New Geography

Category: Economics

  • Suburbs will decide the election

    By Joel Kotkin and Mark Schill

    Suburbs may not have cooked up the mortgage crisis, but they absorbed much of initial damage. Now that Wall Street and the big cities are also taking the fall, suburbanites might feel a bit better — but there’s still lots of room for anger out in the land of picket fences, decent schools and shopping malls.

    Widely demeaned in the media and academe, suburbs still exercise their power at election time. Home to roughly half the country’s population, and likely a greater share of its voters, suburbs seem destined to remain — to borrow from that great wordsmith George W. Bush — “the decider” in this election.

    Indeed, as the campaign has evolved, the critical position of suburbs seems to have grown. Barack Obama’s stranglehold on the urban vote seems unshakeable — even against a maverick “moderate” such as John McCain.

    At the same time, after seeming unsettled, the rural and small-town electorate appears to be returning to the GOP fold. Alaska Gov. Sarah Palin’s place on the Republican ticket and, perhaps even more, the mainstream media’s snooty reaction to her, may have sealed the GOP deal in the countryside, at least at the presidential level. One sure sign: The small Obama strike team sent to reliably red North Dakota this summer has departed for more competitive terrain in nearby Minnesota and Wisconsin.

    So now it’s really up to the suburbanites, who come from the only geography that has grown faster than the national average over the past 30 years. But it’s critical to recognize that suburbs themselves have changed, becoming more reflective of America’s diversity, just as cities have grown more bifurcated between rich and poor. Once lily white, suburban America is now roughly 21 percent minority.

    Voting behavior among suburbs overall also has changed over the years. In the 1980s, Ronald Reagan carried the suburbs in the key swing states by between 20 points and 40 points. Bill Clinton ended this dominance, essentially battling the GOP to a suburban standoff. He even beat the Republicans in the peripheral communities of Pennsylvania, Michigan, Missouri and Florida.

    In 2000 and again in 2004, President Bush recovered some of the Republican edge, running as much as 10 percent better than Sen. Bob Dole’s weak 1996 effort. But in the 2006 congressional elections, Democrats regained much of the ground Clinton had carried.

    As of now, polls suggest McCain, who lagged in the suburbs into the summer, has pushed back some of the Democratic momentum. He now enjoys, according to the latest Wall Street Journal poll, a 10-point edge among suburban voters, not far from what Bush garnered in those parts of the swing states. If McCain can combine this suburban group with his rural and small-town base, he could be in striking distance of staging an upset.

    But this may not be so easy. Democrats’ recent gains seem to be solidifying, particularly in older, metropolitan suburbs. Fairfax County, home to one out of seven Virginians, has been trending strongly Democratic in recent years, even supporting John F. Kerry in 2004.

    McCain, who appeals more to independents than Bush did, should be able to erode some of this advantage in such communities. But Palin’s social conservatism could turn off many generally well-educated, middle-of-the-road voters who are so prominent in many of the most upscale suburban communities.

    At the same time, Palin — herself a former mayor of an Anchorage exurb — could help McCain consolidate Bush’s gains in the fast-growing exurbs, which tend to be more heavily composed of traditional families and generally less ethnically diverse. In his 2004 victory, Bush won 97 of the nation’s 100 fastest-growing counties with roughly 63 percent of the vote. If McCain can duplicate that feat, he will be well-positioned.

    Several factors, notably the financial crisis, could work against these efforts. Foreclosure rates in many of these exurban suburban counties are well above the national average, particularly in Florida and the Virginia suburbs of Washington and also outside Denver, Detroit and Cleveland.

    The mortgage crisis affects not only foreclosed homeowners, but also homeowners who are still above water. First, foreclosures lower everybody’s home values and bring on the possibility of renters replacing owners — not a good development in a suburban context. Second, particularly in exurban counties, construction has often been the basis for a lot of job growth in this decade, because construction jobs and other employment related to the real estate industry has been centered there.

    All of this makes suburbs a theoretically good target for Obama. In places like Pennsylvania, as longtime Republican activist Dennis Powell suggests, Obama should try to duplicate Democratic Gov. Ed Rendell’s wildly successful performance in 2002 in the so-called collar counties around Philadelphia. By winning those counties, in addition to building up a huge margin in his native Philadelphia, Rendell built a margin of more than a half-million votes that helped him win, even while he was getting thrashed throughout most of the rest of the state.

