While Fixing Housing, Fix the Regulations


Everyone knows that subprime mortgages lie at the root of our current financial crisis. Lenders originated too many of them, they were securitized amidst an increasingly complex credit market, and the bubble popped. The rest is painful history.

Most commentators have explained the source of the problem by pointing either to faulty federal housing policies – such as Fannie Mae’s affordable housing goals, the Fed’s easy money practices, and the Community Reinvestment Act – or to the imprudent zest for gain among investors who miscalculated risk and kept up the demand for bad mortgages. Both views are correct to varying degrees. These perceptions will shape the ongoing policy debate about needed reforms.

But as this debate advances, we should not lose sight of another consequential, yet mundane, factor in the crisis: the way that regulations raised house prices and created conditions ripe for subprime loans. Regulations may be one of the least debated contributors to the current crisis, and yet their effect on the middle class’s ability to buy homes may arguably have been a key reason why subprime loans flourished in the first place.

In the heated housing market before 2007, a median income family in the U.S. could only afford 40 percent of homes for sale across the country, compared to more than two-thirds of homes in 1997. Banks got creative and helped ordinary families buy overly expensive homes with risky mortgages. In a hot market, the risks seemed low. People never should have purchased homes they could not afford, but at the same time, rising prices were putting homeownership out of the reach of ordinary families such that unconventional loans seemed a convenient solution.

Why were housing prices rising so rapidly? Observers have traditionally held that land scarcity drives up prices by preventing supply from meeting demand. But the more likely answer is that regulations on housing overly constricted supply in many parts of the U.S. Through the groundbreaking work of Wendell Cox at Demographia and scholars such as Ed Glaeser at Harvard and Joe Gyourko at the University of Pennsylvania, we have come to see that rules and regulations drive up housing prices much more than we had originally thought. Blaming supply problems on land scarcity has been a convenient excuse for too long for those who see hyper-regulation of housing as a good thing.

Regulations often limit the number of housing units that can be built on a given lot, or they restrict the number of new home permits that can be issued in a given municipality, making supply a function of rules, not land scarcity. Restrictions to the property itself, such as environmental or design requirements, also raise the cost of construction (see Andres Duany’s thoughtful article on this issue here.).

Increased regulation on housing has been a quiet, but disquieting, trend. For example, Glaeser has shown that only 50 percent of communities in greater Boston had restrictions on subdivisions in 1975, compared to nearly 100 percent today. Housing prices in the Boston area would have been between 23 and 36 percent lower on the eve of the crisis were it not for burdensome restrictions on housing. While the Boston area’s regulatory impulse may be excessive, it is nonetheless emblematic of a national trend. A recent U.S. Department of Housing and Urban Development has found that more than 90 percent of the subdivisions in a recent national study now have excessive restrictions.

According to Harvard’s housing research center, the growing cost of regulations has edged smaller builders out of the construction market and increased the market share of the nation’s ten largest builders from 10 to 25 percent since the early 1990s. This doesn’t mean that the larger builders are happy about restrictions. Bob Toll, president of one of the nation’s largest builders, has said that his company quit building “starter homes” for young families years ago because the margins on small homes grew too narrow due to excessive regulations.

How big is the problem? Most observers have typically agreed that housing regulations account for 15 to 35 percent of a median-priced home in the U.S. These percentages come from a 1991 federal housing commission, and they are likely to have increased considerably since then. If we conservatively use them to calculate the scope of regulations by the time the housing crisis began in earnest in 2007, they suggest that regulations accounted for between $35,850 and $83,650 of a median-priced home. Using the National Association of Homebuilders’ methodology for determining the impact of price increases on home affordability, we can say that regulatory restrictions priced at least 7 million – and as many as 18 million – families out of their local housing markets in 2007. As we have learned, families priced out of their markets still purchased homes – usually with unconventional, risky mortgages.

