"Land Use Regulations and the Housing Bubble"

This post from Economics of Contempt looks at the relationship between price bubbles and regulation in housing markets, and poses an hypothesis about how regulation could have influenced the housing bubble. The argument is that regulation causes larger and more sustained swings in prices, and, on the upside of the cycle, the larger more sustained increase in prices helps to fuel the perception that prices will keep going up, a key factor in the propagation of bubbles:

Land Use Regulations and the Housing Bubble, Economics of Contempt: Mark Thoma, while linking to an article on the cost of land use regulation, expresses doubt about the idea that land use regulations contributed to the housing bubble by raising housing prices. So I guess this is as good a time as ever for me to make the case that land use regulations probably contributed to the housing bubble. ...

To be clear, I'm not saying that land use regulations definitely did contribute to the housing bubble. I'm only saying that based on the existing empirical literature on the relationship between land use regulations and housing prices, it's likely (very likely, in my opinion) that land use regulations contributed to the housing bubble in a not-insignificant way.

First, a very crude summary of the theory underlying the link between land use regulations and housing prices.

Land use regulations raise housing prices by restricting the supply of developable land, and thus new housing construction. Such regulations generally take the form of minimum lot sizes or explicit growth controls (which limit the number of building permits that can be issued). Local governments adopt these land use regulations because homeowners -- who absolutely dominate local politics (see pg. 15) -- have a strong interest in maintaining high housing prices (see pg. 9) by restricting the supply of developable land. (Berkeley economists John Quigley and Larry Rosenthal published a very thorough description of the existing empirical literature here, although I agree with Bob Ellickson that Quigley and Rosenthal were far too timid in their conclusions. See also William Fischel here)

Now to the link between land use regulations and housing bubbles. Ed Glaeser, Joseph Gyourko, and Raven Saks provide a nice illustration of the effect that land use regulations will have on housing prices in the face of a demand shock:

The most persuasive evidence comes from a 2006 paper by Min Hwang and John Quigley, "Economic Fundamentals in Local Housing Markets: Evidence from U.S. Metropolitan Regions". Hwang and Quigley's model is based on data from 74 metropolitan areas (MSAs) from 1987-1999. Using a well-known Regulation Index (developed by Stephen Malpezzi), which measures the restrictiveness of an MSA's land use regulations, Hwang and Quigley are able to simulate the impact of restrictive land use regulations on housing price appreciation across MSAs.

First, they take 3 MSAs with different levels of land use regulation "restrictiveness": Houston (least restrictive), Tucson (medium restrictiveness), and San Jose (most restrictive). Here's the effect that an unexpected income shock has on housing prices in each MSA:


As Hwang and Quigley explain, "After an initial shock, lagged market responses play an important role in the development of equilibrium prices."

Second, they take Denver, the MSA with the least restrictive land use regulations:

"This simulation is reported in the same manner as those reported for Houston, Tuscon, and San Jose. We also report a second simulation for Denver, but with one counterfactual. In this second simulation, we assume that Denver's regulation of new construction is as stringent as that of San Francisco, the market with the most stringent building regulations in our sample."

As you can see, more restrictive land use regulation leads to larger and more sustained house price appreciation.

Additionally, here's Harvard economist Raven Saks in a 2005 paper:

"To identify metropolitan areas where the supply of housing is constrained, I assemble evidence on housing supply regulations from a variety of sources. In places with relatively few barriers to construction, an increase in housing demand leads to a large number of new housing units and only a moderate increase in housing prices. In contrast, for an equal demand shock, places with more regulation experience a 17 percent smaller expansion of the housing stock and almost double the increase in housing prices."

The fact that the house price appreciation in MSAs with restrictive land use regulations is so long in duration would give realtors and homebuyers the impression that (stop me if you've heard this one already) "housing prices always go up!" In other words, the sustained house price appreciation lays the groundwork for a speculative housing bubble. The length of the price appreciation, I think, assures people of the stability of the upward trend, thus inducing them to borrow over their means in order to buy.

That's my take, anyway. I really just wanted to write it down.

A follow-up:

Land Use Regulations and Housing Bubbles: Part Deux: I outlined the argument and presented some of the empirical evidence supporting the idea that land use regulations played a key role in the housing bubble... I want to expand on that argument, as well as provide more empirical evidence...