    In 2004, Kerry also won Pennsylvania’s collar counties, not by a large margin but by enough to secure his victory in the state. If Obama does as well as Kerry in the collar counties, he will win the state — perhaps not at a Rendellian scale, but comfortably enough.

    For his part, McCain needs to emulate the success of maverick Republicans, such as Sen. Arlen Specter, who have won by winning the Philadelphia suburbs. If McCain can replicate Specter’s performance and add some of the disgruntled Clinton Democrats in the rural south and west of the state, he could pull off a game-changing upset.

    McCain also has an opportunity to win in the Detroit suburbs, where Obama’s ties to disgraced former Detroit Mayor Kwame Kilpatrick could hurt him. Bush won those areas in 2000 and 2004, but not by enough to capture the state’s electoral votes. As in Pennsylvania, McCain needs to forge a rural-suburban coalition to capture this traditionally blue-tinged state.

    For Obama, suburbs in wobbly red states such as Ohio, Florida, Colorado, Virginia and Missouri offer similarly critical opportunities. Even traditionally conservative exurban voters may feel that under Bush they have been led down the bubble path only to have it pop painfully in their faces.

    Ultimately it may all come down to “body language.” In our estimation, Obama’s weakness stems not so much from his race — he may well run better in suburbia than did the very white Kerry — but with his close identification with Chicago and Mayor Richard Daley’s Democratic machine. Having spent his adulthood in college towns and big cities, Obama seems to lack the instinctive Clintonian understanding of the suburban mindset. You never got the sense that Clinton was too urbane to wolf down a Big Mac or get a Slurpee at the local strip mall — and he really seemed to “feel the pain” of an overstressed homeowner.

    In contrast, Obama and his team, including campaign manager David Axelrod, reflect the mentality of a totally urban political culture. Obama’s intellectual and media supporters also include elements — ensconced at publications such as The New York Times and The Atlantic Monthly as well as within the leftist Netroots — that often regard suburbs and their denizens as a form of social and environmental pestilence.

    Obama is simply too smart, as a candidate and perhaps also as a president, to publicly give in to this mindset. He’s certainly trying to appeal to suburban voters who are too concerned with issues such as health care and foreclosures to worry about his lack of geographic empathy.

    If he can convey this message effectively, Obama could benefit from the suffering now taking place in suburban communities. There may well be enough disgruntled suburban voters, even in the more peripheral areas, to blunt McCain’s suburban lead down to manageable numbers.

    If so, McCain’s rural and small town base will not be enough to win the critical swing states and the election. If the Republicans can hold their 2004 suburban base, though, McCain could yet triumph. Whatever the result, one thing is clear: Suburban voters will be the deciders.

    Joel Kotkin is a presidential fellow at Chapman University and executive editor of www.newgeography.com. Mark Schill is a principal at Praxis Strategy Group and the site’s managing editor.

  • How Low Can House Prices Go?

    There is much speculation among economists and others about how close we are to the bottom of the collapse of housing prices. This is, of course, an important question, and goes to the heart of the wisdom or folly of the proposed $700 billion government bailout of financial markets, which is a consequence of their own profligate lending practices.

    You would think that the experts would look at history. We have decades of experience with housing prices. Indeed, for at least the past six decades, median house prices have tended to be around three times an area’s median household income. It bears looking at where house prices are today compared to that standard.

    And looking at it from the perspective, we may have a long way to go. As late as 1999, there was only one major metropolitan market among the top 100 with a median multiple (median house price divided by median household income) exceeding 5.0 (Honolulu), according to data compiled by the John F. Kennedy School of Government at Harvard University. The national median multiple was less than 3.0. By 2006, 23 markets, all highly regulated, had median multiples of more than 5.0.

    Last week, we estimated that the aggregate value of the owned housing stock in the nation had risen nearly $5.3 trillion since 2000. Approximately 85 percent of that figure – $4.5 trillion – had occurred in metropolitan markets with severe land use regulations (strategies often called “smart growth”). These areas accounted for only 30 percent of the nation’s population. The large, more traditionally regulated markets experienced an estimated value increase approximately $200 billion, while outside the major metropolitan markets, the increase was approximately $500 billion.

    If you accept this logic we may not be close to the bottom yet in many markets. Based upon an analysis of housing price declines from the peak, it appears that the losses in the highly restricted markets have taken back between one-third and, at most one-half, of the unprecedented house price increases relative to incomes.

