The Shape of the Future

E M Risse


 

Two Spheres of Fraud

 

While the media salivates over the subprime lending fiasco, journalists are overlooking the main reason why Americans can't afford housing:  the building of the wrong kind of housing in the wrong places.


 

There are many reasons why the Affordable and Accessible Housing Crisis deserves to be on the front hook. Shelter is one of the fundamental requirements of life. For humans that means housing.

 

Unfortunately, the current media frenzy over “housing” is focused on the flawed and fraud-tainted housing finance system that has evolved over the past two-plus decades.  In the most recent real estate speculation driven financial crisis, the housing finance system has out done itself. It has infected the entire financial sector across the globe.

Speculators are losing their shirts. That is not a bad thing. However, citizens are losing their shelter and their livelihoods. That is a bad thing.

At S/P we have come to the conclusion that there are two Spheres of Housing Fraud contributing to the Affordable and Accessible Housing Crisis:

  • The First Sphere of Housing Fraud is the financial- sector crisis resulting in an epidemic of home foreclosures in some locations and plunging house values across the nation-state.

  • The Second Sphere of Housing Fraud is more pervasive and far more important but is not yet even recognized.

The First Sphere of Housing Fraud

 

The First Sphere of Housing Fraud is easy to identify and document. Brigid Schulte does a fine job in “‘My House.  My Dream. It Was All an Illusion:’ Home Crisis Epitomized in Latino Woman’s Loss” a page A-1 story on Sunday, 22 March in WaPo.

 

The First Sphere Fraud is perpetrated by professional crooks, cheats and bottom fishers. It is also the venue of gamblers – intentional and unintentional. The sad stories are populated by greedy, gullible and vulnerable individuals and Households. Especially vulnerable are those lured to the US of A by the illusion of getting rich easily and quickly. Many never understood the need for, nor were they given a chance to acquire, the tools and knowledge needed navigate the shark-infested housing sector.

 

The First Sphere Housing Fraud is not just made up of unethical loan officers, appraisers, agents, lawyers and other low lifes who have been praying on the weak and taking advantage of speculators’ greed. An entire white- collar industry evolved in the regulatory vacuum created by that magic elixir of “economic growth” that goes by the name of “deregulation.” First Sphere Housing Fraud is an intentional, Enterprise (Second Estate) fraud with a name: The subprime Mortgage Industry.

The list of defrauders in the First Sphere does not end with the subprime Industry and its victims.

The false prosperity and the fleeting illusion of home “ownership” was enabled and abetted by Agencies and governance practitioners – elected and appointed. The subprime house of cards is based on flawed programs and policies intended to expand home ownership and increase Mass OverConsumption without regard to settlement pattern or other long-term consequences.

 

First Sphere Housing Fraud was financed by “securities” based on location-blind mortgages. It turns out many of these mortgages were just what they were called: “subprime.” A high percentage of the mortgages also turn out to be “sub”urban as documented by the Radial Analysis noted below.

 

Is this the end of the list of First Sphere Fraud enablers?  No, add to the roster all the negligent Agencies who are chartered and paid to prevent this sort of fraud and meltdown. The defrauders in this cohort range from the former Fed Chairman who says he “may have missed that” to thousands of Agency employees who should have blown the whistle.

 

The entire financial regulatory apparatus including the federal Departments of Treasury and Housing and Urban Development and “independent regulatory agencies” are to blame. Any list of Agency culprits must also include Congress, the White House and all the others who are now tut-tutting and looking for election year patches.

One has to wonder how this Meltdown could happen so soon after billions of citizens' dollars were spent to bail out the Savings and Loan industry, and before that the REIT bloodbath.

Think of how much of the infrastructure needed to achieve a sustainable future could have been financed by what it cost to bail out these two recent real estate fraud driven catastrophes!

 

The First Sphere Fraud impacts all sectors of society and all parts of every New Urban Region and most Urban Support Regions. The only consolation is that, for the most part, First Sphere Fraud is just plain, everyday fraud and negligence. There are signatures on documents.  There are laws, regulations and professional ethics codes that must have been violated.

 

Prosecutors and lawyers should have a field day, or rather a field decade. If not, democracies with market economies are in worse shape than Robert Reich portrays in "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life." Reich has been quoted recently as calling the current condition “dog eat dog capitalism” and that describes the subprime Meltdown very well.

