July 29, 2010

"Dirt Gap" Validated

Here's a study called "Residential Land Use Regulation and the US Housing Price Cycle Between 2000 and 2009" by Haifang Huang and Yao Tang that does a regression analysis on U.S. metropolises that comes to some of the same conclusions as I've been saying since my "Dirt Gap" article right after the 2004 election. 

Huang and Tang find that the size of both the housing price inflation in 2000-2006 and the size of the price crash in 2006-2009 correlate with:

1. Geographic constraints on suburban development (water, wetlands, slope)
2. Regulatory constraints on suburban development (zoning, environmentalism, etc.)
3. Borrower quality (as measured by % of local mortgage applicants turned down in 1996, back before subprimes)

California, for example, had a less elastic supply of housing than Texas because it's more constrained by ocean and mountains, and by government restrictions on development. So, increases in demand for housing, such as the war against down payments, cause sharper price shocks in California than in Texas because supply can catch up with demand faster and more cheaply in Texas. (Furthermore, California has more marginal borrowers than, say, Vermont.)

Their conclusions:
Stringent land use regulation and restrictive geography reduce the supply elasticity in housing markets. In a housing boom with rising demand, the lower elasticity forces house prices to increase by more. In the subsequent bust, however, the drop 25 in the price     may or may not be bigger in the more constrained areas. On one hand, greater price booms likely lead to greater corrections. On the other hand, a smaller number of houses can be constructed in those areas during the boom, and the downward pressure on prices from housing stock is smaller during the bust.

Using data from 326 US cities, our study examines empirically how residential land use regulation, geographic land constraint and credit expansion are related to the swing of house prices between January 2000 and July 2009. The regulation data is from Gyourko et al. (2008). The geographic data at metropolitan level is from Saiz (forthcoming). We use the mortgage-application rejection rate in 1996 to proxy for the local impact of the nationwide mortgage-credit supply expansion, following the approach in Mian and Sufi (2008a). We find that cities that are more regulated or have less developable land experienced greater price gains between January 2000 and June 2006, and greater price declines between June 2006 and July 2009. In addition, the natural and man-made constraints both amplified the responses of house prices to an initial demand shock arising from the mortgage market, turning the shock into a greater price gain and subsequently a greater loss. Finally, over the entire period, cities that had more marginal borrowers before the credit expansion did not experience greater growth in housing prices, indicating that the subprime expansion did not leave a positive legacy on the price front. 

My view is that the more constrained geography of California compared to Texas inevitably creates more demand for more regulatory constraint on development. You'll have more NIMBY feelings if you have a nicer view from your backyard.


l said...

Off topic: LA Times columnist says the best immigration policy is to do nothing. And you're a racist if you disagree.


wild chicken said...

It is funny how this seems to happen. I tend to believe that the land use restrictions do limit supply, yet there is a nagging chicken-and-egg problem here. Places like SF or Palo Alto were just damn desirable to begin with, at least to people like me. Same with Boulder, Portland, and other expensive places, due to universities or high tech industries or outdoors or all three. Correlation is not causation.

Do they become even more desirable as open lands get locked up and developments are forced into housing clusters with 60% of the land dedicated common area? Is that what's happening say in Palo Alto, with all the special natural preserve areas up in the hills? I don't know the answer. It's happening in my town too.

Anyway, people should remember this when they go all NIMBY about something going on in their back yard that they want to limit or stop entirely.

Anonymous said...

In central and western nh (beyond the coastal plain that blends seamlessly with nh). The geographic constraints of wetlands granite and clay soils as well as no natural gas lines always keep the supply of housing in check during booms. Although it works to control unbridled growth it seems like we could use a little more coordination to overcome these since nh is rapidly becoming a human capital driven state.

Anonymous said...

Portland, Oregon is a good illustration of how constraint on development brings about higher residential real estate prices.

Oregon has very restrictive zoning laws that require large minimum size parcels outside cities - I believe as large as 40 acres. I live in the Midwest, and when visiting my sister in Portland some years ago, observed that when comparing houses of comparable age and square footage, Portland prices seemed to be about 60% higher than they were at home. They would not be sustainable if suburbs were freer to develop in Oregon.

I also observed that the political will to maintain such restrictive land use laws, and to prevent the sort of suburban sprawl we see around many cities, was probably attributable to the small number of blacks in Portland and the consequent relative absence there of the inner-city necrosis that always accompanies concentrated black populations.

If the nice upper-middle class liberals in Portland had to send their kids to school with lumpenprole blacks, you can bet those land use laws would swiftly be repealed, and white suburbs with their own public school systems would flourish outside city jurisdiction, just as they have done elsewhere. It's easy to be a politically-correct progressive when you don't have to face the unpleasant consequences of your policies.

Mil-Tech Bard said...

Mr Sailer,

The missing part of your analysis between California and Texas is the percentage of land in the state that is privately held.

In Texas the percentage is well over 95%.

In California it is less than 50%

This means that the state government and Feds have to fight to get access to land in Texas and always face huge resistance to any populist environmental issues that reduce the value of privately held land.

The Agriculture/Rail corporations, Feds and the State government in California between them hold the majority of the land. This mean that you always have a Populist/Left base plus government bureauct majority to work with to control the minority of private property holders.

Eric said...

People who already own in a desirable neighborhood have no interest in reasonably priced houses - quite the opposite.

When I lived in Santa Barbara housing was ridiculously expensive ($300k for a fifty year old tract home in the '80s), but undeveloped land was virtually worthless. The reason was the voters had artificially constrained the water supply and you couldn't get a meter.

It was the ultimate "I have mine so screw you" system of land use.

Truth said...

Where does Mil-Tech Bard get the info about private property ownership?