First, Goodman and Thibodeau (2008), in a paper titled "Where Are the Speculative Bubbles in US Housing Markets?", find:

"We estimate housing supply elasticities for 133 metropolitan areas and conclude that although areas on the East Coast and in California had large observed price increases, they owe much of their house price increases to inelastic supplies of owner-occupied housing."

This is, I think, the key point: it was housing supply inelasticity more than anything that led to the housing bubble.

What role do land use regulations play? Not surprisingly, it is land use regulations that lead to inelastic housing supply. In a 2005 American Economic Review paper, Quigley and Rosenthal report:

“For the growth in the overall housing stock, we find a significant and positive supply elasticity for unregulated cities and a negative and significant negative effect for regulated cities.”

Quigley and Rosenthal then turn to the effects on housing prices, finding:

“We find a positive relationship between the degree of regulatory stringency and housing prices for both owner-occupied units and rental units.”

Thus, restrictive land use regulations -- which make housing supplies inelastic -- turn a demand shock into a bubble because they lengthen the duration of price appreciation. This argument that land use regulations turn demand shocks into bubbles was bolstered by a recent paper by Dusansky and Koc (2007):

"We find that an increase in housing prices increases the demand for owner-occupied housing services. Thus, housing's role as investment asset with its potential for capital gains dominates its role as consumption good, which alone would produce a downward sloping own demand curve rather than one which is upward sloping."

Housing's dual role as an investment and a consumption good is what makes it more susceptible to bubbles. When house price appreciation is fast enough and lasts long enough, consumers don't demand less of it, as they would with normal consumer goods, because the expected capital gains from the house price appreciation, in the minds of consumers, offsets the higher price for housing as a consumption good. Moreover, the belief that house price appreciation will continue -- which is reinforced by the long duration of the price appreciation -- leads consumers to overestimate the expected capital gains.

This is why, I think, land use regulations were likely a key factor in the housing bubble.

Comments

[dilbert dogbert]

I admit to ignorance here but even so I see apple and oranges comparisons going on in these studies. SF, San Jose and the Penensula area between are built out. These areas have only one way to increase housing and that is by building greater density, ie tearing down SFH and building condos and apartments. Palo Alto, where I live, made the decision a long time ago to remain a residential city. This goes for all the towns from Los Gatos, Monte Sereno, Los Altos, Los Altos Hills, Palo Alto, Woodside and Atherton. The restrictions in these cities may have forced development to the East Bay and over the hills to the central valley where there is cheap buildable land with lower restrictions. That is the extent of the responsibiltiy of land use restrictions on the inflating of the bubble.

This, blaming of land use restrictions, is a funny argument considering the effects of cheap money and funny money loans of the last few years. My opinion is that the bubble would have been much smaller and would not have precipitated the current crisis if lending had not gone off the rails.

[Bruce Wilder]

Just a note in passing:

The U.S. is a pretty big country. It has more than one real estate market. Most major cities have many distinct real estates markets.

The present credit crisis and the underlying housing price decline is a national phenomenon. It is acute in some real estate markets where there was a big run-up in prices, as well as in some markets where there was none whatsoever.

When we are puzzling over "the bubble" we ought to decide if we are trying to explain the behavior of real estate prices nationally or in particular markets.

And, we ought to recognize that we talk of a "bubble" the implied interest is not only in the circumstances, which lead to run-up, but also in the circumstances which lead to a run-down. The most interesting bubble cities are places like San Diego and Las Vegas.

Finally, and this would seem to me to be key, there is a question about how housing prices ever become substantially detached from household income.

Sure, if there's a bump in household income, I can see how that might feed through to a rise in house prices, and that rise might be larger when there are significant restraints on building, either regulatory or geographic.

I remember how videotape and DVDs fed real estate mania in West Los Angeles, so I get it.

Did I miss something? Because I don't remember any big bumps in the last six or seven years in household income, in the U.S., (outside of Washington D.C. and Manhatten, that is)

If the whole subject is academic, that's OK with me, but if it's purpose is to add a gloss of credibility to a cynical apology for predatory and fraudulent lending practice, count me disgusted.

[Blissex]

Local governments adopt these land use regulations because homeowners -- who absolutely dominate local politics (see pg. 15) -- have a strong interest in maintaining high housing prices

Well, sure, but also because they have a strong interest in keeping dark skinned people out of nice neighbourhoods, because dark skinned neighbours are poison to real estate prices too.