 

Cures Are Worse Than the Illness

 

There are now "solutions" pouring out of the Agency (Second) Estate. They are being generated by federal Departments, Congress, the White House, those who hope to occupy the White House and by state executives and legislatures. Even municipal governance practitioners are looking at ways to address the rising concern among voters. Looking for solutions is fine but no one is yet talking about any program that matches the scope needed to make whole those who have been damaged.

To make matters worse, the biggest losers with the current “solutions” are the vast majority who did not participate in the subprime orgy. They have lost value, equity and interest on their savings but played no role in creating the fraud-ridden subprime process. (See End Note One.)

Just how bad the subprime Meltdown bailouts have gotten is made clear by the front page headlines of 3 April 2008 in WaPo: “Housing Accord Puts Builders First: Strapped Homeowners Offered Little Aid; Bipartisan Senate Package offers Billions in Aid to Home Builders.” Even the editorial page cannot stomach the give away: “Wrong Relief: A Senate housing package would be better without an unjustified tax break for businesses.” State legislation is apparently not much better: “Md. Passes Broad Bills To Stem Foreclosures.” (See End Note Two.)

 

It is very clear to Wall Street what the bailout is all about. Note the 6 April 2008 WaPo story, "Housing's Bright Spot: Stocks; Despite the Sector's Spiraling Crisis, Builders' Shares Are Gaining Fast." The gross obscenity of this "investment" reality should sour even the most staunch supporters of the current winner-take-all gambling venue called the stock market. It also highlights the need to address the Second Sphere of Housing Fraud explored below.

 

Even if the rescue programs dramatically morph for the better, they will not address the core cause of the Affordable and Accessible Housing Crisis. That is because, as bad as the First Sphere Fraud “solutions” are for the vast majority, by far the most important impact of pandering political “solutions” is that all the attempts to “rescue” those directly impacted by the First Sphere will cover up and put off dealing with the much more important Second Sphere of Housing Fraud.

It is critical for citizens to understand that the First Sphere of Housing Fraud illuminates the more profound Second Sphere of Housing Fraud. Unless they come to understand and act, the Second Sphere will continue to thwart all attempts to evolve Affordable and Accessible Housing.

The Second Sphere of Housing Fraud

 

What is the Second Sphere of Housing Fraud? To ferret out the scope of the Second Sphere, one first needs to look at the spacial footprint of the foreclosure crisis. A good place to look for the roots of the Second Sphere of Housing Fraud is to consider a Radial Analysis of home forecloses. (See End Note Three.)

 

The foreclosure data is maddeningly incomplete. It is confusingly aggregated by municipal jurisdiction boundary and zip code, which do not relate to one another. Much of this obfuscation is intentional. (See End Note Four.)

 

In spite of these flaws, one can discern that:

For Virginia inside Radius R = 20-Miles from the Centroid of the National Capital Subregion home foreclosures over the past five months have been around five dwellings per 1,000.

As the story cited above, ‘My House. My Dream. It Was All an Illusion,’” documents, any foreclosure has dramatic personal consequences. But five per 1,000 is not a high rate given the pervasive scope of First Sphere Housing Fraud.

In Radius Band R = 20 Miles to R=30 Miles the foreclosure rate is around 20 dwellings per 1,000. That is four times the rate for homes closer to the Centroid of the National Capital Subregion. (See End Note Five.)

This Radius Band in Virginia includes Prince William County and the eastern one third of Loudoun County including “sub-markets” such as Sterling. The Radius Band includes the logical location of the Clear Edge. It covers about 330,000 acres -- room for 3.3 million residents at minimum sustainable densities -- and is where most of the new "affordable" housing was built in the last two decades.  

 

The foreclosure patterns within the R = 20-Miles to R = 30-Miles Radius Band are not uniform. Eastern Loudoun County has areas with lower rates due to the location of Dulles Airport and higher paying jobs in Greater Reston.  On the other hand, areas in Prince William County are hurt by lower paying jobs, especially those accessible from the I-95 corridor, and by the municipal government targeting immigrants as noted in the “Ring of Fire” story cited in End Note Five.

