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Zoning and the Subprime Mortgage Crisis:

Randal O'Toole has an interesting post rounding up evidence showing that zoning and other government land-use restrictions have played a major role in causing the subprime mortgage crisis. Zoning helped cause the crisis in two ways: by artificially inflating the price of real estate, and by increasing the likelihood of a "boom-bust" cycle in real estate prices.

As Harvard economist Edward Glaeser and UPenn economist Edward Gyourko showed in this 2002 paper, restrictive zoning greatly increases housing prices by artificially reducing the amount of land on which new housing can be built and also by reducing the amount of housing that can be built even in those areas where residential construction is permitted. Glaeser and Gyourko show that zoning restrictions account for a high percentage of the total cost of housing in some of the nation's most expensive real estate markets, such as California and the major East Coast cities. O'Toole's post cites more recent research that supports this conclusion (including his own). Higher housing prices helped cause the subprime mortgage crisis by forcing homebuyers to borrow more money in order to purchase homes of a given size and location. If prices had been lower, so too would homeowner indebtedness. Fewer buyers would be on the verge of default as a result of a market downturn; their debt burden would likely be much smaller relative to their income.

More recent research by Glaeser and his colleagues (summarized here) shows that restrictive zoning not only drives up housing prices, but also makes them more volatile. Presumably, this is because zoning makes it more difficult for property owners to make marginal changes in land use in response to market signals, thereby increasing the chance that adjustments will be put off until the housing market actually collapses. Obviously, the sudden nature of the recent market downturn exacerbated borrowers' difficulties in repaying their mortgages.

Abolishing restrictive zoning probably would not eliminate housing bubbles entirely. But it would reduce both their incidence and their severity. Even more important, it would make homeownership far more accessible for the poor and middle class. Rental housing would also probably be less expensive, since rents are in large part determined by land prices.

Unfortunately, it is unlikely that we will see such beneficial policy change anytime soon. Widespread economic illiteracy and political ignorance help ensure that most voters don't realize the connection between high housing costs and zoning. Thus, the general public is unlikely to punish politicians who promote restrictive zoning. Meanwhile, the big current landowners who dominate local government in many areas have a strong incentive to promote zoning policies that keep housing artificially scarce, thereby increasing the market value of their own holdings.

UPDATE: It is telling that none of the presidential candidates who have focused on the subprime crisis have even so much as mentioned restrictive zoning, much less called for its abolition. Their economic advisers are surely knowledgeable enough to understand the connection. But their political advisers know that voters' economic illiteracy will make it difficult for them grasp the point. On the other hand, coming out against zoning would alienate powerful interest groups that benefit from the status quo, such as wealthy landowners in major urban areas with restrictive zoning policies. Just another example of how what the voters don't know ends up hurting them.

George Weiss (mail):
im pretty sure people realize zoning is widely restrictive and stupid pretty much everywhere.

any homeowner who tries to build an addition to his house or even buy a house and is charged an administrative fee just to figure out what zone hes in (in my county its not even publicly available information)..knows that local zoning is pretty ridiculous.

in fact..people know that local government laws are generally the most zany and local government generally the most corrupt of the three levels of government.

the thing is...its hard to tell what politicians are doing what at the local level...and even the people who are less then ignorant spend their time following state and federal politics. there are so many local government that only local non top quality papers can generally carry stories featuring local stories...and nobody is going to read a story about the politics of zoning..even if they strongly think zoning is dumb.
2.19.2008 2:02am
George Weiss (mail):
come to think of it-maybe we should just abolish local governments and pay the taxes to the state to cover things like police garbage and schools...it would also simplify the law across the state so that say smoking regulations don't change dramatically when you walk 2 miles away..

business would benefit because they would have a more predictable business law

taxpayers would have less paperwork when they file taxes by only filing state (increased by the amount needed to cover local services) and federal taxes

lawyers and courts would not need to adjudicate the meaning of an entire third set of laws

what exactly are the benifits of local governments anyway?
what e
2.19.2008 2:07am
M_G:
It is an interesting article. I don't necessarily agree with the argument that zoning played a "major role in causing the subprime mortgage crisis."

I think where it did have an impact was that some (although dominant) types/implementations of zoning have been used to propagate single-family detached houses. However, this is a response to market forces. People want to live in a huge house, with a white picket fence, on a cul-de-sac. Zoning has in the past, and continues to reinforce the pursuit of the American Dream.

Things are changing though, urban planners do not, and cannot think of planning in the same way as it has been construed in the past. Also, be mindful that zoning is not the same as planning. Though courts (in most states) require that zoning be implemented according to a comprehensive plan. The two are different and can have different impacts. There are also many parts of zoning which have been created to provide for flexibility within what is, at face value, static and fixed.

Randall O'Toole is steadfast against the existence of zoning - which has proven economic benefits, and other benefits for society. Zoning is also a legitimate exercise of the police power. Perhaps, without zoning, the opposite effect would occur - a deflation of housing rules. If your are interested in this - do some research on the zoning rules of Houston. They don't really have any. It would be hard to imagine that they haven't seen a fair share of foreclosures recently.
2.19.2008 2:26am
Elliot (mail):
Ilya,
I don't think you are right. Zoning restrictions would serve as an artificial on time supply shock that would permanently raise the price of housing - just as a better school, a new stadium in the area, or a famous person moving into the neighborhood would. What drove the housing crash was not so much increase in underlying prices - but ease of access to credit that fueled those prices going up.
2.19.2008 2:38am
BGates:
Higher housing prices helped cause the subprime mortgage crisis by forcing homebuyers to borrow more money in order to purchase homes of a given size and location.

I was lucky - a local church offered me sanctuary when the developers and banks sent their hired thugs through my apartment complex, pointing guns at people and ordering them to take out mortgages at 30x their income.
2.19.2008 2:38am
Cornellian (mail):
It is telling that none of the presidential candidates who have focused on the subprime crisis have even so much as mentioned restrictive zoning, much less called for its abolition. Their economic advisers are surely knowledgeable enough to understand the connection.

Or maybe Ron Paul isn't the only candidate who appreciates that zoning is none of the federal government's business?
2.19.2008 3:01am
Nathan_M (mail):
From what you linked, I would question the claim that zoning makes housing prices more volatile. Hopefully someone can comment who knows more about statistics than me, but I see some potential problems with their analysis.

Most importantly, I think the definition of volatility they have used is flawed. They are looking at the volatility of housing prices measured in terms of dollars. One would expect volatility, thus defined, to be positively correlated with prices.

For example, suppose an average apartment in NYC is $1m and an average house in Reno is $200,000. Further suppose both increase in price by 25% a year for five years, and then stagnate for five years. In 10 years time, both properties will have increased in value by 200%, but the volatility of the NYC apartment will be $1,000,000 while the volatility of the Reno house will only be $200,000.

Thus, even though the housing markets in NYC and Reno were identical, aside from the fact that prices in NYC started higher, the volatility in NYC as measured by Glaeser would be five times as high as the volatility in Reno.

To make things worse, it's likely that prices are higher in cities where there aren't many building permits issued. There are two obvious reasons for this: firstly because a lack of permits will tend to drive prices up, and secondly, and most importantly, built up cities where there is not much undeveloped land will likely have higher prices and fewer new constructions.

Thus, I would suggest that even if there is absolutely no causal relationship between zoning regulations and housing prices one would expect to see the result Glaeser found. That is because higher housing prices are associated with more onerous zoning regulations and, ceteris paribus, higher prices equals higher volatility.

I'm not suggesting zoning regulations don't cause volatility, only that I don't think Glaeser's study necessarily supports that conclusion.
2.19.2008 3:07am
Ilya Somin:
Zoning restrictions would serve as an artificial on time supply shock that would permanently raise the price of housing - just as a better school, a new stadium in the area, or a famous person moving into the neighborhood would. What drove the housing crash was not so much increase in underlying prices - but ease of access to credit that fueled those prices going up.

Maybe. But even if zoning served as a "one-time shock," it still raised prices and therefore still raised the amount of money buyers need to borrow to make a given purchase. Moreover, zoning in many areas has been getting more restrictive over time, so it's not just a one-time event.
2.19.2008 4:13am
Public_Defender (mail):
Do you also support voiding the "agreements" of homeowners' associations? After the first purchase, these agreements are functionally almost identical to zoning. If anything, they are more restrictive and more resistant to change.

Further, abolishing longstanding zoning laws would frustrate the intent of many homeowners who bought their homes in part because of the zoning. The abolishment would also lower residential property values by permitting incompatible uses in what were previously zoned residential or light commercial areas.

