Among the many theories about what caused the housing crisis, the standard line is that more-liberal credit increased demand, which increased prices. Some say tax and investment policies made houses more attractive than other investments, which increased demand for housing and thus drove up prices.
The problem with such macroeconomic diagnoses is that they ignore the stunning differences in house-price inflation among different regions in the United States. As Paul Krugman of The New York Times noted more than three years ago, there is no national housing bubble. There are bubbles in some areas, but not in others.
Most of the country, in fact, has not experienced the radical housing-price escalation that helped instigate the current crisis.
Since 1950, median house values have tended, on the national level, to be 3.0 times median household incomes or lower (this measure is called the “Median Multiple”). As late as 2000, the overall Median Multiple in the more-than-100 U.S. metropolitan markets covered was 2.8.
Since then, however, unprecedented house-price escalation has occurred in some markets.
For example, in the Los Angeles metropolitan area, average house prices escalated more than $400,000 relative to incomes between 2000 and 2007. In the Washington, DC metro area, the escalation was more than $250,000, and it was above $225,000 in the New York City metro area.
At the same time, median price escalation relative to incomes was less than $15,000 in the Houston metro area and below $5,000 in the Atlanta metro area, and prices actually dropped relative to incomes in the Dallas-Fort Worth area.
What can explain these differences? It is certainly not federal tax policy, which would have exerted similar influence on prices in all markets. It is not more-liberal lending, because that occurred everywhere. It is not even demand, because the fastest-growing large metropolitan markets in the developed world are Atlanta, Dallas-Fort Worth, and Houston.
In fact, people are moving from the New York and Los Angeles areas to elsewhere in the country with a vengeance, and Washington has lost 100,000 net domestic migrants since 2000. Demand is decreasing in those areas even as house prices continue to climb.
The difference between the markets with large price increases and those with modest increases or declines is actually quite clear and is consistent with economic theory: The metropolitan markets with the strongest price increases relative to incomes all have significant restrictions on development of land for new residences.
These restrictions include “smart growth” policies such as urban-growth boundaries, building moratoria, large-development impact fees, extensive large-lot zoning requirements, large areas on which development is not permitted, and in some cases, federal and state ownership of developable urban fringe land.
The principal difference between housing prices in different parts of the country is not local construction or building material costs, it is land prices. Overzealous land use regulation creates scarcity, which increases prices.
Among the 25 metropolitan markets with the most draconian land-use regulations, the escalation in aggregate house prices relative to incomes since 2000 peaked at approximately $4.5 trillion in 2007. Among the 25 metropolitan markets with more traditional, liberal land-use regulation, the aggregate house cost escalation was under $300 billion, less than one-fifteenth as much as in the heavily regulated markets.
Approximately 85 percent of the aggregate escalation in U.S. housing costs occurred in the 25 most-restrictive land-use markets—areas that account for only 30 percent of the population.
While profligate lending was the proximate cause of the housing crisis, overzealous land-use regulation provided the fuel that made the losses far worse, without which the crisis might have been avoided.
A just solution would be to require the metropolitan areas that implemented these costly regulations to pay for the losses in their own areas. While that won’t happen, it is crucial that the regulations that have exacerbated the problem be dismantled, or it could happen again.
Wendell Cox ([email protected]) is coauthor of the Demographia International Housing Affordability Survey, a visiting professor at the Conservatoire National des Arts et Metiers in Paris, and a senior fellow of The Heartland Institute.