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This morning, I was reading over the 2010 US Census population figures for major metropolitan areas.  If you’re interested, you can view the rankings of the top 366 metropolitan areas here. There are a few interesting observations:

(1) Dallas has surpassed Philadelphia as the 4th largest metro area in the US.

(2) Houston was the 6th largest metro area as of 2010.  In all likelihood, it has now surpassed Philadelphia for the #5 spot.

(3) The fastest growing major metro areas in the US over the past decade are Raleigh-Durham, Austin, and Las Vegas. The growth of the latter has probably slowed significantly in the past few years, however. As for Raleigh and Austin, their growth is more predicated on being major technology centers with some of the best universities in the United States.  It’s likely that they will continue to grow.

(4) Atlanta is now significantly larger than Boston.  (This is somewhat surprising to me as an Atlantan.)

Why Do Houston and Dallas Continue to Grow?

Moving forward, Dallas and Houston will probably continue to grow more rapidly than the rest of the nation.  You’ll hear a lot of reasons as to why.  Certainly, part of the success in both cities in related to the growth of the US oil / gas industry over the past half-decade. While energy is an important part of both cities’ economies, it would be a mistake to overlook deeper reasons for their success. Both Dallas and Houston have diversified economies, so even with an energy downturn, the cities could still continue to experience healthy growth.

Texas certainly has a lower tax and regulatory burden than many US states.  It lacks some of the financial and budgetary issues, as well.  In fact, Texas was harmed much less by the financial crisis than the rest of the nation.  But while all this is true, it still only explains so much.

The biggest reason for the success of Dallas and Houston is best explained in economist Edward Glaeser’s work Triumph of the City.  Glaeser is an unabashed proponent of dense urban development and praises cities as “the healthiest, greenest, and richest places to live.”  While Glaesar speaks glowingly of densely populated cities, you might think his work would extoll praise for New York, Boston, or San Francisco.  Instead, Glaeser holds up Houston as the model for urban development.

What makes Houston different?  A lack of housing development restrictions.

Houston was founded by real estate developers and carried with it a philosophy of minimizing burdens for those who wished to build.  Conversely, cities like New York and San Francisco have shifted towards restrictions that greatly limit development.  While it may seem counter-intuitive to suggest that Houston’s policies promote upward development moreso than New York’s, remember that much of Manhattan’s rapid upward development came in the early 20th Century, before the Great Depression.  After that, New York retreated toward policies of “neighborhood preservation”, high-rise restrictions, rent controls, and difficult development requirements.

The end result is that cities like New York and San Francisco are unable to meet their demand for housing, which creates massive upward price pressures.  These pricing pressures are bad for businesses, as well, since it means they have higher costs and become less competitive.  And let’s not forget, real estate is one of the most significant costs for most major American companies.

As an example, for a luxury high-rise rental that you would cost $8,000 per month in Manhattan and $10,000+ per month in San Fran, you could probably find a similar property in Houston for $3,000 per month.  Of course, it’s the lower- and middle- segments of the scale that are more important to economic growth, but that’s a dramatic display of how Houston’s policies allow for it to produce things at a lower cost. If you can provide housing at a lower cost, then you can pass the savings onto businesses, who are able to pay lower nominal wages, but higher real wages.

In other words, Houston’s development policies provide every single company that operates within a competitive advantage.  This is the secret to the rapid growth of Houston and Dallas.  If more major American cities emulated Houston’s hands-off development policies, the American economy would be more competitive; and we’d help solve many of our other issues in the process, including environmental degradation and excess energy usage.

Of course, you’ll note that a lot of Houston and Dallas’ growth has been outward, not upward.  But don’t be surprised if that changes over the next few decades.  With less virgin land being available to developers, it’s likely that you’ll see more infill properties and denser development in both cities.  After all, most major cities have developed outwards first; before pushing upward.  Cities like Houston and Dallas seem to be increasingly moving towards that next stage, which makes them very fascinating.

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