    If the economists and analysts had been paying attention, they might have looked at what happened in the last bubble, in bubble-land itself, California. From the middle 1980s to the housing bubble of the early 1990s, median house prices rose nearly 40 percent relative to household incomes in California’s largest markets (Los Angeles, San Francisco, Riverside-San Bernardino, San Diego and Sacramento metropolitan areas). By 1996, after a particularly deep recession in the early 1990s, the median house prices had declined to their previous household income relationship.

    Yet there the bubble of the 2000s dwarfs what happened in the 1990s, a decline set off by a severe economic decline, particularly in Southern California. In the latest run-up California house prices doubled relative to household incomes in the five largest California markets by 2007. In effect the present bubble topped out at about a 2.5 times increase from pre-existing prices relative to the previous bubble. In 1985, the median multiple in these Golden State markets was 3.7, not much above the historic norm. By 1990 the median multiple had peaked at 5.3 and fell to 3.9 by 1996, rising to 4.2 by 1999. By September of 2007, the median multiple in these markets had risen to 9.1, far above the 1990 peak of 5.3.

    It is not inconceivable that history will repeat itself – that prices will fall to the equilibrium level that has been the rule for so long. That would mean that the bottom may not yet be in sight. Moreover, it could well mean that the house prices reached at the peak of the bubble will never return except in another bubble, or in a hyper-inflating economy (another potential consequence worthy of concern).

    In the next few weeks there will be no shortage of speculation about whether or not the bottom has been reached. Before house prices began to collapse in the highly regulated markets, many analysts gleefully reported on the unprecedented house price increases as if could continue without relation to the economy. The law of gravity appeared to have been repealed.

    But my guess is Newton is still a very relevant person. If so, we should expect additional price decreases of 30 percent or more could occur in already declining markets such as Los Angeles, San Diego, Washington, D.C. and Miami. Similar declines from now could take occur in places like New York, Boston and Seattle, which have only recently experienced a downturn in prices.

    Of course, it is always possible that smart growth regulation in these markets might have created a new floor that prevents prices from falling to historic norms. That would be good news for the owners of real estate – largely older and Anglo – in these areas. On the other hand, it would be disastrous news for millions of households and the next generation, many of them younger and minority, who will now have to remain on the sidelines of the housing markets of their choice. For many the choice may be moving to one of those places – like Indianapolis, Dallas-Fort Worth or Kansas City, Houston or Atlanta – where the opportunity to own a home still will exist for those without trust funds and elite occupations.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • How to Protect Main Street While Saving Wall Street

    The current discussion in Washington can either lead to a rapid processing and recovery at the local level or a long drawn out destruction of local economies. This is particularly true of regions – Las Vegas, Phoenix, San Bernardino-Riverside, much of Florida – that have been hardest hit by the foreclosure crisis.

    The current discussion is being limited to maximizing the yield on the securities that the Federal Government would acquire and then sell at auction nation wide. The disconnect that needs to be bridged lies with the focus on securities. In reality, these mortgages, however arcanely packaged, represent residential real estate. The smoke and mirrors of securities too complicated to understand must be cleared away. Otherwise, a few Wall Street interests will do even more damage and reap all the returns.

    The key issue, then, is not how the paper gets marketed but how to maximize real estate values locally. If the Feds dump securities that then lead to high levels of absentee ownership in local communities for example, many neighborhoods will be seriously damaged. If local regions can manage the disposition of these assets – higher returns will be realized and goals such as home ownership and local economic development can be advanced.

    We have seen this before. In the 1980s, the Federal Home Administration dumped large numbers of foreclosed homes on the market in San Bernardino. Instead of finding buyers, speculators preferred to rent these residences out. The result was a long-running decline in parts of the city, one that could now be further exacerbated.

    Again in the 1990s, the Federal Resolution Trust Corporation dumped apartments, commercial, office and Industrial properties. Depressing real estate values in local economies, it killed many deals and devastated local property taxes.

    But this time the Inland Empire will not be alone. If these securities are purchased nationally, Wall Street speculators could transform significant parts of formerly middle class suburban areas into largely renter-dominated badlands.

    What we need is a locally controlled intermediary – perhaps a Regional Asset Value Recovery Corporation (AVRC) – that would seek to maximize asset value by taking full advantage of local real estate knowledge. Such a regional public-private partnership could help retain value for real estate assets while stabilizing communities, and minimizing the fiscal impact on the taxpayer.