At least in my part of the country, prospective homeowners seek out more restrictive areas to buy homes because they don't want to live next door to a factory, a Wal-Mart, or an auto repair garage. That demand drives up prices in the restricted areas. Removing the restrictions would decrease prices and frustrate the bargain everybody who has bought restricted residential property has made.
2.19.2008 6:14am
martinned (mail) (www):
L.S.,

Taking the train to Brussels in the past, every time I crossed the border I noticed the difference between here, the Netherlands, where zoning is extremely strict, and Belgium, where, as a practical matter if not a legal one, you can build wherever you please.
Although its effect on the housing market matters, it is clear that in a country with a population density almost 15 times higher than the US (CIA world factbook numbers add up to 489 inhabitants per sq. km for NL and 32,9 for the US), what people do with their land affects the owners of the land near them. In that sense, it is a classic externality, and absent any Coasian bargains, it seems like an appropriate response for the government to restrict whan land owners can do with their property.
2.19.2008 6:27am
Brett Bellmore:
It's not just a matter of driving up the cost of comparable houses. Zoning and building codes also drive up the sort of housing people must build, by prohibiting "starter" homes and a number of different, highly affordable (But not in any sense unsafe!) building techniques.

If I'd built the house I wanted, I'd have been mortgage free, instead the smallest home I was legally permitted to build was nearly 1800 square feet, and a mortgage was unavoidable. This sort of thing isn't for the benefit of the homeowner, but instead is intended, I suspect, to drive up property tax revenues by forcing people to build expensive homes or go elsewhere.
2.19.2008 7:13am
Public_Defender (mail):
New developments can often impose restrictive covenants to meet the the expectations that virtually all residential property buyers want. But that tool is unavailable in established neighborhoods. If you abolished zoning, established neighborhoods could not compete with new developments for buyers, and property values would plummet.

I'll take some extra volatility in my home's value (and some restrictions on what I can do with my property) in exchange for avoiding a substantial and sustained drop in value (and in exchange for living in a truly residential area) any day.
2.19.2008 7:14am
Traveler:
It's the population growth-fed demand, pure and simple and there's plenty of evidence that zoning rules have been changed rapidly in recent years specifically increase supply.

Any casual observer of US real estate will notice that over the past decade there has been significant relaxation in residential zoning. In order for communities that have already been "fully built" to sustain the population growth of the last years, traditionally non-residential areas have been opened up and residential densities have increased tremendously. In many communities, agricultural land long-promised to be in reserve "for eternity" has been converted to residential, and the traditional preference for US families to live in detached single-story houses with large yards, front and back, has given way to row houses or houses detached by little more than a walkway, with multiple stories built over a garage of increasing capacity. One yard will now suffice, and even that is often too much for homeowners who are too little at home due to their long commutes, as they settle in newly-zoned suburbs further and further away from their workplaces.
2.19.2008 7:23am
Temp Guest (mail):
Analyzing the economic damage imposed by land use restrictions is neither new nor rocket science nor extremist economic theory. For ages Thomas Sowell has been writing about how government restrictions on land use raise housing prices. The effects are strongest in precisely those areas where there is the greatest need for moderately priced housing, e.g., the San Francisco Bay area, greater Los Angeles, Greater Boston, etc.
2.19.2008 8:16am
Mr. Liberal:

It is telling that none of the presidential candidates who have focused on the subprime crisis have even so much as mentioned restrictive zoning, much less called for its abolition.


First, under what theory does the Federal government have the power to force states to abolish restrictive zoning? So much for federalism.

Second, while I agree that zoning has tended to decrease the supply of housing, thus increasing the prices, aren't their solutions to this problem short of abolishment? Is it really true that we have to allow strip clubs ten feet away from our elementary schools in order increase the supply of housing? I don't think so. Maybe you should go back to the drawing board and think of a proposal that is less extreme than abolishing zoning. =)
2.19.2008 8:33am
Nick J (mail):
Abolish zoning? Not even the economists who are the most ardent opponents of restrictive land use regulations (Ed Glaeser, Joseph Gyourko, William Fischel, Bob Ellickson, Stephen Malpezzi, Lee Anne Fennell, etc.) advocate that. Bernie Seigan argued for abolishing zoning in the 1970s, but his own study of Houston's no-zoning regime showed very little measurable difference without zoning. The only arguably serious person who still advocates abolishing zoning is Robert Nelson (whose most recent book, Private Neighborhoods, is on this subject), and even he admits that it is a radical solution that would probably cause as many problems as it solves.

The problem isn't the institution of zoning, it's restrictive zoning regulations. Used properly, zoning regulations can increase efficiency (e.g., separating the cement factories from the residential housing). It's when zoning regulations are used to capture monopoly rents that they become inefficient.

Does the zoning power need to be curtailed? Absolutely. Does zoning need to be abolished? Certainly not. Abolishing zoning would create a sort of libertarian utopia, but it's simply not a respectable proposal. I'm as anti-zoning as anyone, but as Ed Glaeser and Dartmouth economist William Fischel (by far the two leading authorities in this area) both say, abolishing zoning is throwing the baby out with the bathwater.
2.19.2008 8:45am
Waldensian (mail):

But their political advisers know that voters' economic illiteracy will make it difficult for them grasp the point.

I don't follow this at all. Zoning laws aren't hard to grasp. Most people I know understand, and generally detest, zoning restrictions. Rationalizing or eliminating zoning actually could make a pretty decent populist political issue.

Is it just slightly possible that voters might be.... wait for it.... gird your loins.... SUFFICIENTLY KNOWLEDGEABLE about this one issue?!?

I realize the Earth would explode at the speed of light if voters weren't ignorant about every last thing, but we must have the courage to follow the truth, wherever it may lead.
2.19.2008 9:10am
J. F. Thomas (mail):
Gee, this country has used zoning to control land use for the better part of a century. This housing bubble with its unprecedented rise in value of house prices (which traditionally track just at or slightly above the rate of inflation) occurred over the last five years when subprime mortgages, home equity loans and highly speculative derivative debt instruments to fund them were introduced and everyone from the Fed Chairman to the president were encouraging people to turn their homes into revolving credit accounts.

Yet Ilya calls those of us who think zoning regulations (and some of the areas that had the most ridiculous housing inflation, e.g. Las Vegas, Phoenix, and Florida have very lax zoning) had very little to do with the current crisis in the real estate market "politically ignorant" and "economically illiterate".

Is it any wonder that Libertarians can only survive in the Ivory towers of state funded universities.
2.19.2008 9:26am
Aultimer:

Waldensian:

Zoning laws aren't hard to grasp. Most people I know understand, and generally detest, zoning restrictions. Rationalizing or eliminating zoning actually could make a pretty decent populist political issue.


Unless you mean that the people you know detest zoning other than restrictions on their immediate neighbors, you have an odd set of acquaintances. I like the character of my neighborhood, and rely on zoning to keep the house on the corner from becoming a 24-hour fast food joint or trailer park. Yes, I'm a bit sympathetic to the family that would like to convert the garage into a dental practice out on the main road, but not much.


IS: Higher housing prices helped cause the subprime mortgage crisis by forcing homebuyers to borrow more money in order to purchase homes of a given size and location.

There are market substitutes that the financially conservative could have acquired. The lack of fiscal sense is the cause (or predatory lending, if you prefer to make victims out of the greedy), not the choice of home.
2.19.2008 9:26am
shawn-non-anonymous:
Public Defender: "New developments can often impose restrictive covenants to meet the the expectations that virtually all residential property buyers want. But that tool is unavailable in established neighborhoods."

This is not the case in many areas of the US. Zoning overlays can achieve this for established neighborhoods. The most common type of these are referred to as Local Historic Districts.

My neighborhood in Tampa has a non-Historic District overlay currently and the residents are considering adding a Historic District overlay on top of it. (1920s neighborhood.) The current overlay adds additional restrictions to fencing (no chain link), and some basic new-construction limits to make sure the new homes are essentially compatible with existing construction without restricting materials or style.
2.19.2008 9:27am
J. F. Thomas (mail):
Zoning and building codes also drive up the sort of housing people must build, by prohibiting "starter" homes and a number of different, highly affordable (But not in any sense unsafe!) building techniques.

So if there are no building codes, who is to decide what is safe or unsafe? Just because you put an exclamation point after "but not in any sense unsafe" doesn't make it so.
2.19.2008 9:29am
FantasiaWHT:
I would love to see research on a link between homeowner's associations and the housing bust. Those things absolutely drive me nuts, and I refuse to buy a house that requires one. Sadly, that greatly limits my choices for buying my next home. Anybody know if there are any groups out there specifically developing new land without covenants?
2.19.2008 9:32am
AD:
I'm not sure the theory fits the facts--places such as Miami, Orlando, and Las Vegas have seen more volatile price movements, mainly associated with condo construction which was hardly limited by significant zoning restrictions; these problems stem from unrealistic oversupply in response to a spike in demand, not from artificial scarcity. Sounds like the market is "working" to me and any effect from zoning regulation is marginal at best.
2.19.2008 9:33am
ReaderY:
It's been claimed that the current crisis is due to an oversupply which had been masked due to speculative development and purchasing as a result of artificially cheap credit, unduly lax credit requirements, and general overoptimism.

How exactly did government restrictions reducing the amount of available land contribute to the oversupply?
2.19.2008 9:52am
ReaderY:
It's been argued that extreme boom-bust cycles reflect a lack of regulation, not over-regulation.
2.19.2008 9:53am
Mr. Liberal:

I would love to see research on a link between homeowner's associations and the housing bust.


