Cafe Hayek - Latest Comments in Location, Location, Location

Re: Location, Location, Location

John Thacker — Fri, 21 Nov 2008 18:46:10 -0000

If Regional Growth Planning restricted the number of permits as O'Toole asserts, one would expect AZ's ratio of permits to population increase (450k/1M=0.45) to be smaller than TX's (960k/2.7M=0.36). Rather, it is larger. The supply side was not constrained due to Regional Growth planning, at least in AZ.

One does have to look at not just number of permits, but the length of time it takes to obtain a permit, and the length of time from permit to housing occupation. A very long approval process can increase the severity of boom-and-bust cycles, even if permits are eventually granted after a long period of time.

Re: Location, Location, Location

John Dewey — Thu, 13 Nov 2008 04:33:12 -0000

In addition to the lack of restrictive zoning, I think low costs were also a factor in keeping Texas home pricesd low. Cement costs are probably lower here than anywhere in the nation. That's due in part to our large supply of limestone as well as our lack of enforcement of cement plant environmental laws.

Our construction labor supply is virtually unlimited. Crossing the border has been far easier in Texas because we had neither natural nor artificial barriers. The large existing Mexican population in the state made migration to our cities very simple, as relatives and friends eagerly offerred housing to new workers.

Some may object to my state's lack of law enforcement. I certainly enjoyed paying only $85/sq ft for a new home in an uipper middle class suburb.

Re: Location, Location, Location

John Dewey — Thu, 13 Nov 2008 04:06:13 -0000

Charlie Perkins: "Texas has had lots of oil industry related boom-bust cycles in real estate"

While that may be true of Houston, it's not the case for San Antonio, Austin, and Dallas. The majority of large employers in Dallas, for example, are not oil companies. Exxon HQ is an exception. Greater Dallas - Fort Worth has long been home to J.C. Penney, EDS, American Airlines, Southwest Airlines, Texas Instruments, Kimberly Clark, Tandy Radio Shack, and Frito-Lay, as well as many mid-sized companies and subsidiaries of large ones.

Austin and San Antonio are even less dependent than Dallas on the oil industry.

Texas is an oil state, of course. But it is much, much more than that.

Re: Location, Location, Location

Robert S — Wed, 12 Nov 2008 19:49:56 -0000

As someone who has taught Securities Prep and Insurance Prep classes since 1993, I can tell you that the types of asset backed securities discussed on the Series 7 are CMO's, not CDOS. Ray, if you are anything like the thousands of students / brokers/ agents that I've taught over the years, then you probably forgot 90% of what was covered in class within 30 minutes of passing the Series 7. So your confusion is understood. While I'm working as a stockbroker/insurance agent now, I haven't heard anything about CMO failures so far. But I have to admit that I may have simply missed those articles.

Re: Location, Location, Location

Ray G — Wed, 12 Nov 2008 17:29:18 -0000

I just finished Michael Lewis' article mentioned above. Very good.

More of an inside baseball commentary than a real explanation of why things sped up and exploded when they did though.

When I did my Series 7 test in 2003, we were taught that asset-back securities such as caused this mess were golden, and perhaps only second in safety to Treasuries.

Of course fully 9 of 10 financial advisors know very little about the product they sell. If Obama makes any new securities laws, perhaps they can require anyone holding a Series 7 to be officially referred to as a "salesperson" so as not to confuse their clients.

Re: Location, Location, Location

Ray G — Wed, 12 Nov 2008 14:49:48 -0000

I'll research the various land restriction concerns later this evening, but I know for the most part, we've had no problems expanding here in the sandy Southwest metropolis of Phoenix metro.

Lots of desert, lots of room.

Off the top of my head, I do know that AZ was already a growth area before the bubble began. Throw in a large immigration population along with many citizens moving here from other states, a robust job market, etc, and we have foreclosure soup.

Affluent types got caught flipping houses, poor immigrants got in over their heads, junior exec types saw their big chance to catch up to the Jones', and they all got burned.

