Rebuilding Place in the Urban Space


Thursday, November 13, 2014

A prescription for a real estate bubble and subsequent crash

Yesterday's Post had an article, "Why you're often better off saving for retirement than buying a house," making the point that in many housing submarkets across the US, prices are stagnant, so people can "make more money" by investing rather than owning a house which isn't likely to appreciate and when the tax benefits of the mortgage deduction are minimal.

In Understanding Neighborhood Change: The Role of Expectations in Urban Revitalization authored by Rolf Goetze, then the research director of the Boston Redevelopment Authority and published in 1979, he makes the point that the reason that center city real estate markets crashed in the 1960s was not just because of outmigration to the suburbs per se but because far more housing (and retail space) supply was created than there was overall demand. So with an oversupply in total, and various trends and policy mechanisms working to support the suburbs, the cities went into tank.

Today it's a little different, in some markets, where there is a supply restriction and heavy demand, then you see great housing price appreciation.  E.g., in my old H Street neighborhood, property values have increased by 3 to 6 times since 2004 in the part of the neighborhood north of H Street.

(They dropped some after the recession and since have come roaring back as various new projects like apartment buildings, condominiums, lots of bars and restaurants, supermarkets, and a new streetcar line are delivered.)

In Vox, Matthew Yglesias suggests ("The best cure for wage stagnation nobody in Washington is talking about") that current wage stagnation could be addressed by densification in cities and inner suburbs, leading to a massive construction program, which would stoke the economy now, especially by adding construction jobs, rather than undertaking measures with extremely long payback periods.

The problem with the proscription is it sounds like the US housing market from the late 1990s to 2008.

Media coverage of sprawl and the beginnings of the foreclosure place in Florida, North Carolina (Charlotte Observer coverage), Las Vegas, and Arizona became particularly evident starting in 2006, more than two years before the big commercial real estate crash touched of by the bankruptcy of Lehman Brothers and the subsequent failure of subprime mortgage company Countrywide, and others.

The reason that the housing market boomed was a slumping economy led to low mortgage interest rates (pumped along by other global capital flows I won't detail), and low interest rates boosted the housing market. To keep things going when normal demand was met, the market dipped into the subprime end, which ended up blowing up in terrible fashion.

But when the boom was booming, it was great for people in real estate, construction, and banking.

2. There are a couple problems with the Yglesias thesis. First, the reason for wage stagnation is (global) overcapacity, automation, and an increasingly integrated global economy, which depresses wages. That's a structural problem that won't be going away any time soon, especially when the general policy for national governments is austerity, not investing in major capital infrastructure projects that will have significantly positive and extraordinary investment returns.

Second, while I have no problem with intensification within the built environment, it is difficult to pull off because so much of land use is devoted to owner occupied single family housing, and in only the most extraordinary situations can that zoning and building intensity be changed.

Generally, commercial property zoning can be changed more easily and the land intensified.  That's why in DC, most of the bigger buildings are going into commercial districts or otherwise repurposed land (federal, industrial, etc.), and are not being constructed by rezoning single family housing and converting low density neighborhoods to "tower districts."

Third, what this would do is shift demand and supply within a metropolitan area, not so much create new wealth, and the wealth would be created in part by destroying the real estate values of farther out locations, in the same manner as what happened in the center cities in response to suburban outmigration. So new value created in one area cancels out existing value in another.

As a center city proponent, of course I am fine with the cities benefiting from in-migration of residents and commerce, but it's not possible for me to ignore the other impacts.

Labels: , , , ,


At 9:25 AM, Anonymous charlie said...

I'm coming to the conclusion that a lot of problems in economics thinking is using a metric designed for one purpose and applying it to another end.

Inflation vs cost of living, for example.

Or growth.

Or livability.

The last thing you want in a urban environment is a cheap building boom. Maybe in China or India,where you allegedly have to construct a Chicago a year for the next 50 years.

But what you really want is a restraints on growth so that values appreciate enough than eventually you can recycle buildings and land.

We are just getting to that point in DC, where it makes sense to rip down 1970s low-rise constructions and replace them with 5 story buildings at 2x or 3x the density.

(or course in China since you don't own the land the government just takes it. Much easier!)

At 9:48 AM, Blogger Richard Layman said...

