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.)

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.)

International migration and city growth

Wendell Cox recently posted a piece on Newgeography slicing and dicing the Census Bureau's 2008 estimates of county populations and domestic migration.  He tells us that:

• people continue to move to the suburbs of large metropolitan areas, and away from core areas;
• in 2008, large metropolitan areas' core counties experienced a net domestic loss of 314,000, and an annual average loss of 580,000 between 2001 and 2008; 
• net domestic migration gains were down to 192,000 in suburban counties from an average gain of 246,000 over the decade.

The story, as Wendell sees it, is that slowing domestic migration to the suburbs does not signify a flight back to the cities.   Rather, it is a return to normal migration patterns -- spiking home prices between 2001 and 2007 created a domestic migration bubble as homeowners cashed out and moved to cheaper areas.

But there is another interesting phenomenon lurking in the the Census data.  Even after accounting for domestic migration, demand for central counties has risen.  And that rise often has been driven by international migration.

It's clear that demand for central counties has been rising if we look at changes in total population rather than just domestic migration outflows.  In 36 of the 48 large metropolitan areas analyzed by Wendell, the core counties added people between 2001 and 2008.  In four of the other twelve metropolitan areas, both core and suburban counties lost residents; it is hardly surprising that the core county of a declining metropolitan area will lose population.  Only eight metropolitan areas fit the "flight to the suburbs" model -- an increase in suburban population and a decrease in  core county population.

Some cities can thank domestic migration for the rise in their core-county populations.  Austin, for example.  It added 41,000 from domestic migration between 2001 and 2008, nearly 11,000 from 2007 to 2008 alone.

But the growth of other core counties has been driven by international immigration.  For example, Los Angeles County lost a staggering 1,007,000 residents due to domestic migration between 2001 and 2008.  Its population nevertheless grew by a total of 318,000.  It more than replaced its departing residents with healthy natural growth and international immigration.  The Census Bureau estimates that between July 1, 2007 and July 1, 2008, Los Angeles County lost 103,000 residents to domestic migration -- but added  87,000 from natural growth and 70,000 from international migration, a net population increase of 54,000.

The story is the same in booming Dallas.  Between July 1, 1007 and July 1, 2008, Dallas County lost 19,000 residents to domestic migration, but added 20,000 from international immigration.  Its international migrants replaced its departing residents one for one.    

One explanation of this phenomenon is that international immigrants are outbidding existing residents.  The supply of housing in central cities is relatively inelastic thanks to tighter restrictions on new construction, NIMBYism, and the generally higher cost of dense, infill construction.  A central city can add only so many people in a single year.  A large inflow inevitably triggers a rise in prices and a corresponding outflow.  

An alternate explanation is that demand is in fact dropping for core counties, causing a decline in housing costs, which in turn is attracting less affluent international migrants.   Home prices of course have dropped sharply nearly everywhere over the last year or two.  But that was not the case for the preceding seven years, and the international migrant inflows did not start last year.  Regardless, declining demand can't be squared with rising population.  Each year, more people, not fewer, want to live in these central counties.

I suspect that core counties are relatively more attractive for international immigrants than domestic residents.  Immigrants are attracted to clusters of immigrants of the same nationality; these clusters naturally develop in core counties first, and tend to be self-sustaining.  Perhaps immigrants are more comfortable with a denser, central-city environment.  And perhaps domestic residents have a better grasp of the opportunities that exist outside the core county.

Whatever the reason, international immigration is driving demand for many the  core counties in many metropolitan areas.  The recession will cause international immigration to plummet.  If international immigrants have been outbidding domestic residents, then domestic migration will drop sharply.  On the other hand, if domestic migration has been prompted by a distaste for central cities, the outflows will continue.  We'll see.

Demand for suburbs vs demand for central cities

Americans overwhelmingly prefer suburbs.   We know this because most Americans  choose to settle in suburbs.

No, wait.  Demand for suburbs and exurbs is collapsing; they are on their way to becoming the next slums.

Both memes are wrong, I think.  The "suburbs are dying" meme is wrong because most metropolitan growth will continue to occur in the suburbs -- at least in rapidly growing metropolitan areas -- regardless of shifts in preferences.  The first is wrong because rapid suburban growth doesn't tell us anything about the relative demand for suburbs and central cities.  

First, rapid growth in a metropolitan area is synonymous with rapid growth in the suburbs.  And it will always be that way.  (The form of suburban development is a separate issue.)  It is harder to add new housing in a built-out environment.  Denser construction is more expensive and takes a lot longer to get built.  

