Everyone agrees that the recent financial crisis
started with the deflation of the housing bubble.
But what caused the bubble? Answering this
question is important both for identifying the
best short-term policies and for fixing the credit
crisis, as well as for developing long-term policies
aimed at preventing another crisis in the future.
Some people blame the Federal Reserve for
keeping interest rates low; some blame the
Community Reinvestment Act for encouraging
lenders to offer loans to marginal homebuyers;
others blame Wall Street for failing to properly
assess the risks of subprime mortgages. But all of
these explanations apply equally nationwide, while
a close look reveals that only some communities
suffered from housing bubbles.
Between 2000 and the bubble’s peak, inflation-
adjusted housing prices in California and
Florida more than doubled, and since the peak
they have fallen by 20 to 30 percent. In contrast,
housing prices in Georgia and Texas grew by
only about 20 to 25 percent, and they haven’t significantly
declined.
In other words, California and Florida housing
bubbled, but Georgia and Texas housing did
not. This is hardly because people don’t want to
live in Georgia and Texas: since 2000, Atlanta,
Dallas–Ft. Worth, and Houston have been the
nation’s fastest-growing urban areas, each growing
by more than 120,000 people per year.
This suggests that local factors, not national
policies, were a necessary condition for the housing
bubbles where they took place. The most
important factor that distinguishes states like
California and Florida from states like Georgia
and Texas is the amount of regulation imposed on
landowners and developers, and in particular a
regulatory system known as growth management.
In short, restrictive growth management was
a necessary condition for the housing bubble.
States that use some form of growth management
should repeal laws that mandate or allow
such planning, and other states and urban areas
should avoid passing such laws or implementing
such plans; otherwise, the next housing bubble
could be even more devastating than this one.
Everyone agrees that the recent financial crisis
started with the deflation of the housing bubble.
But what caused the bubble? Answering this
question is important both for identifying the
best short-term policies and for fixing the credit
crisis, as well as for developing long-term policies
aimed at preventing another crisis in the future.
Some people blame the Federal Reserve for
keeping interest rates low; some blame the
Community Reinvestment Act for encouraging
lenders to offer loans to marginal homebuyers;
others blame Wall Street for failing to properly
assess the risks of subprime mortgages. But all of
these explanations apply equally nationwide, while
a close look reveals that only some communities
suffered from housing bubbles.
Between 2000 and the bubble’s peak, inflation-
adjusted housing prices in California and
Florida more than doubled, and since the peak
they have fallen by 20 to 30 percent. In contrast,
housing prices in Georgia and Texas grew by
only about 20 to 25 percent, and they haven’t significantly
declined.
In other words, California and Florida housing
bubbled, but Georgia and Texas housing did
not. This is hardly because people don’t want to
live in Georgia and Texas: since 2000, Atlanta,
Dallas–Ft. Worth, and Houston have been the
nation’s fastest-growing urban areas, each growing
by more than 120,000 people per year.
This suggests that local factors, not national
policies, were a necessary condition for the housing
bubbles where they took place. The most
important factor that distinguishes states like
California and Florida from states like Georgia
and Texas is the amount of regulation imposed on
landowners and developers, and in particular a
regulatory system known as growth management.
In short, restrictive growth management was
a necessary condition for the housing bubble.
States that use some form of growth management
should repeal laws that mandate or allow
such planning, and other states and urban areas
should avoid passing such laws or implementing
such plans; otherwise, the next housing bubble
could be even more devastating than this one.
Randal O’Toole is a senior fellow with the Cato Institute and author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future.