An Urban Planning-Driven Recession?

Published November 21, 2006

To the extent there’s been anything about the economy still worrying some journalists and media analysts in recent months, it has been softness in the real estate market. Last month downward price pressures in new housing were noted as having contributed to less-than-expected economic growth. And on November 20, the National Association of Realtors issued its third quarter report showing a 12.7 percent decline in existing home sales when compared to last year.

All of this, of course, will refuel the debate about the “housing bubble.” Is there one? If there is, will it burst? Paul Krugman, the economist and columnist for The New York Times, has argued there is a bubble, but it is a geographical one. His thesis is that the “zoned-zone” is artificially inflating housing costs–and he appears to be right.

A zoned-zone is an area of the nation that has embraced land rationing policies, usually under the misleading title of “smart growth.” Those policies include restrictions on suburban development, such as Portland’s urban growth boundary, and requirements for excessively large lots, reducing the supply of land for residential development.

There is little argument about this dynamic among economists–rationing raises prices and it does so with a vengeance.

Take “smart growth” friendly San Diego–where today the median house price is more than 10 times the median household income (a measure called the “median multiple”). The historic median multiple norm has been 3.0 or less. In San Diego, the median multiple was 3.6 in 1995. Over just 10 years, the total cost (including interest) of the median-priced house in San Diego has risen more than $900,000. And in just the first half of the decade 100,000 domestic migrants–people who move from one metropolitan area to another–have left the San Diego Who can blame them?

This pattern, huge housing cost increases and outward domestic migration, has generally occurred in the metropolitan areas that have adopted “smart growth” land rationing policies. Other metropolitan areas have allowed the supply of land for development to keep up, for the most part, with the demand for housing. In these areas prices have remained fairly constant relative to incomes.

Atlanta, Dallas-Fort Worth, and Houston, three of the high-income world’s fastest-growing large urban areas, have managed to keep the median multiple to just 3.0 (as opposed to San Diego’s 10). Midwestern metropolitan areas, after years of losing residents to the two coasts, have generally resisted the temptation to ration land and are now gaining back domestic migrants. This includes places like Kansas City, Indianapolis, and Columbus.

State-level home sales tell a stark story. In the states with stronger smart growth or other land rationing policies, the fall-off in existing house sales has been by far the greatest. Over the past year, existing house sales have fallen an average of 20 percent in the highly regulated states. All 18 of these states experienced declines, even in historically fast-growing states like Arizona, California, Florida, Nevada, Oregon, and Washington. By contrast, in the less-regulated states, the annual loss was just 4 percent and one-third of these states, including Georgia and Texas, experienced sales increases.

It is too early to tell for sure, but the signs are troubling. The housing bubble may be bursting in those areas where it was inflated by urban planning policies that took no account of the economic consequences. It seems the nation could even be headed toward a “smart growth” induced recession.

The economic and social consequences are ominous. The hundreds of thousands of additional dollars that must be paid to own a home in California, Florida, Oregon, or other smart growth states will mean less money for other needs. Fewer consumer products will be purchased. Fewer jobs will be created.

But, worst of all, there will be fewer homeowners. Lower income and many middle-income households will find their way to the mainstream of economic life blocked by artificially high prices resulting from naive urban planning policies.

The cost of this urban design extravagance will fall most significantly on minority households, whose income is generally lower and whose home ownership rate remains a full one-third below that of white-non-Hispanics. In the long run, “smart growth” is simply bad for the economy and for the people on whose enterprise and wealth creation the economy relies.

Wendell Cox ([email protected]) is a senior fellow with The Heartland Institute and co-author of the “Demographia International Housing Affordability Survey,” which analyzes housing affordability in 100 markets in six nations.