    These local groups – using both government and private matching funds – would be able to use the crisis to bring new life, and new homeowners, to these communities. This is something we are already working on in San Bernardino and Riverside counties, geographically known as the Inland Empire. This area is among the most impacted regions in the country.

    San Bernardino and Riverside county governments, along with more than 15 city governments within those counties and over 30 business owners, are prepared to come together to manage the acquisition and disposition of properties. The group would manage the unraveling of income streams so that packaged mortgages can more suitably be restructured for the benefit of homeowners. It would also capture other current Federal resources, for instance the New Market Tax Credits, and fully utilize them in order to “prime the pump” of housing recovery.

    Among the priorities of this entity would be to ensure the housing stock is maintained or renovated to meet basic health and safety standards. Abandoned housing stock is posing a serious public health risk. Addressing those risks has a direct impact on federal, state and local governments and on asset value.

    It would also work to create opportunities to meet low and moderate income housing needs. On the one hand, not everyone can buy. Making units available to rent in the right areas would be a good way to maintain and support value. On the other hand, eventually, price stability and performance by tenants makes those same tenants candidates as future homeowners. The AVRC would be the right vehicle to undertake those efforts.

    Another primary focus would be to maintain local property taxes and critical services. Depressed property values have an obvious ripple effect on local government’s ability to provide basic government services. Local communities stand ready to partner to protect our economy, their communities, their taxpayers, and their homeowners. We cannot leave the health of our communities solely to the discretion of either Washington or Wall Street.

    Tony Mize
    President, Workforce homebuilders

    Jeff Burum
    President, Inland Empire Opportunity Fund
    Chairman, National Community Renaissance

    Steve PonTell
    President, La Jolla Institute
    Germania Corporation

  • Rx for ‘Residential Renaissance:’ Take Two Years and Ease Up on the Hype

    A big going-out-of-business sign on the Rite-Aid store at 7th and Los Angeles streets tells a bigger tale—a story I’ll call “Hype Happens.”

    The Rite-Aid opened a few years ago with fanfare, arriving at just about the high-point of the hype over the “Residential Renaissance” of Downtown. Rite-Aid set up shop in the Santee Village project, an ambitious effort that saw a developer get plenty of help from various government agencies in order to convert a collection of mid-rise buildings from garment shops to residential lofts.

    The project won plaudits as the latest in a trend that was bound to remake Downtown into a place where folks with lots of disposable income could “live, work and play,” according to boosters.

    Rite-Aid’s arrival appeared to offer a clear signal that the trend would go on unabated. The new, young, and relatively upscale residents of Downtown would need a proper drugstore, after all. It all seemed quite modern for a section of the city where mom-and-pop corner stores were the only option for aspirin or chewing gum, and pharmacies were still just that—not places that offer shampoo and light bulbs and soda to customers waiting for their prescriptions to be filled.

    The hype apparently failed to meet the expectations of the marketplace, though, and now Rite-Aid is leaving.

    Get used to it—but also realize that this is a phase, and there can be some benefits to a slowdown.

    Also keep in mind that Downtown has, indeed, seen a great deal of change with the latest round of residential redevelopment. Much of it has been good, even with the strains that have come as wealthier newcomers bumped into the many poor folks who called the area home long before its latest star turn. Take some solace in the thought that such strains will likely find room to ease now that the hype fading.

    The pending closure of the Rite-Aid, meanwhile, offers lessons to be absorbed by boosters and others. The chain is no stranger to inner-city retail, but you can bet that its executives overlooked a few things on the way to the corner of 7th and Los Angeles, especially in regard to the chances for crowds of upscale loft dwellers filling their aisles. All the gushing press and publicity couldn’t change the fact that the location still backs up against Skid Row, one of the toughest precincts of the city. It still takes a walk of several blocks—through territory that can be pretty scary at night—to get to the next section of Downtown where bright lights and activity provide a perception of public security.

    Add that up and you’ll see that Downtown has not reached the sort of critical mass that matches the “live, work and play” sloganeering. There are pockets of the city’s center that have established an active, commercial nightlife. The Old Bank District centered at 4th and Main—a collection of several residential buildings, a few restaurants, a convenience store, and a DVD shop—comes to mind. For the most part, though, many gaps remain and the larger scene just hasn’t been knitted together.

