Urban Returns

Is it really necessary for the federal government to introduce new market distortions?

For the reasons I just gave, I don't believe that our past subsidies to suburban development justify maintaining those investments.  End them and let the chips fall where they may.

But even if reasonable people can disagree about that, I see no argument for creating new subsidies.  But that is exactly what our federal government is about to do.

The FHA is a major player in the mortgage business.  It insures mortgages for home buyers who otherwise would not be able to get credit or scrape together a down payment; this allows some to buy homes with as little as 3.5% down.  Without the FHA guarantees, the mortgage market would be much smaller.  A few years ago, its share of the market was 2.7%.  This seemingly small share had an outsized effect by scooping up the biggest credit risks and reducing the risk for private mortgage insurers.  In any event, its share of the market has ballooned recently:  according to Friday's WSJ, its market share reached 23% in the second quarter of this year.

And now the FHA is about to adopt new rules explicitly encouraging home buyers to purchase single-family, detached housing in the suburbs rather than attached (condos) in urban cores:

Until now, almost any condo development could apply to FHA for “approved” status, therefore making FHA financing available in that development.  In addition, in developments that were not approved, “spot approvals” were sometimes available for individual units.  (The lender applied for an approval for the unit you wanted to buy, in spite of the development not being approved).

Following are the new guidelines:  (This is not pretty, so prepare yourself)

1. There will be NO more spot approvals.

2. All development not considered primarily residential are out.  For instance, a development with more than 25% of the total floor area dedicated to commercial business use is out.

3. Noise issues is a new concern, so any development within 1,000 feet of a highway, freeway, or heavily travelled road, 3,000 feet of a railroad, 1 mile of an airport, or 5 miles of a military airfield will become ineligible for approval.

4. If the property has an “unobstructed view , or is located within 2000 feet of any facility handling or storing explosive or fire prone materials, it is not insurable - we're not talking just fireworks factories here.  A gas station 2 blocks away can disqualify this development.

5. Any property located within 3000 feet of a dump, landfill, or superfund site, is ineligible.

6. No more than 10% of the properties can be owned by a single investor, including builders or developers who are renting out or have not yet sold vacant units.  For 2-3 unit developments, no one can own more than one unit.

7. No more than 15% of the homeowners can be more than 30 days late on their homeowner dues.

8. For new developments, at least 50% of the units must be sold prior to applying for FHA approval (valid presales include those with purchase agreement and lender validation of an approved loan in process)

9. A minimum of 50% of the units must be owner occupied or sold to owners who intend to occupy as their principal residence.

10. Projects in designated wetland and flood zones will not qualify.

11. All current condominium project approvals will be invalid (with the exception of projects approved on or after October 1, 2008) and projects must be re-approved under the new options available.  Going forward, all projects will require recertification every two years.

Perhaps most insidiously, the FHA will no longer insure more than 30% of the units in a single condominium development.

I understand that the FHA has been taking large losses on its guarantees.  I also understand that condominiums are riskier to insure than single-family homes.  Some of these new regulations seem reasonable -- it's probably a bad idea to invest in a condominium when the condo association lacks the resources to pay for upkeep.  Higher risks justify higher premiums, too.

But these new regulations seem purposely designed to push new homeowners out of dense, urban areas to the suburbs.  They exclude many mixed-use developments (#2).  In a central city, it is hard to find a condominium not within 1,000 feet of a highway, freeway, or heavily travelled road, 3,000 feet of a railroad, or one mile from an airport (#3).  Allowing developers to tap into FHA guarantees for entire single-family subdivisions but only 30% of condominium units naturally will encourage developers to shift to single-family subdivisions.  These new regulations are fundamentally anti-urban.  

Even if it is somehow possible to defend our existing scheme of suburban subsidies, is it really possible to defend introducing new market distortions?   

(Cross-posted at Austin Contrarian; comment there.)

