Did Houston's Lack Of Zoning Shield It From The Housing Meltdown?

A recent report by a Federal Reserve Bank senior economist argues that Houston's resiliency during the ongoing housing crisis is due in part to its lack of zoning regulations.

"Houston has remained on the sidelines of the latest national financial crisis. Our housing prices haven't plunged, just as they didn't soar as the national housing bubble inflated. Our prices remained modest, if you believe the conventional wisdom, because we have a secret ingredient: plenty of land.

An abundance of open space by itself, though, may not be what protected us. Texas, after all, experienced an ugly real estate implosion in the late 1980s.

In a report issued by the Federal Reserve Bank of Dallas' Houston branch, senior economist Bill Gilmer found another reason Houston has been shielded from the country's real estate crisis: the lack of zoning.

Gilmer's findings are worth considering as the zoning debate rages anew.

From an economic perspective, zoning laws work as a constriction of supply, which played a role in rising housing prices in other parts of the country."

"In Houston, however, demand was met with new construction rather than rising prices. As a result, when the real estate bubble burst, the effects on Houston were less severe than elsewhere.

As of January, about 4 percent of Texas homes backed by subprime loans were in foreclosure, according to the Fed. That compares with 11.5 percent for California and 14.4 percent for Florida."

Full Story: Lack of zoning has paid off for Houston

Comments

Comments

Michael Lewyn's picture
Blogger

So explain Cleveland...

Which has plenty of cheap housing but also plenty of foreclosures.

speculation

Home prices in Houston never got overinflated, so how could they burst?

There are two basic types of markets that are struggling the most in the current housing downturn. Relatively fast-growing and expensive markets that became overbuilt due to a meteoric and unsustainable rise in home prices during the early-mid 2000s, and slow-growing/declining cities that are struggling with far bigger economic problems than just the housing market. Speculators played a large role in both the surge in home prices and the surge in foreclosures in the former markets. Houston's long history of limited home price increases never attracted speculation in housing on the scale of the growing markets that are struggling today. That is arguably a good thing, and maybe it has to do with a relatively unlimited supply of land, but the downside is that Houston residents do not have near the same opportunity to benefit from increasing home values, the key element of wealth creation for the majority of US households.

I'll take my chances with an occassional bubble in a dynamic market with limited supply and expanding demand over a flat market with limited opportunity.

Of course, there was no bubble

There certainly was no bursting of the bubble in Houston, because prices never rose in the first place. The same could be said for Indianapolis (my city) and multiple other "rust belt" cities. It's not due to our lack of zoning (we do have zoning), it's due to people not particularly wanting to live here. The most important thing to take away from this housing crisis is how critical a metropolitan planning region is. Portland, for example has seen substantial population growth, with some of the most restrictive planning in the country, and no bursting of the bubble. It's because the suburbs weren't allowed to overbuild.

I expect houston will see some major price drops in the exurban regions, whereas the city will begin to rise, due to high gas prices.

Cleveland, Houston and bubbles

I disagree with your reasoning. True, Houston did not experience a bubble like many other cities, but it had significant economic and popluation growth during that time. It wasn't because people didn't want to live there. The supply in Houston kept pace with demand, thus prices never rose that much, albeit somewhat, thus many buyers didn't resort to using exotic mortgages or serious overleveraging.

The only thing restricting supply would do is increase prices beyond an economically efficient point. One way to look at this is that bubbles bursting is a GOOD thing. Houston's affordability index is almost as high as it was in the mid 90s.

Cleveland is a totally separate issue. Clearly, places like it and Detroit have high foreclosure rates because the local economy is shrinking. There are very different forces at work in places like this than Stockton or Las Vegas where the main issues were investor speculation and overleveraging.

If the energy bubble bursts, expect Houston's housing market to be much like Cleveland's. Overbuilding is a relative term. An MPO or city government can't and should not try to predict how a local/regional economy will perform in the future because they have no clue. Despite short-term disconnects, the market has no incentive to overbuild and will control itself in terms of overall supply in the long term.

The most important thing to take away from the housing crisis is certainly not the existence of MPOs -an entity known almost exclusively in the planning community. The most important things to take away are 1) be financially prudent with your money by not overborrowing, 2) a house is a not a tech stock investment and should not be treated as such, 3) house and real estate prices do not always go up in price, 4) understand what you are buying when dealing with a financial professional, 5) do not participate in pyramid schemes, and 6) don't let emotions and your neighbors rule your decisionmaking.

Bubbles and location^3.

Nice comment cp.

One point of clarification, when you state An MPO or city government can't and should not try to predict how a local/regional economy will perform in the future because they have no clue. , this is correct in that most MPOs don't predict, they project: they develop different scenarios and attempt performance in those likely scenarios.

Your comment points out, also, another important takeaway: it is important to be careful when comparing different regions to one another to make a conclusion.

Best,

D

Houston Has Zoning

Houston does have zoning. They just call it deed restrictions. The differences are that they implement it by individual agreement (direct democracy v. representative democracy) but still look to the courts to enforce it. You could write a zoning code that duplicates Houston's system if you wanted to. And if you don't think that deed restrictions can be as restrictive as zoning, try to build a high-rise in one of the upscale single-family neighborhoods.

Jim Mc

www.jamesoncapitalllc.net

Enron may have played a role as well

Remember, Houston lost its largest employer when the firm collapsed. It would be interesting to see if the dip from Enron, despite later growth and other companies stepping in to "fill the void," didn't have some deflationary effect.

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