    Consider the once-a-month Art Walk for a clear illustration of the over-sell of Downtown. The event has inspired an outsized helping of hype even by Downtown standards, getting regular and uncritical boosts from print media, broadcasters and the blogosphere, with reports offering it up as evidence of the success of Downtown’s upscale makeover. The Art Walk does draw hundreds of upscale visitors to galleries at 5th and Main and a few adjacent blocks on the second Thursday of each month. That’s great, but turn the proposition on its head and think about it this way: The Art Walk imports visitors who account for a vibrant sidewalk scene once a month. That’s not “live, work and play.” It’s more like “drive Downtown, look around, and leave.” Check 5th and Main on the other nights of the month and you’ll seldom see anything like the Art Walk crowds.

    Does this render the boosters’ dreams for Downtown dead?

    Certainly not—but expect them to go on hold for awhile.

    The economic turmoil that’s shaking the nation is hitting Downtown, too, and will continue to do so. The city’s center is not some chic pocket of creative energy that’s somehow able to escape the mess.

    So Downtown is in for a tough row to hoe, but there’s also a chance to learn some lessons in preparation for its next phase, which will surely start with plenty of hype at some point in the next several years.

    Perhaps by then our boosters and builders will have learned enough from the last go-round to ensure that the new corner drugstore will still stand tall when the next hot streak comes to an end.

    Jerry Sullivan is the Editor & Publisher of the Los Angeles Garment & Citizen, a weekly community newspaper that covers Downtown Los Angeles and surrounding districts (www.garmentandcitizen.com).

  • Back to Basics: The Financial Crisis Requires a Paradigm Shift

    It’s tempting to look at the current financial meltdown – and the proposed bailout – with a Bolshevik mentality. Let’s line up the investment bankers, hedge fund managers up against a wall and spray them with an odorous substance.
    If it were only so easy. Rescuing Wall Street may not solve many problems but letting the investor class implode won’t help many people either.

    What we really need is not a revolution against capitalism, but a paradigm shift within it. We need to move away from fads and quick bucks, and towards productive investment. If we don’t make that shift, the current bubble will simply recreate itself again, perhaps in ill-thought out speculative ventures painted “green” but motivated by the same shortsighted greed.

    Instead let’s stop the whole bubble cycle and get back to basics. That means shifting our investments towards productive activities such as manufacturing and basic infrastructure– and training the critical skilled workers that a ‘real’ economy needs. It means shifting investment priorities by providing incentives for entrepreneurs whose main interest is to build companies, not flip them.

    Over the past decade we have seen a repeated pattern. Americans innovate, start new companies and bring a moribund economy back to life. This takes place primarily in the suburbs and the expanding growth regions. Then the markets heat up and there’s rapid asset inflation. This happened in the late 1990s with dotcom stocks, and more recently in real estate creating a huge wealth effect, particularly in elite cities. Both instances ended with a dispiriting crash.

    Breaking this pattern is an important issue for all of us, but most importantly for our children. America’s robust population growth necessitates rapid long term, and widespread, economic growth. That means moving away from a financially oriented economy to a production oriented one.

    Most Americans cannot sustain themselves trading paper. We also need robust growth in a host of productive industries – energy, fiber, food, manufacturing goods and high-end business services – that can provide decent employment for someone other than Wall Street bankers, well-placed developers and dotcom entrepreneurs.

    For these broader based industries to grow, we need to improve basic infrastructure for moving goods, providing energy and educating skilled workers. American firms in fields from farm equipment and aerospace to textiles still compete with China and India. In an era of high-energy costs, we can drive more of our manufacturing closer to home, if we can provide them with better technological, transportation and human resources.

    Tragically we have ignored both infrastructure and industry. This can be seen from the largest cities to the smallest towns. “One looks back at that map ‘Landscape by Moses,’” writes the noted sociologist Nathan Glazer in looking at the legacy of New York City’s “master builder” Robert Moses, “and if one asked what has been added in the fifty years since Moses lost power, one has to say astonishingly: almost nothing.”

    Indeed, despite the staggering private wealth generated by the stock market and real estate in New York, the city’s public infrastructure has been largely neglected. Its industries are dying and new ones have trouble expanding. There are billions for new stadiums and other elements of Mayor Bloomberg’s “luxury city” but not much for the diverse entrepreneurial firms particularly in the outer boroughs.

