Huang and Tang find that the size of both the housing price inflation in 2000-2006 and the size of the price crash in 2006-2009 correlate with:
1. Geographic constraints on suburban development (water, wetlands, slope) 2. Regulatory constraints on suburban development (zoning, environmentalism, etc.) 3. Borrower quality (as measured by % of local mortgage applicants turned down in 1996, back before subprimes)
California, for example, had a less elastic supply of housing thanÂ Texasbecause it's more constrained by ocean and mountains, and by government restrictions on development. So, increases in demand for housing, such as the war against down payments, cause sharper price shocks in California than in Texas because supply can catch up with demand faster and more cheaply in Texas. (Furthermore, California has more marginal borrowers than, say, Vermont.)
Stringent land use regulation and restrictive geography reduce the supply elasticity in housing markets. In a housing boom with rising demand, the lower elasticity forces house prices to increase by more. In the subsequent bust, however, the drop 25 in the priceÂ Â Â Â may or may not be bigger in the more constrained areas. On one hand, greater price booms likely lead to greater corrections. On the other hand, a smaller number of houses can be constructed in those areas during the boom, and the downward pressure on prices from housing stock is smaller during the bust.My view is that the more constrained geography of California compared to Texas inevitably creates more demand for more regulatory constraint on development. You'll have more NIMBY feelings if you have a nicer view from your backyard.
Using data from 326 US cities, our study examines empirically how residential land use regulation, geographic land constraint and credit expansion are related to the swing of house prices between January 2000 and July 2009. The regulation data is from Gyourko et al. (2008). The geographic data at metropolitan level is from Saiz (forthcoming). We use the mortgage-application rejection rate in 1996 to proxy for the local impact of the nationwide mortgage-credit supply expansion, following the approach in Mian and Sufi (2008a). We find that cities that are more regulated or have less developable land experienced greater price gains between January 2000 and June 2006, and greater price declines between June 2006 and July 2009. In addition, the natural and man-made constraints both amplified the responses of house prices to an initial demand shock arising from the mortgage market, turning the shock into a greater price gain and subsequently a greater loss. Finally, over the entire period, cities that had more marginal borrowers before the credit expansion did not experience greater growth in housing prices, indicating that the subprime expansion did not leave a positive legacy on the price front.