Friday, February 13, 2009

The Mind and the Housing Bubble

French economist Vincent Benard identifies a contributing factor to the housing bubble that has often been overlooked--land use regulations. (HT: Freedom is the Solution)

Benard writes:

[H]ousing inflation did not occur everywhere in the country. Some of the most dynamic metro areas, in terms of population growth, haven’t experienced any housing bubble. Recent Nobel Prize Paul Krugman, supported by several research papers, notably from academics like Ed Glaeser or Wendell Cox, explained it by land use regulations : when these regulations are flexible and tend to be respectful of the property rights of the land owner, housing bubbles cannot even get started. But when regulations allow the existing real estate owners to prevent farmland holders to build the houses required to satisfy all housing needs, housing prices start skyrocketing.

Economically, land-use regulations (for example, zoning) limit the land available for any particular use. When the demand for housing began to rapidly grow, the reduced supply of land (coupled with permitting and other delays) prevented developers and builders from responding quickly--that is, increasing the supply of housing. The result was housing inflation.

As Benard and others have noted, this did not occur in cities with less restrictive land-use policies, such as Houston, even though Houston's population has steadily grown for decades. Housing prices have remained relatively stable in Houston.

Higher housing costs and an insufficient supply of housing are the visible and practical consequences of land-use regulations. While some would say that this is simply an issue of supply and demand, it really doesn't address the fundamental issue involved.

Land-use regulations, like all regulations, prohibit individuals from acting according to their own judgment. An individual who identifies a demand in the market is often delayed or stopped from acting accordingly by regulations, mandates, and other controls. The arbitrary dictates of bureaucrats and politicians prohibit him from pursuing the course of action he deems best.

Depending on the design, size, and other considerations, a typical 2,000 square foot house can be built in four to six months. Which means, a builder can increase the housing supply relatively quickly. However, if land-use regulations, building codes, environmental impact statements, and other controls stand in his way, he could easily spend years plodding through this morass of paperwork. And in the meantime, the demands for housing remain unmet because the builder is prevented from acting as he judges the facts.

Land-use regulations are actually a misnomer. While the controls dictate the use of land, that control is ultimately aimed at the minds of developers, builders, and their clients. Those controls prohibit individuals from acting on their own judgment in the pursuit of their own values. Individuals are forced to sacrifice their values, and their judgment, to others.

Altruists demand that the individual place the welfare and interests of others before his own. They demand that the individual serve the "common good". But man is a being of mind and body--his actions are guided by his ideas. A man who is intellectually independent will also be independent in action. The altruist understands this, at least implicitly.

While producers are often prohibited to act according to their judgment, consumers are often prodded to act contrary to theirs. Freddie Mac and Fannie Mae dangled tempting mortgage terms in front of unqualified home buyers. No money down, artificially low interest rates, and interest only payments were just a few of the incentives used to encourage consumers to engage in reckless behavior. (I don't mean to absolve the home buyers of their responsibility in doing this. But such loans would not have been probably never have been offered if government had not been involved.)

As Ayn Rand noted many times, reason ends at the point of a gun. As an agent of force, government interventions necessarily involve coercion, whether by manipulating interest rates, "encouraging" home ownership, or regulating land-use. Such actions penalize rationality, and encourage irrationality. As further evidence, the government bailouts are intended to help those who have failed, while making those who succeeded foot the bill. The rational are forced to pay for the errors of the irrational. (This does not mean that every failure is the result of irrationality. But a large number of the failures clearly were.)

While there have been many contributing factors involved in the housing bubble, the essential cause was the government's attack on the mind. Had producers been free act on their own judgment, they would have met the demand for housing. Had the government not encouraged irrational decision making, consumers would not have demanded as much housing. Had individuals been free to act according to their own judgment, the housing bubble would not have occurred.


Anonymous said...

Were you at the West Point Society of Houston's luncheon today? An economist from the Federal Reserve spoke and cited onerous land-use regulations as one of the three main causes of the housing bubble. His examples were California towns that limited building permits, and Massachusetts cities that disallowed all building outside the currently-established city limits (in an effort to save "green" space).

Of course the economist didn't place ANY of the blame of the housing bubble on the Federal Reserve's monetary policies during the last decade. But that's a different topic for another day.

Brian Phillips said...

No, I was not at the luncheon. But it doesn't surprise me that he would absolve his employer of any responsibility. What were the other two main causes he cited?

Anonymous said...

First was the generally strong economy from early 1990's through 2006 (with a brief dip as the tech bubble burst). Home prices tend to rise as the economy grows.

Second was low mortgage interest rates, although he did not acknowledge the connection between printing money and low mortgage rates.

Third was onerous land use regulations.

It was just funny to see your blog post as soon as I got back from the luncheon, where we talked extensively about the same topic.