I think homeowners associations are an example of market failure. The people who seem to benefit are busybodies who want to stick their noses into everyone else's business, while those paying the cost are those who want to go about their daily life with a minimum of hassle.

But, homeowners associations are often and usually the last thing on a home buyers mind when they buy a house.

I guess this is another example of ignorance having negative effects.

But guess what, this is ignorance in the private sector. So much for the libertarian fantasy that ignorance does not have deleterious effects in the private sector, since people have more of an incentive to correct incorrect thinking, at least in this context.
2.19.2008 9:53am
shawn-non-anonymous:
Having lived next to pig farm while stationed in Suwon S. Korea, I can tell you that I do not resent zoning restrictions at all. Imagine buying a home only to have a small pig farm move in next door a few years later. The value of your house just turned into porcine excrement. Homeowners will pay a premium for some insurance of stable home values.

Further, I've lived in Las Vegas during the beginning of its boom and growth phase, and now in Tampa during a more moderate growth phase. Vegas couldn't build infrastructure fast enough to support the large developments. New freeway capacity was obsolete before the first car drove on it. As the population continued to move outward into cheaper housing, the cost to the average citizen to support the infrastructure increased. In Tampa, the freeways opened up cheaper housing and drained the inner city of its tax base. The county swelled with tax revenue as a result and neighborhoods were built to the borders. Now the surrounding rural counties are expanding with Tampa suburbs but the cost of supporting the wide freeways to keep commute times tolerable are being paid in large part by the county that does not get any of the tax revenue. Unrestricted construction is not the ideal situation, especially where taxes pay for infrastructure.
2.19.2008 9:54am
KenB (mail):
Waldensian says:
Most people I know understand, and generally detest, zoning restrictions
I fear most people understand little and detest zoning of their own property, wanting it only for that of everyone else.
2.19.2008 9:56am
shawn-non-anonymous:
FantasiaWHT:
"[Homeowner's associations] absolutely drive me nuts, and I refuse to buy a house that requires one. Sadly, that greatly limits my choices for buying my next home. Anybody know if there are any groups out there specifically developing new land without covenants? "

Most of the demand for this sort of housing is satisfied in either the old inner-city neighborhoods or rural areas where individual lots can be purchased. If the market is any indicator, demand for this sort of "risky" housing is low. I would imagine that if housing was cheap, people wouldn't care so much.
2.19.2008 10:03am
Javert:

So if there are no building codes, who is to decide what is safe or unsafe?

You, your builder, lender, and insurance company. Or don't you trust your own judgment?

Having lived next to pig farm while stationed in Suwon S. Korea, I can tell you that I do not resent zoning restrictions at all. Imagine buying a home only to have a small pig farm move in next door a few years later. The value of your house just turned into porcine excrement. Homeowners will pay a premium for some insurance of stable home values.

Then buy the adjoining property or move into a neighborhood that has voluntary, non-coerced, contractual restrictions on land use, i.e., restrictive covenants. Otherwise, what gives you the right to abridge the property rights of others?

Ilya, don't forget the insidious affect of "inclusionary zoning" -- where the government forces builders to include, e.g., low-income housing, as a condition of constructing a residential development. This raises the price of the uncontrolled units to make up for the artifically low prices of the controlled units.
2.19.2008 10:17am
J. F. Thomas (mail):
Or don't you trust your own judgment?

Actually no. I am not an electrician, plumber, carpenter, mason or schooled in any of the other myriad skills and trades that go into building a house. I am however a civil engineer and know enough to know how much I don't know about residential construction. I also live in a hurricane zone and I am thankful that the American Society of Civil Engineers has developed standard building codes for hurricane zones (also for earthquake zones). Louisiana, after Katrina, has finally adopted these building codes state wide.

It may be nice to imagine a world where you can build your own house with any materials you desire in whatever haphazard manner you wish but your construction methods could endanger others. For example, tile roofs are no longer permitted in the hurricane zones in Louisiana because in a hurricane the tiles become lethal and damaging projectiles. From an individual home standpoint, tile roofs are just fine, since a storm will not dislodge all the tiles on your roof and those that do come loose are unlikely to damage your house, just those of your neighbors. Likewise with gravel covered tar roofs on commercial buildings.
2.19.2008 10:39am
Elliot (mail):


Maybe. But even if zoning served as a "one-time shock," it still raised prices and therefore still raised the amount of money buyers need to borrow to make a given purchase. Moreover, zoning in many areas has been getting more restrictive over time, so it's not just a one-time event.


The difference is that zoning laws change the asset's underlying long-term value. Yes, they might change by corrupt socialistic ways. But they still change it. These are demand side things.

On the other hand, what drove the housing bubble was not long-term changes in underlying value, but how much the international supply of money was willing to fund it in the quest to find the best rate of return.

Further, looking at it historically, I don't think your zoning example is really all the instructive. My understanding is that zoning laws have been around for quite a while. They have not changed drastically in the last 35 years in their application - whereas this bubble, if you look at the historical graphs available online, is a very recent development.
2.19.2008 10:40am
J. F. Thomas (mail):
Then buy the adjoining property or move into a neighborhood that has voluntary, non-coerced, contractual restrictions on land use

You have obviously never been anywhere near a pig farm or cattle feedlot. It's a nice fantasy world you live in where everyone is rich enough to have exactly the neighbors and wherewithall to independently their environment and choose their surroundings.
2.19.2008 10:43am
Mr. Liberal:

Further, looking at it historically, I don't think your zoning example is really all the instructive. My understanding is that zoning laws have been around for quite a while. They have not changed drastically in the last 35 years in their application - whereas this bubble, if you look at the historical graphs available online, is a very recent development.


These are excellent points. And I think point to a sort of selective bias on Somin's part as he tries to exploit current events to advance his own extreme ideology, in this case, the total and complete abolition of even the most reasonable and benign zoning regulations.

But, just because the claim that zoning "caused" the housing bubble is obviously false, that does not mean that there isn't a real problem caused by zoning regulations in cities such as San Francisco, NYC, etc. where such regulations result in a shortage of housing and thus lead to raised prices making living in the city too expensive for many.

I think where Somin goes wrong is not in critiquing zoning regulations for causing a shortage of housing, I think he is right on in that regard. It is his exploitation of that fact to suggest that it is a primary cause of the housing bubble that is somewhat problematic. (Although, to be fair, one does see a causal link between zoning and the bubble. The bubble has been more severe on the coasts, where zoning restrictions have restricted new housing development. Somin is not crazy to suggest a link between the two.) Even more problematic is Somin's suggestion that we should go with a radical and politically infeasible solution (i.e. abolishing zoning regulations) instead of a moderate and political possible solution (i.e. reforming zoning regulations).
2.19.2008 11:15am
Mr. Liberal:

You have obviously never been anywhere near a pig farm or cattle feedlot. It's a nice fantasy world you live in where everyone is rich enough to have exactly the neighbors and wherewithall to independently their environment and choose their surroundings.


I think you are being too kind.

It is very unlikely that this individual, who seems to be a particularistic and extreme version of property rights on a pedestal above all other interests, thinks that everyone has the financial resources to control their own environment, making it either pleasant or safe.

I think his response to this would be: If you do not have enough money to buy adjacent land or work yourself into an exclusive neighborhood, too bad. All other interests should give way to property interests.

Any concern about the neighborhood that is not backed up by money is invalid.
2.19.2008 11:20am
Buckland (mail):

Having lived next to pig farm while stationed in Suwon S. Korea, I can tell you that I do not resent zoning restrictions at all. Imagine buying a home only to have a small pig farm move in next door a few years later. The value of your house just turned into porcine excrement. Homeowners will pay a premium for some insurance of stable home values.


Such a battle was fought in a small downstate Illinois town I once lived in. A local resident ran a trout fly business out of his house. His lot was about 10 acres, zoned for residential/agricultural use next to a residential neighborhood . Custom trout flies brought 3-5 customers a day to his house. A busybody complained and the local constabulary put him out of business. In revenge he started raising 20 or so hogs on his land, a use that couldn't be stopped.

Then the real hard feelings started....
2.19.2008 11:25am
PLR:
At 9:26:
"Is it any wonder that Libertarians can only survive in the Ivory towers of state funded universities.

That's not quite fair. They can also survive in think tanks funded by industrial concerns looking to feather their own nests with phony concern about homeowners and others in higher uses.
2.19.2008 11:29am
Cato (mail):
On the other hand, coming out against zoning would alienate powerful interest groups that benefit from the status quo, such as wealthy landowners in major urban areas with restrictive zoning policies.

Query: Would the removal of zoning restrictions and the consequent devaluation in certain owners' valuation constitute a taking by governemental action?
2.19.2008 11:32am
Mr. Liberal:

Query: Would the removal of zoning restrictions and the consequent devaluation in certain owners' valuation constitute a taking by governemental action?


