A Smart Growth Induced Recession? SF Chronicle Oped by Wendell Cox
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Smart growth not so smart?
Wendell Cox
Monday, December 11, 2006
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To the extent that there's been anything about the economy still
worrying some journalists and media analysts in recent months, it has
been softness in the housing market. Downward price pressures in new
housing were noted in October as having contributed to
less-than-expected economic growth. On Nov. 20, the National
Association of Realtors issued its third-quarter report showing a 12.7
percent decline in existing home sales when compared to the same period
last year.
All of this, of course, will refuel the debate about the "housing
bubble." Is there one? If there is, will it burst? Paul Krugman, the
economist and columnist for the New York Times, has argued that there
is a bubble, but it is a geographical one. His thesis is that the
"zoned-zone" is artificially inflating housing costs -- and he appears
to be right.
A zoned-zone is an area of the nation that has embraced land-rationing
policies, usually under the misleading title of "smart growth." Those
policies include restrictions on suburban development, such as
Portland's (Oregon) urban growth boundary, and requirements for
excessively large lots that reduce the supply of land for residential
development.
There is little argument about this dynamic among economists --
rationing raises prices and it does so with a vengeance.
Take "smart growth" friendly 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 norm has been a median
multiple of 3.0 or less. In San Diego, the median multiple was 3.6 in
1995. In just 10 years, the total cost (including interest) of the
median-priced house in San Diego has risen more than $900,000. By
comparison, the total cost over a 30-year period of the median priced
house has risen only $55,000 in Atlanta, where there is more liberal
land-use regulation. And in just the first half of the decade, 100,000
domestic migrants -- people who move from one metropolitan area to
another -- have left the San Diego. Who can blame them?
In the San Francisco-San Jose area, the domestic migration loss over
the same period has been nearly 550,000. Total population growth in the
San Francisco-San Jose area since 2000 has been less than that of San
Joaquin County.
State-level home 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. During the past year,
existing house sales have fallen an average of 20 percent in the highly
regulated states. All 18 of these states experienced declines, even in
historically fast-growing states like Arizona, California, Florida,
Nevada, Oregon and Washington. By contrast, in the less-regulated
states, the annual loss was just 4 percent and one-third of these
states, including Georgia and Texas, experienced sales increases.
The escalation of housing prices relative to incomes in the highly
regulated markets is not the result of low interest rates. The same low
interest rates have not produced the same effect in markets with
lighter regulation, such as Dallas-Fort Worth, Houston or Kansas City.
Nor is the escalation a result of demand, as Atlanta, Dallas-Fort Worth
and Houston are the fastest growing large metropolitan areas in the
nation, yet the median house price has remained below the 3.0
benchmark.
The problem in highly regulated markets is that the supply of housing
is not allowed to keep up with demand. If housing affordability doesn't
improve, it is not inconceivable that it could at some point have
serious effects on the overall economy, perhaps even 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, Florida, Oregon or other smart-growth states will mean less
money for other needs. Fewer consumer products will be purchased. Fewer
jobs will be created.
But, 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 resulting from naive
urban planning policies. It seems likely these higher prices will lead
in the long run to lower rates of homeownership.
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 long run, "smart growth" is simply bad for
the economy and for 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 analyzes housing affordability in 100 markets in six
nations.