Of course, not all housing regulations are bad, and zero regulation would introduce unnecessary risks to homeowners. But the increasing rate of regulation in the U.S. represents one of the nation’s larger assaults on the middle class that defenders of “working families” rarely talk about. Conservatives avoid the issue for federalism reasons, since any effective restraint on land-use planners will likely require the federal government’s involvement. And liberals hide from an honest debate about the effects of regulations for fear that it will derail their environmental agenda that relies up on regulations to limit the kind of housing most people want – such as single family homes.

Now that there is an over-supply of housing in the U.S., the problem of housing regulations may seem moot. But if we do nothing about this issue, it will trip us up again in the future. While I served in the George W. Bush White House between 2005 and 2007, economists inside and outside the administration offered mixed – and sometimes completely contradictory – assessments of what was happening in the housing sector. We continued to work on our proposed reforms of Fannie and Freddie and the Federal Housing Administration in an effort to reduce the “systemic risk” but approached it more as a theoretical matter than as a perceived, impending crisis. We even had a HUD-based initiative on reducing regulatory barriers that quietly lumbered along but which we never elevated as a major policy issue. We now know that what we were grossly underestimating the scope of a potential crisis. We should have made housing sector reform a front burner issue.

That is all behind us now, and we can see much more clearly what led to the crisis. We need to look at how rule-makers have for too long been making housing unnecessarily expensive for ordinary families. There is a limit to what the federal government can and should do about local housing regulations, but options exist for President Obama and Congress to consider.

First of all, just as federal agencies are legally required to analyze the environmental impact of new regulations, Congress could require federal agencies to demonstrate the impact of new federal regulations on the cost of home construction. Federal agencies already have the personnel required for the task, and such a requirement would cost the taxpayer nothing extra. Second, Congress should consider new incentives in existing federal law, from highway construction to affordable housing, that would prompt states and municipalities to reduce burdensome regulations in exchange for federal resources. Third, President Obama could issue an executive order requiring federal agencies to amend regulations that have a negative effect on home construction costs. He could also use the same order to establish a task force whose job would be to identify the chief price-increasing regulations in use around the country to inform the legislative process.

If we ignore the problem, as the housing market recovers, regulations will once again make housing more expensive than it should be. Unconventional mortgages will no longer be available due to the current crisis, and we will be back in a familiar debate about “affordable housing” in which the federal government is called upon to subsidize housing that others have made too expensive. In other words we return to the status quo in which we once again increase the role of a government that – under both Republican and Democratic administrations – has gotten ever bigger, more expensive and increasingly intrusive.

Ryan Streeter is Senior Fellow at the London-based Legatum Institute and former special assistant to President George W. Bush for domestic policy.

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The idea of blaming development regulations for the credit crisis is a creative one, but it flies in the face of the facts. If insufficient supply were the reason for the bubble, then why is it that the housing supply grew by record amounts throughout the boom? The number of single family housing units completed reached a new all-time high every year from 2002 to 2006. Housing prices soared even in areas where construction was vastly outpacing household growth (Las Vegas, Phoenix, Florida etc.). Even in places with higher regulations and slower household growth (like the Northeast), housing construction hit 20- and 30-year highs.

If anything, development regulations were too permissive. If there were greater barriers to housing development during the bubble, we would be seeing a lot fewer unsold and foreclosed homes and bankrupt developers today.

The word "regulation" is much too abstract

You are quite wrong to say that "housing supply grew by record amounts throughout the boom". Where I live, in San Francisco, population has been declining since the 50's, despite vast, virtually abandoned industrial quarters and perhaps 70% of the land zoned for mandatorily-exorbitant single family use. The region as a whole is growing at Detroitian rates (<2% population) The same pattern applies to every attractive nearby city -- there is a powerful social mythology that inflating prices by mandating scarcity is a public good. This is the most loathsome, anti-social belief since Jim Crow -- except that even they didn't exile their own children to other states. I don't know the figures for NY, northern NJ, inner ring CT, etc., but I would bet dollars to EIRs that there has not been any significant increase in density in any town that appeared on maps in 1950.

