Global Warming Caused the Housing Bubble (Sort Of)!
by Steven Greenhut by Steven Greenhut
Environmental activists have blamed every conceivable ill in society on global warming — from the spread of disease to increased risks of forest fires to environmental despoliation and the retreat of glaciers. If you read the "enviro" literature, you’ll be hard-pressed to find any problem worldwide that might not be exacerbated by the Earth’s changing temperature. I dismiss most such claims, or at least treat them skeptically, given that the goal of the alarmists is obvious: to scare humanity into ceding more of our freedom and our money to the politicians, government administrators and activist groups that promise to save us.
Yet there is one massive and ever-present problem that environmentalists have not yet tied to global warming: the global financial meltdown, which has threatened the world economy much the way supposedly melting polar ice is supposedly shrinking polar bear habitats. This is one crisis, however, that might actually be directly tied to global warming. I exaggerate a bit. Actually, theoretic man-made global warming didn’t cause the housing bubble, but land-use policies implemented, in part, to fight global warming, do have a direct link to the housing bubble, the subsequent deflation of that bubble and all the wreckage that has followed.
This is the largely untold story of the ongoing economic crisis. It’s not nearly as far-fetched as it sounds.
We’ve all been reading about the main causes of the economic bust. It’s elementary economics, really. Science-fiction writer Jerry Pournelle puts it in simple terms: "I’ve been telling you for years: you can’t pump money into the housing market, and keep lowering the interest rates, without creating a bubble; and eventually the bubble will burst." Cheap money and loosened home-lending standards, pushed by politicians who wanted to make homeownership affordable even to people who clearly were not financially ready to buy and maintain a house, created an unnatural demand for housing. Demand went up, and prices soared. All Ponzi schemes come to an end, and now you’ve got wide choices among Southern California houses that cost not much more than a decent luxury car.
We know that. But let’s look more closely at what happened. For example, answer this question: Why did prices go up when demand shot up? That’s easy. Demand exceeded supply. Now for the follow-up question: Why didn’t supply keep up with demand? It takes awhile to build houses, and government restrictions on land use made it far more difficult for that new supply to be built as demand soared.
In reality, the housing bubble did not get particularly inflated in many parts of the country. The bubble was almost exclusively a feature in big urbanized markets, and not just any big, urbanized markets. The bubble was inflated mainly in those metropolitan areas — i.e., San Francisco, San Jose, Los Angeles, Portland, Seattle, etc. — that embrace Smart Growth, the trendy and widely implemented idea that government should limit suburban growth (sprawl, as it is pejoratively called) and insist that new growth be crammed into urban growth boundaries.
"’Easy money,’ by itself, does not explain what caused the unprecedented housing bubble in California," writes Wendell Cox, a former Los Angeles transportation planner and a well-known housing and transportation consultant who battles the Smart Growth folks for Heritage Foundation and other market-oriented think tanks. "If u2018easy money’ were the sole cause, then similar house price escalation relative to incomes would have occurred throughout the country. Take, for example, Atlanta, Dallas-Fort Worth and Houston. These are the three fastest-growing metropolitan areas in the developed world … . Since 2000, these metropolitan areas have grown from three to 15 times as fast as Los Angeles, San Francisco, San Diego and San Jose. … This is where the demand would have been expected to produce the bubble. But it did not. House prices remained at or near historic norms and average house prices rose one-tenth that of the California coastal metropolitan areas."
I heard Cox last week at the American Dream Coalition conference in Bellevue, Wash. (I spoke on local Smart Growth initiatives, and Cox offered a presentation via satellite from Paris). He noted that even economist and New York Times columnist Paul Krugman agrees that land rationing causes home-price increases. In fact, it’s so obvious, I’m surprised a liberal Nobel Prize winner, as Krugman is, would recognize as much.
Don’t get caught up in the politics of it, though. Think economically, in terms of any product you choose. Let’s say money became available to virtually anyone to buy a new car, but that carmakers weren’t able to build many new cars to fulfill the demand. Car prices would go up and up. The same thing would happen with anything. Remember the short-lived bubble for — it’s hard to believe, but true — "scarce" Beanie Babies?
I looked at home-price data for some decent-size Midwestern cities over the period of bubble and bust that we experienced in California. The trend line was shocking — prices went up steadily but modestly year after year. In California markets, the prices spiked and then fell. In California, there wasn’t enough supply — and it takes too many months to get approvals to fill the demand.
Certainly, some of the California markets that experienced the biggest bust, such as the Central Valley, the Inland Empire and the high desert, are not Smart Growth havens. But, as Randal O’Toole, a land-use expert for the Cato Institute, explained to me, these are markets that served as the blow-off valve for the highly restrictive Bay Area and Southern California urban markets. In other words, average folks couldn’t afford homes in restrictive Orange County and Los Angeles, so they moved out to places such as Perris and Moreno Valley. Those are among the communities particularly hard hit by the bust.
California and other progressive states have been pushing tough land-use rules for years and for myriad reasons. But there’s no doubt that global warming concerns have provided recent impetus for stringent restrictions. California Gov. Arnold Schwarzenegger signed into law last year Senate Bill 375, a "Smart Growth" bill that withholds transportation funds from localities that do not embrace limits on suburban development. That was a follow-up to Assembly Bill 32, designed to battle global-warming-related emissions. In fairness, we shouldn’t blame global-warming hysteria entirely for these problems, but it deserves a good share of the blame.
Global warming might someday harm the polar bear. But the policies politicians have implemented to deal with this issue have had a good bit to do with the financial suffering Americans are facing today. Next time someone complains about the ill effects of global warming, add this one to the list.