Path dependence

Ryan Avent has had some back and forth with Tyler Cowen and Will Wilkinson over roads and rail.  Tyler and Will acknowledge that, yes, our reliance on roads rather than rail has been influenced by long-standing government subsidies.  But by now we have sunk so much into roads, and have built up so much road infrastructure, that the marginal cost of adding to our road network is much lower than creating a viable rail network from scratch.  In other words, our past investments have had a lock-in effect, and there's no wishing it away.  

Ryan responds that Tyler and Will are committing the "sunk costs" fallacy, but I'm not sure that's right.  Past investments matter a lot because they have generated network externalities.   One million dollars spent extending an already extensive network is often worth more than one million sunk to build a network from scratch.  

But Ryan is right that past investments in suburban infrastructure do not require us continue throwing up barriers to denser developments:  

In practice, the US is far from done building.  Tens of millions of new homes will be built in the coming decades.  Hundreds of billions of dollars will be spent on transportation infrastructure.  The current built environment has, as a result of decades of government policy, taken on a rather suburban, auto-centric tilt.  So what?  No one is suggesting that we tear down all of that and replace it with something entirely new.  I, and others, are suggesting that making it easier (or, you know, legal) to build in a denser, more walkable fashion would be advantageous.  Similarly, given the burden of maintaining such a large and costly road infrastructure, it might be wise to devote a larger share of dollars for new construction to substitute technologies.

And bear in mind that a technology's lock on the market is not always as secure as it seems.  A small initial advantage allowed VHS to dominate the videotape market, all but squeezing out Betamax.  But it did not save VHS from the DVD, even though a vast infrastructure had been created to support VHS:  video players, Blockbuster, video cameras and a complete library of titles.  All wiped out by a superior technology.   

Now imagine the government had subsidized VHS to help it fend off insurgencies from new technologies.  At best, many of us would still be stuck with an inferior technology.  At worst, there would be no DVD.  The government should let these things work themselves out in the marketplace; that's the true libertarian position.

All of this means that the government should let denser development happen.  Stop the  subsidies and tax policies -- including subsidies to new highways -- that encourage shifts to the suburbs.  There are perfectly sound economic arguments for investing in rail lines in some situations; make those investments.  Many home buyers, probably most, will continue to settle in the 'burbs.   But we can't anticipate shifts in technology.  Nor shifts in preferences or energy costs.  We think we can.  But we really, really can't.   If the housing market would continue down today's path anyway, fine, but the government shouldn't lead it by the nose.  

(Cross-posted at Austin Contrarian.  Comment there.)

Tipping points

Here are a couple of interesting pieces on  the "tipping point" theory of racial segregation.

Why do racially-segregated neighborhoods exist and persist?  The standard explanation  is that whites don't like to live near, say, African-Americans; when African-Americans start moving in, whites start moving out.  Real estate agents steer whites away from African-American neighborhoods and vice versa.  And let's not forget the legacy of de jure segregation, which herded African Americans into a few neighborhoods; residential patterns typically change slowly.  The standard explanation relies on more or less overt, conscious racism.

There's clearly some of that going on.  Most cities -- Austin included -- had either de facto or de jure rules that relegated African Americans to just a few, exclusively African-American neighborhoods.  Although I consider Austin as a fairly racially tolerant place today, it is still  strikingly segregated:

Legacy costs

Here's a thoughtful piece from Aaron Renn on an unintended consequence of the Clean Water Act.   EPA mandates are forcing Cleveland to spend $5  billion to overhaul its sewer system.   That's a lot of money for any city, but especially for a struggling rust-belt town.   Cleveland will be forced to raise water and sewer rates dramatically, and probably a bunch of other taxes, too.

Cleveland can't go anywhere, but its residents can.   (This is a city where the police and firefighters openly celebrated an Ohio Supreme Court ruling that allows them to move to the suburbs.)  Renn predicts -- accurately, I think -- that the higher taxes will speed up the depopulation of Cleveland as homeowners have one more reason to move to the suburbs.   In fact, the mandate will kick the city twice:   Cleveland must not only raise taxes, but it will lose money that it could have spent on other improvements that would have attracted suburbanites back to the city.

