"Smart Growth" Causes Home Mortgage Collapse

Thomas Sowell turns his keen eye onto the collapse of the mortgage industry and the housing market.

Amid all the hand-wringing and finger-pointing as housing markets collapse, mortgage foreclosures skyrocket, and financial markets panic, there is very little attention being paid to the fundamental economic and political decisions that led to this mess.

Such risky mortgage loans were rare just a few years ago. As of 2002, fewer than 10 percent of the new mortgages in the United States were of this type. But, by 2006, 31 percent of all new mortgages were of this "creative" or risky type.

In the San Francisco Bay Area, 66 percent of the new mortgages were of this type.

Why this difference in times and places? Because housing prices were skyrocketing in some places and times, so that people of modest incomes had to go out on a limb to buy a house, if they expected to buy a house at all.

But why were housing prices going up so fast, in the first place? A number of studies of communities across the United States and in countries overseas turned up the same conclusion: Government restrictions on building.

While many other factors can be involved -- rising incomes, population growth, construction costs -- a scrutiny of the times and places where housing prices doubled, tripled, or quadrupled within a decade shows that restrictions on building have been the key.

Attractive and heady phrases like "open space," "smart growth" and the like have accompanied land use restrictions that made the cost of land rise in many places to the point where it greatly exceeded the cost of the homes built on the land.

In places that resisted this political rhetoric, home prices remained reasonable, despite rising incomes and population growth.

Construction costs were seldom a major factor, for there was relatively little construction in places with severe building restrictions and skyrocketing home prices.

In short, government has been the principal factor preventing the "affordable housing" that politicians talk about so much.

Politicians have also been a key factor behind pushing lenders to lend to borrowers with lower prospects of being able to repay their loans.

The Community Reinvestment Act lets politicians pressure lenders to lend to people they might not lend to otherwise -- and the same politicians are quick to cry "exploitation" when the interest charged to high-risk borrowers reflects that risk.

The huge losses of sub-prime lenders, some of whom have gone bankrupt, demonstrate again the consequences of letting politicians try to micro-manage the economy.

Yet with all the finger-pointing in the media and in government, seldom is a finger pointed at the politicians at local, state and national levels who have played a key role in setting up the conditions that led to financial disasters for individual home buyers and for those who lent to them.

In Maryland, where I live, the driving force in much of the housing crunch comes from the People's Republic of Montgomery County. Their policies regarding growth, i.e. limiting it a great deal, meant that many people wanting to live in Montgomery county looked elsewhere for housing, nearby Frederick, Carroll, Howard and Prince George's Counties. That market pressure drove up housing prices in those counties and well as spurred massive real estate development, which then caused "Smart Growth" supporters in those counties to push the government for smart growth restrictsion there, again artificially inflating housing prices.

Thus as Sowell points out, people who otherwise might not qualify for a mortgage get a sub-prime loan to afford a house and then it comes back to bite them when their income doesn't rise to the level necessary to pay the latter years of the mortgage. In my home county of Frederick, a "starter house," like a 1500 square foot townhome runs about $275,000 at the low end of the cost spectrum. A couple would need to earn about $77,000 a year to afford such a home on a standard 30 year mortgage with a 5 percent down payment. However, the median income in Frederick is just over $53,000 for a family of four.

In short the supply of homes is limited by artificial means and the push for homeownership is rewarded by artificial means (by deductibility of mortgage interest) that people made bad decisions.

Yes, the government has a hand in the problem, but they really can't offer much of a hand to fix it, nor should they. The best move for local governments to do right now is to lift all "smart growth" restrictions and let the housing market sort itself out.