Monday, August 2, 2010

Smart Growth Advocate Asks: Did We Cause The Crisis?

Jonathan Hiskes, a smart growth evangelist supporter* at Grist, is at a pause for a response to a new report that’s been circulating. In the report, Haifang Huang and Yao Tang argue that land-use regulation (a common “smart growth” policy) inflates housing prices and contributes to market bubbles (like the one that took place over the last decade):
“Restrictive land use regulations and geographic land constraints are lined to larger booms and busts in housing prices. [They] amplify price responses to an initial positive mortgage-credit supply shock, leading to greater price increases in the boom and subsequently bigger losses.”
The argument is simple supply and demand: when the government places limits on the supply of land available to build on (whether to protect a river or counteract sprawl), it will put upward pressure on prices. With more and more demand, and no more land, this could be the recipe for a Boom.

Huang and Tang’s results poses a bit of a crisis for the housing sustainability squad, who have hung our hats on the long term economic “smarts” of compact land use. The Center for Housing Policy has done loads of research on sustainable communities, and staff are looking into the intersection of regulations and affordability as we speak. But a few initial retorts are after the jump.

  • First, blaming dense urban areas for the housing bubble overlooks where the burst ended up blazing the worst: the suburbs. A disproportionate bulk of foreclosures have occurred in the outer stretches of metro areas, where buyers believed housing was more affordable than it actually was, and few families considered transportation, the hidden cost of sprawl. So before we blame sustainable development for starting the fire, let’s remember what the alternative patterns had in store for us.
  • It may be true, as Matt Yglesias argues, that limiting the supply of land can sometimes lead to price elevations – but when you put land use regulation in the broader context of other smart growth strategies, affordability can be one of many positive outcomes. For example, cities can incentivize affordable housing production within compact, mixed-use neighborhoods through density bonuses and other policies that lead to more opportunities for households with a mix of income-levels.
  • Last, we need to broaden the metric beyond just housing costs, and include transportation expenditures as well for a full “cost of place.” Designing a mix of housing types in compact and walkable communities, close to shopping and jobs or transit, brings down one of families’ top expenditures (and leaves more money in their bank accounts, thus making housing more affordable). This sounds like no big deal, until you consider that transportation costs creep toward housing levels for millions of Americans. (A Heavy Load, the study by the Center for Housing Policy and Center for Neighborhood Technology, showed the complete cost of housing, transportation and utilities combined accounting for 57% of the incomes of working families making $20,000 to $50,000 a year in 2000.) 

If there’s one lesson to take away from a foreclosure burst, it’s that local and national markets aren’t sustainable if they aren’t affordable.

But what say you, wise readers? Can we put together a collective defense of smart growth to put Mr. Hiskes at ease?

*Update: Jonathan has reminded us that he's not technically an "evangelist" for smart growth, but an inquisitive supporter. It's true - posing the original question shows a healthy dose of skepticism. We're all just looking for answers, aren't we?


Kurt said...

We have to be very careful in interpretations of this result because we have to look very carefully at the underlying composition of the WRLURI. Given how the index is constructed, of course places with higher scores on the index should show higher house price appreciation because what the index measures is a whole range of supply restrictions. Very few, if any, of the supply restrictions actually measured have anything to do with "smart growth." Actually, if you look at the data carefully, communities which engaged in "dumb growth" (only single-family detached on large lots, no transit, mixed-use, etc.) had the highest rates of house prices appreciation and then fast rates of decline with the substantial demand weakening beginning in late 2007. The data are equally consistent with a hypothesis which said that smart growth areas performed better because the did not have the drastic swings in house prices. Of course, that too is way too much of a generalization.

Anonymous said...

The crucial factor that has to be examined is the price of land. It is all very well to have a whole lot of noble objectives for urban redevelopment, and all the objectives of "smart growth" are good; but if your urban growth boundaries have forced up the cost of land, all your other objectives become harder to realise. This is the lesson that planners need to grasp.

They need to compare the price of raw land inside their urban growth boundary, with the price of land outside of it. This is where the bubble started, in EVERY region that had a bubble. Every region that has a loose enough boundary that the land inside it cannot all be cornered by land bankers, is "bubble proofed".

Yes, in some areas the suburban fringe is where prices have collapsed the most. This is simply because the urban fringe was the "least unaffordable" option for lower income earners; it was, however, still many times too expensive. In metros where the price of ALL land is successfully kept down by relaxed urban boundaries, there remains a lot more options for "affordable" homes, many of them quite conveniently located. In the looser jurisdictions, new fringe homes might be $120,000 and older, inner suburb homes might be LESS than this. But in the bubble jurisdictions, the new fringe homes might be $400,000 and the older inner suburb homes might be $1,000,000 (simply because the LAND is ten times the cost it should be). In which jurisdiction were the lower income earners going to be the most squeezed into subprime mortgages?