Also, home ownershership and rising asset prices are well known to political scientists (and Grover Norquist) to create and entrench voting for Republicans and in general support for conservative policies (the "f*ck you, I am fully vested" culture), therefore to *some extent* restrictions on supply are also enthusiastically endorsed by conservative politicians. Even more enthusiastically if most voters are home owners anyhow, and the people priced out don't or cannot vote.

how housing prices ever become substantially detached from household income.
Sure, if there's a bump in household income, I can see how that might feed through to a rise in house prices

Or viceversa: household income is stagnant or declining, but *disposable* household income rises a lot thanks to low or negative real interest rates.

Low or negative real interest rates have a a *double* effect: they reduce the monthly payments for a given house price, thus increasing the disposable income even if real total income is stagnant or declining, and that increased disposable income can drive house prices up; but low or negative real interest rates also create large capital gains that can be liquidized with house equity loans.

And liquidized capital gains can be used not just for consumption, but more investment.

If a house quickly (in the space of a few years) goes from $200k to $400k, the owner can take out say $100k-$200k for the down payment on a second $400k house, and wait until house prices have gone to $600k.

With the side effects that undesirable dark skinned people are even more priced out of nice neighbourhoods.

So everybody who matters (conservative politicians, their sponsors, white voters who already own RE, their children, financial business owners) wins big from zoning restrictions and a policy of always low interest rates, and the Fed*mart should restart that engine by lowering interest rates further and buying distressed mortgages to support rising home prices.

[Blissex]

to add a gloss of credibility to a cynical apology for predatory and fraudulent lending practice

That always helps of course. However for conservatives to blame zoning restrictions more than Fed*mart always low interest rates is an own goal: because while it diverts the attention from the drive to create ever rising asset prices to the benefit of business interests by it focuses the attention on the racial basis of much local zoning restrictions, apart from them restricting supply, and racial based voting is still a big part of the conservative coalition.

Anyhow, there has been little fraudulent lending, I reckon that most of the fraud was fraudulent borrowing and consequent fraudulent securitization, where in both cases the creditor is being taken advantage of, not the debtor.

[Blissex]

Did I miss something? Because I don't remember any big bumps in the last six or seven years in household income

You also missed that negative real interest rates in effect create unlimited disposable income to those able to enjoy from the internal carry trade and who understand arbitrage. These are usually high net worth individuals or people who have no qualms about liar loans.

Both have been making a lot of money. In a recent article George Soros estimated that 40% of subprime loans would go bust, and this means that around 60% of subprime borrowers have got a house they would have been unable to afford otherwise, and will gratefully and self interestedly vote Republican for the rest of their lives, now that they have joined the fraudster and landlord classes ("f*ck you! I am fully vested").

[so far, ths is just speculation on speculative bubbles]

I have no problem with the idea that existing land use regulations are imperfect and harm average peoples’ welfare, but I don’t think these papers present much evidence that regulations were key part of the bubble, or at least the aspects of a bubble that caused significant real losses. And by ‘ real loss’ I mean aggregate social loss from lots of new houses sitting around empty and rotting away.

For example, the Hwang Quigly paper shows bigger price increases with lower supply elasticities. The link to speculative bubble comes in with hand waving about larger and more rapid price appreciation producing overshooting in price forecasts. But look at the relative supply response. In the first year low reg Houston adds over 7 times the housing stock as high reg San Jose. It is not clear from the graph how one should cumulate over years, but the ratio of the two total responses in the first 3 years looks to be even larger. Now, using my definition of bad bubble (overshooting of forecast over fundamental price that leads to waste of real resources in building housing that is not wanted or not profitable at fundamental price), which regulation regime is worse? Can you tell me? Both cities have significant price appreciation that could lead to overshooting. But Houston has a large supply response that might lead to much real waste, San Jose has a small one that would seem to lead mainly to wealth transfer of existing house sales at the wrong price. Seems like it is an interaction between overshooting supply expectations and elasticity of supply to those mistaken price expectations that lead to a bubble that causes trouble. The paper also needs to a section that measures how the simulations match up to historical prices, seems to me. I cannot tell how well their simulations match up with historical price trends.