Take Austin.  Austin's urban core had about 170,000 residents in 2000.  Austin's metropolitan area added about 390,000 residents between 2000 and 2008.  Even if Austin's urban core had doubled in population between 2000 and 2008, most growth had to and did occur at the metropolitan area's fringes.  Of course, Austin's urban core did not double in population.  It is not possible to double the density of a built-out urban core in just eight years.  I'd be surprised if Austin's urban core grew by 20% between 2000 and 2008.  So its suburbs necessarily have boomed, even though Austin's core is healthy and experiencing steady growth.

Ditto with cities like Dallas, Houston and Atlanta, which each added one million residents between 2000 and 2008.  It would have been impossible for their central cities to add more than a small fraction of the newcomers.

But because most growth must occur in the suburbs, this growth does not alone tell us whether demand for the suburbs is growing faster than demand for the central city.  

We know that demand is higher for the suburbs when the central city is losing population while the suburbs are adding population.  But in thriving cities, both suburbs and central cities are adding population.  The central city is simply adding population at a slower rate.

To figure out relative demand, we also have to consider prices.  Because the housing supply in the central city is relatively inelastic, higher demand mainly shows up as higher prices.  Because the housing supply in the suburbs is relatively elastic, higher demand mainly shows up as more subdivisions.  To determine whether demand is rising more rapidly for one than the other, we have to weigh both the rate of new construction and the change in prices.  And, to complicate things, we have to factor in shocks like rising gas prices and recessions; these have different impacts on the relative demand.  

So determining whether demand for one is growing faster than demand for another means disentangling a complicated knot.  That is a hard thing to do.  A lot harder than focusing on just rising supply or rising prices.

Federalizing local street networks

Streetsblog has an interesting interview with John Norquist, the president of the Congress for the New Urbanism.  He discusses boulevard design, highways' impact on cities, and the benefits of dense, local street networks.

He also discusses a CNU proposal to use federal funds to encourage the latter:

The first step is to allow federal funds to be used to bring street networks up to a standard of 150 intersections per square mile. So if you have a suburban sprawl kind of situation where the intersection density is like at 40 per square mile, if you have a project that’s going to bring that intersection density up to 150, then the state would be eligible for getting federal funding to go in and do that.

As much as I prefer grids to cul-de-sacs, I think this is a bad idea.

First, it’s important to distinguish between local street networks and major arterials like boulevards and highways.  States and the federal government (indirectly) pay for most highways, while cities pay for most boulevards and other arterials.  Norquist rightly complains that the feds have shaped highway design and location for decades.  Not to mention the mix of highway and transit spending.

Local streets are different.  Local street networks look like they do because cities don’t build them anymore.  They instead are platted, built and paid for by subdivision developers. They don’t become public streets until dedication, when cities take title and the responsibility for maintaining them.  Cities thus have privatized their grid design.  We should not be surprised, then, that developers ignore spillover benefits -- especially connectivity -- when laying out their streets.

Cities do plat and build the arterial roads that link subdivisions to the rest of the city. But we can’t get intersection density by redesigning arterials.  Arterials are one-dimensional; grids are two-dimensional.  CNU understands that, which is why it wants federal funding for local street networks with a minimum intersection density.

I’m sure developers would be perfectly happy with CNU's proposal. It would eliminate one of their two major infrastructure costs. (The other is running connections from the subdivision to the local water, sewer and electric lines.)  Developers would lose some developable lots because a dense street network needs more pavement than the minimal street networks developers build.  But I’m sure developers would gladly give up 10% of their buildable lots if cities would agree to build their streets.

Do we want to abandon developer-financed local streets?  Even if cities and the feds paid just part of the cost, this would be an immense expense.  Most cities don't have the money.  It would take billions per year -- every year -- to make a noticeable difference in city structure.

It is also a bad idea to subsidize developers and property owners.  Reducing the cost of building subdivisions would get us . . . more subdivisions.  If you dislike the relentless spread of single-family subdivisions, then you want developers to bear all the cost.  (Actually, you should want developers to bear all their costs regardless.)  

Such a subsidy could be efficient in theory if it were limited to the extra expense incurred by the developer to densify their street networks.  But developers would have no incentive to disclose their true costs, and local officials could not figure that out on their own.

Finally, it is a bad idea to get the feds involved in local street design.  If “incentives” meant “funding,” the feds would dictate street layout, just like they dictate highway width, turning radii, and drinking ages. Cities wouldn't  use their scarce dollars to build more than the feds require.  Developers certainly wouldn't. And the federal government might not do it the way you or I want it done.  Suppose the feds, thanks to lobbying by property owners and developers, decided to fund only 100 intersections per square mile? Or 75? Then 100 or 75 intersections per square mile is what would get built.

There would be enormous pressure to go with less dense networks since they are  cheaper.  Developers would continually push for less dense networks even if the cities were footing the bill -- sacrificing 20 houses for road funding might be a good deal, but sacrificing just 10 houses would be a better deal.

