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A
growing number of New Urban Regions in the
United States, including Washington-Baltimore,
are facing an unprecedented shelter (aka,
housing) crisis. (See End
Note One on prior and future housing related
columns.)
What
new information is on the table about house
prices? Why is this rampant escalation
occurring? What is being done about it?
Boom
In
our April 25, 2005 column (“Gimme
Shelter”) we explored the issue of
escalating house prices. The bottom line was
this: The last 115 years has never seen a period
of rapid escalation in the cost of shelter
comparable to the past six years. Now, it turns
out that the house price boom is much worse than
we thought just four weeks ago.
The
Federal Deposit Insurance Corporation has
released a report that identifies 55 regional
and subregional markets where house prices were
up by an inflation adjusted 30 percent or more
per year as of December 2004. That is
unprecedented in the three decades that this
data has been collected and over twice the
number of regional and subregional hyper price
markets that existed during the housing boom that preceded
the Savings & Loan bust.
The
FDIC figures is only one of many similar data
points. The FDIC data is for 2004. What about
regional data for 2005, which is almost half
over? We will know in a year or so but in the
meantime the boom rolls on.
There
are regions where house prices are rational,
just not any of the places with “More, Better
Jobs” (aka, prosperous magnets for economic
growth).
In
other words, none of the regions with very
prosperous economies have stable housing
markets.
In
our July 14, 2003 column “The
Affordable and Accessible Housing Dilemma,”
we suggested that the provision of shelter the
United States of America was slouching toward
Gomorrah in a near-perfect demonstration of the
2nd Law of Thermodynamics. Well now it is a
traveling at a gallop, and Gomorrah occupies the
entire valley just ahead.
Just
How Bad Is The Boom in Virginia?
Below
the
regional level, housing data is confusing because
information is primarily collected on a
municipal jurisdiction basis. Frequently, data
is cooked or skewed from year to year to support
the agenda of those in office. It will be years
before comprehensive information at the
neighborhood, village and community scale is
available and then only if someone is willing to
pay to dig it up.
Snapshot,
headline-grabbing summaries are confusing
because they often co-mingle "median"
and "average" figures, confuse
"new" house prices with all house
sales and use incongruent data periods. In spite
of these shortcomings, it is safe to say that
the gap between median price of a house and the
median family income is widening at an
accelerating pace.
Recent
data indicate that there are continuing waves of
“move outs” along every major radial
corridor in the Subregion. Those moving back
toward the core are at the top of the economic
food chain and can afford the luxury of a
functionally located house.
Data
on outer jurisdictions in Virginia portion of
the National Capital Subregion is even more
confusing than that for closer in jurisdictions.
Since our “Gimme Shelter” column appeared,
the Fauquier Citizen has published
average house prices for March 2004 to March
2005. The numbers are staggering, indicating
increases of 80 percent to 90 percent for one
year in some smaller, more remote
jurisdictions.
The
stories on the street are even worse. In the
barber shop, beauty saloon, hardware store and
dentist’s office one hears stories such as:
“I purchased my rancher in 1999 for $190k and
a realtor told me that it would go for $530k
today.” Some of this is hot air but not all of
it. Besides, house price bubbles are created and driven
by hot air. Places in the Subregion that once
were “affordable” are not any longer
(“Prince William Homes Slip Beyond Reach”).
In jurisdictions like Culpeper County and Warren
County homes are up by around 40 percent. This
prices almost all except “the commuters”
with jobs inside the Clear Edge out of the
market. (See End Note
Two.)
The
Cause of Price Escalation
The
housing price boom is a real crisis, and it
documents a fundamental problem in the provision
of shelter. From a 20,000-foot altitude above
any portion of the northern part of Virginia the
problem is crystal clear:
The
current economic context and governance
structure is delivering the wrong size house
in the wrong location for home buyers who
already have a house.
What
is worse, households are buying far more house
than they would if the total location variable
costs were fairly allocated and the irrational
subsidies were removed. While there are few
houses being built that families making less
that $70,000 a year can afford, there are many
units in just the configuration needed between
Radius=2 Miles to Radius=20 Miles to create
Balanced Communities within the Clear Edge.
The
problem is that these dwellings--condominiums
and single family attached units-–are being
built between Radius=20 Miles to Radius=30
Miles. Few would really want the housing units
being built from Radius=30 Miles to Radius=60
Miles if they thought there were an alternative
with the same amenities in a functional location
or if they had to pay the full location variable
cost of the scattered dwellings. Recall from the
Fairfax example in “Antidotes”
that the problem is not a lack of land, if only
there were a functional distribution of land
uses at the Alpha Community scale.
Finally,
as we point out in earlier columns on affordable
and accessible housing, the $100 billions of
direct and indirect federal, state and municipal
housing subsidy ends up primarily in the pockets
of those at the top of the economic food chain.
