Did Smart Growth Cause the Housing Bust?

It depends on how you slice the data. This was the point of a June 14, 2011 Wall Street Journal article after it summarized Wendell Cox’s 2011 empirical study on the topic. Smart growth refers to land use regulations that try to check “suburban sprawl” and vehicle travel by steering new development away from farms, forests, and open spaces to already developed places where people can get around easily on riding bikes, buses, and trains. Cox calls places with smart growth regulations “prescriptive areas” and those with looser regulations, “responsive” areas.

Because prescriptive areas drive up housing costs by limiting the amount land for new development, it follows that these areas bore a disproportionate share of the drop in home values. According to Cox, the 11 heavily regulated metropolitan markets accounted for over 73% of the aggregate home-value losses, with an average loss of $175,000 per house.

But the Urban Land Institute’s Patrick Phillips countered that Phoenix, Arizona and Central Florida aren’t known for restrictive land use regulations and still suffered during the housing bust. When it comes to slicing the data, it’s a mistake to treat individual markets as either highly regulated or not because land use regulations might make it easy to build in one neighborhood but not another. For Phillips, an unfounded faith that real estate prices couldn’t fall caused the bust, not land use regulations.