This is an amusing point.
2.19.2008 11:34am
statfan (mail) (www):
Higher housing prices helped cause the subprime mortgage crisis by forcing homebuyers to borrow more money in order to purchase homes of a given size and location. If prices had been lower, so too would homeowner indebtedness.

Wouldn't people just have bought bigger houses in more expensive areas?
2.19.2008 11:34am
SteveA (mail):
Consider: a small city which changed from farmland to suburbs in the 1950's and is now pretty well built-out. It has good schools, which are funded by local property taxes. In fact, the schools are noticeably better than in surrounding cities, so the house prices are higher, so the taxes are higher, so the schools are better -- a virtuous circle, at least for those who appreciate good schools. And those people "vote with their feet" to come to this city, despite the higher prices and higher taxes.

One can calculate (based on tax rates, demographics, and budget data) what the price of a new house must be so that the new taxes on that house will pay the additional cost to school the new kids who move into that house (and build their new classrooms, etc.). If a new house is priced lower than that, all the other school kids in the district will be hurt. Marginally hurt, if it's just one house, but more so if new houses are an ongoing trend. Or conversions of a block of single-family houses into a block of high-density condos, which is what's actually happening. IIRC, this is the sort of thing that economists call a "negative externality."

I live in a city like this, and these calculations have been discussed routinely in the last few years at meetings of the city council and school board, when zoning changes were being considered. It's no secret. Even the residents whose kids are grown recognize that their house prices will fall if the schools get worse (another negative externality). So there's a lot of local support for strict zoning.

In a perfect libertarian world, there would be no link between local taxes and local schools. But one permanent imperfection creates another (zoning) as a rational response.
2.19.2008 11:35am
trotsky (mail):
First, O'Toole doesn't even use the word "zoning."

Second, in Northern California, Marin County has the reputation of the land-use restrictions -- and, no surprise, it also has the highest real estate prices.

Last I heard, even as home prices were flat or falling elsewhere, Marin County's have actually risen a bit the past two years.

The reduction in supply is real and obvious, but on the other hand people really want to live in that nice place precisely because of the building rules.

On the flip side, places in the San Joaquin Valley with the lowest prices and the least restrictive planning (though we're still in California) have seen the most extreme swings in price -- yes, in part because of overbuilding.

As for the restrictive growth policies in Los Angeles, yeesh, you know, 20 million people managed to find homes in Southern California in the past few decades. How much more housing are we looking for?
2.19.2008 11:38am
Huh. . .:
How does zoning "artificially reduc[e] the amount of land on which new housing can be built?" It is no more artificial than municipal boundaries (defining limits to city services), the impact of state and local road construction decisions, or any number of other factors in land use incentives.

More importantly, how does zoning make land prices volatile or artificially overpriced unless the zoning regulations themselves are volatile? Restrictive zoning may restrict the supply of land, but if the restrictions remain in place, the supply is ~stable~ -- stably limited, perhaps, but that is not the same as a "bubble."

Perhaps there is more to the argument, but taken on its face there isn't much to link zoning restrictions to price instability or bubbles.
2.19.2008 11:38am
Javert:

I am thankful that the American Society of Civil Engineers has developed standard building codes for hurricane zones (also for earthquake zones).

You're equivocating between a voluntary association (ASCE) and government-initiated force (national and local building codes).

You have obviously never been anywhere near a pig farm or cattle feedlot. It's a nice fantasy world you live in where everyone is rich enough to have exactly the neighbors and wherewithall to independently their environment and choose their surroundings.

Nice ad hominem. Try again when you can muster an actual argument.
2.19.2008 11:47am
Mike S.:
Actually, there are a great many people who understand that zoning raises housing prices and like that, rationally so. They are homeowners. Many of whom paid a price that was higher than it would have been had the neighbors been free to open a paper mill next door. They would stand to lose quite a bit if the zoning were relaxed.
2.19.2008 11:52am
Huh. . .:
That's exactly my point. Zoning hasn't been relaxed, therefore it is hard to understand how it contributed to declining housing prices or even volatility of prices. If we did relax or eliminate them. . . well, that combined with current problems would devastate the housing market.

And the pig farm point is a strong one, fellow reader, if phrased somewhat personally. There is a lot of work studying zoning restrictions, and one of the strongest points is that in practice the market is unable to prevent the establishment of incompatible land uses. That includes pig farms and paper mills, which reek -- there is an instance (in my hometown) of a pig farm locating immediately next to a golf community; years of litigation and declining home prices because the zoning codes didn't apply there.

Houston is the standard example of zoning-free jurisdictions, and the results there are generally acknowledged to be something less than encouraging.
2.19.2008 11:58am
Avatar (mail):
There's a wide continuum between the sort of strict land-use regime that prohibits you from building an addition and having a pig farm move in next door, you guys.

Take a look at Houston. Very little zoning law - as close to a "free fire" zoning regime as you're going to find in a large city. Housing costs here are practically flat, basically just keeping pace with inflation, and you can get a brand-new 5-bedroom house for less than $130k. Why? Because it's cheap to buy up an undeveloped area and drop in a new housing development - you don't have to spend years on the paperwork. New housing goes in to meet rising demand, instead of that rising demand pushing up the value of existing housing stock.

Yet you don't have the problem of Wal-Mart moving in next door, because virtually all residential development is in sub-divisions with homeowner's associations.

Sure, there are other factors affecting home pricing (notably the weather, which is slightly less salubrious than Hell itself.) It also helps that Houston is very large and definitely not at risk of being enveloped by smaller communities who can stymie metropolitan growth for the benefit of their own tax bases. But the city's growing like a weed, so people are definitely interested in moving here despite the heat...

You can practically sell a house in San Francisco, buy a bigger one in Houston, and -retire on the difference-. That implies that something in Houston is being done right... ;p
2.19.2008 12:13pm
JRip (mail):
Right &Wrong

Yes - Zoning that restricts availability of land for a particular purpose tends to raise the price; scarcity, supply &demand economics.

It can also be said that it is sad that the USA has the coastline that it does. If the USA had severely irregular coastline there would be so much more "ocean frontage" for those who want a beach front house.

It is sad that the north has winter because the warm, sunny places are in the south - more scarcity. But high summer humidity makes some of those warm locales less desirable compared to southern California where the weather is sunny, warm but not too hot, not too humid, and not too dry (desert). perfect. So I guess climate also contributes to housing bubbles?

Of course there is an undertone of Zoning is bad; governments are bad (or at least are too intrusive sometimes).

But you are wrong if you would sweep over all zoning and through it out. Come to the countryside where the neighborhoods are uncrowded, zoning is lax or non-existent (which is a Local government thing) and see how you like it when a modern hog farm opens near you... because it can.

Then the locals become believers in zoning.
2.19.2008 12:15pm
Thales (mail) (www):
"Otherwise, what gives you the right to abridge the property rights of others?"

This response to the pig farm hypothetical begs the question. What gives the pig farmer the right to emit noxious smells onto the property of the landowner (and first occupant of the neighboring space, who was quietly enjoying it before the farmer showed up). The law of nuisance, a subset of property and tort law, evolved to answer such questions. It's not at all clear ab initio that the pig farmer should win this land use conflict, or that it in fact should not buy the other landowner out or otherwise compensate for the harms it is inflicting. The property rights in question here are defined by the contours of the law, and it's a facile answer to respond as the snarky questioner did.

Ilya, I'm curious, does Cato address the effects of private land use controls v. public zoning, or situations where both overlap? It seems to me that private controls such as neighborhood-wide covenants and neighborhood associations attached to the rights in real estate can also be slow to respond to "market" signals and produce suboptimal price effects, despite the perhaps initial desirability of such controls. Why is is necessarily easier to unlock parcels from suboptimal private controls (which may require getting consent from many parties who have divergent interests), than to have a zoning board with a light and nimble touch? The example of zoning-free Houston another commenter mentioned is interesting. Houston is widely reported to have the worst air quality of any major American city, including Los Angeles. It is not clear to me that this "market" solution to the conflicting uses of land is optimal, and many homeowners of course deliberately buy land knowing that it is zoned in their favor, just as they buy in other situations knowing it is subject to private controls. I think it is Cato's market fundamentalism that suggests that the latter case is always preferable to the former.
2.19.2008 12:15pm
Richard S (mail):
But there have been real estate boom and bust cycles in North America since English settlement began in the seventeenth century. Zoning is neither a necessary nor sufficient cause.
2.19.2008 12:58pm
trotsky (mail):
O'Toole's linked WaPo piece was ... odd. A luxury-home builder says buyers can't afford houses, so we need a new mortgage product that lowers the payments. He didn't actually suggest how this something-for-nothing transaction might work.
2.19.2008 1:07pm
trotsky (mail):
But he did say that home prices simply cannot fall enough to match demand with wrecking the economy. Well, the economy of luxury-home builders, no doubt.
2.19.2008 1:08pm
Cato (mail):
I have long considered the effects of deregulation on prices. For example, suppose taxi licenses in NY were found to be an unreasonable restraint on foreigners beginning an entry-level occupation, as certain conservative commentators have suggested. What happens to those who have bought licenses for $300,000 a piece?

