An Urban Planning Driven Recession?

An Urban Planning Driven Recession?
By Wendell Cox

Recent national economic news has focused on the softness in the housing market. Last month, downward price pressures in new housing were noted as having contributed to less than expected economic growth. This week, the National Association of Realtors issued its third quarter report showing a 12.7 percent decline in existing house sales compared to last year.

All of this, of course, will refuel the debate on the “housing bubble.” Is there one? If there is, will it burst? Columnist and economist Paul Krugman of The New York Times has it right --- there is a bubble, but it is geographical. The Krugman thesis is that the “zoned-zone” is the home of artificially inflated housing costs.

The zoned-zone is the areas of the nation that have embraced land-rationing policies, usually under the misleading title of “smart growth.” These policies include restrictions on suburban development, such as Portland’s urban growth boundary and requirements for excessively large lots, which reduces the supply of land for residential development. There is little argument in economics about this dynamic --- rationing raises prices.

Rationing raises prices with a vengeance. Take “smart growth” San Diego, where today the median house price is more than 10 times the median household income (a measure called the “median multiple”). The historic median multiple norm has been 3.0 or less. In San Diego, the median multiple was 3.6 times in 1995. Over just 10 years, the total cost ---including interest --- of the median priced house in San Diego has risen more than $900,000. It is no wonder that nearly 100,000 domestic migrants --- people who move from one metropolitan area to another --- have left San Diego in just the first half of the decade. Huge housing cost increases and outward domestic migration has generally occurred in the metropolitan areas that have adopted “smart growth” land rationing policies.

Meanwhile, in the metropolitan areas that have generally allowed the supply of land for development to keep up with the demand for housing, prices have remained fairly constant relative to incomes. Atlanta, Dallas-Fort Worth and Houston, which as three of the high-income world’s fastest growing large urban areas, have managed to maintain a median multiple of 3.0 or less. Midwestern metropolitan areas, long losers of residents to the two coasts, have generally resisted the temptation to ration land and are now gaining domestic migrants. This includes places like Kansas City, Indianapolis and Columbus.

The state level existing house sales tell a stark story. In the states with stronger smart growth or other land rationing policies, the fall off in existing house sales has been by far the greatest. Over the last year, existing house sales have fallen an average of 20 percent in the highly regulated states. All 18 highly regulated states experienced declines, such as historically fast growing California, Oregon, Washington, Florida, Nevada and Arizona. By contrast, in the less regulated states, the annual loss was just 4.0 percent, while one-third of these states experienced sales increases, such as Texas and Georgia.

It is too early to tell for sure, but the signs are worrying. The housing bubble may be bursting in those areas where it was inflated by urban planning policies that took no account of their economic consequences. The nation could be headed toward a “smart growth” induced recession.

The economic and social consequences are ominous. The hundreds of thousands of additional dollars that must be paid to own a home in California, Oregon, Florida or other smart growth states will mean less money for other needs. Fewer consumer products will be purchased. Fewer jobs will be created. However, worst of all, there will be fewer homeowners. Lower income and many middle-income households will find their way to the mainstream of economic life blocked by artificially high prices that are the result of naïve urban planning policies. The cost of this urban design extravagance will fall most significantly on minority households, whose income is generally lower and whose home ownership rate remains a full one-third below that of White-Non-Hispanics. In the longer run, none of this is good for the economy or the people on whose enterprise and wealth creation the economy relies.

Wendell Cox is a Senior Fellow with the Heartland Institute and co-author of the “Demographia International Housing Affordability Survey,” which analyses housing affordability in 100 markets in six nations.

Originally posted on On the Heartland 2006.11.21