How Urban Planners Caused the Housing Bubble (Policy Analysis)

Studies from the Cato Institute | Contributor

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.

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