Phoenix:Smart Growth & State Destroy Housing Affordability

The Phoenix metropolitan area is sometimes erroneously characterized as having a responsive (traditional or liberal) land use market. In fact, the Phoenix market is highly prescriptive, as a result of the combination of strong land use regulations (“smart growth”) and the large share of developable fringe land by the state of Arizona, which has been restricting sales to maximize revenues.

The state of Arizona owns a large share of the developable urban fringe land in the Phoenix urban area. The state has been auctioning land at a rate well below what the market could accommodate. This is illustrated by the large increase in prices per acre and in a comparison with agricultural land values.

In 2002, the average auction price of urban land was $32.600. By 2006, which was the peak of the Phoenix housing bubble, urban land sales reached an average auction price of $190,800. Rising land prices are the principal element of house price escalation in the Phoenix area over the period. As median house prices have declined in Phoenix (median house prices declined 39 percent in the year ended November 2008), average auction prices fell back to $68,600 in 2008.

Agricultural land in Maricopa County (the core county of the Phoenix metropolitan area) had a value per acre of approximately $8,500 according to the 2007 United States Census of Agriculture. Further, there was plenty of agricultural land, an amount in Maricopa County alone nearly equal to the entire urbanized land area of Phoenix in 2000. At the 2006 peak state auction prices, “raw” land was being sold at more than 20 times the value of agricultural land per acre. Moreover, the land ownership was highly decentralized, with nearly 1,800 farms. If “raw” agricultural land had been freely available for development, purchasers would not have paid such high prices for the land sold by the state.

Brookings Institution Land Use Planning Rating: In addition, the Phoenix metropolitan area is rated as “growth management” by the Brookings Institution in From Traditional to Reformed: A Review of the Land Use Regulations in the Nation’s 50 largest Metropolitan Areas. This is further indication that the metropolitan area has converted from responsive (traditional or liberal) land use regulation to prescriptive land use regulation.

Prescriptive Land Use Regulation and Price Volatility: Not only does prescriptive land use regulation artificially increase house prices, but it also makes prices more volatile. Prescriptive land use regulation brings more chaotic “boom and bust” cycles to housing markets. They convert what would have otherwise been modest price bubbles into extreme price bubbles. This is noted by Glaeser and Gyourko, who summarize the findings of a number of studies:

Recent research also indicates that house prices are more volatile, not just higher, in tightly regulated markets.

…price bubbles are more likely to form in tightly regulated places, because the inelastic supply conditions that are created in part from strict local land-use regulation are an important factor in supporting ever larger price increases whenever demand is increasing.

The mortgage meltdown has hit the Phoenix area about as hard as any in the country. Prices have reached approximately $163,000, down approximately 40 percent from the peak of $268,000. But, given the insufficient land sales rate and the excessive exurban land preservation provisions, it is likely that house prices in the Phoenix metropolitan area will again escalate once the economy recovers.

Phoenix provides an example of how land rationing, from both “smart growth” policies and insufficient government land sales can lead to far higher house prices and reduced housing affordability.




2007 Consumer Expenditures on Transportation & Housing: US Metropolitan Areas

It is popular for analysts to use the US Consumer Expenditures data to make points about the costs of living between metropolitan areas, especially with respect to transportation and housing. This is not a completely valid exercise, because the Consumer Expenditure report does not principally measure the cost of living. The Consumer Expenditure report is more a measure of preferences.

This is illustrated by considering the transportation sector. The Consumer Expenditure report divides transportation expenditures into four categories --- (1) vehicle purchases, (2) gasoline and motor oil, (3) other vehicle expenses and (4) public transportation.

The vehicle purchases category is reflective of the problem. This category reports the net cost of new and used vehicle purchases. The price a household pays, however, is not necessarily reflective of the cost of living with respect to vehicles. Some households might be happy with a new economy car with a base price of $10,000. Others may want a mid-sized car that may have a base price over $20,000, while still others may want a luxury car costing over $50,000 or even $200,000. All of these purchases are recorded as consumer expenditures. The $10,000 purchase may be reflective of the cost of living, the $20,000 to $200,000 purchase is reflective of a preference that exceeds the base cost of living. The same argument can be made with respect to houses. Many people buy houses that are more expensive, which skews the housing figure upward.

The only transportation expenses that are generally reflective of reflective of the cost of living are gasoline and motor oil and other vehicle expenses.

The following discussion outlines the situation with respect to Consumer Expenditures in Houston, which has often been the target of discrediting efforts by organizations hostile to the suburban lifestyles that now prevail throughout all metropolitan areas in the United States. The following data is calculated from the 2006-2007 Consumer Expenditures report, which is the latest and which contains information for 18 metropolitan areas.

    1. Houston ranks 2nd in total transportation expense per household, following Phoenix. A major component of this expense is vehicle purchases, with a considerable portion being “discretionary” as people buy cars that are more expensive than required for basic transportation (above). It also includes public transportation expense, principally airline fares.

    2. Houston ranks 3rd in automobile operating costs (gasoline and motor oil and other vehicle expense) per household, behind #1 San Francisco and #2 Los Angeles.

    3. Houston has a higher number of workers per household than most of the other metropolitan areas. This requires more vehicle travel. Houston’s automobile operating costs per worker rank 5th, behind #1 San Francisco, #2 Detroit, #3 Los Angeles and #4 New York.

    4. There is a well-known trade-off between house prices and driving distance, as many households live farther from employment locations so that they can afford better homes. Houston’s consumer expenditures per household on shelter (mortgages and rents) ranks 15th out of the 18 metropolitan areas. Only Dallas-Fort Worth, Cleveland and Detroit have lower combined housing and vehicle operations costs.

    5. When housing and vehicle operations are combined, Houston ranks 11th. The Houston figure is below both the average (mean) and the median for the 18 metropolitan areas.

Finally, the public transportation category is also misleading, because it includes airline travel and is not limited to local transit use. For example, in Houston, Federal Transit Administration data indicates that transit fares are at a level that would correspond to about $30 annually per household, leaving more than $450 for other expenses, principally airline fares.

United States Department of Labor, Bureau of Labor Statistics, http://www.bls.gov/cex/ .
Metropolitan data: http://www.bls.gov/cex/#data