Lack of zoning has paid off for Houston

During the past year, I've made several appearances on television news programs to talk about the housing crisis. My role was that of the straight man.

Typically, the shows would have three journalists from different regions of the country — one from the Northeast, one from the West Coast and me.

After the doom-and-gloom pronouncements from the coasts, I would come on and say, "Things aren't so bad here in Houston."

Houston has remained on the sidelines of the latest national financial crisis. Our housing prices haven't plunged, just as they didn't soar as the national housing bubble inflated. Our prices remained modest, if you believe the conventional wisdom, because we have a secret ingredient: plenty of land.

An abundance of open space by itself, though, may not be what protected us. Texas, after all, experienced an ugly real estate implosion in the late 1980s.

In a report issued by the Federal Reserve Bank of Dallas' Houston branch, senior economist Bill Gilmer found another reason Houston has been shielded from the country's real estate crisis: the lack of zoning.

Gilmer's findings are worth considering as the zoning debate rages anew.

From an economic perspective, zoning laws work as a constriction of supply, which played a role in rising housing prices in other parts of the country.

"It raises the price of new-home construction," Gilmer said. "Those supply restrictions began the process of price increases."

Speculators finish the job, inflating the housing bubble with demand for mortgage securities that encourage ever-riskier lending practices.

As housing demand has increased, cities with tight zoning laws saw a steep rise in prices because of limited supply.

Rising prices ultimately extinguish demand, as we're now seeing with the collapse of the mortgage market.

Construction met demand

In Houston, however, demand was met with new construction rather than rising prices. As a result, when the real estate bubble burst, the effects on Houston were less severe than elsewhere.

As of January, about 4 percent of Texas homes backed by subprime loans were in foreclosure, according to the Fed. That compares with 11.5 percent for California and 14.4 percent for Florida.

That's not to say we've been immune. For the first four months of the year, foreclosures in the Houston area were almost 17 percent higher than a year earlier, according to Foreclosure Information and Listing Service.

Houston's combination of available, unrestricted land and municipal utility districts to fund infrastructure have allowed it to grow at a lower cost than other metropolitan areas, Gilmer said.

"A lot of cities want to force you into particular patterns of development," he said.

The higher prices that come with zoning essentially close some of the most desirable neighborhoods to all but the wealthiest homeowners.

Shock, disbelief

Gilmer said he's often surprised by the reaction of colleagues in other cities when he discusses Houston's housing prices.

"They do not believe housing could be that cheap," he said. "It's a tremendous draw for people who are locked out of communities in San Francisco, where they have to commute two or three hours each way."

Of course, Houston's lack of zoning is something that outsiders view as, well, crazy for a city our size. I must admit that before I moved here, I was among them.

After all, who wants to see their property values fall because a neighbor opens a nightclub or an auto repair shop in a residential neighborhood?

Many neighborhoods, though, already have deed restrictions or homeowners associations that address such concerns, Gilmer said.

Zoning, by comparison, is designed to regulate development on a broader scale, which is why it can become exclusionary, he said.

As homeowners, many of us don't mind the higher prices that come with building restrictions. We like to see the value of our real estate investment rise.

Cost of zoning

The question for Houston becomes whether the cost of zoning is worth the benefit.

Gilmer's study, released earlier this year, is a reminder that the real secret ingredient in Houston's economic recipe is affordable housing, not just abundant land.

Not only do our housing prices make Houston attractive for relocations, it means that residents spend less of their income on housing, so they have more to spend on other things.

"It's a big driver of our growth," Gilmer said. "There aren't a whole lot of places that can offer a big city life and affordable housing."

That's something I never get to talk about on TV.

As the straight man, I don't get to deliver the punch line.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.