    The city controller’s office has estimated that infrastructure spending levels in the late 1990s and early 2000s were barely half of what was required to maintain the city’s streets, main roads, and railways in “a systematic state of good repair.” Subways and rail lines in America’s richest city are frequently shut down after heavy rains due to flooding caused by poor drainage. Brownouts and blackouts, in part caused by underinvestment in energy infrastructure, have become common during summer high-use periods.

    Similarly, California’s once envied water-delivery systems, roadways, airports, and education facilities are in serious disrepair. In the 1960s, infrastructure spending accounted for 20 percent of all state outlays, but as the technocratic perspective took hold in Sacramento, infrastructure spending fell to just three percent of all expenditures, despite the rapid growth of the state’s population.

    Many communities have decided that instead of attending to basic needs, to invest in spectacular new convention centers, sport stadiums, arts and entertainment facilities, hotels, as well as luxury condos. Some have poured money into projects that they think will attract a few big corporate executives with luxury boxes or opera tickets. Others have poured their resources into ways to lure “creative” professionals with edgy museums, jazz clubs and cultural centers.

    These approaches are built around the deluded notion that Americans can thrive simply by being more clever and creative – even more self-fulfilled – than our competitors. China, India, or other low-wage nations won’t be content to concede higher-end economy activity to us. Software design, special efforts, high end legal services, architecture, fashion and even hedge funds all migrate to places where wealth is being created.

    In the coming years, for example, Mumbai, Dubai and Shanghai will employ their enormous wealth – gained in such unfashionable pursuits as writing computer code, drilling oil or making steel – to break into the lucrative businesses formerly dominated by Wall Street, Hollywood or Silicon Valley. You cannot give up productive, wealth-generating enterprises without consequences. Over time this also will hit all but the most elite workers.

    In contrast a policy that focuses both on old fashioned and new, green infrastructure would spur positive impacts on employment across a broad spectrum of activities. We could use new bridges, roads, trains, energy transmission facilities to help resuscitate the Great Plains as well as the beleaguered Great Lakes so they sustainably exploit the natural resources and logistical advantages that made them productive hotbeds in the first place. We can turn our cities, both old and new, into ideal spots for the nurturing of hosts of growing industries by providing adequate skills training, new transportation systems and updated power grids.

    Governments at every level can and should play a critical role in this great project, both in financing physical infrastructure and providing critical skills training. But given the financial realities today, we also need to take advantage of private capital available both here and abroad for such investments.

    So rather than simply rescue Wall Street, or let it hang out to die, let’s figure out how to redirect it. We need to shift incentives away from mindless speculation and the creation of ever more obscure financial instruments. Instead let’s find ways of encouraging investors to make their profits in ways that spur production and widespread wealth creation.

    Joel Kotkin is the executive editor of Newgeography.com.

  • The Smart Growth Bailout?

    One way to see the federal rescue of the home mortgage market is to call it “the smart growth bailout.” True, the proximate cause lay with profligate lending practices. The flood of mortgage money covered the entire country, irrespective of state, regional or local land use regulations. That’s where the similarity stopped.

    During this decade there has been an unprecedented divergence of housing prices among U.S. metropolitan areas. Generally, the difference has been associated with strong land use regulations. Where restrictions are greater, house prices rose strongly relative to incomes. Where more traditional regulation remained, house prices also rose, but only modestly.

    This is illustrated by the change in the Median Multiple (median house price divided by median household income). In the more regulated metropolitan markets, it rose from 3.5 to 6.0, a 70 percent increase. In the more traditionally regulated markets, the Median Multiple rose from 2.7 to 3.0, remaining within historic norms.

    Economics teaches that scarcity or rationing leads to higher prices. Smart growth policies ration land for development through the use of urban growth boundaries and prohibitions or restrictions on building on vacant land. In such an environment, higher house prices can be expected.

    “The affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land,” said Donald Brash, governor of the Reserve Bank of New Zealand (the national central bank) for nearly 15 years.

    America has become two nations with respect to housing costs and housing cost increases. Princeton economist and New York Times columnist Paul Krugman put his finger on the cause of the difference more than three years ago. Others have made similar findings, such as Edward Glaeser at Harvard, Theo Eicher at the University of Washington and Kate Barker of the Bank of England. House prices have exploded in highly regulated markets, while they have changed little where traditional land use regulations still apply.