Cleveland needed to make dramatic improvements in water quality; after all, this is the city whose river famously caught fire in 1969 (which itself provided much of the momentum for the Clean Water Act).  But the Cuyahoga is now clean; residents fish from it, in fact.  Spending another $5 billion to get that last 10% improvement is a bad use of money when Cleveland has more pressing needs.  And it is counter-productive to drive residents to the suburbs to leave rotting infrastructure sitting unused in the central city.

Renn suggests that the federal government assume the cost of replacing ancient sewer systems.  That might be the only solution.  The federal government has no incentive to weigh costs and benefits accurately when it can simply issue a mandate.  And the moral hazard risk is smaller than one might think:  the city's main "crime" is being old enough to need a new sewer system.

Guarding against strategic behavior by a city is tricky anyway since, again, its residents can simply move when things get bad.  Rather than stick central cities with crippling legacy costs, it makes more sense for the federal government to issue reasonable regulations and pick up the tab for unforeseen costs.  

(Cross-posted at Austin Contrarian.  Comment there.)

Density and congestion, etc.

Whenever I see new data on cities, I'm always tempted to match them to the cities' weighted densities, if for no other reason than no one else does it.  And so with the Texas Transportation Institute's latest report on city congestion.  TTI found a wide range in hours lost due to congestion per year -- e.g., in 2007, Lost Angeles drivers lost an average of 70 hours per year to congestion;  Cleveland drivers, just 12.  (The relevant TTI table is here (pdf).)  Does weighted density partly explain this variation?

The answer is "No," based on my admittedly simplistic analysis.  

Below the jump I have three charts plotting, for 33 cities, weighted density, standard density and total population against hours lost per traveler to congestion.   (The 33 cities include the 31 largest urbanized areas -- excluding New York City, which is always an outlier -- and Austin and Honolulu.) 

As the scatter plot shows, weighted density explains virtually none of the variation in congestion (adjusted R² = .06).   Standard density explains a bit more  (adjusted R² = .19).  And total population, a bit more than standard density  (adjusted R² = .28). 

Skilled cities II

While I'm in this nerdy mood, let me point to this paper by Jaison Abel, Ishita Dey and Todd Gabe:

We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Using new measures of output per worker for U.S. metropolitan areas along with two measures of density that account for different aspects of the spatial distribution of population, we find that a doubling of density increases productivity by 10 to 20 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock that is one standard deviation below the mean level realize around half of the average productivity gain, while doubling density in metropolitan areas with a human capital stock that is one standard deviation above the mean level yields productivity benefits that are about 1.5 times larger than average.

This is a little technical, so let me translate:   Cities tend to become more productive as they grow denser.   On average, a city's workforce becomes 10% more productive when the city doubles in density.   But that average obscures the importance of skills.   Less skilled cities benefit a lot less than skilled cities from densification.   In fact, skilled cities, on average, enjoy three times the productivity gain from denser growth than less skilled cities.   This is yet more evidence of the increasing returns and agglomeration benefits from density.

This is a nice complement to the Glaeser and Resseger paper.  Glaeser and Resseger found that workers in skilled cities become more productive as the city grows, while workers in unskilled cities do not.   Abel et al find that workers in skilled cities become more productive as the city grows denser; workers in unskilled cities, less so.

The authors also test their conclusions using a variant of weighted density. They find even greater productivity gains (20% on average) when a city doubles its weighted density.

The authors use a coarse form of weighted density.  They weight urbanized area density by county subdivisions.  But how you chop up a city matters when calculating weighted density.  In order to calculate weighted density, you first divide the city into a bunch of smaller regions.  You then assign each region's density a weight equal to its share of the populations.  In general, weighted density increases as you chop up the city into smaller regions.

I used census tracts for my weighted densities.  There are many more census tracts than county subdivisions.  I thus got a lot more stratification than they did -- e.g., their top weighted density was 19,000 ppsm, while mine was 33,000.  How you divide a city for calculating weighted density is somewhat arbitrary, but I think using census tracts makes more sense than county subdivisions, which are more or less arbitrary.  I suspect the authors would have found even greater returns to density had they weighted density by census tracts rather than by county subdivisions.  

