Everyone agrees that the recent financial crisisstarted with the deflation of the housing bubble.But what caused the bubble? Answering thisquestion is important both for identifying thebest short‐term policies and for fixing the creditcrisis, as well as for developing long‐term policiesaimed at preventing another crisis in the future.
Some people blame the Federal Reserve forkeeping interest rates low; some blame theCommunity Reinvestment Act for encouraginglenders to offer loans to marginal homebuyers;others blame Wall Street for failing to properlyassess the risks of subprime mortgages. But all ofthese explanations apply equally nationwide, whilea close look reveals that only some communitiessuffered from housing bubbles.
Between 2000 and the bubble’s peak, inflation‐adjusted housing prices in California andFlorida more than doubled, and since the peakthey have fallen by 20 to 30 percent. In contrast,housing prices in Georgia and Texas grew byonly about 20 to 25 percent, and they haven’t significantlydeclined.
In other words, California and Florida housingbubbled, but Georgia and Texas housing didnot. This is hardly because people don’t want tolive in Georgia and Texas: since 2000, Atlanta,Dallas–Ft. Worth, and Houston have been thenation’s fastest‐growing urban areas, each growingby more than 120,000 people per year.
This suggests that local factors, not nationalpolicies, were a necessary condition for the housingbubbles where they took place. The mostimportant factor that distinguishes states likeCalifornia and Florida from states like Georgiaand Texas is the amount of regulation imposed onlandowners and developers, and in particular aregulatory system known as growth management.
In short, restrictive growth management wasa necessary condition for the housing bubble.States that use some form of growth managementshould repeal laws that mandate or allowsuch planning, and other states and urban areasshould avoid passing such laws or implementingsuch plans; otherwise, the next housing bubblecould be even more devastating than this one.