Local Development Policies and the Foreclosure Crisis in California

Abstract

Can local governments shape the long-run fortunes of their communities through their own policies, or is the autonomy of localities swamped by larger macroeconomic forces? This study considers the relationship between California municipalities’ policy orientations toward residential development at the start of the housing boom in the late 1990s and the subsequent incidence of foreclosures during the housing crisis in 2008 and 2009. The authors find that cities reported to have stronger city council opposition to residential growth had a lower incidence of foreclosures a decade later, even after controlling for the rate of increase in the housing stock and other local economic, demographic, and geographic characteristics. Although the foreclosure crisis was driven by national and global forces, more cautious local government policy approaches to residential growth appeared to moderate the damage.