Between 30% and 40% of Goodman and Thibieau’s supply elasticities make any sense, and I don’t see where their measures of cost include anything about land use regulations. And I think they cheat a little in reporting results. They represent states and regions by median and mean supply elasticity estimate,. but individual within state and region MSA estimates are all over the map. Take a look at Central Valley and Inland Empire CA, for example. After looking over the individual MSA estimates, I do not feel comfortable about making any generalizations about states or regions (neither the good regions nor that bad supposedly regged-up nimby regions)

I think Quigly and Rosenthal’s tentative conclusions are justified by their observations on poor data quality and limited sensitivity analysis for robustness of results to alternative estimators. I see almost all studies use OLS, in spite of the reviewers observations on many potential places were endogeneity bias may exist. I don’t see any evidence of bias in their conclusions.

I see two big problems with the current bubble. One, seems like lots of housing got built that people cannot afford at a price that keeps the builders solvent. Two, the poorly designed securitization of the mortgages that seems to have turned the securities industry into a huge market for lemons. Neither of those two are simple products of price overshooting.

Lets get a model down on paper that models bubble price formation against a reasonable model of fundamentals, and supply response under high and low regs. Then make some forecasts and compare that to future out of sample data as it comes in, (not comparison of real prices to what some in-sample estimate of what some economist thinks they should be).

PS Goodman and Thibodeau do an out of sample forecast exercise, which is great, but it is so informal, I cannot tell what it says about their results.

[so far, ths is just speculation on speculative bubbles]

PPS: my informal out of sample exercise. From what I have seen so far, the post-bubble price decline in SF bay has been much smaller than in places in CA with less stringent restrictions.

And PPPS: In Prop 13 CA, local governments hunger after property tax dollars, and go for what they perceive to be high and reliable tax revenue projects. That might explain taste for McMansions and high amenity low density projects, and business developments. They figure they will get high class upper income homeowners, and business project that wouldn't be built unless profitable, since business don't make such bad mistake, do they? Some of the anti-regulatory party have a postively unhealthy fixation on 'NIMBY' and snooty home owners and them humanity-hating enviros. Which is not to say those do not play a role, but other things do also.

Anyway, as for property owners, in the Bay Area, both home and rental owners are key factors in many building restrictions, since the value of views, ambience, and just the right density is key. But so what? Where is the efficiency loss? For the regualton haters, I "Coase" them. QED.

[Gavin]

"so far, ths is just speculation ...", you are taking a narrow geographical view of the effect of land use regulation. The stringent regulation on housing development in the San Francisco Bay Area has resulted in long commutes and rapid development in the central valley. Some of the worst housing markets in the nation surround the Bay Area. You cannot treat the central valley markets as separate from San Francisco and San Jose housing markets.

The efficiency loss has first shown up in the foreclosed houses in Sonoma, Sacramento, Stockton and Salinas. I believe drops in housing prices will soon be showing up in San Francisco and San Jose though they are not likely to be the same magnitude.

One interesting fact I noticed during the boom was that housing got even more un-affordable as measured by (price-income) ratio in Sacramento and Stockton than in San Francisco and San Jose. House prices were lower in the central valley but incomes were much lower relative to the Bay Area resulting in less affordable houses to the local residents.

I wondered why the central valley saw greater increases in prices. It wasn't the locals driving up prices but Bay Area residents speculating on houses. If it werent for the land use regulations San Francisco homeowners wouldn't have increased home prices providing money to speculate in central valley real estate.

[paine]

making the obvious "doubt able"
by posing two causals and calling for a pick one

we have the volume constraining
boundary of a rigid chamber
and the forced entry of air

pressure will increase inside the chamber

now
is it the walls of the chamber or the entering air
causing the increase ???

[paine]

lets agree
use regs are rent producing

and circular collateralization credit systems
can tit twist both ways release themselves
from their feasible debt service moorings
at least when in "final " full ponzi mode

and yet

rule of thumb notions (like income to debt reatios )
-- usually in place to govern this process--- are no longer
a determinative prudence
when pass thru speeds reach high enough velocity to qualify as a looters highway
once switched off .....

[reason]

Paine,
very good comment.

Now I have another question, why doesn't local building regulation cause substitution (both of housing and business) to other areas, rather than decreasing affordability? You would think that the logic would be that deliberately choosing to price outsiders out of the market would result in economic stagnation. Why didn't it?

says...

why doesn't local building regulation cause substitution (both of housing and business) to other areas, rather than decreasing affordability? You would think that the logic would be that deliberately choosing to price outsiders out of the market would result in economic stagnation.

