Zoning Laws and The Subprime Crisis

Ilya Somin at The Volokh Conspiracy brings up Randal O’Toole’s post, which questions if restrictive zoning might be one of the causes of the subprime lending crisis.

Not the cause, mind you, but a contributing factor, and one larger than we might think.

As Harvard economist Edward Glaeser and UPenn economist Edward Gyourko showed in this 2002 paper, restrictive zoning greatly increases housing prices by artificially reducing the amount of land on which new housing can be built and also by reducing the amount of housing that can be built even in those areas where residential construction is permitted. Glaeser and Gyourko show that zoning restrictions account for a high percentage of the total cost of housing in some of the nation’s most expensive real estate markets, such as California and the major East Coast cities. O’Toole’s post cites more recent research that supports this conclusion (including his own). Higher housing prices helped cause the subprime mortgage crisis by forcing homebuyers to borrow more money in order to purchase homes of a given size and location. If prices had been lower, so too would homeowner indebtedness. Fewer buyers would be on the verge of default as a result of a market downturn; their debt burden would likely be much smaller relative to their income.

Interesting, and certainly an example of the law of unintended consequences.

Zoning laws are the reason my neighbor can’t put a neon sign outside on his lawn to sell his wares from his home office. They’re also the reason why I couldn’t build a 900 sq. foot house on the spot I wanted to (1800 ft. minimum, the law said).

Interesting concept, that. Zoning laws don’t say I can’t do something; they say I can’t do something there. I suppose that’s fine, until I run out of there. Then it’s a whole ‘nother kettle of fish. I guess it’s good that we recognize zoning restrictions as a mixed blessing, which means that communities – you and I, need to be very careful with them, much more than we have been. Every election, every referrendum is our opportunity to have our say in this, and by not looking at how zoning is actually being implemented, Joe and Jane voter have allowed a very mundane form of corruption to creep into the lowest forms of government, the very forms that affect us daily.

As a cause of the subprime lending crisis, I suspect strongly that greed on the part of developers, greed on the part of lenders and greed on the part of buyers (who saw opportunities in flipping houses) figured in more than zoning restrictions. An unexpected influx of new buyers in certain areas (such as mine) exacerbated the problem.

I don’t have an answer as to why the taxpayer (me) is going to paying for the mess, but I know he will.

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