It seems to me regulations should be made with a light touch, because undoing them undoes an established system on which many rely reasonably.
2.19.2008 1:10pm
WT (mail) (www):
I'm a land use and zoning lawyer, and I get involved in litigation over local zoning decisions on a very consistent basis. I live in central Virginia, and we litigate with local governments (or for them) all the time over the application of ordinance to site plans, subdivisions, special use permits, rezonings, and the like. The problem is not zoning per se, but "mission creep". Local governing bodies, responding to all manner of political pressure from constituents (who want their properties to continue to increase in value), and enact increasingly restrictive zoning ordinances to control the use of land, particularly in rural areas. The results are predictable: (a) more expensive housing or commercial development; (b) greater requirements on developers to build "affordable housing" in the form of mandatory set-offs with artificial price controls, which in turn makes the cost of every other house in the development greater; and (c) an increasing level of market interference by government planners -- and planners don't appear to understand economics or constitutional law very well. As one commenter noted, Thomas Sowell has been discussing this for years and years, and he's right about the economic impact.

It seems to be a leap, however, to tie the subprime "crisis" to higher prices due to restrictive zoning -- there are a lot of factors that drive housing prices other than zoning, although zoning is an important one. Cheap money, scarcity of residential property in desirable areas (even those without zoning at all--see Watauga County, NC, as an example), etc.

Now, if you made a deal on a house you couldn't afford, zoning may have impacted the price, but no one made you buy it, now did they?
2.19.2008 1:12pm
David M (www):
The Thunder Run has linked to this post in the - Web Reconnaissance for 02/19/2008 A short recon of what's out there that might draw your attention, updated throughout the day...so check back often.
2.19.2008 1:19pm
J. F. Thomas (mail):
You're equivocating between a voluntary association (ASCE) and government-initiated force (national and local building codes).

Apparently you didn't read closely enough. The ASCE standards have been adopted as the statutory requirement (they already were in some, but not all, parishes).
2.19.2008 1:22pm
Brett Bellmore:

So if there are no building codes, who is to decide what is safe or unsafe? Just because you put an exclamation point after "but not in any sense unsafe" doesn't make it so.


Just for the record, I'm not advocating the abolition of all building codes. I'm advocating the abolition of all non safety related building codes. The county didn't prohibit me putting a used single-wide on my 16 acres in order to safeguard me, they did it because the property taxes would be less than they desired.
2.19.2008 1:43pm
J. F. Thomas (mail):
The county didn't prohibit me putting a used single-wide on my 16 acres in order to safeguard me

Are you contending that a "used single-wide" is as safe as site-built construction in a severe storm or tornado?
2.19.2008 1:51pm
Bruce Hayden (mail) (www):
Apparently you didn't read closely enough. The ASCE standards have been adopted as the statutory requirement (they already were in some, but not all, parishes).
What is, or at least was, cute about this was that a lot of such building codes were protected by copyright, so the city, etc., would adopt them, through incorporation, but then wouldn't/couldn't publish them. Then you had to go buy a copy of them from the standards organization. That always bothered me a bit - being bound by laws that you had to buy to read and to know how they affected you.
2.19.2008 1:55pm
Francis (mail):
Oh for heaven's sake. The Inland Empire area of Southern California (essentially the western edge of Riverside and San Bernardino counties) and northern San Diego County are some of the areas most hard hit by the housing bubble.

But California's land use laws did NOT radically change in 2001 or 2002. (Actually, they did -- land use was linked to water availability. But those laws are only having a bite this year, as the impact of the decision regarding the delta smelt is starting to be understood.)

Ilya, do you know any California land use lawyers? Have you attended any California land use conferences in the last several years? The relationship between General Plans, Specific Plans, Development Agreements, CEQA, Mello-Roos financing and all the other components of turning raw land into houses and schools has been stable for years.

The ability of a community to restrict, reasonably, the use of all lands within a community no matter who owns the land has been around for a very long time. The idea that zoning has suddenly and "artificially" inflated land prices is just ridiculous.
2.19.2008 2:20pm
Thomas_Holsinger:
Professor Somin,

You'll be burned at the stake for that. Some truths should not be uttered in public.

I was a development attorney in private practice.
2.19.2008 2:21pm
J. F. Thomas (mail):
You can practically sell a house in San Francisco, buy a bigger one in Houston, and -retire on the difference-. That implies that something in Houston is being done right... ;p

Cheap land, the oil industry and a almost non-existent business regulation are the reason Houston is booming. Nobody in their right mind moves to Houston because it is a great place to live--they move there because they got a good job. Houston is dirty, congested, sprawling, and the traffic is horrendous. The weather is unbearable 9 months of the year.
2.19.2008 2:22pm
Waldensian (mail):

Unless you mean that the people you know detest zoning other than restrictions on their immediate neighbors, you have an odd set of acquaintances.

Not odd, just refugees from the suburbs (I live in a somewhat "transitional" urban area surrounded by vast developments). So perhaps my sample is skewed. Anyway, nobody has convinced me that "voter ignorance" is playing any role at all here.
2.19.2008 2:51pm
Bruce Hayden (mail) (www):
I found WT's description of some of the causes of the problems with zoning interesting. No surprise that those who already own property of a certain type would want to limit availability through zoning, in order to drive up the value of their own properties, and that they routinely accomplish this through capture of the zoning process.

I am seeing this right now to my detriment, with an apartment building right at the edge of a historic district, which a city is trying to expand. The ultimate best use for that property would be to tear it down and build higher end condominiums. But that alternative is likely to vanish should the expansion of the historic district go through. Never mind that the apartment building is 50 years old constructed of cinder block, while the historical residences nearby are well over 100 years old and look quaint. And the condos would look far better, blend in, and would likely have a lower density.
2.19.2008 2:55pm
Bruce Hayden (mail) (www):
As to HOAs, my experience is that they are most often implemented by the builder, and they tend to keep control of the HOA until they sell out, or at least vote for all the unsold (and often unbuilt) properties. I have seen it both ways, with them controlling the HOA until a certain threshold of properties have been sold, or controlling the votes of the unsold or even unbuilt properties.

The problem, at least for some, is that you often don't understand the powers of the HOA, and what it is going to turn into. Sometimes they are benign when you buy, and sometimes they become less so as some owners with more time and energy take them over. And things often change, a lot, over time.

For example, 37 years ago when we bought a condo in the mountains for skiing, etc., we had a gorgeous view of Lake Dillon and the Ten Mile range behind it. But at the behest of some of the owners, some non-indigenous Blue Spruce were planted behind, and after a couple of decades now obstruct that view. On the other hand, all the indigenous Lodge Pole have been cut down (most before the pine beetles struck), mostly for view. So, the values of some units have gone up and others have gone down, based on what trees the association has planted and cut down (and now city zoning prevents any cutting except for pine beetle kill). Worse, the owners who pushed through the planting of those trees are long gone.
2.19.2008 3:08pm
Thomas_Holsinger:
J.W. Thomas,

In California, the environment needs protection from people. In Texas, people need protection from the environment.
2.19.2008 3:21pm
Brett Bellmore:

Are you contending that a "used single-wide" is as safe as site-built construction in a severe storm or tornado?


Are you contending that a used single-wide is somehow safer if located in a trailer park than if situated on a rural lot? The idea that the county prohibits them in one location, but not another, on the basis of safety is facially absurd.
2.19.2008 4:02pm
Avatar (mail):
JF, but isn't "cheap land" precisely the topic at hand? It's not like Houston has huge land reserves and California cities don't! But because the Houston market has very easy development, and the Californian markets do not, one city has "cheap" land and the other has, well, no cheap land. (Of course, factor in climate and coast, though maybe not air quality - Houston's not any worse than LA these days.)
2.19.2008 4:24pm
DensityDuck (mail):
trotsky: "On the flip side, places in the San Joaquin Valley...have seen the most extreme swings in price..."

Part of the reason for this is that Santa Clara County is starting to re-zone a lot of commercial property as residential. Since all the chip-fab work has moved overseas, there are a lot of empty labs in the Silicon Valley, and there are more and more places that are being knocked down and rebuilt as townhouses. Why commute all the way from Altamont when you can buy a townhouse in the middle of Sunnyvale?
2.19.2008 4:40pm
David Sucher (mail) (www):
Huh? What are you talking about? Where does O'Toole round up "evidence showing that zoning and other government land-use restrictions have played a major role in causing the subprime mortgage crisis...? His post barely even alludes to the subject.

Moreover, what places are you thinking about? where
"...the big current landowners who dominate local government in many areas,,,"

Which areas? Like Seattle and San Francisco? I think you are raising a red herring as housing markets - especially ownership-based markets -- have too broad a base to be dominated by "big current landowners."

May I suggest that you stick to eminent domain.
2.19.2008 6:37pm
Public_Defender (mail):
Whenever I hear claims that we should abolish zoning, I think about the claims that we should go back on the gold standard. Both ideas have a wisp of intellectual value which quickly evaporates when exposed to reality and common sense.