Re: Location, Location, Location

John Thacker — Wed, 12 Nov 2008 14:47:50 -0000

OTOH, the percentage with negative equity has its own problems-- it biases against states with recent population growth, since older homes are much less likely to be underwater. The number is still important in one sense, but in another way it doesn't say much about how a state dealt with the situation. Similar population NJ and NC have a similar percentage of homes underwater, but NC has had a much larger growth in population recently, so presumably NC scores much better on "percentage of homes built in the last X years that are underwater" where X is less than ten.

Re: Location, Location, Location

John Thacker — Wed, 12 Nov 2008 14:44:59 -0000

BTW, that New York Times graph, while pretty, picks what I think is a bad statistic for the size of the circle-- total number of underwater homes. The percentage, available as a mouseover, is probably more reliable. The circle size means that one has to know the population of the state in order to realize, e.g., that VA is much worse off than NC, which has over a million more in population. NV really should have an enormous circle; its population is still really low, so 48% are underwater.

Re: Location, Location, Location

Mike Farmer — Wed, 12 Nov 2008 13:37:53 -0000

BoscoH wrote: "And isn't it strange that San Diego, as fast as its grown since 1990, isn't at the top of the problem list?"

Yes, there will be other factors causing prices to fall sharply, or less sharply as I assume is the case you're making for San Diego, but in most cases the economic effects, or poorly designed growth-effects, that cause havoc, will cause more underwater situations in areas where the prices rose the highest. Here is Savannah, appreciation was going along around 5-8%, now it's flat and slightly depreciating by 2% in some areas.

The bubble was a lot bigger in Calif, Fla and Ariz.

Re: Location, Location, Location

Brian Shelley — Wed, 12 Nov 2008 11:08:16 -0000

Mr. Roberts,

John Thacker seems to have your answer down pretty well.

Re: Location, Location, Location

Sam Grove — Wed, 12 Nov 2008 10:22:44 -0000

but I have seen a lot of new, higher end homes, presumably made more "affordable" by easier credit, including variable rate loans with ballooning payments.

There's a lot of that around here as well. The houses are large, the lots tiny. Also a lot of development occurred so far out that extensive commutes became the norm for a lot of people. There was a lot of complaining when gas prices were up.

Re: Location, Location, Location

Martin Brock — Wed, 12 Nov 2008 10:02:23 -0000

People began snapping up homes because they likely thought prices would keep rising ...

That's the "bubble" theory, and it's presumably also part of the story, but it doesn't explain what I see in my part of the country. I haven't seen existing house prices double or triple in the last five years, but I have seen a lot of new, higher end homes, presumably made more "affordable" by easier credit, including variable rate loans with ballooning payments.

Re: Location, Location, Location

BoscoH — Wed, 12 Nov 2008 08:55:56 -0000

Mike wrote: "I think it's because these are the areas with the highest price increases during the run up in prices."

Actually, in SoCal, Riverside county, and especially towns like Lake Elsinore, are spillover from the more expensive and crowded Los Angeles and Orange counties. There were lots of people who would buy in Riverside because they could afford a nice home, then commute to Los Angeles or Orange. From Lake Elsnore to the OC, you can take a windy and dangerous Ortega Highway to the 5, or you can take the 15 north to a crowded 91 west. Either way a horrible commute, but one that thousands made daily because it let them have a great home and a good job.

Strangely, long before the Riverside housing boom, there was the controversy over the 91 toll road. It ends at the Orange/Riverside county line because back in the early 90s, the Riverside county pols opposed the whole idea. The OC has a network of toll roads that keeps traffic moving, while Riverside freeways slow to a crawl. There had also been talk about a toll tunnel cut through Saddleback mountain, but the OC is against it because of all the Riverside county traffic it would dump in south OC.

So I blame Lake Elsinore on the road situation. While the city probably grew up with people envisioning it as a suburb of OC, it's better connected to San Diego. And isn't it strange that San Diego, as fast as its grown since 1990, isn't at the top of the problem list?

Re: Location, Location, Location

John Thacker — Wed, 12 Nov 2008 08:53:31 -0000

Take, for example, the planned MetroWest near the Vienna Metro stop. It's an idea to create a high density housing complex near the Vienna stop; seems reasonable to Smart Growthers. However, the plan was delayed for several years because "[i]in an effort to decrease reliance on the personal automobile and encourage the use of transit, ridesharing, telecommuting, bicycling, and walking the Fairfax County Comprehensive Plan provides that Pulte Homes implement a Transportation Demand Management (TDM) Plan."