Pricing out low productivity dark skinned losers does not cause stagnation -- it just causes the losers trading down, as they should. Living in smaller flats, longer commutes, are the rightful punishment for the losers.

As to the winners, the role of negative real interest rates is to increased their disposable income, and in any case the winners are already asset owners and have made a lot of money flipping property bought years ago.

Put another way, stagnation comes when value added generation decreases, but interest rate/real estate Ponzi schemes just have a redistributive effect: from poorer/younger/darker/outsider losers to richer/older/whiter/insider winners.

As it should be, because it is the latter that donate the most campaign funds.

[Blissex]

deliberately choosing to price outsiders out of the market would result in economic stagnation.

Similar logic can be used to *prove* that there is no discrimination against inferior races or gender: if it was really discrimination and not inferiority, employers who did not discriminate would be more profitable and overtake those stagnating employeers who drove away good employees solely out of prejudice.

Therefore the market shows that there is no discrimination, and those races and gender are really inferior, as every right thinking Southerner has known for centuries :-).

Fortunately :-) much of the Economics taught in most prestigious USA Universities by the Ken Lay Chairs of Economics or similar is based on that kind of sophistry, and all is good and well for the Movement :-).

[Gene O'Grady]

To inject a little note of history regarding my home town (Palo Alto), the fact is that the elimination of racial covenants and the restrictions on building in the hills to the west happened more or less at the same time, and pretty much the same people were behind them. So let's have a little less fact-free right wing snark.

[jean]

Whatever happened to the environment? Most of the southwestern US is UNsustainable as far as water goes, it looks to get worse. Some communities are looking at that. Here on the coast of nca, we have water, power, garbage, transportation issues. Outside the city limits the parcel size is 5 AC for a reason. Wells too close to septics are...well do I need to elaborate? The city has barely enough water for the residents within the city limits. We are in a drought. Damn right we have to zone! We are also trying to create affordable housing, as the locals are severely priced out right now. This whole argument is pretty laughable. I am sure Reps and Dems have done such, my democratic father among them. But we are in a new century, now. Things are different.

[Bruce Webb]

Well the substantive points were made already. None of the most notorious bubble markets: Las Vegas, Phoenix, Denver, Miami or the Inland Empire are known to be areas of strict land use regulation, nor are they particularly constrained by geography. Frankly this just seems to be episode CCXLVIII in "lets justify our 'Big Government is the problem' thesis even though real world evidence doesn't you know, actually support our position'.

Look I live in an area where the land use restrictions are very, very strict. Under various aspects of the State Growth Management Act, the State Shoreline Act, Dept of Ecology Rules on Stormwater runoff we are required to protect shorelines, fish bearing streams, farmlands, flood plains, forest lands, mineral lands, and steep slopes which given the particular geography of this piece of the Pacific Northwest would make you think building would be impossible. And certainly the Master Builders maintain as much. But the reality is that plenty of building permits have been and continue to be issued (I used to issue those permits for a living), houses are going up along with strong increases in population. If you have a piece of land that doesn't flood and doesn't slide it can and will be built on. We have huge amounts of wealth creation here led by Microsoft and Boeing, more billionaires than you can shake a stick out.

But. No bubble. Certainly Seattle's prices plateaued last year, and from what I hear permitting in Snohomish County slowed as well, because after all we are not isolated from national and international credit markets, but there are exactly zero signs that I see that we are going to undergo a substantial amount of actual depreciation in housing prices.

That is I am sitting in a place and a time where the combination of regulation, geography, economy, and demography should be sending prices through the roof. If we actually put credence in this mumbo-jumbo about regulation causing bubbles.

You can under regulate as well as overregulate, and depending on the particular political makeup of the County Council and the various City and Town Councils here we have certainly seen the pendulum swinging on the regulatory front. But none of that seemed to directly control overall growth rates or housing prices. Not here. Your mileage may vary and probably will vary given your different geographic and economic condition.

