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The Dog That Didn’t Bark

Jul 14

2008

“Planning-induced housing bubbles not only threaten individual families and local economies,” the Antiplanner wrote in Best-Laid Plans, “they threaten the world economy.” Those threats are being realized today.

The federal government seized another big bank last week. Fannie Mae and Freddie Mac are on the verge of collapse and the fed is likely to announce a major bailout this week. More banks are expected to fail soon. “This is a very serious banking crisis,” says a former president of the American Bankers Association.

My suspicion is that government bailouts of the banks and lenders will only prolong the agony. At least, that is what happened when Japan’s real-estate bubble burst in 1990. When Japan’s central bank refused to force banks to write off bad loans, the economy did not begin to recover until 2004. By that time, housing prices had fallen by as much as 90 percent and some commercial property values had fallen by as much as 99 percent — and they were probably still overpriced.

While all kinds of reasons have been offered to explain the housing bubble, I still insist that growth-management planning was the initial cause. My evidence is the dog that didn’t bark.

The figure above shows a classic bubble: steeply rising prices followed by a steep fall that has yet to reach bottom. If you chart home price data from the Office of Federal Housing Enterprise Oversight, you will find similar patterns throughout California, Florida, Hawaii, Oregon, Washington, and other states with growth-management planning.

The dogs that didn’t bark are shown in the figure above: Atlanta, Dallas-Ft. Worth, and Houston. Do you see a bubble? I don’t see a bubble. These cities don’t have growth-management planning.

If no American cities had growth-management planning, there would have been no housing bubble. There would have been some subprime mortgage problems, but they would have been problems, not a world financial crisis.

But because housing prices in California were rising with no end in sight, the money that fled the telecommunications and dot-com industries in 2001 went into real estate. This fed a bubble that had to eventually collapse. Now that money is going into petroleum, which pushed gas prices above $4 a gallon. If prices fall below $4 next fall, we will know that bubble is collapsing.

So next time you fret about the devaluation of the dollar, the current recession, or even high fuel prices, thank an urban planner. They caused the housing bubble and they are responsible for the world’s current financial crisis.

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Reprinted from The Antiplanner

More on Housing

Jul 15

2008

Some commenters on yesterday’s post want to pretend that the Antiplanner “cherry picked” three data series to show regions with a housing bubble and three more to show regions without a bubble. What rubbish.

My 2006 report on housing is based on data for 385 housing markets. Complete data are in the spreadsheet that I prepared for the report. You can use this spreadsheet to make your own charts like the ones in yesterday’s post for up to 6 metro areas at a time.

Of course, data in that report only go through 2005, so they show the bubbles but not the crashes. If you want more recent data, you can download them from the Office of Federal Housing Enterprise Oversight’s web site.

As I describe in my more recent Cato paper, the data reveal that most urban areas that have done growth-management planning experienced a housing bubble while most of those that have not done such planning have not had a housing bubble. The few exceptions, such as Nashville (planning but no bubble) and Las Vegas (bubble but no planning) are easily explained in the report.

State growth-management laws are not the only causes of bubbles. In Wisconsin, both the Milwaukee and Madison areas are run by county or regional governments that are applying various growth controls. No other parts of Wisconsin are experiencing bubbles.

The evidence shows that, if government does not stand in their way, home builders can meet just about any demand for new housing. The three non-bubble housing markets I reported yesterday — Atlanta, Dallas-Ft. Worth, and Houston — are the three fastest growing metropolitan areas in America, each growing by more than 130,000 people per year. Home builders have no problem meeting that demand with very affordable, very nice homes.

Some commenters still hold the wishful belief that prices are higher on the coasts because the coasts are so much more desirable to live in than the interior. This does not explain why prices are so high in places like Boulder, which has been trying to manage growth for decades, but which is not near a coast. Prices are pretty reasonable in Colorado Springs, which has little growth control but is aesthetically at least as nice as Boulder. Meanwhile, many housing markets in North and South Carolina are very popular and near the coast, yet (with a few exceptions like Asheville and Charleston, both of which imposed various growth controls in the 1990s) did not experience bubbles.

It turns out that housing is an inelastic good. Like salt, we need it even if the price goes way up. What this means is that small restrictions on the supply of new housing can lead to large increases in price. And since sellers of existing homes are keenly aware of the price of new homes, if the price of new homes goes up, the price of all homes goes up.

Subprime mortgages, speculators, and Wall Street manipulations of mortgages all may have accelerated the recent housing bubble. But they did not cause it.

Without growth management, prices would not have been so high that lots of people had to resort to subprime loans. Without growth management, rising prices would never have attracted speculators to the market. Without growth management, the money that fled the telecommunications and dot-com industries when they busted might have gone to some other investment. So, without growth management, most of America’s housing markets would look like Houston’s or Dallas’s, and we would not be facing a banking crisis or a serious recession.

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