MetroWest was approved of and supported by the Smart Growth Alliance. Yet that actually has made its planning process take longer than other developments. Smart Growth sabotages itself.

Re: Location, Location, Location

John Thacker — Wed, 12 Nov 2008 08:49:25 -0000

O'Toole especially has a remarkable ability to use the word "zoning" to mean only Smart Growth type regulations (i.e., mandating minimum densities), while ignoring the far more prevalent form of traditional zoning where you limit density by way of maximum occupancy zoning rules, minimum lot sizes, and (perhaps most importantly) minimum parking requirements.

I've seen O'Toole attack those requirements well. The problem is that the constituency for "traditional zoning," as you put it, is so strong that there seems to be no way to remove it (though it can be stopped before it begins, as in Houston.)

Smart Growth advocates talk a nice game about encouraging density. But everywhere I've seen, they have a lot more success in stopping sprawl than they do in encouraging density. They end up having to compromise with "traditional zoning" advocates, and the end result is that little gets built and everything gets slowed down. The same rules that are used to prevent low density housing from being built end up being used against high density housing as well.

Partially this is because Smart Growth advocates realize that in the absence of regulation, there would be some additional high density housing but also more sprawl as well (again, see Houston), and some hate sprawl more than they love more high density housing.

Re: Location, Location, Location

Rationalitate — Wed, 12 Nov 2008 07:54:12 -0000

As a note: be very wary when reading things written by O'Toole, Cox, or other "libertarian" land use experts on the current crisis. O'Toole especially has a remarkable ability to use the word "zoning" to mean only Smart Growth type regulations (i.e., mandating minimum densities), while ignoring the far more prevalent form of traditional zoning where you limit density by way of maximum occupancy zoning rules, minimum lot sizes, and (perhaps most importantly) minimum parking requirements.

Re: Location, Location, Location

Bike Bubba — Wed, 12 Nov 2008 07:12:57 -0000

I don't know if this TOTALLY explains anything, but I do remember that Flori-duh was one of the big hotspots for second homes a few years back. I'd assume the southwest would also be so. Perhaps it's just suffering the consequences of being the "marginal" home for so many people?

Re: Location, Location, Location

Current — Wed, 12 Nov 2008 06:40:28 -0000

Land use regulations are quite clearly relevant.

For some further evidence look at these two maps of England. This is the "green belt", the areas of England where development is covered by very strict regulations.

http://www.magic.gov.uk/sta...

Here is a map based on estimates of places at risk:

http://www.thisismoney.co.u...

The big exceptions in these maps are London and Cambridge. Both of those areas have green belts but are not in the at risk category.

However, both of these areas are extremely expensive. In those places subprime is rare, renting is more common. In those places the landlords are the ones currently having problems.

Re: Location, Location, Location

Anonymous — Wed, 12 Nov 2008 06:40:01 -0000

"First time I've seen that."

The "Bank Owned" sign that is.

Re: Location, Location, Location

Sam Grove — Wed, 12 Nov 2008 06:31:00 -0000

Martin, Does not this:

And why is that? Cheap credit has something to do with it, but it's not the whole story.

Help explain this?

More people perceiving that they can afford these homes, and more builders perceiving that more people can afford the homes, while much of the perceived wealth is a house of cards.

----------------

It's tough to understand how a "housing crisis" focused on low income borrowers in low income communities, targeted by the CRA, could result in a builder of luxury homes seeing a forty percent drop in revenue.

A lot of low cost condos in our neighborhood zoomed way up in price, like 2 or 3X. Of course, the more expensive homes went up as well. People began snapping up homes because they likely thought prices would keep rising and if they waited, they might end up being priced out of their target home set. After the boom ended, a lot of those condos began sporting FOR SALE signs. I saw a sign yesterday the said "Bank Owned".

The house next to us, owned by a real estate "wealth builder" went on foreclosure sale last month. It was priced about $515K.

I suggest that easy credit drove up demand across much of the market.

First time I've seen that.

