Sub-Prime building restrictions distort market

Thomas Sowell:

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.

The growth in risky "sub-prime" mortgage loans by people buying homes they could not really afford has been a key factor in the collapse of housing markets, when the risks caught up with both borrowers and lenders.

But why were home buyers suddenly taking out so many risky loans and lenders suddenly arranging so much "creative" financing for these borrowers?

One clue is the concentration of such risky behavior in particular places and times.

Interest-only mortgages, where nothing is being paid on the principal for the first few years, enable many people to get started on buying a home with lower mortgage payments at the outset.

But of course it is only a matter of time before the mortgage payments go up and, unless their income has gone up enough in the meantime for them to be able to afford the new and higher payments, such borrowers can end up losing their homes.

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.

...

The most affordable homes in the country are in the Houston area. they are also some of the most attractive. a Houston resident can have four or five times the space of a New York residence for the same or less money and he can also have a yard if he wants it. The big difference is that Houston has virtually no government restrictions on building.

Developers can put deed restrictions to make a community homogeneous, and these can be enforced by the courts, but the developer does not have to get the approval of a zoning board. He does not need a zoning board to tell him how to market the neighborhoods he is building. If the people in that neighborhood want to sell out to a developer who wants to change the area to multifamily high rise development they can do so.

The Greenway Plaza area inside the loop in Houston is one such area where residents were given a tender offer above the current market price for their homes and a huge high rise office complex was built without using Keto like condemnations and without the expense of going through the zoning process. The home owners and the developers both benefited from the lack of regulatory costs.

People who move to Houston from areas where housing restrictions have pushed up prices are amazed at what they can buy and the attractive selection offered. It has been no secret what the market can accomplish if you are willing to trust it.