    The predictable economic effects have occurred with a vengeance in more regulated (smart growth) metropolitan markets. From 2000 to 2007, the median house price rose an average of $174,000 in the more regulated metropolitan markets with more than 1,000,000 population. In the less regulated markets, the average increase was $12,500.

    The easy money was available everywhere in the nation increasing the demand for housing in most markets. But in most of the nation, housing price increases were modest, as planning systems allowed new housing to be provided at historically competitive prices. For example, in Atlanta, Dallas-Fort Worth and Houston, the three fastest growing metropolitan areas in the high-income world with more than 5,000,000 population, housing prices changed little in relation to household incomes. Furthermore, from 2000 to 2007, 2,550,000 million people (domestic migrants) left the more restrictive metropolitan markets for elsewhere in the country. That pretty well dismisses the idea that demand was the primary cause of the price escalation.

    Demand, in and of itself, does not increase price. But, when higher demand is experienced in an environment of limited supply, price increases occur. Where there were strong land use restrictions, there were strongly escalating house prices. The restrictions drove prices up because land regulations had reduced the supply of developable land, thereby raising the price. The planners may have succeeded in their objection – slowing suburbanization (or if the pejorative term is preferred, “sprawl”) – but they also created a pricing bubble that made things much worse.

    It is estimated that the overall housing stock owned in the third quarter of 2007 was slightly over $20.1 trillion. If the Median Multiple of 2000 had been preserved, the aggregate value today would be approximately $14.8 billion. Of the $5.3 trillion increase in value, it is estimated that $4.5 trillion of this can be attributed to the 25 metropolitan areas with the most severe housing regulations. This means that 86 percent of the increase took place in areas accounting for only 30 percent of the nation’s population. The other 70 percent of the nation had an overall increase in value of less than $800 billion, or 14 percent of the total “bubble.” More than 65 percent of the higher value occurred in ten metropolitan areas – Los Angeles, San Francisco, San Jose, San Diego, Riverside-San Bernardino, New York, Boston, Washington, Miami and Baltimore. These metropolitan areas account for little more than 20 percent of the nation’s population.

    And just as the highly regulated metropolitan areas led the way up, they now are leading the way down. It is estimated that the house value losses in the more regulated metropolitan markets is approaching $1.5 trillion, while the losses in the more traditionally regulated metropolitan markets are estimated at less than $150 billion.

    None of this is to suggest that smart growth has only negative ramifications. To the extent that smart growth removes barriers to the development of higher density housing or less costly housing where it is demand is a good thing. But the land rationing policies proposed under “smart growth” clearly have reaped a very bitter harvest.

    The end of this catastrophe may be in sight (or it may not be). Housing prices, particularly in the inflated markets, have started to fall. This is true not only in the United States but in other highly regulated markets such as the United Kingdom, Australia and New Zealand.

    Yet the bottom line remains: Without smart growth’s land rationing policies, the severe escalation in home prices would never have reached such absurd levels. But the disaster in the highly regulated markets will be with us for years. The smart growth spike in housing prices turned what might have been a normal cyclical downturn into the most disastrous financial collapse since 1929. Now the taxpayers are being asked to bail out the mess that smart growth advocates, no doubt inadvertently, have created.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • Getting Beyond the Quadrangle: Rethinking the Reality of Town and Gown

    In the spring of 2003, I chaired an Urban Land Institute Advisory Services Panel focused on strategies for continuing the revitalization of downtown Birmingham, Ala. As in many cities this was driven by the stock of historic downtown buildings slowly being converted to either new office buildings or loft condominiums, supported by a handful of downtown cultural assets and public spaces. Our tour host proudly invited to the panel’s attention that three of the four buildings anchoring downtown’s “100 percent corner” were the high-rise headquarters of three regional banks.

    No one on the panel was prepared to share with our hosts what many of us were thinking at the time: That these regional banks would inevitably be swallowed up by much larger national banks, their staffs pared down substantially, and most downtown operations relegated to “back-offices” in much less-expensive suburban office park locations well outside the downtown area.

    What was, however, truly remarkable was that a mere eight blocks away from the “100 percent corner,” the real economic engine for the future of Birmingham–the University of Alabama Birmingham (UAB)–seemed all but ignored by the city.