H/t Richard Florida.

Skilled cities

Ed Glaeser and Matthew Resseger have a new paper out examining how worker productivity varies with city size.  They find that workers in skilled cities become more productive as the cities grow; workers in less skilled cities do not:

There is a strong connection between per worker productivity and metropolitan area population, which is commonly interpreted as evidence for the existence of agglomeration economies.  This correlation is particularly strong in cities with higher levels of skill and virtually non-existent in less skilled metropolitan areas.  This fact is particularly compatible with the view that urban density is important because proximity spreads knowledge, which either makes workers more skilled or entrepreneurs more productive.  Bigger cities certainly attract more skilled workers, and there is some evidence suggesting that human capital accumulates more quickly in urban areas.

No one is quite sure exactly why (skilled) city growth makes workers more productive (Glaeser and Resseger included).  One theory is that workers learn more quickly from one another in larger cities; there is more trade-specific information "in the air."  For example,  software engineers and musicians develop their skills more quickly in a city with lots of software engineers and musicians.

The other theory is that a large city has a deeper pool of entrepreneurs and others with "high human capital" (i.e., smart, creative people).  It generates more innovations, which make the city's population more productive, which attracts more workers, who generate more innovation, etc. (This one better matches Jane Jacobs’ theory.)

These are genuinely different explanations. If the first is accurate, then workers’ pay should rise more steeply with experience in large, skilled cities than in small, skilled cities.  The second is a sort of “creative destruction” theory; it means that workers in large, skilled cities face a higher risk of being displaced by the latest innovation.  I think both are true, which (partly) explains why big cities attract some highly skilled people while repelling others.

City growth

The Census Bureau has released its July 1, 2008 city population estimates.  Note that Texas has three of the largest eight (Houston, San Antonio and Dallas) and six of the largest 21 (add Austin, Fort Worth and El Paso).  Houston now trails Chicago by just 600,000, a gap that Houston could close within 20 years if the last decade's growth rates hold.  This is a surprising statistic as long as one ignores metropolitan populations, which are what really count when calculating a city's heft.  Chicago's metro population is still much larger than Dallas and Houston's, which are probably now the fourth and fifith largest metro areas.  And, in general, Texas cities have large boundaries and aggressively annex surrounding areas, which partly accounts for their rapid growth.

What's going on with Fort Worth? It had the fastest growth of the top 25, both between 2007 and 2008 (3.6%) and between 2000 and 2008 (29%).  No other city in the top 25 was close; Charlotte and Phoenix were the closest at 21% and 18%, respectively.  Fort Worth has grown twice as fast as Austin since 2000.  I haven't heard much about Fort Worth's explosive growth.  Strange.

One surprise on the other end:  Philadelphia contracted at a faster rate than Detroit between 2000 and 2008.

The most noteworthy fact here may be that, as the WSJ points out, central cities did very well between July 1, 2007 and July 1, 2008.  

The central-city population in U.S. metropolitan areas with more than one million people (excluding New Orleans) grew at an annual rate of 0.97% between July 2007 and July 2008, compared with a growth rate of 0.90% in 2006-2007, and growth rates around 0.5% in the years between 2002 and 2005.  By contrast, U.S. suburbs in metro areas greater than 1 million people grew at a 1.11% annual rate in 2007-2008, down from growth rates between 1.29% and 1.48% between 2002 and 2005.  Central cities are closing the gap.

The WSJ attributes the shift in growth rates to the recession.  We have a short memory.  2007 was the year of the historic spike in gas prices.  Central cities -- especially older, monocentric cities like Chicago -- began to look a lot more attractive to commuters.  I imagine this played a much bigger role than the nascent recession.   

Why we don't need TxDOT's central planning

Tory Gattis agrees with me that Perry's veto of the so-called "smart growth" bill was a good idea.

