[i][Ilya Somin, February 19, 2008 at 12:53am] Trackbacks
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 ( Cato at Liberty: Cato Institute Blog ). 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 ( The Impact of Zoning on Housing Affordability by Edward L. Glaeser, Joseph Gyourko :: SSRN ), 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: Harvard Kennedy School | Harvard Kennedy School ) 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 ( Bryan Caplan ) and political ignorance ( Knowledge About Ignorance: New Directions in the Study of Political Information by Ilya Somin :: SSRN ) 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.[/i]