Commentary

Big Burdens from Growth Management

Median family incomes in Raleigh, N.C., almost are identical to those in Seattle, Wash., but a family purchasing a house in Seattle would have to pay more than twice as much as for a similar home in Raleigh. The additional cost almost entirely is due to a form of restrictive land-use regulation known as growth-management planning. As practiced in about a dozen states and a number of other urban regions, growth management puts the American dream of homeownership out of reach for many young and low-income families and was a major cause of the housing bubble that helped plunge the nation into recession.

The additional cost of housing in regions that use growth management can be called the planning tax. In many parts of the country, this tax averages hundreds of thousands of dollars per home. Growth management attempts to control either the rate of a city’s or region’s population growth or the location of that growth. Either way, it limits the ability of homebuilders to meet the demand for new housing. Thanks to growth management, someone buying a four-bedroom, two-and-one-haft bath home would have to spend more than $1,100,000 in San Jose, Calif., which has practiced growth management since 1970, and more than $550,000 in Seattle, which has practiced growth management since 1985. That same house would cost less than $250,000 in Raleigh and other cities that have no growth management, such as Houston (Tex.), Kansas City (Mo.), and Louisville (Ky.).

The most popular form of growth management today is called smart growth, which uses urban-growth boundaries and other tools to restrict development beyond the urban fringe and instead promote high-density development in the cities. Such restrictions drive up land prices and particularly increase the cost of the type of housing that most people prefer: single-family homes with a yard. When new home prices rise, the cost of existing homes follow as homesellers see that other homes are getting more expensive. This means that any policy that makes new homes more expensive—whether it is growth boundaries, impact fees, or a lengthy permitting process—will make all housing less affordable.

Although American cities have been planning and zoning since before 1920, growth management only began in the 1960s, when a few cities and states adopted policies aimed at restricting the rate of growth or controlling where growth would take place. Boulder, Colo., for instance, limits the number of building permits that can be issued each year and purchases land outside the city limits to prevent developers from building at the urban fringe. In 1961, Hawaii passed a statewide growth-management law requiring all cities to write such plans. Oregon followed in 1973. California passed a law in 1963 that gave cities control over the rural areas in each county; this unintentionally became the state’s growth-management act.

The most telling fact about the recent housing bubble is that it did not occur everywhere. As economist Paul Krugman notes, prices rose most in what he calls “the zoned zone,” regions where land-use restrictions “made it hard to build new houses.” In the rest of the country, prices rose not much faster than the rate of inflation. In fact, all but one of the states that saw rapid home price increases have state growth-management laws or local government restrictions on housing supply. The one exception, Nevada, is 90% owned by the Federal government. Prior to 2000, the state’s growth was enabled by Federal land sales but, when such sales slowed, homebuilders in Las Vegas and Reno literally ran out of private land. So Nevada’s growth management effectively resulted from Federal—rather than state or local—policies.

At the same time, all but one of the states that have passed growth-management laws saw housing prices increase rapidly after 2000. The one exception, Tennessee, passed its law in 1998, and the law’s implementation has yet to restrict new home construction.

Growth management is responsible for much of the recent subprime mortgage crisis. Because state and local restrictions on housing supplies sent prices soaring, families who ordinarily would have qualified for prime loans were compelled to borrow at subprime rates. When the housing bubble burst, housing prices dropped, leaving many families with mortgages greater than the value of their house. The resulting credit crisis has shaken the American economy to its core.

This was not the first housing bubble the U.S. has experienced, but it was the first to affect so many homes. A bubble took place in the 1970s in just the few states that then had growth-management laws. After more regions wrote growth-management plans, a second bubble in the 1980s affected several more states. The most recent bubble covered about 40% of the nation’s housing.

There is a strong correlation between the year states and regions write growth-management plans and the year, usually very shortly afterwards, when housing prices begin to rise sharply. Historically, U.S. housing prices have risen at about the rate of inflation but, when regions or cities write growth-management plans, prices suddenly accelerate and housing quickly becomes unaffordable.

Research by Harvard University economist Edward Glaeser has found that land-use restrictions not only increase housing prices, they makes those prices more volatile. “If an area has a $10,000 increase in housing prices during one period, relative to national and regional trends,” says Glaeser, “that area will lose $3,300 in housing value over the next five-year period.”