Well, the point on restraints on growth is key. (As Ian Lockwood says, "the best cities are constrained" although he was talking about mountains and Salt Lake City...)

OTOH, you can argue like with Houston that lack of restraints, sprawl, means low(er) cost housing, but that comes at great cost.

But again, if Houston wasn't the epicenter of the oil industry, maybe it would be a slum.

Part of the reason research by Newman and Kenworthy shows greater economic return in high transit areas is that it is a marker for density and intensity.

I don't have a problem with the general point Yglesias is making about intensity. But it doesn't work in a vacuum.

I wish he would just have jumped on the invest in infrastructure bandwagon...

2. Similarly, most people miss the point in the city when they say, "well don't increase the height limit in the core, but increase it in places like Anacostia or Friendship Heights."

Businesses don't want to locate outside of the core (agglomeration economies and all), so you don't have the kind of economic demand that makes tall buildings economically feasible.

The value is in the core.

One of these days I am going to write a short paper/blog post on this, and what I would use the increased bonding capacity for:

- building the separated blue line, but with a different routing than WMATA's

- some tunneling for commuter traffic

- Georgetown's gondola proposal

- parking wayfinding systems and maybe some investment in neighborhood parking facilities

etc. and other investments in civic infrastructure, not just transportation, along the lines of the Oklahoma City "Metropolitan Area Projects" initiatives.

In all the discussion of the height limit issue last year, the planners did a piss poor job of explaining what the benefit would be to residents.

Well, having the money to go big and invest in the city in ways that make it better for generations is well worth the tradeoff of taller buildings.

At 11:38 AM, Anonymous charlie said...

Yes, either natural constraints or artificial ones -- for example HK or Singapore owning all the land and only releasing it in limited batches.

London is a counterexample -- I don't see natural limits there, but it goes to the point of transit + density.*

Constraints create diversity in the buildings, which is useful when markets change.

In terms of the height limit, the discussion was highjacked by the idea that height limit means lower rent. I agree that it only applies to downtown. That said, as I have stated before I don't think DC's office market is bursting out of the seams. It may be constraining future growth by not attracting new business but in the long term the elephant in the room is the feds.

* the history of london is fascinating in terms of local government structures.

At 11:43 AM, Blogger Richard Layman said...

wrt london, I was reading some stuff about the central govt. taking over the borough govt. in Tower Hamlets. I of course don't have enough knowledge about what's going on there to make sense of it.

At one level people like Ken Livingstone make it out to be taking over a local govt. that is overtly opposing the general central govt. agenda as it relates to cities, like what Margaret Thatcher did with the hard Labour govt. in Liverpool.

But yes London/UK is "weird" in how the central govt. controls the most picayune details.

OTOH there is the thrust to create locally elected mayors, which is still rare.


wrt the office market in the city, I agree about the federal govt. issue. When I raised this before, speculating that the moment for intensifying in the core may have passed, you opined that the central business district still has a lot of value vis a vis other locations, in the city and suburbs.

At 11:45 AM, Blogger Richard Layman said...

wrt the Yglesias thesis, I have been reading some stuff on Vancouver, because of tomorrow being the mayoral election, and so I looked at the Gordon Price Price Tags website, and he has this piece, the comment thread to an earlier piece on residential high rises in Vancouver, and adding density etc.

At 1:20 PM, Blogger Richard Layman said...

some of the discussion in the Price Tags piece is about why prices don't drop as supply increases. This has been discussed here and in GGW (especially in comments by Alex B.). If supply is still lower than overall demand you won't see price drops.

One of the comments in PT makes the point that in certain areas of the city the increase in supply was matched more by price maintenance than increases, that new supply helped keep rents on an even keel when they may have otherwise risen.

Anyway, wrt the height limit, I argued that it would take decades to begin to see prices leveling off, as you mentioned.

The other thing that people discount is how long it takes projects to come to fruition.

E.g., the 360 H St. project that took 13+ years to deliver, after the original intent was a gas station.

Or I just heard that work on the redo of H Street Connection is supposed to start next year, a perfect example of your point about values getting to the point where a low density one story project can be rebuilt into something "better," in this case as a multistory multiunit building with ground floor retail.

The project was first proposed in 2007? So that's 9-11 years too.


Post a Comment

<< Home