There is general agreement that the housing bubble of the 2000s was fueled by a relaxation of mortgage loan standards that allowed many families to purchase homes they could not afford. Less well understood is that the housing bubble was not a “monolithic event,” writes Wendell Cox in a National Center for Policy Analysis report, “The Housing Crash and Smart Growth.” The bubble varied widely by geography: Some markets saw extreme housing value increases, others saw very little at all.
The key variable, Cox argues, was the extent to which land use regulations prevailed in different markets. By making it expensive to build new housing, regulations created scarcity that drove up house prices, which, when combined with looser lending standards, set off a speculative fever. “As the housing bubble developed,”he writes, “prescriptively regulated markets, including those in non-major metropolitan markets, accounted for 89% of the aggregate increase in house values. Conversely, 25 percent of homeowners lived in the responsively regulated markets, which accounted for just 11 percent of the aggregate value increases.”
For the most part, Cox makes a sound case. It seems beyond dispute that (1) the intensity and cost of land use regulations varies widely from region to region, that (2) intrusive regulatory regimes make housing more scarce and/or more costly, and that (3) on average, regions where regulations were tightest saw the greatest increases in housing prices. The chart to the left tells the tale. (Click on chart to view more legible version.)
I have one important bone to pick with Cox: the way he equates intrusive land use regulation with “smart growth.” The fact of the matter is, most heavy-handed land use regulation is the very opposite of smart growth. The dysfunctional human settlement patterns we have in Virginia (and much of the United States) are the direct result of zoning codes and comprehensive plans that mandate scattered, disconnected, low-density development in marked contravention of smart growth principles. Historically, these restrictions here in Virginia were the handiwork of anti-growth boards of supervisors who thought that they could reduce taxes and traffic congestion by smearing growth at low density over wide swaths of land and who resisted re-development in more compact, mixed-use configurations at higher densities.
There is nothing inherently anti-growth about the smart growth movement, although anti-growth groups do often expropriate smart-growth rhetoric to advance their agendas. Further, I would add, “smart growth” comes in a variety of flavors, with some advocates eager to use the coercive power of government to impose their vision and others, like me, who are more inclined to rely upon market forces.
With that significant caveat, I do agree with Cox’s conclusion that land use regulation has exacerbated housing scarcity and, accordingly, was an unappreciated contributor to the 2000-era housing boom-bust cycle that left our economy in tatters.
Update: I hasten to add one more thought. Just as significant as the problem of metropolitan-wide overbuilding is the problem of maldistribution of the houses that are built. As EMR frequently reminds us, developers built too many houses in the wrong location within the region, typically on the metropolitan periphery. The price of those houses have declined the most.