Note that prices never fall to their original levels. This means that home prices in places like California, which has seen three booms and busts since 1970, become more unaffordable with each new boom. Of course, prices are higher in California partly because California incomes are higher than in many other states. A more valid measure of housing affordability is median home price divided by median family income, known as the price-to-income ratio. If the price-to-income ratio is less than 3.0, a median family can pay off a six percent mortgage on a median home out of 30% of its income in less than 15 years. At a ratio of 5, the family would have to spend 36% of its income to pay off the loan in 30 years. Since prime loans generally limit mortgage payments to about 30% of income, high price-to-income ratios force more families to get subprime mortgages.

Not surprisingly, the states with the highest price-to-income ratios are those with growth-management laws, such as Hawaii and California. The average price-to-income ratio in California is more than 8 and, in some of the state’s urban areas, it is more than 10. By contrast, the price-to-income ratios in several fast-growing states with no growth-management laws, including North Carolina and Texas, are 2.5 or less.

Nationally, people who bought homes in 2006 were socked with more than $250,000,000,000 in planning taxes. About half of this was in California. Most of the rest was in nine states with mandatory growth-management laws—Arizona, Florida, Hawaii, Maryland, New Jersey, Oregon, Rhode Island, Vermont, and Washington—or in urban areas such as Denver (Colo.) and the Twin Cities (Minn.) that have adopted regional growth-management plans without state mandates. It is not clear that homebuyers are getting anything for this tax. Planners say the goal of growth management is to make cities more livable, but is there anything planners have done to make, say, San Jose (Calif.) more livable than Dallas (Tex.)? If the benefits are murky, it certainly is clear that planners have made San Jose, where the price-to-income ratio is more than 9, far less affordable than Dallas, where it only is slightly more than 2. No wonder that, since 1990, the Dallas urbanized area has grown by 40%, while Silicon Valley, the heart of the nation’s fastest-growing industries, has grown by 10%.

The planning taxes paid by buyers of new homes simply are absorbed by the higher costs of home construction. Other than the impact fees collected by local governments, they mostly are a dead-weight loss to society. The planning taxes paid by buyers of existing homes at least have the virtue of not being a total loss, as they become windfall profits for the homesellers. Yet, homeowners may find that the benefits they get from growth management partly are an illusion. While they can borrow against their increased equity, they run a greater risk of seeing prices decline and owing more than their homes are worth. The only way they truly can realize their gains from high housing prices is to sell and move to an area that has not adopted such strict land-use policies.

Homeowners in high-priced markets who want to move to a larger house in the same region face the same cost barriers as first-time homebuyers. The worst cases are when—perhaps due to job transfers after a housing bubble has burst—people have to sell their homes “short,” that is, for less than the amount remaining on their mortgages. Even if some homeowners profit nicely from growth management, this raises another issue: people who already own their own homes tend to have higher incomes and be wealthier than first-time homebuyers. So, the planning tax is a reverse-Robin Hood program: taking from the poor and giving to the rich.

A study by an Oregon economist, Randall Pozdena, found that, if all states had adopted his state’s smart-growth policies before 1990, more than 1,000,000 fatuities that had become since 1990 would not have been purchase their homes. At least one-quarter of those families would be minorities, leading Joseph Perkins, a black radio and newspaper commentator in the San Francisco Bay area, to observe, “Smart growth is the new Jim Crow.”

Nationally, more than 72% of white families own their own homes, but only 46% of black and Hispanic families are homeowners. High housing prices actually are driving black families out of the San Francisco Bay area. Intentionally or not, smart growth has become just one more impediment to families trying to escape poverty.

To make up for the loss in housing affordability, many areas that have passed growth-management plans have followed with rules requiring homebuilders to sell or rent a certain percentage of their homes to low- or moderate-income families at below-market prices. However, research by economists at San Jose State University has proven that this is self-defeating because homebuilders merely pass the costs onto other homebuyers, thus making the overall housing market even less affordable than before.

From 1940-60, U.S. homeownership rates grew from 44% to 62%. Since 1960, they have grown a mere seven percent. Many other countries, including Ireland, Italy, and Spain, enjoy much higher homeownership rates. Growth management is a major reason for the slowdown. Homeownership in California and Oregon peaked in 1960, while it has continued to grow in most states with no growth-management laws. Without growth management, overall U.S. rates would be well above 70%.

Why is homeownership so important? Studies show that owner-occupied homes create more stable neighborhoods, provide a better environment for raising children, and are a generator of wealth. Homeowners tend to take better care of their dwellings than renters. This means people who own their own homes usually live better than those who rent, and neighborhoods dominated by owner-occupied homes more likely are nicer than those dominated by renter-occupied homes. This especially is important for families with children. After adjusting for the income and education of their parents, children in families who own their own homes do better in school than those in families who rent—and the difference is greatest in low-income families.