 

Farther from the Centroid of the Subregion in Radius Band R = 30-Miles to R = 50-Miles the foreclosure rate varies from around 5 per 1,000 (similar to that inside R = 20-Miles) to twice that rate depending on the land use control policies of municipalities and the existence of dysfunctional settlement pattern inducing infrastructure.  (See End Note Six.)

There is no end of foreclosures in sight and most agree it will get worse before it gets better.

The more important question is: What causes the much higher R = 20 to R = 30 Radius Band foreclosure rates? Getting to the bottom of the spacial distribution of foreclosures allows one to come to grips with the Second Sphere of Housing Fraud.

 

Before taking the next step, it needs to be clear that outside Radius R = 20 there are impacts from “global” (aka, not location-specific) shelter dysfunctions:

  • Municipalities that accommodate the construction of “cheaper” housing for those willing to take long commutes have higher foreclosure rates because these locations are fertile ground for the First Sphere Fraud.

  • Enterprises (and Agencies due to the monetization of politics) have created a economic context where it is more attractive for a Household to borrow and spend rather that to save and invest in non-leveraged, non-securitized gambling venues.  This leads to speculative move-ups, cashing out equity and other behaviors that invite First Sphere Fraud.

  • Mass dependency on Autonomobiles for Mobility and Access and disorienting MainStream Media advertising for cars and homes makes “drive ‘til you qualify” appear to be an acceptable shelter strategy. (See THE PROBLEM WITH CARS.)

It also needs to be noted that the opportunity to perpetuate the Second Sphere of Housing Fraud on citizens and investors exists because citizens do not receive the information they need to make intelligent decisions in the voting booth and in the market place.

 

For what do citizens need information upon which to make better informed decisions? They need this information to wipe out the Myths that blind them to spacial reality. They need this information to develop a comprehensive Conceptual Framework with which to consider Community and Regional settlement pattern issues.

 

As readers of these columns know citizens lack the needed information due to the demise of media in the Fourth Estate as documented in THE ESTATES MATRIX.

 

Beyond these “global” factors is the nub of the Second Sphere of Housing Fraud and tits pervasive impact on the Affordable and Accessible Housing Crisis.

 

The bottom line is this:

 

It is a pervasive Myth that it is now possible to provide Affordable and Accessible Housing for the lower two-thirds of the economic food chain in locations and in configurations that have been offered for this purpose for the last 20 years. The subprime industry exacerbated the myth by appearing to make these settlement patterns “affordable.”

 

Stated in terms of building type:

It is a Myth that monocultures of scattered Single Household Detached (SHD) housing can provide “work force” housing.

It is a matter of physics that SHD dwellings are more costly to construct than other housing types. Between 1945 and 1973 there were ways to make SHD affordable for those in the lower half of the economic food chain. Since 1973 three things have happened:

  • New Urban Regions have evolved and in their Beta state have expanded so that there is a far greater distance between places where lower cost SHD units can be built and the jobs needed to pay for the dwellings. This is a cause of, and the result of, the Mobility and Access Crisis.

  • Municipal Agencies have raised the standards for SHD construction due to both health and safety and fiscal impact considerations.

  • The income of those in the lower half, and more recently the lower ninety percent of the economic food chain has not grown as fast as costs. For a complete perspective on why this has happened see Robert Reich’s book "Supercapitalism" cited above.

For over a decade S/P has called the assertion that SHD housing was a sound investment for those in the bottom two-thirds of the economic food chain a Myth. (See any of the eight Shape of the Future columns on this topic over the past five years.)

 

Only when considering this position in the context of the current foreclosure Meltdown did it become clear to us that perpetuatation of this Myth creates what we now term the Second Sphere of Housing Fraud. For this reason, the most important aspect of the current financial crisis is that it converts from mere Myth to outright Fraud the perception that large, remote tracks of SHD can provide Affordable and Accessible housing to meet this (or any) New Urban Region’s housing needs.

 

Under the Hood

 

It is a physical and economic impossibility to build and deliver SHD dwellings as inexpensively other dwelling types. SHDs consume far more material and waste far more energy per Unit than do other building forms. As noted above, this is a matter of physics, not an issue of preference or policy.

 

Further, SHDs take up far more land per unit and thus raise the cost of all infrastructure. This reality is magnified by the collective footprints at the Dooryard, Cluster and Neighborhood scales. There is no way for these patterns to yield settlements that meet citizens economic, social or physical needs.