I just find these theory driven attempts to put the national housing market into one tight bundle with a one-size fits all explanation are doomed for failure. Real estate always has been to a degree cyclical, sometimes those cycles correlate more or less nationally with market effects spilling over from one region to another, other times not. In the end it all comes down to the same rule: 'the three most important things to know about real estate are location, location, and location'. But determining what goes into that is a lot more difficult and trying to reduce all this to soundbites like 'NIMBYs are just racists' or 'land use regulations make low cost housing impossible' is just special pleading. The builders I know sought to maximize their margins, which around here like most places, meant ever bigger houses on ever smaller lots, regulations were just something they had to work with or work around, the notion that they were driving the market just doesn't pass the smell test.

[Economics of Contempt]

Bruce Webb,

I appreciate the comments. However, I think you're misreading my posts. I never said that land use regulations "caused" the housing bubble. I was simply saying that land use regulations were a contributing factor; one of many factors, to be sure, but a contributing factor nonetheless, and one that has been largely overlooked in my opinion. And I was certainly not trying to blame the housing bubble on "big government." On the ideological spectrum, I'd put myself in the New Keynesian camp, on par with the Krugmans and DeLongs of the world. But that doesn't mean that I'm in favor of every single regulation.

As for your comment that none of the most notorious bubble markets are known for strict land use regulation, I have to disagree. On the Wharton Regulatory Index, which measures the strictness of land use regulations, San Francisco ranks #5 in the country Denver ranks #7, Phoenix ranks #8, and the Inland Empire ranks #12. I'll concede that Las Vegas isn't known for particularly strict land use regulations, but again, I'm not arguing that land use regulations caused the housing bubble, so I don't think that disproves anything.

I'm not arguing that all land use regulations are evil or that we should abolish them all, like libertarian extremists like Richard Epstein or Robert Nelson maintain. I'm just saying that the effect they have on housing cycles (i.e., higher and longer price appreciation in a given metropolitan area) is very conducive to bubble formation. And housing's dual role as both a consumer good and an investment makes it very plausible that demand might actually increase in the face of rising prices in some areas, as realtors switch their pitch from "buy a house while they're cheap!" to "housing is a great investment!"

Also, there are mountains of empirical studies showing that the stringency of land use regulations is a significant factor in local housing prices. So I think the burden of proof is on those who deny that fact to prove that the stringency of land use regulations is not a significant factor. See Quigley and Rosenthal here for an overview of the empirical literature.

[Economics of Contempt]

In my post above, it should say "Seattle ranks #7," and not "Denver ranks #7."

[AJ]

What Bruce Webb says, it's true more inelastic markets respond to bubbles with higher price spikes, but areas like Phoenix and Las Vegas responded with vast oversupply. See this post on Arizona over at Calculated Risk. It's not clear there is a significant deference in the end result.

Besides, here in Boston, while there's no doubt there are too many restrictions on building, but those are mostly responses to an inadequate funding system for local government, unlikely to be overcome by pleas to housing market efficiency.(Each house brings in $3,000-4,000 in taxes, each kid costs the local district $6,000 to educate, you do the math). Economists would be better off looking at local governments as loss reducing economic actors, whether they're rubber stamping developers in AZ or snob zoning in the Boston 'burbs, it's going to be determined by their budget needs not econ theory.

[so far, ths is just speculation on speculative bubbles]

Good comments (and a special thank you to paine for good analogies), and I do not disagree with the logic, but that logic applies to areas with inelastic supply for any reason whatever, not just regulation. So what data or writtne down theory do we have the regulation was 'significant' or 'key' in creating the current mess? And I see no response to my argument that it is the interaction of price spikes causing overshooting in price forecasts mixing with relatively elastic supply that causes booms with misallocation of investment in real capital. I mean, as soon as you have that, you are kicked out of your rational expections moving towards a stable long run equilibrium story, and some of the reg blamers have have just as much explaining to do as the more regulation friendly folks.

Look, I got no problem with changing many land regulatons and development restrictions. Many of them are bad and cause big problems. But the saying that regulation was a key or special factor in this particular crisis is just hand waving so far. I will read with interest any written down models with real data people come up with.

[Cynthia]

Strict land use conditions can cause housing prices to inflate, thus amplifying the inflationary phase of the housing bubble. By contrast, lenient land use conditions can cause a housing glut, thus amplifying the deflationary phase of this bubble.

Just a thought, though...

[reason]

Cynthia et al,
I think it is important to realise that regulation is not regulation. Not all regulation restricts supply. Some of it improves quality or promotes positive and avoids negative externalities. As I have argued elsewhere, this will increase the cost of building, but not necessarily the cost of housing, as at least in the long run the cost of building land (or its efficiency of use) should adjust to equate total housing cost to total capacity to pay. We (progressives in particular) need to get away from thinking of regulation as though it was something uniform and concentrate on distinguishing between good and bad regulation.

