Zoning and the Housing Bubble

Paul Krugman churns out one of his past columns on the role of zoning in creating housing bubbles on his new blog. I know some of you may not like what he has to say on politics, but the fact of the matter is that he is a brilliant economist who will eventually win the Nobel Prize.

In Flatland, which occupies the middle of the country, it’s easy to build houses … As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can’t even get started. But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up.

This is exactly right and fits the pattern of housing prices. House prices in San Francisco shot up like a rocket in the 1990s and in the last couple of years but plummeted around 2001. In contrast, mid-west towns with elastic land and few growth restrictions have seen much more steady and sustainable appreciation of house prices. A less restrictive zoning regime in cities like Los Angeles or San Francisco would make these cities both more affordable and less susceptible to the foreclosures that we are seeing as house prices drop.