 

Even using the skewed and flawed housing data that is now available, it has been clear for more than a decade that “over half” of the potential home buyers – specifically those seeking what is now called “workforce housing” – do not qualify for the “median priced” housing. It turns out that this is just the tip of the iceberg. These working Households do not qualify for any housing. The demise of the subprime lending spree documents this fact.

 

The underlying reality of the Affordable and Accessible Housing Crisis is:

It is no longer possible to build Single Household Detached dwelling Units that the bottom 60 to 70 percent of the economic food chain can afford.

There are two alternatives:

  • Expand the extensive system of subsidies that now exits for SHD dwellings.

  • Create settlement patterns that support a range of housing types in close proximity to jobs and evolve a Balance of J / H / S / R / A at the Village, Community and New Urban Region scales.

The rising cost of energy and the economic reality illuminated by the demise of subprime loans make clear that the first option is not a viable economic alternative.

 

S/P and others have documented that scattered Units, Dooryards and Clusters of SHD dwellings outside the Clear Edge are a core contributor to dysfunctional human settlement patterns and to the Mobility and Access Crisis. Now this reality is starkly clear.

 

Immediately after World War II it was possible to deliver “cheaper” housing in remote locations. There were, for example, ways to overcome the capital cost of SHDs via sweat equity. Building “hope houses” (dig a basement, move into the basement and hope you can build a house to shelter the Household as it grew) was a good example.

 

However as Beta New Urban Regions expanded and became more unbalanced, location became an ever more serious obstacle. Remote locations shifted costs to the buyer since they have to spend more and more time and resources to overcome locational dysfunction. For example, owners could not “be home at 5:00 p.m. to work on the house.”

 

There were many other factors at play. Citizens believed the advertising suggesting that they “deserve” to consume more and have more leisure time. Rising costs and expectations put both adults in most Households to work. New regulations and inspection requirements “professionalized” the building process. (Some parameters of “cheaper” housing are briefly summarized in End Note Seven.)

 

Getting to the Bottom Line

 

Many understand that one root cause of the Affordable and Accessible Housing Crisis is the “Accessible” aspect of workforce housing. The location of jobs that will pay the cost of the housing are remote from the locations where affordable housing Units exist.

 

The “Accessible” disconnect is the result of the Mobility and Access Crisis and is exacerbated by auto dependency. Some blame the rise in gasoline prices. However, the cost of fuel is only 20 percent of the total monthly cost of Autonomobile dependency. Some other costs are going up faster.

 

As we have seen, when there is not enough left to pay the mortgage, shelter disappears.  (See THE PROBLEM WITH CARS.)

 

There are two overarching causes of the demise of SHD as a housing option for most citizens:

  • Over the last 35 years the cost of living, especially living the "as seen and advertised on TV” lifestyle of Mass OverConsumption, has gone up far faster than wages for all but the top ten percent of the economic food chain.

  • The market has started to more fairly allocate location-variable costs.

No one suggests that wages have “kept up” especially for the lower two thirds of the economic food chain. These “workforce” Households are falling farther and farther behind as documented by Robert Reich in "Supercapitalism."

 

There are many ways to create Affordable and Accessible Housing. Chapter 28 of The Shape of the Future contains several specific suggestions. However, building SHD housing in remote locations that require an Autonomobile to reach a Job, acquire Services, Recreation or enjoy Amenity is not one of them.

 

Enterprises, Agencies and Institutions have conspired to build the wrong size houses in the wrong locations. This Second Sphere of Housing Fraud keeps information on this reality from citizens. It is fraud perpetrated by Agencies, Enterprises and Institutions.

 

-- April 7, 2008

 


 

End Notes

 

(1). Robert J. Samuelson does a nice job of articulating why the current round of “solutions” is flawed on both moral (rewarding the wrong parties) and economic (slowing down real economic recovery) grounds. “How Not To Save Housing” in 2 April 2008 WaPo.  Alan Sloan puts the whole financial crisis bailout in clear perspective in “Dreams End With Collapse of Tinker Bell Market” on 1 April 2008 also in WaPo.

