Growth Management Laws Created Housing Bubble

For some time, I have been pointing out that the rapid increases in home costs are limited to some areas of the country and that these rapid increases have been largely determined by local governments, or in some cases by state governments. Even the Federal government has contributed in some areas out west where the Federal government owns a large fraction of the land. Where growth management planning by governments is not practiced or has been very newly implemented, the cost of housing has simply increased at about the inflation rate. Home sales are still brisk in areas without such growth management and people have little need to resort to subprime home mortgages in such places. The story is catastrophically different in California, Oregon, Washington, Arizona, Florida, Hawaii, Maryland, New Jersey, Rhode Island, and Vermont, where the states have mandated growth management laws. The Denver and Minneapolis-St. Paul areas have also been hit due to local government restrictions. Randal O'Toole, a senior fellow at the Cato Institute, has written an excellent article on this called Big Burdens from Growth Management.

He points out that a four-bedroom, two-and-a-half bath home in San Jose, CA costs $1,100,000, while the same home costs $550,000 in Seattle, WA and only $250,000 in Raleigh, NC. San Jose has practiced growth management since 1970, Seattle since 1985, and Raleigh has the wisdom not to interfere. Housing costs in urban areas depend heavily upon how long growth management policies have been followed. O'Toole points out that several fast-growing states such as Texas and North Carolina have home price to buyer income ratios of less than 2.5. In comparison, the average ratio is more than 9 in San Jose! In Dallas, this ratio is slightly more than 2 and the area growth rate is 40% since 1990, compared to San Jose's growth of only 10% in that time. The average home price to buyer income ratio in all of California is more than 8. If more than 30% of your income goes to making your mortgage payment, you will most likely have to take a subprime mortgage. Consequently, it is most in the growth-managed areas that subprime mortgage loans have become a major problem.

The difference in home price brought on by government growth management requirements is such that in 2006, home buyers paid more than $250 billion in planning taxes, the cost of this government meddling in the home and land markets for that single year. Needless to say, these costs keep many families from owning the homes of their dreams, which is exactly what they are supposed to do. From 1940 to 1960, homeownership grew from 44% to 62%, but has grown to only 69% since. Homeownship has grown better in most states with no growth-management laws. This is important, because a home is the biggest investment most families have. It also provides the most common means for people to finance a new small business.

It is commonly said that growth management prevents the "urban sprawl" that planners hate, but that most people's dream of a single-family home with a yard requires. Yet, all urban areas now account for less than 3% of the land in the U.S. California requires 95% of its people to live in 5.1% of that state's land, but with no growth management, only about 8.5% of the state would be urban. In order to keep 3.4% of the state's land unoccupied, the state has tripled the cost of a home. Oregon requires its people to live in 1.25% of the state, but with no requirement and assuming the same densities of people in urban areas as in the rest of the country, they would occupy less than 1.7% of the land in Oregon.

O'Toole points out:

"Of course, when we say a particular law has 'protected' open space from development, we usually mean that the law has denied rural landowners the right to use their property as they see fit. Because landowners receive no compensation for this taking of their property rights, it should be viewed with even greater outrage than the Supreme Court recent decision allowing cities to take people's land by eminent domain -- with compensation -- and give that land to private developers."

"Russians say that Americans do not have any real problems, so they have to make them up. Urban sprawl is one of those made-up problems. Unfortunately for U. S. citizens, efforts to control sprawl have led to very real difficulties: unaffordable housing, higher land costs for business and industry, housing bubbles and busts, and increasing barriers to homeownership for low- and moderate-income families."

In an effort to address some of these problems, local governments create subsidized housing, which adds to the tax burden. They sometimes require builders to build money-losing housing so they will be allowed to build other single-family and townhouse homes, to which they shift the costs. This makes them more expensive. The federal government uses Fannie Mae and Freddy Mac to help insure a market for subprime home mortgage loans. Fanny Mae and Freddy Mac fed the bubble in the securities based on these unstable loans to the max, while greasing the palms of many Congressmen with heavy donations to keep them onboard with the program. It also used the Community Reinvestment Act to force lenders to make subprime loans to many of the riskiest borrowers. Critical error was piled upon critical error has governments wrecked havoc on the free market and addressed every problem with more government mandated havoc. Without the government interference, no one would have been interested in loaning out their money in so many risky subprime loans.

The financial problem we are facing today was not caused by Capitalism or by the free market, as the socialists in government and in the Democrat Party are claiming. They have been clamoring mightily to try to prevent the people from understanding what did cause the problem. It was caused by socialist governments all the way from the local to the federal levels.

This is not the first housing bubble that has burst. A bubble occurred in the 1970s in the few states with growth management then, while a worse bubble erupted in the 1980s with more homes involved as urban planning spread. O'Toole says this present bubble affects about 40% of the nation's housing. The bubbles are becoming worse as more and more areas turn to urban planning.