Texas Avoids Housing Collapse by Refusing Smart Growth

Published August 20, 2010

Texas has frequently been noted for its superior economic performance of late. The most recent example is the CNBC ratings, which designated the Lone Star state as the top state for business in the nation.

Moreover, Texas has performed far better than its principal competitor states during the Great Recession, as indicated in the Demographia report for Houstonians for Responsible Growth, “How Texas Averted the Great Recession.”

One reason Texas did so well is that it escaped the “housing bubble” that did so much damage in California, Florida, and other states. The liberal, traditional land regulation shielded Texas from the damage done where land use restrictions were more restrictive.
Largely Avoided Recession
Texas has performed better than its competitors California and Florida, in gross domestic product, employment, unemployment, personal income, state tax collections, and consumer spending. There has also been less mortgage distress in Texas. The Brookings Institution’s Metropolitan Monitor ranked the performance of the six largest Texas metropolitan areas among the top 10 in the nation. The latest Metropolitan Monitor ranked each of those six metropolitan areas in the highest performance category.

Texas has experienced far smaller house price increases than California, Florida, and many other states. During the bubble, California house prices increased at a rate 16 times those of Texas, while Florida house prices increased seven times as fast those of Texas.

As a result, the subsequent house price declines were far less or nonexistent in Texas. Texas had experienced its own housing bubble in the 1980s, however, and even then overall prices did not exceed the Median Multiple of 3.0 (median house price divided by median household income).

Land-Use Restrictions Harmful
All the markets with steep house price escalation had more restrictive land use regulations than Texas. This association between more restrictive use regulation and higher house prices has been noted by economists such as former governor of the Reserve Bank of New Zealand Donald Brash and former member of the Bank of England Monetary Policy Committee Kate Barker.

The relationship is confirmed in The Costs of Sprawl—2000, the leading academic advocacy piece on more restrictive land use controls.

Unlike in California, housing has remained affordable in Texas in recent decades. Until the early 1970s, California’s housing affordability mirrored that of the nation. Then, prices escalated after more restrictive land use regulations were adopted.

William Fischel of Dartmouth University has attributed California’s housing price increases to the restrictive land use regulation. Other factors have had little impact.

Construction cost increases have been near the national average in California. Underlying demand, as measured by domestic migration, is lower in California than in Texas, and California has more than enough vacant land to accommodate demand The problem is that planning regulations do not permit its use.

Price Volatility in Florida, Portland
The situation in Florida is similar. The affordability of housing in Florida was comparable to that of Texas in the 1990s, but strict planning control kept the supply of new housing below the demand, driving prices skyward.

Similarly, the Texas housing market avoided the huge price increases that occurred in Portland, Oregon, which relies on extensive restrictive land use regulation. In 1990, Portland house prices relative to incomes were similar to those of the large Texas metropolitan areas. At the recent peak, the median Portland house price had risen to approximately 80 percent above Texas prices.

Portland did not experience the price collapses of California, yet the greater price volatility associated with smart growth is illustrated by price declines in relation to incomes that were five times those of Texas.

Speculators Kept Away
Speculation is often blamed as having contributed to the higher house prices that developed in California and Florida. This is correct.

With some of the strongest demand for housing in the nation resulting from its relatively vibrant economy, Texas would seem to have been a candidate for rampant speculation. Yet the speculators were not drawn to Texas because its land regulations did not produce scarcity.

Speculators are drawn by scarcity. In housing, a sure road to scarcity is to limit the supply of buildable land by outlawing development on much property that might otherwise be available.

Speculators flocked to California and Florida by contrast. They also descended on Las Vegas and Phoenix. Despite their nearly limitless expanses of land in those places, supply fell short of demand and prices rose spectacularly.

The governments created scarcity in a theoretical sea of plenty in those places, by creating virtual urban growth boundaries through government ownership of land encircling these urban areas.

‘Smart Growth’ Press Continues
Despite the success of the less restrictive land use policies in Texas, there are strong efforts to impose smart growth policies in the state.

In 2009, Gov. Rick Perry (R) vetoed a bill that would have required the state to promote smart growth. Federal-government initiatives also would encourage expansion of smart growth policies into Texas and other liberally regulated markets.

This would be the death knell of housing affordability where smart growth has not already destroyed it.

Wendell Cox ([email protected]) is a visiting professor at the Conservatoire National des Arts et Metiers in Paris and author of  War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life. His principal Web sites are demographia.com and rentalcartours.net. This article is adapted from newgeography.com.

Internet Info

“How Texas Averted the Great Recession”: http://www.budgetandtax-news.org/article/28233.