Peruvian economist Hernando de Soto attributes the wealth of the U.S. in part to the ease with which people can buy their homes and then leverage the equity to start small businesses. “The single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur’s house,” de Soto stresses.

Some people think homeownership has a downside. A study in Britain found that homeownership actually is an impediment to finding a job—but this, too, is due to growth management. Britain has practiced growth management since 1947, and price-to-income ratios there are between 6 and 9. British neighborhoods with high homeownership rates, the study found, also had high unemployment rates. When housing costs are so high, people cannot afford the realtor fees to sell their homes, so they remain jobless rather than move to a place where they can find work.

So far, this is not widespread in the U.S., where states and regions that do not practice growth management act as relief valves for the ones that do. However, “places with rapid price increases over one five-year period are more likely to have income and employment declines over the next five-year period,” Glaeser notes.

Politically, the key to keeping housing affordable is to make sure that homebuilders have access to developable land outside of city limits. So long as this remains true, cities will welcome development within their boundaries to avoid losing property and sales tax revenues. If, however, cities can restrict development in rural areas, as they can under California’s 1963 law, then they will feel free to impose high impact fees, add red tape to the permitting process, and otherwise increase the cost of home construction within their boundaries

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Promoting compact cities

Smart growth explicitly seeks to give cities such control over rural development in order to promote more compact dries. Planners say this is needed to limit urban “sprawl,” a pejorative term for the way most Americans live: in single-family homes with large yards. Moreover, this is the way most people say they aspire to live. Surveys show that more than 80% of Americans would rather live in a single-family home with a yard than live closer to shops, jobs, and transit. Moreover, this is not an exclusive American preference, as European cities also have suburbanized, and their suburbs, indicates urban historian Peter Hall, are “almost indistinguishable” from those in the U.S.

It is easy for people who already own their own homes to imagine that all future residents of their cities or regions will be happy to live in condos or apartments, but this is why growth management leads to unaffordable housing. Most people are not happy living in high densities, so the price of single-family homes goes up.

Contrary to some claims, there is no evidence that sprawl causes obesity or other health problems. Although research shows that people who are obese are slightly more inclined to live in the suburbs than others, the suburbs are not responsible for their health problems—nor do we need to curb sprawl to protect the environment. As Robert Bruegmann, author of Sprawl: A Compact History, points out, “The environmental effects of sprawl are benign.”

Despite the impression you might get if you drive exclusively on Interstate freeways, urban growth does not threaten our farms, forests, or open spaces. The Census Bureau says that all U.S. urban areas occupy less than three percent of the nation’s land. You might think that, as the nation’s most populous state, California is overrun with sprawl. In fact, the state’s growth-management plans have jammed 95% of its residents into just 5.1% of the state’s land, making California urban areas the second most dense in the nation (trailing only New York City). If California residents had been allowed to “sprawl” at the same densities as other urban areas, they would occupy 8.5% of the state. Even the most ardent lovers of open space should find it hard to argue that tripling the state’s housing costs is a fair price to pay for saving a mere 3.4% of the state’s rural open space.

In most other states with growth-management laws, the amount of open space those laws protect is even more insignificant. Oregon’s 1973 law restrains most development to within urban-growth boundaries that cover just 1.25% of the state. Yet, if Oregon’s urban densities were the same as those in the rest of the nation, the additional sprawl would cover merely one-third of a percent more of the state’s land.

Of course, when we say a particular law has “protected” open space from development, we usually mean that the law has denied rural landowners the right to use their property as they see fit. Because landowners receive no compensation for this taking of their property rights, it should be viewed with even greater outrage than the Supreme Court’s recent decision allowing cities to take people’s land by eminent domain—with compensation—and give that land to private developers.

Zoning originally was created to protect residential neighborhoods from the pollution of industry or the traffic generated by shopping malls. However, it is one thing to say, “You can build a house next to my house but not a factory because the factory will make me and my neighbors sick.” It is quite another to say, “You can’t develop your land at all just because I like the idea that every rural acre stays rural forever.”

Russians say that Americans do not have any real problems, so they have to make them up. Urban sprawl is one of those made-up problems. Unfortunately for U.S. citizens, efforts to control sprawl have led to very real difficulties: unaffordable housing, higher land costs for business and industry, housing bubbles and busts, and increasing barriers to homeownership for low- and moderate-income families.

States that have passed growth-management laws should repeal them. States that have not passed such laws should avoid them—only then will we see homeownership rates rise and more individuals achieve the American dream of owning the home of their choice.