No. 646
October 1, 2009
How Urban Planners Caused
the Housing Bubble
by Randal O'Toole
Executive Summary
In other words, California and Florida hous-
Everyone agrees that the recent financial crisis
ing bubbled, but Georgia and Texas housing did
started with the deflation of the housing bubble.
not. This is hardly because people don't want to
But what caused the bubble? Answering this
live in Georgia and Texas: since 2000, Atlanta,
question is important both for identifying the
DallasFt. Worth, and Houston have been the
best short-term policies and for fixing the credit
nation's fastest-growing urban areas, each grow-
crisis, as well as for developing long-term policies
ing by more than 120,000 people per year.
aimed at preventing another crisis in the future.
This suggests that local factors, not national
Some people blame the Federal Reserve for
policies, were a necessary condition for the hous-
keeping interest rates low; some blame the
ing bubbles where they took place. The most
Community Reinvestment Act for encouraging
important factor that distinguishes states like
lenders to offer loans to marginal homebuyers;
California and Florida from states like Georgia
others blame Wall Street for failing to properly
and Texas is the amount of regulation imposed on
assess the risks of subprime mortgages. But all of
landowners and developers, and in particular a
these explanations apply equally nationwide, while
regulatory system known as growth management.
a close look reveals that only some communities
In short, restrictive growth management was
suffered from housing bubbles.
a necessary condition for the housing bubble.
Between 2000 and the bubble's peak, infla-
States that use some form of growth manage-
tion-adjusted housing prices in California and
ment should repeal laws that mandate or allow
Florida more than doubled, and since the peak
such planning, and other states and urban areas
they have fallen by 20 to 30 percent. In contrast,
housing prices in Georgia and Texas grew by
should avoid passing such laws or implementing
only about 20 to 25 percent, and they haven't sig-
such plans; otherwise, the next housing bubble
nificantly declined.
could be even more devastating than this one.
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Randal O'Toole is a senior fellow with the Cato Institute and author of The Best-Laid Plans: How Government
Planning Harms Your Quality of Life, Your Pocketbook, and Your Future.