Planning, Housing Foreclosures, and the Recession

Planning critics Randal O’Toole and Wendell Cox have stumped for planning’s role in causing the housing crisis for a long time, and their insights have been largely ignored. USA Today, however, recently provided some compelling data supporting their thesis (and to a lesser extent ours).

USA Today reporters tracked foreclosures and found (not surprisingly) that just 35 counties captured the lionshare of foreclosures. These counties made up 20% of the US population and 50% of the mortgage defaults, home repossessions, and home auctions.

More than half of the nation’s foreclosures last year took place in 35 counties, a sign that the financial crisis devastating the national economy may have begun with collapsing home loans in only a few corners of the country. Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year, a USA TODAY analysis of figures compiled by the real estate listing firm RealtyTrac shows — more than were recorded in the entire United States just two years earlier. They were the epicenter of a wave of foreclosures that have left leading banks teetering and magnified the nation’s economic problems.

The foreclosures in these counties started a ripple effect that led to the collapse of the financial system.

But, it’s the geography that’s important. The top 35 counties are dominated not by weak indusrial states, but high cost housing markets.

In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.

A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.

Indeed, the USA Today article points out 25% of the nation’s foreclosures last year were concentrated in just eight counties in Arizona, California, Florida, and Nevada.

In another, earlier analysis, USA Today looked at 2008 foreclosure rates and ranked the states with the highest rates. Here are the top ten states fore foreclosures per 1,000 poopulation in 2008 (the national average was 1.8%):

1. Nevada, 7.3%
2. Arizona, 4.5%
3. Florida, 4.5%
4. California, 4.0%
5. Colorado, 2.4%
6. Michigan, 2.4%
7. Ohio, 2.3%
8. Georgia, 2.2%
9. Illinois, 1.9%
10. New Jersey, 1.8%

The top five were all bubble housing markets–experiencing dramatic increases in supply as a response to high housing demand. Often, housing price increases outstripped the increases in household income by large multiples, severely limiting their ability to pay off the mortgage once the market stabilized.

But, some of theses states, most notably California and Florida, are notorious for their restrictive planning laws. A closer look at the clustering within states reveals that the foreclosures are highest in counties around the San Francisco Bay Area, the Florida coasts, and the suburban areas around Washington, DC. The Bay Area has some of the most restrictive laws in the nation. Maryland is not known for its market-based planning, and several high-growth counties in Viriginia have adopted significant growth controls.

The correlation is not perfect, but the evidence is growing that, on the margin, restrictive planning laws make a difference and they should be noted. Indeed, our study of the impact of Florida’s statewide growth management law suggested that 16%, and as much as 20%, of the growth in housing prices at the county level could be explained by the implementation procedures imbedded in the law. We found similar results in Washington State a couple of years earlier.

It’s time to take a fresh look at planning’s role in causing the housing crisis.