It’s widely recognized that the collapse of the housing market was the spark that led to the meltdown in the U.S. economy and a significant contributor to some of Europe’s ongoing economic woes. And the general consensus seems to be that the problems in the housing market began with a loosening of lending standards (encouraged by federal policies and loan subsidies via the federally chartered Fannie Mae and Freddie Mac), along with the trading of mortgage-backed securities, the risks of which no investors really understood (indeed, they didn’t seem to understand the make-up of these particular financial instruments at all).
However, recent research by a Wendell Cox, a colleague of mine at the National Center for Policy Analysis, points to another significant — perhaps the most significant — but widely unrecognized factor in the nation’s housing collapse: Restrictive land-use regulations. Cox argues persuasively that so called smart-growth policies played a primary role in the 2008 housing bubble’s bursting and continue to contribute to sinking housing values.
The NCPA paper shows that the majority of losses in the housing crash were overwhelmingly concentrated in metropolitan areas with restrictive land-development regulations. Indeed, Cox shows that land price premiums that ballooned during the bubble would have been less likely to develop if those metropolitan areas had been able to better respond to market pressures.
Restrictive land-use policies prevented the ability to respond to increased demand for home ownership caused by the greater availability of mortgage credit. Therefore, prices inevitably increased, encouraging speculation which spiked housing prices even higher, especially among the national 50 largest metropolitan areas:
In the 10 markets with the greatest rise in prices compared to income, the cost of a house rose by an average of $275,000 relative to incomes. Among the second 10 markets, prices rose by $135,000. By contrast, in major markets with the least rise in prices, housing prices rose by only $5,000.
The most telling fact that Cox discovered is that the housing markest in cities with the most restrictive smart-growth policies accounted for 94 percent of the losses during the housing crash — an average of $97,000 per house.
If only those major metropolitan markets had been able to replicate the performance of markets with less restrictive growth policies, the losses might have been as little as one-fourth of the actual $2.4 trillion, and the average loss per house would have been $17,000, not $67,000.
Absent the depth and severity of the housing collapse, the U.S. might have avoided the financial crisis and thus much if not all of our continuing economic malaise might have been avoided.
In an earlier paper, I argued that smart-growth policies — contrary to the claims of those self-appointed urban planners pushing them the hardest — don’t reduce crime and, in fact, increase congestion. Others at the NCPA have shown that smart-growth policies reduce freedom, contribute to homelessness, and fail to prevent environmental harm. Now Wendell’s study throws the third strike against centralized land-use planning. Combined, this research shows that smart growth is a pretty dumb idea.