Sure, some zoning restrictions don't make sense, but so do some decisions of the Federal Reserve.
2.19.2008 8:06pm
Public_Defender (mail):
Professor Somin writes:

Widespread economic illiteracy and political ignorance help ensure that most voters don't realize the connection between high housing costs and zoning. Thus, the general public is unlikely to punish politicians who promote restrictive zoning.

Yes, I can hear the outcry from homeowners everywhere:

Zoning increases the value of my house! Someone must be punished!
2.19.2008 8:10pm
TJIT (mail):
Building codes and zoning are different issues and should not be confused.

For example, Houston has no zoning but it does have building codes, flood plain restrictions, and green space requirements.
2.19.2008 10:07pm
TJIT (mail):
Public_defender said


Yes, I can hear the outcry from homeowners everywhere:


Zoning increases the value of my house! Someone must be punished!
Isn't that another way of saying zoning has helped make housing unaffordable?

Don't forget zoning can easily make construction of affordable types of housing illegal.
2.19.2008 10:14pm
TJIT (mail):
I am posting this link to emphasize just how big an impact zoning policies can have on the price of housing.

UW study: Rules add $200,000 to Seattle house price

Backed by studies showing that middle-class Seattle residents can no longer afford the city's middle-class homes, consensus is growing that prices are too darned high. But why are they so high?

An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.

Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations
2.19.2008 10:18pm
TruthInAdvertising:
Does anyone believe that the increase in value due to every other factor but zoning is only $26,000 in a 17 year period? That's ridiculous.
2.20.2008 12:35am
Dan Simon (mail) (www):
Sorry, Ilya, but your update positively screams for a thorough fisking...

It is telling that none of the presidential candidates who have focused on the subprime crisis have even so much as mentioned restrictive zoning, much less called for its abolition.

Indeed, it tells me that unlike Ilya, they realize how heartily they'd be laughed at if they said anything so stupid.

Their economic advisers are surely knowledgeable enough to understand the connection.

...Or, rather, that the connection is self-evidently non-existent, and that one Cato Institute crackpot's blog posting doesn't change that.

But their political advisers know that voters' economic illiteracy will make it difficult for them grasp the point.

Actually, it's Somin's economic illiteracy that makes him a sucker for the garbage O'Toole is peddling.

On the other hand, coming out against zoning would alienate powerful interest groups that benefit from the status quo, such as wealthy landowners in major urban areas with restrictive zoning policies.

...Or not-so-wealthy homeowners, for that matter, who are protected from property value-destroying changes to their neighborhoods by those same restrictive zoning policies.

Just another example of how what the voters don't know ends up hurting them.

...Whereas what Somin and his fellow libertarian law profs don't know actually allows them to publish ignorant drivel like this in otherwise respectable law journals.
2.20.2008 1:26am
trotsky (mail):
DensityDuck,

I hadn't heard about that. Good for the socialist planners of Sunnyvale. I never could fathom how anyone would commute from Lathrop anyway, but then I would just never live in the Bay Area in the first place.

TruthInAdvertising,

An excellent point. My understanding is that the same period in Seattle's history has brought the transformation of a sleepy industrial/fishing town with too much rain into a fabulously wealthy tech hub -- something about a little company named Microsoft might have been involved.

But no, really, it's all about the zoning.
2.20.2008 2:36am
Public_Defender (mail):

Isn't that another way of saying zoning has helped make housing unaffordable?

Don't forget zoning can easily make construction of affordable types of housing illegal.

Zoning can also mandate construction of affordable housing. It all depends on how intelligently it is done.

But Professor Somin tries to invoke a political "us v. them" (shall I say "class warfare"?) approach. The practical problem with that argument is that homeowners, from working class on up, benefit from tremendously zoning and would exert exactly the opposite pressure that Somin hopes for.

To flip things around on you and Somin, you two are arguing for a proposal that has *as a goal* decreasing the value of existing homes. That's worse than a political non-starter. Your argument will elicit nothing but laughter from serious politicians.
2.20.2008 7:40am
TruthInAdvertising:
"Your argument will elicit nothing but laughter from serious politicians."

This is really the key point and Public_Defender nailed it. It's hard to take Professor Somin's viewpoint seriously when it's so divorced from political reality. The major beneficiaries of zoning aren't major landholders although some do benefit financially when a zoning change adds value to a property. The biggest group in number who benefit from zoning are middle and upper income homeowners who benefit from a continuous increase in home values that come about from the stability that zoning brings to the home market. Without zoning, home values would be subject to wild swings in value as adjoining properties developed in beneficial or negative ways.

Many of these people in this group are also reliable voters and decision makers in their communities. The idea that this group would embrace a candidate who would advocate for policies that would undercut the value of their homes is truly laughable. As for the argument that voters don't understand zoning and it's impact on home values, I can guarantee you that the people who say that have never attended a meeting of their local zoning board or municipal board. The first argument made by adjoining land owners against a rezoning proposal is "this proposal is going to reduce the value of my land/home/condo/etc.!" From an economic viewpoint, that's not always true. But voters are smart enough to grasp how a change in zoning can affect home values. Still, the argument that zoning alone is responsible for large increases in home values and the resulting bubble ignores a lot of other economic and other values that go into the value of homes and property in a community. Studies that claim that 90% of the increase in a homes value is due to zoning aren't based in reality.
2.20.2008 10:12am
D Palmer (mail):
I didn't follow the link to the post, but after spending the past 8 years underwriting various residential construction loans for a small community bank and a large money center bank, I can confidently say that zoning laws played a minor role in the so-called "sub prime mortgage crisis."

First off, there really isn't a crisis. The rapid growth in foreclosures is primarily due to extremely lax underwriting standards on the part of lenders combined with pressure from Federal, State, and Local governments on banks and other lenders to provide loans in low income areas. That pressure encouraged lenders to develope programs that allowed people to buy homes that they couldn't afford when any rational standard is applied.

The most egregious of these products were very low rate ARM's and so-called "option loans" that allowed borrowers to defer principal and in some cases interest. The result was inevitable and entirely predictable.

Rates started to rise. Borrowers had to refi when the low rate period ended or pay a much higher payment, and -surprise- due to poor credit and inadequate income, many were unable to support a higher rate and/or conventional amortization and so defaulted.

Restrictive zoning may well have contributed to housing shortages and rising prices in some areas. But the real cause for the runup of prices was too much easy money which resulted in people who should have been renters becoming buyers.
2.20.2008 12:54pm
markm (mail):
Zoning can also mandate construction of affordable housing. By making other housing even less affordable. You are talking about laws that require a developer to provide one "low income" housing unit for every so many regular ones, right?

Are you contending that a "used single-wide" is as safe as site-built construction in a severe storm or tornado?

Are you contending that a used single-wide is somehow safer if located in a trailer park than if situated on a rural lot? The idea that the county prohibits them in one location, but not another, on the basis of safety is facially absurd.

Not to mention that the same regulations also prohibit building a small site-built house. Brett says his area zoning requires a minimum of 1800 square foot - this is "rich people only" zoning. And I'll bet the people who vote for that also complain about bad service in the stores and restaurants, never thinking that they've ensured that the lower-paid workers are either teenagers and welfare cases who don't depend on their paychecks to live, or workers who drive in from far away and start their shift already tired. Where I live, the minimum is 1,200 square foot; this doesn't drive out the lower-paid workers, but it is about twice as much space as my wife and I need since our kids grew up. When we gave the big old house to our daughter and built a new place for us, we not only had to pay for the construction of the extra space, but we also pay for heating it every winter - and release extra CO2...
2.20.2008 2:10pm
Tom Fitzpatrick (mail):
Most bubbles in the economic history I'm familiar with are caused by easy credit and lack of regulation thereof. On zoning and housing prices in particular, there's an article in today's Crosscut Seattle with the following numbers that might have some relevance:
I was looking over a 2007 report, Housing Facts, Figures and Trends, from the National Association of Home Builders (a downloadable copy is here) and the trends are stunning. Builders respond to market demand. What is it people want?

In 1970, the average new single-family home was 1,500 square feet; in 2005, the figure swelled to 2,434 square feet — an increase of over 900 square feet.

In 1970, 36 percent of new homes were under 1,200 square feet; by 2005, only 4 percent were. In 1970, only 10 percent of homes were over 2,400 sq. feet; in 2005, 42 percent were.
2.20.2008 5:49pm
occidental tourist (mail):
AWARD FOR BEST CAPTURING THE FALLACY OF ZONING STANDARDS AS SAFETY MEASURE:

Brett Billmore:
Are you contending that a used single-wide is somehow safer if located in a trailer park than if situated on a rural lot? The idea that the county prohibits them in one location, but not another, on the basis of safety is facially absurd.

Building standards aimed at remedying safety hazards to the public from poor private choices fall within a reasonable limit of the police power, e.g. standards that separate buildings and specify materials to reduce the danger of spreading fires in dense communities, standards of construction that militate against collapse as a hazard to adjacent structures and pedestrians, standards that protect the occupational safety of buildings occupied by large numbers of people, building material standards that eliminate serious hazards to firefighters in case of a fire. These standards largely relate to building although portions of them - e.g setbacks, lot size related to capacity for septic system are sometimes integrated into zoning rules.