Where housing supply boomed was in what could be called the zoning hinterland of the traditional coastal cities. A little accounting identity: all those people in Vegas and Reno and Coral Gables are from somewhere, mostly not those places themselves. In the case of NV and FL, they are from places where it is illegal to build the kinds of houses they could afford. They could easily afford 1/250th of a minimun 10 acre lot in Marin or Ventura or Lafayette, CA, and wood and concrete and windows, and this is the problem that zoning is intended to remedy. The word "regulation" is much too abstract. It should be called a ban. Example use in a sentence: "Politically powerful and connected people prefer not to live near their social inferiors, so they ban forms of ownership that would be cheap enough for nurses or teachers or, God forfend, the people who wash their dishes and skivvies." The bizarre distortions of those peripheral local markets are directly linked to the places their new semi-voluntary residents are from -- southern Nevada is just an extreme San Bernardino County, with the exact same people, pushed there for the exact same reasons. It would be entirely possible, actually much easier than trying to prop up the current sumptuary system, for there to be naturally, market-clearing affordable housing everywhere in the United States. There would be mid-rises for 700 yards in every direction anywhere near a train station, forests of steel and pre-stressed concrete mid- to high-rises in places like East San Francisco, southern Marin county, 3rd St in LA, central San Diego, NJ and CT on their rail lines, etc. We are nowhere near out of the housing unaffordablility crisis -- our most important cities are 30 years behind in building, and are quickly becoming socially broken. Most of my peers live far from their parents -- in other states, other time zones. Their boomer parents will never get to know their grandchildren. Housing scarcity is a serious human hardship that would be tolerable if it reflected some real shortage -- wood or concrete or capital -- what grates is that it is merely the legal empowerment of boomer, pseudo-environmentalist, and political venality. Gyourko and Glaeser are as conclusive as social science can be on these points, by the way, though they don't dwell as much as they should on the misery, dislocation, and lonliness that is created by the urge you express to stop new families from forming near you.

Just to be clear...

Just to be clear, I’m in complete agreement we need far fewer regulatory hurdles to infill development in center cities and inner suburbs. Where I disagree is with the author’s suggestion that there is a national problem with excessive restrictions on single family subdivisions. (Perhaps I’m reading too much between the lines, but the author seems to imply that his idea of “regulatory barriers” are those meant to conserve land and prevent sprawl.)

The fact is there was a titantic amount of housing construction during the boom, from coast to coast. Since you brought up the Bay Area, I looked up the county housing unit estimates. (http://www.dof.ca.gov/research/demographic/reports/estimates/e-5_2001-06...) There were close to 200,000 new units added in the nine Bay Area counties from ’00 to ’08, which is something like an 8% increase in the housing stock in 8 years. (It’s interesting to note that 15,000 of those units were built in S.F., despite its developer-unfriendly reputation, and the city population has hit an all-time high.) I wouldn’t call that “mandated scarcity”.

I am more familiar with the Northeast (being an ex-Californian living in NY). New York City is at the tail end of its biggest residential construction boom since the early 1960s. The city housing stock is growing by something like 25-30,000 units per year and the population is also at an all-time high.

The point I’m making is that there was no sudden imbalance in supply and demand that caused housing prices to rise in the last decade. The housing price bubble was a result of a confluence of financial causes (the free availability of credit, record lows in interest rates, the speculative mentality of buyers, etc.), not a shortage of new homes.

Not so sudden

I also don't think the problem has been sudden -- this crisis has been over 30 years in the making. It is not some fringe libertarian idea that zoning is the underlying cause of exorbitant prices -- Gordon Brown and Brad deLong came to the same conclusion (without being much bothered by it), as well as Glaeser and Gyourko, whose work (cited by the author) is utterly conclusive on the issue. Yes, there was a debt bubble, but you need both the scarcity-based prices and the debt bubble to get into the mess we are in -- if there had been speculation in abundant, affordable housing, driving prices from 20% of income to 40%, that would be one thing. Instead we went from bad to worse, actually from awful to world-historically, decade-from-resolving worse.

