The truth about the US housing market

The unspoken truth:

As bad as last week's housing data was,the20 cities that comprise the Case-Shiller Composite Index are not representative of the entire United States housing market. In fact, the United States housing bubble/bust was confined to only a minority of cities. To illustrate this point, first consider the below chart, which compares the 10-city Case-Shiller Composite Index against the FHFA House Price Index based on 50 states (chart courtesy of Carpe Diem).

As you can see, the United States housing bubble/bust was confined, to a large extent, to the 10 cities making up the Case-Shiller 10-city Composite Index, namely: Boston, Chicago, Denver, Las Vegas, LA, Miami, NYC, San Diego, San Francisco, and Washington D.C.).

So why was there so much variability in house price performance between United States cities, with some cities booming then busting while other cities remained relatively stable? It certainly wasn't due to liberal lending policies (easy credit), since essentially the same lending conditions were available across the United States. It wasn't because of differences in population growth, since states like Texas, which has experienced the highest population growth over the past 10 years, never had a housing bubble/bust. Rather, the differences in house price performance are accounted for by the way in which these markets regulate land use.

The below table, which comes from Demographia's 6th Annual International Housing Affordability Survey, shows the extent to which the various housing markets employ restrictive land use regulations.

Restrictive land use regulation, often referred to as "smart growth", "growth management", or "new urbanism", refers to policies that force people to live in higher densities while significantly restricting the expansion of suburban residential development. Measures include, but are not limited to, urban growth boundaries, areas declared off-limits to development, building moratoria, development fees and charges, and excessively large minimum lot sizes.

Cities that have adopted liberal market-based approaches ('more responsive land regulation') have experienced relatively stable housing markets, whereas those that have implemented prescriptive land use regulations have experienced volatile boom/bust cycles.