Housing Crash and Smart Growth

NCPA September 18, 2015

Most experts agree that relaxed lending practices, which allowed people to buy homes they could not afford, led to the creation of a housing-price bubble prior to 2007. The 2008 financial crisis deepened when home values stopped rising, causing a subsequent rise in defaults that burst the bubble, with home prices falling by an average of 18 percent nationwide.

The U.S. housing bubble, however, was not a monolithic event and varied substantially by geography, land-use expert Wendell Cox argues. In fact, those areas with restrictive land use regulations suffered the most after the home-price bubble burst. These restrictions include growth boundaries, limits on new development locations, minimum lot sizes and minimum square footage for hew houses. Some of these regulation apply to specific metropolitan areas, but some are statewide. Most of these burdensome land-use regulations remain.

The Artificial Increase in Demand

Cox explains that the housing supply in locales with land use restrictions could not respond to the increased demand for homeownership caused by the greater availability of mortgage credit. The inevitable result was higher prices, which encouraged speculation and increased house prices even more, causing the price-bubble to balloon.

Nationwide, as demand increased, the market value of the existing stock of houses more than doubled from $10.4 trillion in 1999 to $22.7 trillion by 2006. However, 89 percent of the increase in value was concentrated in markets with restrictive land-use regulations. This sharp rise in price led to an equally sharp contraction in price following a peak in the fourth quarter of 2006.

Cox calculates that:

• Some 94 percent of the cumulative losses from the sudden decrease in gross national home values were in restrictively-regulated land markets.

• The remaining 6 percent of losses originated in less-restrictive markets.

• The average reduction in home values in highly-regulated areas of the country was $97,000, versus an average loss of $12,000 in value per house in less-regulated places.

Cox points out that local governments in Hawaii, California, Oregon, Vermont, Florida and Washington, which adopted some type of restrictive land-use policy over the last 30 years, all experienced some of the largest losses, in terms of home affordability, measured by the median home price divided by median income. By contrast, less-regulated markets, like Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Raleigh-Durham and St. Louis, experienced much smaller falls.

Full Text: "Housing Crash and Smart Growth," National Center for Policy Analysis, September 2015.