberal loan policies were implemented, metropolitan areas that had adopted these more restrictive policies lacked the resilient land markets that would have allowed the greater demand to be accommodated without inordinate increases in house prices.
A few voices in the wilderness on both sides of the political spectrum have pointed to the role of excessive land use policies in driving up housing costs. For example: Liberal economist Paul Krugman of The New York Times put most of his conservative colleagues to shame in noting that the house price bubble has been limited to metropolitan areas with strong land use regulation."
Comments
fair and balanced?
I guess this is planetizen's attempt to report from all perspectives. This article, from the conservative Heritage Trust makes no reference to how they classify cities as having strict regulations, and makes no connections to those that have actually had their "bubble burst".
Is the author actually claiming that LA has smart growth? And what happened to Portland's "bubble"? The only specific example quoted is Houston, who's prices never went up, so of course they won't go down. They didn't go up because no one wants to live there!
Ideological opinion pieces and totem-bashing.
Wendell Cox et al. have a cottage industry in propping up their ideology, using strawmen to support their argumentation. It is also common with these ideologies to have a totem to focus angst and ennui (smart growth, hockey stick, Hansen, greenies, etc).
Sure, it's great to get all perspectives. We see that the argumentation never changes, which is enlightening in a sense.
These folk writing persuasive essays for a small audience conveniently "forget" that there are numerous reasons for price increases. One never sees these other reasons in their opinion pieces (never empirical papers). Where are the scholarly papers teasing out equlibrium rents, amenity-seeking, etc from growth management ordinances (and where are the analyses of their effectiveness vis à vis price increases?)? Nowhere. There is only opinion pieces, many of which cannot back their claims.
Best,
Ð
And what about Cleveland?
Cox's article is based on three assumptions:
1. Housing price increases are caused by regulation;
2. All regulation is "smart growth";
3. Housing price increases caused the foreclosure crisis.
1 is probably true in large part.
2 is obviously wrong; it is pretty well documented that a wide variety of land use regulations raise housing prices, many of which are not "smart growth" under the most common definitions of this (admittedly vague) phrase.
3 is probably wrong; certainly Cox provides no basis for the claim, and from what little I have read and heard, low-cost housing markets like Cleveland are suffering just as much as high-cost markets.
Another perspective
The Heritage Foundation report assumes housing prices have been artificially forced upward. They're right, but the causes they cite aren't artificial manipulation, and they conveniently miss the big cause that does push prices up artificially.
First, where they're wrong: Impact fees do not create artificially high prices; they are an attempt to internalize all the costs of development, and thus they help to reflect the true market price. I would have thought the conservative Heritage Foundation would have been in favor of impact fees as an appropriate cost-allocation measure.
Next, the factor they omitted: The mortgage interest tax deduction. Still waiting for the Heritage Foundation report that highlights that as causing artificial upward pressure on housing prices. (Took a quick look through their Web site and didn't find anything, but would be happy to be proven wrong.)
This doesn't address what if anything should be done to ease the burden of high housing costs, but let's at least be honest about where the artificial manipulation is coming from.
Causes
We have beaten this subject to death in other postings. I won't revisit that entirely, but would provide a comment here. The mortgage interest deduction has a relatively small impact on housing values and more importantly, the change in housing values since the mid 90s. We've had stagnant to falling prices with the MID (in the early-mid 90s) so the effect is more of an incentive to buy a slightly larger house rather than something that causes a lot of upward pressure. Plus, the standard deduction has been rising and it mitigates the impact of the MID somewhat.
The concern with impact fees is that they have a loose relationship with the externalities associated with development. All residents contribute to loss of open space, driving, infrastructure costs, etc., but only new residents have to pay for it?? It's a poor, imperfect tool for internalizing all external costs. It does have an impact on house values.
The points that aren't emphasized enough in rising house prices are simply the cost of debt and psychology. Exotic mortgages and low interest rates, in general, played a significant role. Maybe most significant is investor speculation. We have never seen housing speculation from average people like we saw in the latest boom. The number of rental/investment/second homes was amazing. The rapid rise of the flipper had a huge impact.
Regulation certainly plays a role. Growth management shares some of the blame in rising prices by limiting supply. But, there are lots of factors, only some of which I have mentioned.
So, I think those are some "honest" assessments about the causes of artificially high housing.
Complicated causation.
I almost completely agree here, cp.
When you say, regarding impact fees,
All residents contribute to loss of open space, driving, infrastructure costs, etc., but only new residents have to pay for it?? It's a poor, imperfect tool for internalizing all external costs. It does have an impact on house values.
It is an imperfect tool. However, limitations placed on other methods of raising revenue have led to this fact on the ground. Existing residents don't want to pay for new roads that they may not use (esp. local access roads). So who pays? Again, I'd like to see all costs internalized, but until we get there, this is the current incarnation on the ground until new ways of raising revenue to address these issues are dreamed up.
Also, when you say:
Growth management shares some of the blame in rising prices by limiting supply.
Some GM is purposely to limit supply, to ease stress on overworked gray and green infrastructure. Other GM is to ease stress on green infrastructure - whether this is working is a side discussion, as our public isn't ready to go back to the way we lived prior to WWII so they reject "density". Perhaps when our national wealth declines past a certain level, we will return to old long-dominant patterns. But until then, another imperfect tool.
Best,
Ð
True
I hear ya - it is the reality, just not the ideal one in my mind. Another big problem with impact fees, they just raise revenue. Their usefulness as a social engineering tool via economics is nil. Since the fee is passed on to the cost of the house, it is a sunk cost by the consumer. Thus, there is no incentive to appropriately ration resource use after the purchase. So, that money does pay for some necessary infrastructure, but it does a horrible job of rationing when it seems that is exactly one of the things the policy should accomplish.
As for growth management, I have some of the same complaints. One thing I wish O'Toole and Cox would do is to distinguish between smart growth and growth management (restrictions) per Lewyn's comment below. Cox even mentions large lot zoning as a smart growth tenet. I doubt he is that misinformed. That just seems disingenuous. On the other hand, they are trying to counter some of their opponents who identify everything that ever gets built as sprawl, even when it's not. It seems disingenuous rhetoric breeds like termites.
A Case of Scape-goating?
Seems to be a case of scape-goating to benefit a class of interests (i.e. that of developers).
While it may be true that land use regulations exacerbate the affordability crisis, it is certainly nowhere near the cause.
Depends
If you read Glaeser's studies about land use regulation, he concludes that land use regulations are the singular cause of the "affordability crisis". Of course, there are some given assumptions like a functioning economy and a decently desireable place to live... (i.e. it doens't matter how many regulations the bikini atoll has as no one is going to live there). Plus, he does dump all land use regualtions into one catch-all (zoning, UGBs, et.) wihtout differentiating that one (zoning) disproportionately may outweight the others.
Cox is an ideologue trying to make a point. Unfortunately, I think there is a grain of truth in his arguments about excessive land use regulation exascerbating housing afforability and shutting down the upward social mobility of the currently younger and poorer generations/classes...However, he isn't arguing for the relaxation of current rules, only against the imposition of new ones ("smart growth" in his words), and therefore for the continuation of the stauts quo (which isn't great either).
land use and mortgage crisis
i don't see any mention of density in this argument, sprawl and lack of regulation and/or incentives coupled with population growth are going to be the end of US, wake up and smell the coffee!!!