[Bruce Webb]

"I never said that land use regulations "caused" the housing bubble. I was simply saying that land use regulations were a contributing factor; one of many factors, to be sure, but a contributing factor nonetheless"

"I'll concede that Las Vegas isn't known for particularly strict land use regulations, but again, I'm not arguing that land use regulations caused the housing bubble, so I don't think that disproves anything."

"So I think the burden of proof is on those who deny that fact to prove that the stringency of land use regulations is not a significant factor."

Hmm, no. Just about everything is a 'contributing factor'. And while I grant that you are not responsible for the title of the post, Prof. Thoma's judgement was that you thought it more than that and rose to the level of 'causative'. And it is never up to the critic to prove a negative, it is your job to back your case.

Frankly I am not impressed. Really the substance of your argument boils down to 'Land use regulations affect Land Use and so put limits on Highest and Best Use'. Which won't come as news to anyone on either the regulatory or development side. Still once you add all of the qualifiers you don't seem to be making any case at all. As reason points out regulation can add to the cost of building and in many cases can make it unfeasible to build on any particular piece of dirt but generally speaking will only have pricing effects in those cases where there is little to no margin for redevelopment. Which may well include historic urban cores as seen in Boston, Manhatten or San Francisco but doesn't seem to be characteristic of the actual bubble markets.

As to the Wharton index is that broken down by city? or MSA? and how many entities are on the list? Because the real estate world is full of situations where incorporated cities have tight regulatory environments while the surrounding rural areas have little to none and so end up with the burdens of sprawl. For a particularly horrific case try Googling 'Maricopa High School Frys', Oh wait I did that for you: check out this libertarian paradise as related by Calculated Risk.
http://calculatedrisk.blogspot.com/2008/04/maricopa-do-it-for-children.html
Particularly charming is the following:
By the time Maricopa became a city, though, almost half of its land was owned by developers. In 2005, the local school district appointed a superintendent, John Flores, who began pleading with the developers for space for a high school (for a while, Maricopa schools were admitting 300 new students every month). But it was to no avail. Amy Haberbosch, Maricopa’s former director of planning, told me that developers believed high schools lowered property values; she said one developer told her he’d rather build a jail on his property than a high school. . . .

But! But! But!!! It is all so affordable!! Absent those pesky regulations that require us to make it actually livable. See you down at the Deli section at Fry's.

[Ken Houghton]

The model predicts that Denver's regulation will lead to only a modest decline, if any, in housing.

There are currently several thousand homeowners in the Denver area ready to say "Yours!" at those levels.

When the theory sucks in the sciences, scientists give it up. When the theory sucks in economics, economists shout louder and do another study to "prove" their point.

At least, this is what Economics of Contempt would have us believe.

[Cynthia]

Reason,

I agree! And some regulations are solely created to keep a few local bureaucrats fat and happy, whereas other regulations are designed to preserve local color and quality of life...

[Patricia Shannon]

My experience around here is that, while there is certainly racial prejudice, people who own expensive houses don't want smaller houses built near them, regardless of the race of the occupants. And some counties only want wealthy people, because of the tax benefits.

On the other hand, in the Atlanta area, there are also long-established neighborhoods where the people oppose the building of houses much more expensive than existing ones. They raise property values, and thus property taxes, which create a hardship for the original residents. And they attract more people who can afford to replace the original housing with more big houses, creating a cycle that destroys the existing neighborhood, and its web of supportive relationships.

[Lord]

I don't see anything controversial about this unless one is to infer reducing regulation would be an improvement. Coastal land is in limited supply. Areas that have room to expand build. Areas that don't appreciate. No doubt some think the solution to this is to make these areas unpleasant enough to live in to compensate for their charms. Those who live there don't. While regulation has an effect, it is slow changing and thus does not serve as a proximate cause of the bubble but only as a modifier of how the bubble is evidenced, in price rather than inventory. As price is pure gain requiring no inputs, it naturally is more profitable than building inventory. Property in these areas serve as income and wealth filters. Those who can and are willing to afford to live there do so. Those who can't or aren't don't. That is what government and markets are all about.