The U.S. mortgage meltdown has dominated business news for months. The crisis seems to deepen daily, and its impacts are felt throughout an increasingly interdependent financial world. Only recently, the Organization for Economic and Development (OECD) and the International Monetary Fund (IMF) have suggested that losses of an additional $250 billion to $1 trillion may yet be in the offing. In the ongoing debate over the causes and cures of the mortgage meltdown, one of the most important factors has been virtually absent: the role of excessive land use regulations in exacerbating the extent of losses.
What Is Excessive Land Use Regulation?
As we know from introductory courses in economics, scarcity raises prices. In a number of metropolitan markets across the country, excessive land use policies have been adopted, such as urban growth boundaries, huge areas recently declared off-limits to development, building moratoria, confiscatory and unprecedented impact fees, and excessively large minimum lot sizes.
These policies, often referred to as "smart growth," create a scarcity of land, artificially raise the price of housing, and, again, have increased the exposure of the market to risky mortgage debt. When more liberal loan policies were implemented, metropolitan areas that had adopted these more restrictive policies lacked the resilient land markets that would have allowed the greater demand to be accommodated without inordinate increases in house prices.
A few voices in the wilderness on both sides of the political spectrum have pointed to the role of excessive land use policies in driving up housing costs. For example:
• Liberal economist Paul Krugman of The New York Times put most of his conservative colleagues to shame in noting that the house price bubble has been limited to metropolitan areas with strong land use regulation.
• Conservative Thomas Sowell, no stranger to being a voice in the wilderness, has made similar points.