Tory, however, disagrees with me on one point:  he thinks TxDOT's control over infrastructure in metropolitan areas is basically a good thing.  Tory's point is that our highway system is a network that connects places and therefore needs a "master architect" rather than cities going their own way.   Without some form of central control, we'd get NIMBYism run amok and be stuck with the equivalent of planned communities' cul-de-sacs rather than the connectivity of street grids.

I don't think this is right, as long as infrastructure decisions are made at the metropolitan level.   Left to themselves, individual cities might indeed seek to shift infrastructure to neighboring cities, which would set off a battle of NIMBYs. But metropolitan areas want to be connected to other metropolitan areas.  Their citizens want to be able to get places and good connections are essential to a city's economy.   As long as metropolitan areas have control over their roads, they'll have the power to curb NIMBYism.

The better analogy is downtown Houston's tunnels.  Developers have linked their office buildings to the tunnel network without central planning.  They could have shorted the network by scrimping on their own infrastructure -- by building very narrow tunnels, for example -- but they haven't; later additions have matched the quality of the earlier ones.  (Or "had" as of the mid-1990s.  I confess I haven't been in the tunnels in 14 or 15 years.)

Local control works just fine as long as we use the right definition of "local."  

Nothing to see here

The Census Bureau has released a new report (pdf) comparing the growth of Metropolitan Statistical Area central and outlying counties between 2000 and 2007.

Wendell Cox says the report shows "that the nation continues to suburbanize, despite the consistent media 'spin' that people are leaving the suburbs to move to core cities."

[T]he conclusion of the new report is clear. The nation’s most remote suburbs – its exurbs – are growing much faster than the central counties. Whether this trend will now reverse, of course, is up to debate. Perhaps demographic changes and higher energy costs will slow expansion on the outer fringes. More likely, the current recession may well lead to less exurban growth, but history suggests this may prove only a short-lived trend.

My own take is that this report offers little meaningful information other than growth and migration rates for the MSAs as a whole.  Breaking out the numbers for central counties and outlying counties tells us little because the Bureau defines "central counties" expansively as those containing all or a substantial portion of the MSA's urbanized area.   Since a city's urbanized area can and often does stretch across several counties, the Bureau's definition sweeps up counties that we typically consider suburban.  For example, Travis and Williamson are "central counties" in the Austin-Round Rock MSA, even though Williamson is the quintessential suburban county.   (Hays is considered an outlying county, but will almost certainly be a central county in the next census due to the rapid spread of Austin's urbanized area.)

Because of the broad definition of "central" counties, almost all MSA population is "concentrated" in these counties.  In MSAs with more than 5 million, for example, 97.4% of the population lived in central counties (2007 estimates).  For all MSAs, the number is 91.8%.

Naturally, because central counties began with a large baseline population, even large absolute increases in population yielded smaller percentage increases than small absolute increases in the less populous exurbs.   For example, in the Midwestern MSAs, the outlying counties grew at nearly twice the rate of the central counties.  But the central counties added 5 times as many people.   The New York-Northern New Jersey-Long Island MSA is an even more extreme example.  Its central counties grew by 2.6% between 2000 and 2007 while its outlying counties grew at an explosive 26.6% rate.   But the central counties added 480,000 people to just 12,000 for the outlying counties, 40 times as many.

For the United States as a whole, MSA central counties added nearly 17 million people compared to 2.4 million for outlying counites.  Central counties in the northeastern region (which includes New York) added nearly 1 million while the outlying counties added fewer than 24,000.  The South Region's outyling regions added the most by far -- nearly 1.8 million -- but even here the outlying growth was dwarfed by the 7.7 million added by the central counties.   

If the Bureau's goal was to tell us something important about the relative growth of exurbs and central cities, it failed.   There's just not much to the data because of the overly-expansive definition of central counties.   As Wendell points out, this report might very well understate suburban growth (in fact, this is almost certainly true), but this report doesn't shed much light on the question.  Wendell himself recognized this limitation on the data, but unreasonably, I think, attempted to draw an unwarranted conclusions from the report anyway.