Specific solutions offered in the columns cited
in End Note One.
Let's
Have a Conference
While
no one has yet given serious consideration to
implementing real solutions, the problem of
shelter availability is not going unnoticed.
There have been a rash of housing conferences,
and more are planned. Most are held by municipal
jurisdictions or small groups of jurisdictions.
That
is a bad start because the house price/shelter
access problem is clearly a regional problem
that encompasses the entire Baltimore-Washington
New Urban Region, not just some parts of it.
As
geographically fragmented as the sessions are,
they document the problem in dramatic fashion.
The housing crisis is not just:
-
Shelter
for the homeless
-
“Affordable
housing” those at bottom of food chain
-
Workforce
housing” for teachers, fire and police
personnel and skilled workers
The
reality is:
-
Acquiring
shelter, if you do not already have a house,
is now out of reach for much of the
region’s population.
-
Acquiring
desirable shelter in a different location
within the region is out of reach for many
of the region's citizens, even if they now
own a house. (See End
Note Three.)
Roger
Lewis is an architect, University of Maryland
professor and a columnist for the Real Estate
section of The Washington Post. Roger
hits the nail on the head in a recent column
that summarizes a conference on affordable
housing in Montgomery County, Md. In “It’s a
Nice Place to Work, but you Probably Can’t
Live There,” Lewis frames the issue and lists
the “solutions” that were delivered in
“subdued, pedantic and evangelical tones.”
(See End Note Four.)
Anyone
who has attended or presented at conferences on
affordable and accessible housing will feel
right at home. Roger is an even-tempered,
thoughtful, establishment type. He cautions
against forceful ideas or Fundamental Change
initiatives because they are not well received
in the circles in which he moves. That is why
his bottom line is so important. Roger suggests
that the nine categories of “solutions”
offered all to be “worthwhile.” However he
says:
But
the fundamental affordable (and accessible)
housing problem remains: the money gap. No
matter how hard we try to ... working families
will be priced out of the market. The often
unacknowledged 800-pound gorilla ... is the
inescapable need for subsidies to close the
money gap.
He
goes on: “Why is the money gap ignored?
Because subsidies, which can be provided in many
ways, ultimately require some form of public
funding and more tax revenue.”
Roger does not
acknowledge that there are already massive
subsidies for housing and that they do not solve
the problem because they subsidize wrong-size
houses in the wrong locations. The benefit goes
to those who can already afford the very best
shelter on the market. It needs to be made very
clear that, as in transportation, more money
spent in the same ways and within the conceptual
framework that now exists will not solve the
shelter problem. See End Note Five.
Money
Is An Issue
Money
is a real problem in the shelter crisis but it
is not a lack of money to subsidize housing.
First there is the illusion of easy money that
clouds rational thinking. Homeowners believe
they are “making money” from escalating
prices. Unless they have and execute a regional
exit strategy and move to a less desirable
region as determined by the housing market, they
are not going to get ahead in the long run.
Agents
and speculators are making short-term profit
from housing churn, mortgage refinancing and
building housing in dysfunctional locations.
Speculators are also making money selling books on how to become
real estate millionaires.
The Big
Picture
The
National Capital Subregion needs to start over
on housing. First, there needs to be a much
better grasp of the problem and of the solution.
The data to do this is not now available. All we
have is sketchy information on how bad we are
failing to meet the goal of sound, accessible
shelter for all. Obtaining the data is one of
the goals of the PROPERTY DYNAMICS program
introduced in Joe Freeman’s “Rain
Dance” column of Jan. 4, 2005.
A
restatement of the shelter goal would be a good
place to start. What we are trying to do with
respect to shelter? The only clear national
policy on housing is to increase percentage of
home ownership. That simple- minded goal within
the current governance structure and market
context has produced the wrong size house in
wrong location at great cost. We have spelled
out the issues in greater detail in the earlier
columns cited in End Note One
and in housing chapters of The Shape of the
Future.
Bust
Many
understand the immediate threat of a house price
collapse. We noted in “Gimme Shelter” that
most housing experts who are not directly or
indirectly employed by the shelter industry
suggest that it is only a matter of time until
the housing price bubble bursts. Even Warren
Buffet took pains to note the potential for a
residential real estate bust at the Berkshire
Hathaway shareholders meeting at the end of
April.
There
is no question that millions would be hurt by a
house price depression. There would be
underwater mortgages, citizens would lose first
and second homes as well as the equity they have
built up. The extent of the potential damage can
be visualized by a quick read of “It’s on
the House: Now Everybody Is Paying for
Everything With Home Equity.” (See End
Note Six). Especially hard hit will be those
who took the money they had set aside to pay for
their children’s education and used it to
become speculative real estate “investors”
or took equity out of their house to invest in
the stock market.