I look at the same figures you cite and come to exact opposite conclusions. 2,000 units per year in a significant urban center during the greatest construction boom ever, in San Francisco, is pathetic. Just to stay above water, at the current US rate of population growth, SF's should be adding a bit over 6,600 people annually -- at our current average household size of 2.3 we would need closer to 2900 units annually just to break even. That is maybe not immediate scarcity, but we have not been breaking even for 30+ years now, and the same goes for the entire area. San Mateo and Marin, and urban Alameda, the adjacent counties, well served by transit and existing infrastructure, are even worse. Go to this site: http://www.censusscope.org/us/s6/chart_popl.html, look at any county you like. The bottom line is that CA population has increased by over 80% since the 70's, Marin, SF, and San Mateo less than 10%. Even solely on the basis of regional growth your "titanic" 8% supply growth is just treading water in a population that grew over 12% during the same period, which is why the people from this supposedly overhoused region continue to leave. There are dozens of missing cities and neighborhoods in the area, like the girls we can suppose would have been born in China and India but for sex selection. The metastatic counties of Solano, Contra Costa, which have doubled and tripled over the same period, are only "Bay Area" in the sense that you could maybe drive to parts of them in a couple of hours. Even so, the fact that people are building houses there is part of the diagnosis, it is proof of my point that the greatest natural harbor on Earth is surrounded exclusively by suburbs and remote floodplain McMansions are housing the exiled children of their inhabitants. They have grown fast, filling rapidly with people run out of the much nicer not-quite-nearby cities that are much more fit for human habitation. And all because of perfectly nice people, like you I'm sure, have had their preference for predictability and ever higher house prices enshrined into law. ("What do you mean shortage? 15,000 is a big number!")

I disagree on the data. The

I disagree on the data. The census population estimates show about 8% growth in the California statewide population from '00 to '08, so an 8% increase in housing units over the same period is certainly keeping up with population growth. In fact, since there are between 2 and 3 people in the average household, the state would have only needed around around 3% growth in the housing stock just to keep up with population growth.

It's also interesting to look again at San Francisco city/county. The census population estimate increased about 4% from '00 to '08, and the number of housing units also increased about 4%, so again there was more than ample supply added to the market.

It seems to me that if you look at the data, there is little support for the argument that zoning was a root cause of the housing bubble.

Someone is wrong on the internet

In case you are just trying to wind me up, pushing me with arguments that are just abstruse enough to not let me in on the joke, I will try not to be as earnest as in previous comments. I am at a loss to address your point that if housing supply grows by 4%, and population grows by 4%, that therefore housing growth has kept up with population growth. If housing supply had grown at 1%, as it did in some neighborhoods, or 0%, or 15%, as in others, population in those neighborhoods would have grown at 1%, 0%, and 15%, respectively. Therefore, according to your logic, the 0%, 1%, and 15% zones would have each kept up with population growth. I may finally be understanding planner math, and this would explain why you see what you do when you look at the data. If Marin housing stock has grown 10% over three decades while the rest of the state grew 80%, but the population of Marin has only grown 10% -- well this just proves that the housing growth has been adequate, since the area only grew 10%! There just happen to be a lot of Coloradans and Arizonans who happened to be born in California, they apparently didn't hear that the population was only growing at -- you guessed it! -- the rate that there were places available for them to live. To say that your reasoning is circular is an insult to circles.

The many faces of regulations

Regulatory zest comes in many forms. While this article criticizes zoning and related regulations, such criticism is worthy but debatable. I for one question whether density clusters add or decrease land values, and see arguements both sides.

This article misses a more direct regulatory impact on housing, and construction costs, in general: building codes. Up until perhaps this decade, the insurance industry was satisfied if building codes preserved the life and safety of occupants within. Sometime in the last decade (in Florida, hurricane Andrew was the driving factor), building codes were revised to include preservation of the structure itself. This has driven up costs dramatically.

Richard Reep
Poolside Studios
Winter Park, FL