To the extent that zoning is also supposed to represent a civil stand-in or regularization of the common law concept of nuisance, if that was what it really did it wouldn't necessarily be so illegitimate. But the civil process rather than explicating and implementing the nuisance concept has all but supplanted it. (This is equally or moreso true of environmental regulation that claims the same mantle). Civil regimes take cognizance not of interferences long understood in various contexts to violate Sic utere tuo ut alienum non laedas (So use your property as not to injure your neighbour's), e.g. limiting agricultural uses in urban settings, or putting the abattoir in the middle of a residential neighborhood.

I believe the real disagreement here is over zoning as a majoritarian/utilitarian maximazation tool, which is very similiar to the dilemma posed by eminent domain for private use to increase the tax base (and the problems posed by ad valorum property taxation for that matter).

Finally there are commmunitarian quality of life issues, e.g. traffic, crowded schools, tax increases on existing residents. I have some sympathy for impact fees, or capital contributions by developers to these indecies, although they tend to imply an ownership of the existing infrastructure by the existing residents and it doesn't tend to take cognizance of the extent to which some of these supposed 'ills' could be remedied by the private provision of some of these goods. See, e.g.

SteveA:
In a perfect libertarian world, there would be no link between local taxes and local schools. But one permanent imperfection creates another (zoning) as a rational response.

Won't debate this at length. (everyone breathes a sigh of relief). Just trying to round out an area where there might be some legitmate policy prerogatives even if I imagine it to be more legitmate or beneficial that they be handled privately - e.g. private insurance and private fire company subscriptions that require conformance to private building codes, privately maintained local roads, private schools, etc.

But make no mistake. Zoning's jurisprudential underpinnings make it preeminently clear that this institution is about legalized discrimination. Indeed the point is that there are numerous ways to address both the legitmate private considerations and even the majoritarian/communitarian interest in maximual utility and quality of life effects outside zoning. Euclid v. Amber claims the later mantle, i.e. QofL, but actually dissects the same way as bands on mobile homes.

Sutherland dismisses Westerhaven's analogy of zoning to ethnically based segregation on the basis that apartment houses are bad for children. So he's not opposed to apartment house because they are full of immigrants and colored people, he's doing for the children. Of course this doesn't explain how the children of immigrants and colored people can be safely subject to this gross nuisance of apartment buildings.

The regulators have gotten a little more sophisticated and sensitive in their rhetoric but the emperor still has no clothes. I should stop (relief abounds) and let it be said best by the argument between Westerhaven, the district judge in Amber Realty v. Village of Euglid, and Sutherland in Euclid v. Amber.

from Westerhaven's opinion:
Buchanan v. Warley, 245 U.S. 60, 38 Sup.Ct. 16, 62 L.Ed. 149, L.R.A. 1918C, 210, Ann. Cas. 1918A, 1201, in which an ordinance of the city of Louisville, held by the state Supreme Court to be valid and within the legislative power delegated to the city, districting and restricting residential blocks so that the white and colored races should be segregated, was held to be a violation of the Fourteenth Amendment and void. It seems to me that no candid mind can deny that more and stronger reasons exist, having a real and substantial

*313

relation to the public peace, supporting such an ordinance than can be urged under any aspect of the police power to support the present ordinance as applied to plaintiff's property. And no gift of second sight is required to foresee that if this Kentucky statute had been sustained, its provisions would have spread from city to city throughout the length and breadth of the land. And it is equally apparent that the next step in the exercise of this police power would be to apply similar restrictions for the purpose of segregating in like manner various groups of newly arrived immigrants. The blighting of property values and the congesting of population, whenever the colored or certain foreign races invade a residential section, are so well known as to be within the judicial cognizance.

[3] 5. The argument supporting this ordinance proceeds, it seems to me, both on a mistaken view of what is property and of what is police power. Property, generally speaking, defendant's counsel concede, is protected against a taking without compensation, by the guaranties of the Ohio and United States Constitutions. But their view seems to be that so long as the owner remains clothed with the legal title thereto and is not ousted from the physical possession thereof, his property is not taken, no matter to what extent his right to use it is invaded or destroyed or its present or prospective value is depreciated. This is an erroneous view. The right to property, as used in the Constitution, has no such limited meaning





________________



from Sutherland's opinion for the Supreme Court:



The serious question in the case arises over the provisions of the ordinance excluding from residential districts apartment houses, business houses, retail stores and shops, and other like establishments. This question involves the validity of what is really the crux of the more recent zoning legislation, namely, the creation and maintenance of residential districts, from which business and trade of every sort, including hotels and apartment houses, are excluded. Upon that question this court has not thus far spoken. The decisions of the state courts are numerous and conflicting; but those which broadly sustain the power greatly outnumber those which deny it altogether or narrowly limit it, and it is very apparent that there is a constantly increasing tendency in the direction of the broader view. We shall not attempt to review these decisions at length, but content ourselves with citing a few as illustrative of all...

...

With particular reference to apartment houses, it is pointed out that the development of detached house sections is greatly retarded by the coming of apartment houses, which has sometimes resulted in destroying the entire section for private house purposes; that in such sections very often the apartment house is a mere parasite, constructed in order to take advantage of the open spaces and attractive surroundings created by the residential character of the district. Moreover, the coming of one apartment house is followed by others, interfering by their height and bulk with the free circulation of air and monopolizing the rays of the sun which otherwise would fall upon the smaller homes, and bringing, as their necessary accompaniments, the disturbing noises incident to increased traffic and business, and the occupation, by means of moving and parked automobiles, of larger portions of the streets, thus detracting from **121 their safety and depriving children of the privilege of quiet and open spaces for play, enjoyed by those in more favored localities-until, finally, the residential character of the neighborhood and its desirability as a place of detached residences are utterly destroyed.


THE SUBSTANTIVE DUE PROCESS AWARD to


Buckland:
Custom trout flies brought 3-5 customers a day to his house. A busybody complained and the local constabulary put him out of business. In revenge he started raising 20 or so hogs on his land, a use that couldn't be stopped.


There is nothing that shocks the individual conscience or can put an individual into conflict with his community the way that arbitrary and not seldom corrupt local land use planning impinges on reasonable undertandings of property. This is not to give harbor to the guy who went off in Kirkwood or the guy who wrecked the colorado town with his bulldozer. But on a less outrageous scale the personal animus arising from consciences shocked by the actual application of land use regulation I would argue is one of the largest social tolls our government is willing to impose to please the majority.

This is just the kind of majoritarian or populist morals that decisions from Lochner to Roe to Lawrence were designed to apprehend. In some ways it is a misfortune that property rights are viewed as some poor system eligible for disregard as separately stated rather than representing the kind of longstanding interests in, privacy and contract, one currently observed and one forgotten that animate the jurisprudence of substantive due process.

As to planning as the progressive 'scientific' answer to modern society I offer that towering inferno of a decision. Buck v. Bell. We sure need more of this progressive science stuff. Come to think of it Massachusetts v. EPA falls right in line. 274 US 200.

Sorry this has really been a response to comments that struck a nerve more than criticism of the primary sources for the post which I looked over and have thoughts on for tomorrow mornings session if the comment period is still open.

Brian
2.21.2008 8:38am
occidental tourist (mail):
On the central question of the contribution of regulations to the housing market bubble, one of the more convincing bits in the Glaeser piece is the graph comparing housing prices in Boston and Atlanta.

This gives a decidedly different impression than the notion that perceptually less regulated Las Vegas (haven't really followed the regulatory metric but I think it a reasonable proposition for the sake of initial discussion that LV is not as retentive as LA of SF.) has not been insular to price shocks. Given that what's driving the Las Vegas economy is a lot of discretionary spending, it is unsurprising that the area would have volatility. Likewise, Houston, the no zoning example has the backdrop of oil industry such that you would have to use some additional metrics to disaggregate. It seems to be actually a pretty nice place despite all the derision about humidity and industry, but I like oil wells and I visited in November and April, maybe June would make me rethink.

Atlanta is purportedly a case study for sprawl, and apparently, sprawl works. While urban Atlanta certainly exhibits a largely built out characteristic, it appears from the graph that suburban and exurban development, as well as infill and redevelopment, more readily picks up or falls off tracking price and demand leading to less shocks in housing prices.

This at least gives rise to the thesis that developers are able to respond more quickly to market forces when faced with less regulation. You can more quickly gear up projects and are not as concerned that regulatory delay will prevent your project from reaching fruition while the market you are targeting is still available. (Also you are not as worried about shelving projects until more favorable economic conditions are manifest as you might be in the musical chairs environment of rapid regulatory expansion.)

While I tend to be skeptical, as other readers, of the notion that 80% of the housing inflation since 1989 in some highly regulated districts examined by Eicher can be causatively associated with this regulation, I'm not incredulous or dismissive. Methodologically speaking, that study did not disaggregate or examine other causes very well and seems generally suggestive in a confidentally correlative but not definitively causative manner.

