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How Urban Planners Caused the Housing Bubble
...Between 2000 and the bubble’s peak, inflation-
adjusted housing prices in California and
Florida more than doubled, and since the peak
they have fallen by 20 to 30 percent. In contrast,
housing prices in Georgia and Texas grew by
only about 20 to 25 percent, and they haven’t significantly
declined.

In other words, California and Florida housing
bubbled, but Georgia and Texas housing did
not. This is hardly because people don’t want to
live in Georgia and Texas: since 2000, Atlanta,
Dallas–Ft. Worth, and Houston have been the
nation’s fastest-growing urban areas, each growing
by more than 120,000 people per year.

This suggests that local factors, not national
policies, were a necessary condition for the housing
bubbles where they took place. The most
important factor that distinguishes states like
California and Florida from states like Georgia
and Texas is the amount of regulation imposed on
landowners and developers, and in particular a
regulatory system known as growth management....

...On a state level, the biggest housing bubbles
were in six states. Five of the states—Arizona,
California, Florida, Maryland, and Rhode
Island—have growth-management laws, while
the sixth state, Nevada (Figure 3), does not.41 In
all of these states, inflation-adjusted prices rose
by 80 to 125 percent after 2000 and dropped by
10 to 30 percent after their peak.42 Even though
several of these states are located at opposite
corners of the country, the price indices are very
similar....

...Housing prices did not bubble—meaning
that prices grew by less than 45 percent after
2000—in 29 states housing nearly 54 percent
of the nation. Other than Tennessee, none of
these states have statewide growth management,
but a few, such as Colorado and
Wisconsin, contain urban areas that have written
growth-management plans....

...There is a strong correlation between foreclosure
rates and growth-management-induced
housing bubbles. As of January 2009,
one out of every 173 homes in California was
in foreclosure. The rate in Arizona was 1 in
182; Florida was 1 in 214; Nevada was 1 in 76;
and Oregon was 1 in 357—all of which are
worse than Michigan (1 in 400), despite the
latter having the nation’s highest unemployment
rate. By comparison, barely 1 in 1,000
Texas homes was in foreclosure. The rate in
Georgia was 1 in 400, North Carolina was 1 in
1,700, and Kentucky was 1 in 2,800. The correlation
is not perfect, but the hardest-hit
states all have some form of growth-management
planning....

...When brand-new starter homes cost
$110,000, as they do in Houston, a 10 percent
down payment is not a formidable obstacle.
When starter homes cost closer to $400,000, as
they did in the San Francisco Bay Area in the
late-1990s, the obstacle is much greater. Valueto-
income ratios of 5 and above require 40- to
50-year payment periods and/or mortgages that
cost more than 33 percent of a family’s income.
The result was that mortgage companies
greatly reduced the criteria required to get
loans. They no longer required 10 percent
down payments. People could get loans for 40
and even 50 years. And borrowers could dedicate
well over half their incomes to their mortgages.
These changes allowed people to buy
homes that were five or six times their incomes,
but they also increased the risks of defaults
even among supposedly prime borrowers.
Such regulatory actions would not have
been necessary if growth management had not
made a substantial portion of American housing
unaffordable. While urban planners had
nothing to do with credit default swaps or other
derivatives, they are directly responsible for
unaffordable housing and indirectly responsible
for the government’s loosening of credit
standards in response to that unaffordability....