Is “Smart Growth” Really All That Smart?

The following article on the impact of “smart growth” was written by Wendell Cox, a senior fellow with the Heartland Institute and co-author of the “Demographia International Housing Affordability Survey,” an analysis of housing affordability in 100 markets in six nations. It was originally published in the San Francisco Chronicle December 11 and we first saw it in the Hawaii Reporter.

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To the extent that there’s been anything about the economy still worrying some journalists and media analysts in recent months, it has been softness of the housing market.

Several home price declines were noted in October as having contributed to a lack of U.S. economic growth. On November 20, the National Association of Realtors issued a third-quarter report showing a 12.7 percent decline in existing home sales compared to last year.

All of this, of course, will refuel the debate about the “housing bubble.”

Is there one?

If there is, will it burst?

Paul Krugman, an economist and columnist for the New York Times, has argued that there is a bubble, but it is a geographical one. His thesis is that the “zoned-zone” is artificially inflating housing costs.

A zoned-zone is an area that has embraced land-rationing policies, usually under a misleading title of “smart growth.” Policies on development such as Portland, Oregon’s urban growth boundary, and requirements for excessively large lots simply reduce the supply of land for development.

There is little argument among economists that rationing raises prices, and does so with a vengeance.

Take “smart growth” friendly San Diego County — where today the median house price is more than 10 times the median household income (a measure called the “median multiple”). The historic norm has been a median multiple of 3.0 or less. In San Diego, the median multiple was 3.6 in 1995.

• In just 10 years, the total cost (including interest) of the median-priced house in San Diego has risen more than $900,000.
• By comparison, the total cost over a 30-year period of the median priced house has risen only $55,000 in Atlanta, where there is more liberal land-use regulation.
• In just the first half of the decade, 100,000 domestic migrants - people who move from one metropolitan area to another - have left the San Diego. Who can blame them?

State-level home sales tell a stark story. In states with stronger smart growth or other land-rationing policies, the fall-off in existing house sales has been by far the greatest. During the past year, existing house sales have fallen an average of 20 percent in the highly regulated states. All 18 of these states experienced declines, even in historically fast-growing states like Arizona, California, Florida, Nevada, Oregon and Washington.

By contrast, in the less-regulated states, the annual loss was just 4 percent and a third of these states, including Georgia and Texas, experienced sales increases. The escalation of prices relative to incomes in highly regulated markets is not the result of low mortgage rates. The same low rates have not produced the same effect in markets with lighter regulation, such as Dallas-Fort Worth, Houston or Kansas City.

Nor is the escalation a result of demand, as Atlanta, Dallas-Fort Worth and Houston are some of the fastest growing large metropolitan areas in the nation, yet the median house price has remained below the 3.0 benchmark. The problem in highly regulated markets is that the supply of housing is not allowed to keep up with demand.

If housing affordability doesn’t improve, it is not inconceivable that it could at some point have serious effects on the overall economy, perhaps even a “smart growth” induced recession.

The economic and social consequences are ominous. The hundreds of thousands of additional dollars in mortgage loan payments that must be paid to own a home in California, Florida, Oregon or other smart-growth states will mean less money for other needs. Fewer products will be purchased and fewer jobs created.

Worst of all, there will be fewer homeowners. Lower income and many middle-income households will find their way to the mainstream of economic life blocked by artificially high prices resulting from naive urban planning policies. It seems likely these higher prices will lead in the long run to lower rates of homeownership.

In the long run, “smart growth” is simply bad for the economy and for the people on whose enterprise and wealth creation the economy relies.