Mortgage Crisis Blame Partly On Land Policies
A United States mortgage crisis has been at the center of a recent economic slowdown and it seems likely to continue as an issue.
There is an ongoing debate over the causes and cures of the mortgage meltdown, but Wendell Cox, a visiting Heritage Foundation fellow, said one of the most important factors has been virtually ignored - the role of excessive land use regulations in making the losses worse.
Excessive land-use policies have been adopted in metropolitan markets across the country, Cox explained. These include urban growth boundaries, huge areas recently declared off-limits to development, building moratoria, confiscatory and unprecedented impact fees and excessively large minimum lot sizes.
Often referred to as "smart growth," these policies create a scarcity of land, artificially raise the price of housing and have increased the exposure of the market to risky mortgage debt, Cox said.
When more liberal loan policies were implemented, he added, metropolitan areas that had adopted these more restrictive policies lacked the resilient land markets that would have allowed the greater demand to be accommodated without inordinate increases in house prices.
Only a few voices have been raised about the role of excessive land use policies in driving up housing costs, it was noted.
Liberal economist Paul Krugman of The New York Times noted that the house price bubble has been limited to metropolitan areas with strong land use regulation.
Conservative Thomas Sowell has made similar points. More recently, Theo Eicher of the University of Washington produced a working paper placing much of the blame for house price escalation on land use regulation in cities around the nation.
Cox reiterates that more liberal loan policies were the proximate cause of the mortgage meltdown and the subprime crisis. "But strict land use regulations forced prices up much more than would have been the case if the previous more traditional yet environmentally sound regulation had been retained."
Places such as California, the Northeast, the Northwest, and Florida have implemented excessive land use control, it is pointed out. As a result, their land use planning systems have not been able to accommodate the stronger demand created in the more profligate lending environment.
With more relaxed land regulation, much of the rest of the nation was far better able to accommodate the higher demand. This includes the high-income world's three fastest growing metropolitan areas with a population of more than 5 million: Atlanta, Houston and Dallas-Fort Worth.
If price-escalating smart growth policies had not been adopted in state capitals, county courthouses and local planning commissions, the financial risk in the current crisis would be at least $4 trillion less, Cox said.
"The tragedy is that when most of these decisions were made, there was not the slightest consideration of economics - the upward pressure on house prices - or the number of households that would be denied home ownership in the years to come," he observed. "Yet, these local decisions played a major role in what The Economist magazine called a near global collapse."
In the final analysis, smart growth was not very smart, as some suggested at the time.
Yet policies of the Federal Reserve Board thus far have not taken notice of this important connection.
It should be imperative, however, for action removing these destructive land use regulations to be included in efforts to prevent a repeat mortgage crisis in the future.