Re: Location, Location, Location

Martin Brock — Wed, 12 Nov 2008 05:59:54 -0000

Luxury home builder sees revenue plummet. It's tough to understand how a "housing crisis" focused on low income borrowers in low income communities, targeted by the CRA, could result in a builder of luxury homes seeing a forty percent drop in revenue. Maybe the bottom falls out of the luxury home market after the bottom falls out of the trailer trash market, because the presumptive buyers of luxury homes lent to the trailer trash?

Again, for the record, I use "trailer trash" here facetiously, not disparagingly. I've always chosen housing below my means, and my sister lived in a very trashy trailer for years. She was also valedictorian of a class with several hundred students. She chose to live in the trailer rather than go even deeper into debt to build the veterinary practice and buy the small farm she wanted.

Re: Location, Location, Location

John Thacker — Wed, 12 Nov 2008 05:36:23 -0000

As an aside, pushing development further out also increased traffic problems, a readily foreseeable consequence which gives the lie to the stated motivations of the slow-growthers.

I'd say that some slow-growthers and smart-growthers are honest in their motivations. But they're never numerous enough; they start the planning process, and homeowners use it to prevent all increase in density rather than encourage the smart growth.

Many smart-growthers do actually want more urban density and less sprawl. Without zoning, there would be somewhat more density, but also sprawl, because people like suburban living. The only way to prevent sprawl is to create the type of restrictions that also ends up being used to prevent higher density housing. Smart-growthers are never able to get a majority for their higher density dreams, and they themselves are vulnerable to arguments about how regulations and EISes and everything else are necessary, slowing down development. Political realities mean that all that the smart-growthers can do is prevent sprawl, not encourage the high density housing that they'd want.

Re: Location, Location, Location

John Thacker — Wed, 12 Nov 2008 05:29:30 -0000

The counter example that leaves land use regulations as the only reasonable answer is Texas.

And North Carolina, as another example. Those states would seem to argue against Charlie Perkins's theory, among others. (Texas has no state income tax either.)

Worse than ordinary zoning is regional growth management planning. Normally, even though homeowners start restricting building and increasing density in order to preserve their property values, people can still build further out in areas still rural. But in California since the 1960s-- Florida and Arizona since 1985 and 1998 respectively-- has had regional growth-management planning that allows urban areas to prevent surrounding rural areas from allowing more housing. See here. See also the papers of Ed Glaeser at Harvard.

Certainly an area can be hemmed in by having no free rural land available for development at all, and that can make a housing bubble more likely. But in many of these cases, it's more regional and state government preventing the rural areas from allowing development.

Not that rural sprawl is the only way to increase the housing supply; there's also the option of doing it inside an urban area. However, homeowners and zoning tend to prevent that-- just look at Georgetown in DC.

Re: Location, Location, Location

Kurt — Wed, 12 Nov 2008 05:19:06 -0000

I would read War On The Dream by Wendell Cox.

Re: Location, Location, Location

Jeff — Wed, 12 Nov 2008 04:54:04 -0000

I have no idea how you would go from zoning regulations to the subprime crisis

Suppose you have a market with a steadily growing demand for houses and no zoning. With no constraints on the supply side, houses will sell for the cost of construction plus land price. If you then introduce restrictive zoning, the equilibrium price for any particular house will go up. In the Northern Virginia DC suburbs, for example, prices increased as local governments and our congressman imposed high costs on developers who wanted to build high-density housing near Metro stations and in other close-in locations. New development was forced further out and existing housing which was not as far out became relatively more desirable. (As an aside, pushing development further out also increased traffic problems, a readily foreseeable consequence which gives the lie to the stated motivations of the slow-growthers.)

So when building restrictions are first imposed, you should expect to see prices for existing homes trend up for a time until they reach a new equilibrium, and then level off, or at least slow down to a new steady-state upward trend due to the continual increase in relative desirability of close-in housing. Naive observers looking at the market as this adjustment was taking place came to believe that house price inflation was a fact of life, and so did lenders. Flippers were getting rich, fueling even more speculative demand. And thus the bubble.

In areas where building restrictions were few, like Houston, the bubble never got off the ground, as higher prices immediately called forth a greater supply of housing which moderated the price increases. People living in those markets did not see their neighbor getting rich by flipping houses, so the speculative demand was absent.