So i am skeptical of the 80% number but I'm equally skeptical of those who would consign this regulatory taxation on housing to a far more benign number or perceived role. Given the blossoming of the regulatory state that began before '89 but really tracks those dates well if you think of the pile on effect of regulations reaching mutual maturity at that point, e.g. zoning, planning, subdivision, wetlands, highlands, scenic, coastal, endangered species, open space, affordable housing (most ironic award), urban growth boundaries, to name a few, it wouldn't actually surprise me if the real number for the regulatory impact were very high maybe cresting 50%.

In looking quickly at the Eicher study it seems a weakness is that it does not account for background inflation, either in the economy as a whole or in construction costs. If I'm reading it right and haven't missed anything his comparisons are absolute, i.e. 1989 dollars to 2006 dollars vs. keeping the dollar constant, or constant as a matter of construction cost dollars rather than a more general inflation index.

That said, some of the construction inflation reflects the labor and standards regulatory environment which often tracks the property regulatory environment. My bet is it's cheaper to plan and accomplish construction in Atlanta than Boston insofar as labor and building standards costs are concerned as well as land use regulations as a result of a similar mindset with regard to the role of government in private contract arrangements.

Eicher does identify a localized externality of high regulatory impositions that offers a plausible argument to be considered when considering some comments that pointed to date showing that less regulated communities in California experienced greater price shocks. This is the phenomenon that prices increase in nearby low regulated communities when regulations increase in a neighboring community.

This triggered my memory of this as a demand phenomenon. If demand is high and unmet in perceptually desirable area (including but not limiting that to artificial regulatory limits on supply) prices inflate significantly and some of the demand seeks to create outposts of desire, through gentrification or transplating of norms from the desirable community to the some less desirable community (concededly, some of these norms might ulitmately take the form of regulatory enactments, but primarily I'm thinking of simply upgrading homes in downtroden neighborhoods that are adjacent to amenities serving preexisting upscale hoods).

In my circumstance that is east side and west side. So when prices spiraled on the east side, those who couldn't afford them decided to improve the west side. But when prices subsided on the east side many people gave up their pioneering efforts in challenged neighborhoods, and bought the 'real thing'. This resulted in maintaining the values in the original chichi zone within a tighter range while values in the experimental zone fell precipitously.

I have seen this phenomenon repeated on micro and macro levels. Downtrodden post industrial Fall River, MA has classic houses that rival those in nearby Providence, RI for architectural grandeur and potential sense of place and neighborhood, so when the prices in Providence spiraled in the 80s, folks went to Fall River inflating prices there. And when real estate subsided the last cycle, many people retreated abandoning this redevelopment.

I'm not pegging these examples to regulatory structure (although usually jurisdictions that desire such redevelopment may have more relaxed rules to encourage it.), rather I'm pointing out why price swings in one jurisidiction might boomerang into exaggerated adjacent results. Thus, to the extent that there is regulatory exacerbation of supply in desirable communities it can readily, maybe most inevitably, contribute to volatility overall even when not reflected in prices within that particular cohort.

This theory of regulatory contribution to housing price volatility needs a good deal more developing than the work linked but I don't think it opportunistic in the case of a major economic dislocation to raise this as a significant component. Certainly some make the more direct argument that the subprime crisis demonstrates underregulation of the lending industry. But that is argument that demands evidence as well.

Of course libertarians are going to see the world through libertarian colored glasses and pointing that out is within the bounds of blog style discussion, but lets argue about the numbers and leave the ad hominems to other blogs.

(BTW, I'm more than open to arguments about why we shouldn't publicly subsidize universities and do think there is an aspect of principle drawn into question when libertarian leaning professors take publicly funded appointments. But I think there is not necessarily a conflict in participating in the system the way it is even if you offer analysis about the preferential nature of alternaitves. Of course there are potential conflicts of interest, say promoting privatizing the post office over privatizing higher education and the like, so offer suspicious examples if you have them. But libertarian leaning academics are alive and well if, in a somewhat similar idelogically enforced minority, in private institutions as well so I don't see the argument, implied in some critical posts, that only public money could support such unsupportable argumention as supportable. Sorry about that sounds just like Obama talking about change.)

In any event, when this 'suspect' lending was giving people opportunities for home ownership and/or fueling the economy by lending its equity to other spending, not too many folks were complaining.

The biggest problem right now is clamoring for a government solution, after the fact policy which will upset a whole lot of other settled expectations. It seems to me that moratoria on rate resets and foreclosures could actually be private solutions rather than public. We don't need (and apparently probably aren't going to get) Hilary Clinton telling them what to do (although I suppose she could redouble her efforts in the club of 100).

What are these banks going to do with a vastly discounted portfolio of homes with no owner in them subject to all kinds of problems that go along with vacancy as well as no money coming in? It is in their interest to limit this phenomenon by making economic trade offs with buyers who may have at least some personal connection with a property and desire to stay -- same thing happens when credit card companies negotiate over unsecured debt.

As Todd pointed out in an earlier post, a good deal of the problem at the moment is jingle mail. Not banks foreclosing but buyers with little equity walking away. I don't feel bad for the banks who made these loans, but, for the most part, these low equity buyers aren't losing a lot and can rent while their credit is rejuvenated. What really needs working out here?

Brian
2.22.2008 11:57am
occidental tourist (mail):
finally (I hope)ya think this thread struck a nerve?:

Ilya:
the general public is unlikely to punish politicians who promote restrictive zoning. Meanwhile, the big current landowners who dominate local government in many areas have a strong incentive to promote zoning policies that keep housing artificially scarce, thereby increasing the market value of their own holdings.



This argument holds regardless of whether regulation is a significant driver of volatility. It is certainly a price driver and in typical public choice fashion it is in the interest of those who would have multiple affected interests to invest in controlling zoning outcomes, but the artificial scarcity and higher prices are paid by many individuals and while they might legitimately gripe about these price environments they aren't generally writing a check for $300,000 for their house and $150,000 for regulatory cost that make this manifestly clear. Even where understood as a significant factor, once you have passed the barrier to entry you have an individual interest in protecting that extra sunk capital.

Which leads direction to the RED HERRING AWARD:


Ilya
On the other hand, coming out against zoning would alienate powerful interest groups that benefit from the status quo, such as wealthy landowners in major urban areas with restrictive zoning policies.


Cato (is the name meant to be ironic)
Query: Would the removal of zoning restrictions and the consequent devaluation in certain owners' valuation constitute a taking by governemental action?


This classically misunderstands takings jurisprudence. The taking results qualitiatively from government restricting the use not pursuant to extant laws of nuisance.

The extent of effect on value is a surrogate for determining liability in the climate of abounding pragmatism for government that attends the reasonable statement by Justice Holmes that:

"Government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law." Pennsylvania Coal v. Mahon 260 US 393 at 413.

This value formula does not remove the premise that the government action must restrict the use of the property in the first place. As a practical matter this reasonable sentiment of Holmes's has come to the point where government use restriction can extend to destroying just short of all the value in the property without triggering compensation and at same time given rise to the cato's canard. Who would think of looking at speech by the percentage of one's words or thoughts that had been prohibited?

They got the physical invasion prong right in Loretto v. Teleprompter but have completely lost the narrative with regards to use restrictions.

Brian

PS. As to the Taxi driver who paid $300,000 for his license, there seems to be an indication here that an artificial shortage has been created if people are going to pay $300,000. If there is some actual police power excuse for so limiting taxi licenses -- as say where there might be biological reasons for limiting fishing licenses for certain species of fish in certain regions -- the private market trading of these licenses is a potentially useful mechanism. (albeit I don't necessarily always agree with the extent of precaution inherent in these private trading regimes, but given a determination to implement controls, transferable quotas are the least worst idea.

But if the regulation of cabbies is an artificial barrier to entry that pumps up the value of a cab license, when they loose control of their public choice fiefdom and government actually favors the consumer by allowing more cabs, they have not been restricted by government from driving their cabs and so no bar has been placed upon them. A constitutional claim could be conceivable made regarding a regulation that prevented you from using your cab, but where is the constitutional trigger for a claim when government lets more people drive cabs?

It is criminally negligent public policy that cab licenses should trade in this range, but it would be worse if we could not fix the problem because of some kind of public policy stare decisis unrelated to supra statutory constitutional safeguards. Of course it might be good policy or rational political accomodation to mitigate the impact on existing cabbies, but this is a prudential, not constitutional consideration. The only constitutional consideration is whether regulation of the private contract of one person to carry another even passes constitutional muster to begin with (of course legal positivists might argue that a right to travel implies that the cabby has to carry you whether you can afford it or not, which is why I ain't a legal positivist, as legal positivism doesn't augment negative rights, but does away with them.)

I'm not suggesting there are no arguments in favor of some kind of safety regulation of cabs but I would subject such regulations to strict scrutiny. That might be fairly considered to be conservative judicial activism. I plead guilty.
2.22.2008 12:43pm