 

(2). Front page and lead editorial in 3 April 2008 Virginia Edition of WaPo. These proposals are based on the terrible assumption that it would be a good idea to “jump restart” the flawed housing industry that created the problem in the first place. Also see "New Housing Bill Criticized as Scant Help for Distressed," on 4 April 2008, and "Senate to Widen Housing Proposal" on 5 April 2008.

 

(3). The Bacons Rebellion post “AFFORDABLE AND ACCESSIBLE HOUSING – FROM BAD TO WORSE,” 9 March 2008, offers observations from the dawn of the foreclosure crisis.  In the comments following that blog post, the blogger using the name of "Groveton" asked if there were data to support the assertion that the foreclosure epidemic was caused in large part by “building the wrong size house in the wrong location.” EMR suggested a Radial Analysis of the location of the foreclosures would provide strong evidence. That turns out to be correct. 

 

(4). The “median” house price has been distorting the real shelter condition for those in the bottom two-thirds of the economic food chain for years. More and more big, expensive houses, subsidized by tax deductions and artificially low mortgage rates and built in scattered locations, skew the “regional” housing perspective.  House value trends are up if one looks at the median price but down if one looks at indexes such as Standard & Poor’s / Case-Shiller or the even more accurate, “same house, same builder, different location” analysis. To understand the dynamics of this reality one needs to understand the small-area analysis pioneered by Lucy and Phillips in Confronting “Suburban” Decline” and applied in more recent publications by these authors.

 

The root problem is that most published and accessible housing data is generated by and controlled by those who benefit from the illusion of real estate speculation as a gold mine. These Enterprises feed off of housing churn and the Holy Grail of housing churn, “the move up market.”

 

Perhaps the most profound indicator of shelter data corruption is the recent release from the Census Bureau – relegated to page 4 of the Metro section in the 27 March 2008 WaPo: In spite of remarkable job growth over the past decade in the National Capital Subregion, the Census Bureau reports that the population growth “in the region” has been “anemic.” That data documents only one thing: The Census Bureau is looking at the wrong “region” boundaries.

 

(5). See Nick Miroff, “N. Va’s Foreclosures Form a ‘Ring of Fire,’ 23 March 2008.  WaPo.  These concentrations have a ripple effect on home values in the Dooryards, Clusters and Neighborhoods where they occur, as documented in Lee, Mara “Foreclosure Fallout: A Struggle for Stability; In One Md. Subdivision, a Cloud Over Some Homes Affects Many,” 29 March 2008 WaPo.

 

(6). Radial limited access highway corridors that facilitate long-distance “commuting” are prime predictors of pockets of foreclosures in jurisdictions beyond R = 30.

 

( 7). Research done in connection with “The Shape of Loudoun County’s Future” profiled why remote SHD dwellings might be “cheaper” per square foot to buy but not less expensive for the occupants in the long run. This is especially true when location-variable costs are considered.   In some cases there are lower land costs due excess nonurban land being speculatively held for urban land uses.  Often there are lower labor and subcontractor costs in remote locations because construction workers already live in these locations because that is all they can afford and they will work for less pay if they do not have to go to travel inside the Clear Edge. When construction jobs dry up, workers who build the houses lose their house too.

 

For a time, especially just after World War II, subdivision regulations were weaker and processing times shorter in remote locations because “growth” was considered “good” and because municipal Agencies saw themselves as “helping to meet the need for housing.” (See “Burned Out,” 10 July 2006.)

 

Contractors will accept lower profit margins, and in the early stages of scattered development there are lower costs. These lower costs are later wiped out by the congestion and dysfunction that the scatteration creates.

 

The reality of “cheaper” SHDs emerged from “same house, same builder, different location" analysis. These comparisons indicated that the factors noted above, plus a shift  of amenity, standard  features into extra options, and other minor factors impacted price. However, the primary reason for the lower cost is because a large part of the location-variable costs were shifted to others.

 

In other words the big cause of “cheaper” housing was the failure to fairly allocate location-variable costs.

 

 
 

 

 

 

 

 

 

 

 

 

 

Ed Risse and his wife Linda live inside the "Clear Edge" of the "urban enclave" known as Warrenton, a municipality in the Countryside near the edge of the Washington-Baltimore "New Urban Region."

 

Mr. Risse, the principal of

SYNERGY/Planning, Inc., can be contacted at spirisse@aol.com.

 

Read his profile here.