This Wednesday, government-sponsored entity Freddie Mac announced that it lost $2.8 billion in just the last quarter alone from foreclosures and other related expenses. Both Freddie, and its sister Fannie Mae, are at the core of the recent housing finance crisis.

Freddie and Fannie help finance 40% of all U.S. mortgages, and in 2004 the two GSEs bought a combined $175 billion in subprime backed securities — 44% of the subprime market. Liberals are desperate to pin the housing crisis on anybody other than government intervention in the marketplace. Government Reform Chairman Henry Waxman (D-CA) has even decided to go on a fishing expedition. He has sent letters to Freddie and Fannie CEOs asking if they have any evidence that the White House “precipitated the recent distress in the shares prices” of the two GSEs. If Waxman wants a real explanation for the housing finance turmoil, he should drop the partisanship and investigate the local government of his hometown, Los Angeles, instead.

According to the Office of Federal Housing Enterprise Oversight, only four states — Arizona, California, Florida and Nevada — have suffered declines in home prices greater than 4%. Meanwhile, major metropolitan markets such as Houston, Dallas and Indianapolis have hardly seen their home prices fall at all. In other words, the “national” housing crisis is actually just a set of small “local” market corrections. And as Heritage scholars Wendell Cox and Ronald Utt detail, the hardest hit housing markets all have one thing in common: tight land use restrictions. Utt and Cox write:

Over the past few decades, a growing number of states and communities have adopted so-called “smart growth” strategies that discouraged new construction and population growth by using restrictive zoning and tax policies to limit the amount of land available for development. In recent years the regulatory mechanisms that have been used in this effort include growth boundaries, minimum lot sizes, land set asides, impact fees, mandatory amenities, and building moratoriums.

The result of these “smart growth” strategies? An artificially tight housing market inflexible enough to meet rising demand without sending home prices into the stratosphere well beyond the reach of working class Americans.

A tool called the “median multiple” (calculated as the ratio of a region’s median house price to its median income) demonstrates just how effective local government regulations have been at pricing working class families out of the housing market. Localities with few land use restrictions such as Dallas, Atlanta, Houston and Indianapolis all have median multiples between 2.3 and 2.9. Heavily regulated cities such as Boston, San Francisco, Miami and Washington all have median multiples between 5.5 and 10.8. Waxman’s home town of Los Angeles leads the league with a median house price 11.5 times the size of the median income. Cox and Utt conclude:

Economics is clear on this issue: What is rationed is more costly. The differences in the costs of construction between, say, Houston and San Diego are not that great. The home price difference is nearly all in land costs, and land costs have exploded as overly restrictive land use planning systems have been unable to accommodate the demand attributable to population increases. … In a time when there are increasing concerns about the rising cost of living over everything from gas prices to food prices, policymakers should hasten to dismantle the excessive land use regulations that say “no to the next generation of American homeowners.

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