Boom
or Bust Which Is Worse?
The
downside of a home price nose-dive is clear. But
let us assume that residential real estate
values do not crater. Suppose house prices:
-
Stagnate
at the current levels
-
Slow
down to a pace that creeps up at the rate of
inflation
-
Continues
unprecedented hyperinflation
Any
of these scenarios will yield an even greater
financial disaster than a home price bust that
brings house prices into phase with wages,
prosperity and intelligent location choices.
That is because if there is not a bust, everyone
will be hurt by the depressed economy that will
result from failure to solve the shelter crisis.
A
marginal increase in subsidies will not solve
the problem. There are cures but they would have
to be draconian, and very painful to many. Of the
nine categories that Roger Lewis lists in his
column noted above, none will not solve the
problem. Neither will others discussed by
earnest housing “experts.” Solutions that
would "work" might
include:
These
solutions hint at the economic and social impact
of “traditional” approaches to the lack of
suitable shelter. It does not take a Ph.D. in
economics and political science to understand
these actions would cause economic chaos for
regions and for the United States in a global
marketplace. The list of unpalatable cures
underscores just how severe the level of crisis
has reached.
What
Has Happened Here?
Why
has the provision of shelter gotten to this
point? You guessed it: Dysfunctional human
settlement patterns.
As
the Industrial Revolution completed urbanizing
contemporary civilization and the New Urban
Region became the fundamental component of
today’s society, the governance structure has
not evolved to reflect the economic, social and
physical reality. Housing, like transportation,
is a regional issue, and there is no governance
structure that can address the reality of
dysfunctional human settlement patterns or the
derivative problem of the failure to produce affordable and accessible
shelter.
There
has been no evolution of government to represent
the best interest of all citizens in
region–only mechanisms to address the most
pressing concerns of a few. The jobs/housing
mismatch and the lack of Balanced Communities is
the result of beggar-thy-neighbor tax base
competition that puts jobs in one place and lets
the workers seek houses “where ever.” While
becoming a right to those at the top of the
economic food chain, huge housing subsidies have
failed to develop functional human settlement
patterns, as noted in the Fairfax example cited
in “Antidotes."
We will explore the shelter crisis and its
relationship to other current realities in
future columns.
--
May 23, 2005
End
Notes
1.
In our columns of Feb. 17, 2003 (“Affordable,
But No Bargain,” and July 14, 2003 (“The
Housing Dilemma”) we explored the issue of
house location and spelled out the requirements
for creating affordable and accessible housing.
In our April 25, 2005, column (“Gimme
Shelter”) we explored the issue of
escalating house prices. We continue to work on,
and will publish soon, the two follow-up columns
outlined in “Gimme Shelter.” The second in
the series will address the needed reform of
taxes on resident-occupied property. The third
will update the path to affordable and
accessible housing. In the mean time, the issue
of house prices requires further consideration.
2.
Del Rosso, Don; "Climbing Costs:
Fauquier’s Average Home Prince Reaches
$420,000;" The Fauquier Citizen, April
28, 2005. Stewart, Nikita; "Prince William
Homes Slip Beyond Reach: Once Considered a Haven
of Affordability ...”, The Washington Post;
May 4, 2005; B-1. “Toward Affordable Workforce
Housing;” Rappahannock Rapidan Regional
Commission April 21, 2005.
3.
Fleishman, Sandra; “Owners Hold Off On Sales
Of Homes: Unable to Move Up In a Tight Market,
Many Just Stay Put;” The Washington Post; May
2, 2005.
To its credit, The Post also warns of the
risks of real estate speculation in a bubble-prone
market. Deane, Daniela; “Everybody’s an
Investor Now;” The Washington Post; 21
May 2005.
4.
Lewis, Roger; “It’s a Nice Place to Work,
but You Probably Can’t Live there;” The
Washington Post; 14 May 2005; Page F 5.
5.
Advocates of a smaller government and lower
taxes will not be pleased with Rogers' solution.
We have noted, however, that few of these
"smaller government" advocates have refused
the federal dole in the form of mortgage
interest deductions. They prefer to direct their
criticism at federal-, state- and
municipal-level housing programs. A good example
is the dismantling of HUD programs that, after
years of trial and error, are, to some extent,
working. The Washington Post columnist
Steven Pearlstein (May 18, 2005, E-1) and others have pointed out
the hypocrisy of the “free market” real
estate industry confrontations with the U.S.
Justice Department because of standing in the
school house door over competition via the
Internet. We examine the role of agents in house
pricing in the second column cited in End Note
One.
6.
Pressler, Margaret Webb. “It’s On the House:
Now Everybody Is Paying for Everything With Home
Equity” Business Section lead story The
Washington Post 8 May 2005.
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