RALEIGH – I guess it’s cold comfort to say this in a state with thousands of residents underwater on their mortgages, but by national standards North Carolina didn’t experience much of a housing bubble during the past decade. Our trends look nothing like those of states such as California and Arizona where the housing markets look a bit like smoking ruins.
Growth-policy expert Randal O’Toole has the data to demonstrate the point – and an explanation for why some states had huge housing bubbles and other states didn’t.
Let’s start with the data. Back in October, the Cato Institute published a paper from O’Toole that reports several interesting trends. One table shows the average gain in housing prices in each state from the first quarter of 2000 to each peak, and then the average drop in housing prices in each state from the peak to the second quarter of 2008.
Here are some examples of bubble states:
California – 124 percent price gain, then 32 percent price drop.
Florida – Up 108 percent, down 27 percent.
Rhode Island – Up 96 percent, down 16 percent.
Arizona – Up 87 percent, down 22 percent.
I picked these because they illustrate the point that bubbles do not appear to be related to any particular geographical variable. They happened in big states and small, Sunbelt states and Northeastern ones, etc. What O’Toole noticed, however, is that virtually all of the states with major housing bubbles also enforced comprehensive state laws managing growth and land-use markets.
The median state, Alaska, had a 39 percent price gain followed by a 6 percent drop. That’s not much of a bubble. Alaska also has no significant state controls on growth or real-estate development. Virtually all of the states below the median in housing-price variability also lacked statewide growth-management policies.
Consider North Carolina. From 2000 to peak, our housing prices rose by an average of 22 percent. From peak to 2008, they dropped by less than 1 percent. Granted, there’s been some marked declines in prices since then in North Carolina, but that’s true in most of the rest of the country, too. The point is that, comparatively, North Carolina’s housing markets did not gyrate nearly as much as those in states with comprehensive growth management laws.
The explanation of this relationship isn’t hard to fathom. Urban growth boundaries and similar policies restrict the ability of developers to bring housing inventory to market. “In a normal housing market,” O’Toole writes, “home values keep up with inflation and median family incomes. Markets become abnormal when there is some limit on the supply of new homes – and most such limits result from government regulation.” In such abnormal housing markets, producers have far less ability to respond quickly to changes in household preferences. Price swings are amplified.
You can see more evidence for the effect when comparing median home values to median family incomes. In heavy-regulation bubble states, the ratio changed markedly. In California, the median home cost 3.8 times median income in 1999. The ratio rose to 8.3 in 2006 and then dropped to 5.5 by 2008.
Alternatively, look at North Carolina’s ratio. The median home cost 2.1 times income in 1999, 2.5 times income in 2006, and 2.6 times in 2008. That’s not much of a change.
Of course, we’re talking about statewide averages here. Within North Carolina, some housing markets are more heavily regulated than others. Some previous research by JLF demonstrated the consequences of these regulations, with communities such as Asheville and Wilmington forcing their home prices up by thousands of dollars.
Housing regulation didn’t cause the financial crisis and subsequent recession, of course. But it played a role in making housing bubbles bigger – and thus making the pop louder and more painful. Thank goodness North Carolina hasn’t yet emulated California, Maryland, or Florida by passing state growth-management rules.
Not that some haven’t tried.
Hood is president of the John Locke Foundation