The Housing Crash and Smart Growth
There is general agreement the financial crisis that began with the failure of Lehman Brothers in 2008 was worsened by the bursting of the U.S. housing price bubble. It is also generally acknowledged that some of the fuel for the housing bubble came from a relaxation of mortgage loan standards that allowed many families to purchase homes they could not afford with loans on which they subsequently defaulted.
However, the U.S. housing bubble varied substantially by geography, says Wendell Cox, adjunct scholar with the National Center for Policy Analysis. Many metropolitan areas with prescriptive land use restrictions were not able to respond to the increased demand for homeownership caused by the greater availability of mortgage credit. The result was higher prices, which encouraged speculation and increased house prices even more. From 2000 to 2007, among the nation’s 50 largest metropolitan markets:
- In the 10 markets with the greatest rise in prices compared to income, the cost of a house rose by an average of $275,000, relative to incomes.
- Among the second 10 markets with the greatest price escalation, house prices rose $135,000.
- By contrast, in the major markets with the least rise in prices, houses increased only $5,000.
For the nation as a whole, house values more than doubled from 1999 to the peak of the bubble. From the peak in the fourth quarter of 2006 until the end of 2010, homes values fell more than $6 trillion. Losses after the bubble burst were even more concentrated than house price gains. Consider:
- From the peak of the bubble in 2006 to the Lehman Brothers’ collapse on September 15, 2008, more heavily regulated metropolitan markets accounted for 73 percent of aggregate value losses.
- All prescriptively regulated markets (more heavily regulated markets) accounted for 94 percent of losses, or an average of $97,000 per house.
- Responsively regulated markets (less restrictively regulated markets) lost just 6 percent of their value, or an average of $12,000 per house.
If the prescriptively regulated metropolitan areas had instead had responsive land use regulations, prices likely would have escalated at a much lower rate during the housing bubble.
Source: Wendell Cox, "The Housing Crash and Smart Growth," National Center for Policy Analysis, Policy Report No. 335, June 2011.