March 10, 2008
Why the housing roller-coaster? Easy credit or tough laws, or both?
Are restrictive land use laws the real culprit in the housing bubble dilemma? Yes, according to Randall O’Toole of the libertarian-minded Cato Institute. He argues that laws inflated the price of housing –- mostly by restricting the supply –- which then caused borrowers to have to seek out risky loans in order to pay for them, and which many now cannot pay back. He cites the research by Harvard’s Edward Glaeser and others that concluded that land use laws were the major culprit in the recent housing price inflation. This effect is most prominent along the coasts, where there typically are more progressive-minded laws to protect “open space,” etc.
I have written favorably a number of times about the studies by Glaeser, et al. But the housing bust makes me pause. A number of questions remain unanswered in my mind. If restrictive development laws were the dominant factor in causing prices to rise, why did we experience great inflation only from 1995-2005, and not before? If tough development laws are the major factor in causing high prices, why do we now have a bust (in the Tampa Bay area where I live, for example, prices are falling)? And how does this supply-oriented theory explain examples such as Las Vegas, where prices rose as fast as any place (and are now falling) and which is not famous for its restrictive laws (just the opposite, of course).
In sum, I think that we should concede that greatly increased demand -- facilitated by easier credit than we were accustomed to –- played large role in the housing bust and boom. This is not to say that restrictive land use laws don’t cause prices to rise. A University of Washington economist argues that they add an additional $200,000 to the price of a typical home in the Seattle area (presumably as opposed a completely free market, which would of course place subdivisions on top of Mt. Rainier). My speculation (the kind in the mind, not the kind with cash) is that a combination of both tough development laws and easy credit together explains what has happened …
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My research indicates that restrictive building codes have added much more to the cost than restrictive land use laws.
Combine those building laws with ADA and FHA regs and you have a situation where government mandated features often bump up the cost dramatically--especially in mixed use situations.
Posted by: Chad Emerson | Mar 11, 2008 9:11:23 AM
I'm not an economist but even I can see the flaws in the CATO's argument. The financial meltdown we are experiencing is the result of the bursting of a real estate bubble. The bubble was created by easy credit and speculation. The market became overheated. Folks that had no business buying houses or no business buying huge houses obtained subprime mortgages and pumped billions into the market. Houses became overvalued. Prices were unnaturally high. THey were not justified by the market. At some point the bad loans came home to roost and the market collapsed.
Land use restrictions restrict the supply of housing. Demand stays the same, supply is restricted so prices go up. Surely Cato understands supply and demand. But this increase in prices is not an over-valuation. It is simply what the market will bear.
And as you point out, land use restrictions were the cause of the bubble, why did prices go up in places with few restrictions.
Posted by: Edward Viguerie | Mar 11, 2008 4:27:00 PM