Thursday, March 12, 2009
BUTLER: Dumping 'smart growth' is wise
Stuart Butler


America is still trying to sort out the housing mess that helped trigger the recession. So far, most of the focus has been on how mortgage companies induced many modest-income families to get too deep into debt. More recently, attention has turned to borrowers who willfully took out mortgages and second mortgages to live a lifestyle they knew they couldn´t afford.

But there is another element to the story. In many areas of the country, Americans reluctantly took on huge mortgages as their last, best chance of homeownership. "Yes, house prices are incredibly high," the thinking went, "but they keep rising fast. I must buy now, even though it will stretch me to the financial limit, or we´ll never be able to afford a home of our own."

That kind of thinking fueled the housing bubble, too. But what made housing prices rise so fast in the first place?

One of the biggest culprits has been the fad of trying to control development by placing layers of restrictions on suburban land use. Going far beyond the traditional zoning restrictions, some local governments embraced a host of "smart growth" policies. But these policies also artificially inflated housing costs. So the cost of a home moved steadily beyond the reach of normal families - unless they got a subprime mortgage.

It turns out a better name would have been "stupid growth."

I first learned about terrible side-effects of "smart growth" when serving on a housing commission created in 1991 under President George H.W. Bush. The commission´s focus: Regulations that push up housing costs.

We learned about rules requiring minimum lot size and how they add to a home´s land cost and give developers the incentive to build larger, more expensive houses on their land. We learned how communities use "smart growth" zoning to keep out more affordable housing. And we learned of "impact fees" that are supposed to pay for public amenities, but often serve as just an additional tax that buyers must pay at closing time.

We heard about dozens of such rules, all helping existing homeowners watch their investment grow at double-digit rates year after year, and all pricing more and more potential buyers out of the restricted market.

My Heritage colleagues Ronald D. Utt and Wendell Cox have examined exactly how much land-use regulations have inflated housing costs in various parts of the country. So, too, have scholars at the Brookings Institution.

Not surprisingly, they found that housing costs generally rose most sharply (until recently, of course) in metro areas with tight land-use rules. In the "smart growth" cities of Los Angeles and San Diego, for instance, the median house price was more than 10 times the median income by 2005. This compares with less than three times median income in Atlanta; Austin, Texas; and Cincinnati.

Tight land-use rules in the Maryland and Virginia suburbs of Washington have sent prices topping five times income.

In these "smart" parts of the country, families typically had little choice but to take on larger, often riskier mortgages to buy a home. When the mortgage industry crashed, these same areas experienced the largest drop in prices and the worst foreclosure rates.

The most recent survey of housing prices, conducted in the last quarter of 2008 by the National Association of Realtors, gathered data from 159 metro areas. Of the 26 metropolitan areas experiencing the steepest house-price declines, 18 were areas with heavy land-use restrictions.

If we are going to get out of the housing mess, it doesn´t just mean fixing the mortgage market or - as some argue - bailing out homeowners. It also means scaling back the rules in many jurisdictions that continue to artificially push up new house prices and fan the pressure for huge mortgages.

Back in 1991, the housing commission recommended that the federal government place conditions on money (e.g., mortgage revenue bonds) given to states to foster homeownership. To get this money, we proposed, states would have to negotiate with officials in their high-cost cities to change zoning, restrictive land rules and so on to reduce the growth in housing costs.

But those were the days when most people - including those on Capitol Hill - thought ever-rising house prices were the way to make everyone rich. Rather than push to ease restrictions on growth, Congress moved to loosen up the rules for mortgages so that everyone could get easy terms and go into debt, buy an expensive house, and ride the wave.

You know the rest.

Now´s the time to do what Congress should have done 18 years ago. As Mr. Utt and Mr. Cox say, all future federal housing money for states or homeowners should include a requirement for states to reduce or eliminate land regulations and other cost-increasing rules. It´s the key to making new housing more affordable.

Now that really would be smart.

• Stuart Butler is vice president of domestic policy issues at the Heritage Foundation (