Wendell Cox, a visiting fellow with the Heritage Institute, has published a new report, “How Land Use Restrictions Exacerbated the International Finance Crisis” that makes an important contribution to our understanding of the residential real estate bubble and the ensuing financial collapse that has roiled the global economy. Unfortunately, he undercuts a potentially valuable study by characterizing excessive regulation as “smart growth,” badly misconstruing the meaning of the phrase.
First, let’s talk about what Cox gets right. One of the elements missing in the hand wringing over the ongoing mortgage melt-down, he writes, is the roll of excessive land use regulation. A variety of regulations — minimum lot sizes, confiscatory impact fees, urban growth boundaries and building moratoria — have created a scarcity of developable land in many metropolitan areas. That scarcity, he maintains, has raised the price of housing.
Tight housing supplies interacting with liberal mortgage loan policies created the mortgage meltdown. Explains Cox: “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.” Out-of-control lending policies, he emphasizes, were the proximate cause of the fiasco. But land use controls leveraged the damage several-fold.
Between 2000 and 2007, there was tremendous disparity between metropolitan regions at which housing prices increased. In the ten markets that experienced the greatest increase in housing prices over normal affordability ratios, Cox says, house prices increased an average of $275,000 compared to incomes. Among the second 10 markets, prices rose $135,000 more. In markets that remained the most affordable, house prices increased only $5,000 more.
While the gross value of U.S. housing stock increased $5.3 billion relative to household incomes, over that period, $4.4 billion occurred in the 20 markets with the fastest escalating prices. Writes Cox: “It is estimated that in 10 metropolitan markets with the most steeply rising prices, mortgage exposures rose by approximately $3.1 trillion compared to the exposure that would have existed had the previous price to income ratios been maintained. These 10 markets have ‘rung up’ 64 percent of the mortgage exposure overhang, yet account for only 16 percent of the nation’s owner occupied housing stock.”
What the 20 most unaffordable housing markets — the markets with the greatest “mortgage overhang” — have in common, says Cox, is excessive land use regulation. (In Virginia, Cox classifies the Washington, D.C., and Hampton Roads metro areas as having “strong” land use regulation, and Richmond as not.)
Unfortunately, Cox devises a hard-to-decipher measure for ranking unaffordability. He calls it the “aggregate value of housing stock in 2007: change from 2000 price/income ratio.” I sorta, kinda understand it but not really, and I can’t find an explanation of it. But I’ll accept it for purposes of argument. (For what it’s worth, the Washington region ranks 5th out of the 50 largest metro areas in this ranking, Hampton Roads ranks 14th, and Richmond ranks 20th.)
What Cox hasn’t done, is correlate growth controls and housing affordability with the current mortgage foreclosure rates. If he had, I’d bet he’d get a pretty good match up.
Now, let’s discuss how Cox is terribly confused. He equates housing regulation with “smart growth.” Some of the development restrictions he cites — urban growth boundaries, for instance — are rightly associated with smart growth. But large lot sizes are the antithesis of almost anybody’s definition of smart growth. Outside of Arlington and Alexandria, no municipality in Northern Virginia has embraced “smart growth,” which advocates compact development, mixed uses and alternatives to automobile transportation. Instead, Northern Virginia municipalities have employed their formidable arsenal of powers to promote scattered, disconnected, low-density development — a policy mix criticized by Smarth Growthers that has created a shortage of affordable and accessible housing.
“Accessibility” is the key here. Within metro areas, widespread anecdotal evidence suggests, housing prices have collapsed the fastest in areas that are the least accessible to jobs — characterized by the longest commutes and suffering the greatest impact from rising gasoline prices.
Bottom line: Cox’s argument withstands scrutiny if the villain in the mortgage mess is excessive government control over land use. But such a conclusion is a very blunt instrument: It fails to distinguish between different types of land-use regimes, and it ignores the critical variable of accessibility in accounting for the mortgage mess.
(Hat tip to Tim Wise.)
