Smart Growth Policies Worsen Housing Crash
by H Sterling Burnett, Heartland Institute, September 25, 2015
A new report from the National Center for Policy Analysis (NCPA) details the harmful impact of smart growth policies on housing affordability.
The 2007 financial crisis began when relaxed lending practices, allowing people to buy homes they could not afford, led to the creation of a housing-price bubble. The crisis deepened when home values stopped rising, causing a subsequent rise in defaults, bursting the bubble. Home prices fell by an average of 18 percent nationwide. Research shows, the housing bubble was not a monolithic event and varied substantially by geography, in large part due to local and regional land-use restrictions.
Research by Wendell Cox, a land-use planning consultant, shows those areas with restrictive land use regulations, often referred to as “smart growth,” were hit the hardest when housing crisis hit. Smart growth restrictions include growth boundaries, limits on new development locations, minimum lot sizes and minimum square footage for hew houses. Some of land use restrictions apply to specific metropolitan areas, some are statewide.
Policies Artificially Increased Demand
Cox's research shows housing supply in locales with strict land use restrictions was unable to respond to the increased demand for homeownership resulting from the easier access to mortgage credit. Surging demand and limited supply inevitably resulted in higher housing prices. This encouraged speculation and homeowners taking out mortgage backed loans based on home equity created by rising prices. This increased housing prices even more, causing the price-bubble to balloon.
The NCPA paper notes, “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.”
As a result, when the housing bubble burst, approximately 94 percent of the cumulative losses from the drop home values nationwide came in areas where smart growth policies were most deeply embedded. While the average loss in home values in areas with the most stringent land use regulations topped $97,000, home values dropped just $12,000 in value per house on average in less-regulated places.
California, Florida, Hawaii, Oregon, Vermont and Washington, all adopted some type of restrictive land-use policy over the last 30 years, and 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, including Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Raleigh-Durham and St. Louis, experienced significantly smaller declines in home value, during the recession.
Responding to the Crisis
As of 2015, of the states experiencing steep, rapid drops in their housing prices after the onset of the housing crisis and subsequent recession, Florida was the only state that had adopted restrictive land uses prior to the crisis to subsequently change its growth management policies. In 2011, Florida lawmakers reversed regulations originally enacted to curb urban sprawl, and loosened restrictions on construction. Florida also transferred most of the state’s growth management authority to city and county officials.
Wisconsin’s Republican-controlled assembly also passed measures intended to loosen restrictive land-use policies in 2011, but the bill failed in the state senate.
The authors of the NCPA study speculate, "Less land-use regulation in those restrictive regulated markets would have likely blunted the effects of the housing bubble and the following financial crisis of 2008." They also suggest, if another bubble emerges, states that have maintained their restrictive land use policies should prepare for another steep drop in home values.
H. Sterling Burnett, Ph.D., (firstname.lastname@example.org) is the managing editor of Environment & Climate News.
David Grantham and Joshua Latshaw, “The Housing Crash and Smart Growth,” September 18, 2015; https://www.heartland.org/policy-documents/housing-crash-and-smart-growth