So whenever someone wanted to change the rules for local street design, they'd have to run to D.C.  That's worked real well in the past, right?

Panoramic sprawl

Californian Matt Jalbert has taken a stunning set of panoramic photos of California sprawl.  My favorite is of this residential development in San Ramon.  I cropped a tiny patch for the photo to the right, but it does not begin to do justice to Jalbert's photo.

People use "sprawl" to mean lots of different things.  I suggest readers use the panoramic photo to self-administer a Rorschach test, a test to clarify your own definition:  What makes this sprawl?  (Or is it not?)

If you want to do it right, you have to assume you know nothing other than what's depicted within the four corners of the photo.  That is, you don't know how far the development is from the nearest major employment center, or whether it's two miles or ten miles outside a major city.  (Most Northern Californians know where San Ramon is, I imagine.)

So what makes it sprawl?  Note it's not vulnerable to the "sprawl is sparse" criticism -- i.e., that suburban large-lot homes chew up excessive amounts of open space.  This development is as dense, structurally, as an old Italian village.  The houses take up almost all of the space of their lots, leaving tiny yards at best.  

My take below the jump.

"Sprawl" \'sprol\ n.

The Overhead Wire asks what sprawl is.  Ryan Avent gives his answer -- he uses "sprawl" to refer to neighborhood density rather than regional density.  (As a stats geek, I would state it this way:  "What matters is a metropolitan area's weighted density and not its standard density.")

My own thought it that it's time to retire "sprawl."  This little 5-letter word is being forced to do too much work; it simply has too many meanings.  And it might as well be a 4-letter word because it is the land-use equivalent of "asshole" -- I've told you I don't like you but I won't bother getting specific. 

Here are different meanings I've seen it given: (1) peripheral development -- greenfield development at the fringe of an urban area (one variation singles out "leapfrog" development); (2) economic dispersal  -- the rising cost (in both time and money) of getting from point A to point B; (3) "pod" development -- any development sharply segregating single-family, multi-family and commercial uses; (4) low-density development  -- always a relative metric, of course; and (5) auto-dependent development.  I'm sure there are others.

"Sprawl" literally means "to spread or develop irregularly." That best matches (1). But what makes it such a slippery word is the correlation between these definitions, which causes people to conflate one meaning with another. Peripheral growth can lengthen commutes. Virtually all new suburban development is "pod" development, and low-density development at that. And everything built more than a quarter-mile from a rail station -- virtually any suburban development -- is car-dependent, or at least car-oriented.  It is therefore unsurprising that people use "sprawl" to encompass several meanings at once.

For example, Dolores Hayden in A Field Guide to Sprawl defines "sprawl" as "a process of large-scale real estate development resulting in low-density, scattered, discontinuous car-dependent construction, usually on the periphery of declining older suburbs and shrinking city centers."  So she combines (1), (4) and (5), and possibly (3) as well, and throws in a jab at tract development for good measure.  (Note, though, that combining meanings technically narrows the definition rather than expands it.)  There are many others, of course.

But it's sloppy to mix them up.  The correlation is imperfect.  New Urbanist developments that mix single-family, multi-family and commercial uses into a walkable neighborhood are often built on greenfields at the periphery of urban areas and are not served by transit.  Density is not a perfect proxy for urban form because pod developments are sometimes denser than traditional, walkable neighborhoods; this is one reason why places like Phoenix have a relatively high weighted density.  Infill development is frequently not served by transit and consists of segregated uses.  Commuting costs can rise with rising density as well as increasing geographic dispersal if the transportation infrastructure is not up to snuff.

Each of these definitions suggests a different problem.  You cannot propose a solution until you have told the rest of us what problem you are trying to solve.  And "sprawl" is simply too mushy to do that.  If you are worried about the loss of open space, then New Urbanist greenfield development must be included within the definition of "sprawl."  If you are worried about rising commuting costs, it makes no sense to include greenfield development served by mass transit.  If you care about urban form -- if you hate pod development, for example -- you should include pod development whether it's core or suburban, dense or sparse.  We're engaged in lots of different debates over land use but we often don't realize it because we use just one word to characterize them all.

We need to develop more precise, clinical terms to advance the discussion.  Medicine, math and science (and law, more or less) define their terms precisely.  People make fun of jargon, but serious disciplines need it to keep distinct ideas straight.  As used today, "sprawl" is the medical equivalent of "sick."  Imagine the hilarity that would ensue if doctors used "sick" as their primary term for both prostate cancer and the flu.  

Define terms precisely.  And don't build moral judgments into them.  You can cast aspersions once everyone else knows what you're talking about.