    This stark contrast between perception and reality prompted me to focus on the relationship between urban colleges and universities and their “host” jurisdictions.” Universities need to be seen as the primary source of “knowledge workers”–the smart, creative, and skilled people forming the foundation of successful companies in a region. They need to outgrow their medieval culture of isolation and become better integrated into the cities and towns where they are located.

    The ULI Birmingham panel reflected a tendency I have since noted to find fault with the way the cities handle growth issues regarding urban campuses, imploring Birmingham to “get out of UAB’s way.” Yet it is also very true that colleges and universities often have trouble getting out of their own way. In fact, playing nice with others outside of their own ivy-covered walls is not generally in the DNA of most academic institutions. They tend to be introspective to a fault while believing they are always “the smartest people in the room.”

    And yet, it may be just as much in their economic interest as that of their surrounding communities for colleges and universities to learn to work cooperatively with their host jurisdictions. At the same time many states are beginning to realize that the relevance of academic endeavors to commercial enterprises has increased exponentially since World War II. Similarly, the business community has embraced the concept of lifelong learning, often providing tuition reimbursement and sabbaticals to employees to encourage them to return to school.

    We already can cite a few academic institutions where we see this synergy wholeheartedly embraced with marked success. Campus Partners, the result of a true collaboration between the city of Columbus, Ohio, and Ohio State University – and the public-private partnerships it has spawned – has resulted in the dramatic transformation of previously underdeveloped and/or distressed neighborhoods on the periphery of the OSU campus into vibrant new campus gateways.

    One area that faces dramatic physical, economic, and sociological distress are the East Baltimore neighborhoods surrounding the educational and research campus of Johns Hopkins University. The East Baltimore Development, Inc. (EBDI), a collaborative effort between the City of Baltimore, Baltimore Development Corporation, the Johns Hopkins Institutions, local foundations, and others are making progress in creating a new economic engine for the city in an 80-acre assemblage of land surrounding the Hopkins medical campus.

    And in West Jackson, Miss., UniDev has been working with Jackson State University (JSU), an historically black university, the JSU Foundation, the city of Jackson, and the State of Mississippi, to acquire and transform approximately 50 acres of distressed and dilapidated housing to create a new gateway between the city and the JSU campus.

    These examples also suggest a need for colleges and universities to emerge from ingrained planning practices, including the 600-year-plus dominance of the campus quadrangle. As iconographic as the campus quad is, its preeminence is being challenged by the university town center, a new physical form that only now is emerging through a confluence of circumstances that could create a new paradigm for the relationship between the “academic village” and the outside world.

    A university town center combines housing with non-residential uses designed to bring the student population, institutional functions, and the surrounding community together for common purposes. lt may complement or even replace the traditional student union building as the locus of campus life. It also can foster closer social, cultural, and, most important, economic ties between the academic institution and the surrounding community, as well as with the local government. The selection and mix of uses of the university town center need to be designed to maximize synergies among the academic and nonacademic populations.

    Ultimately it is critical to open urban college and university campuses to their surrounding communities. In the information age the historic separation of town and gown is not only antiquated but a detriment to both parties.

    More often than not, the challenge in achieving this kind of transformative change within academia is reminiscent of the old joke, “How many psychiatrists does it take to change a light bulb?” Only one but the light bulb must want to change. The same can be said of the majority of our urban colleges and universities.

    Peter Smirniotopoulos, Vice President – Development of UniDev, LLC, is based in the company’s headquarters in Bethesda, Maryland, and works throughout the U.S. He is on the faculty of the Masters in Science in Real Estate program at Johns Hopkins University. The views expressed herein are solely his own.

  • What’s the Biggest Flaw in the Administration Bailout Plan?

    The biggest flaw in the Administration bailout package: It could all happen again. The system doesn’t need just fixing, it needs decentralizing. Financial institutions should be big enough to fail—and never any bigger. We need compartmentalization, also known as federalism.
    The current crisis was caused by mega-financial institutions that could gamble their money—and lose it. And they did. But first, they grew to the point where they couldn’t be allowed to fail. That’s why even a staunch free-marketeer such as Larry Kudlow supported the AIG bailout. “A collapse of AIG would have been unfathomable,” he wrote on Saturday. “It is simply too interconnected globally.”

    Well OK, then, AIG was too big. When even free-marketeers want the government to step in, that’s proof that size matters. In a bad way. But the American people cannot let themselves be hostage to the financial megalomania of casino-capitalist empire builders.

    It might, indeed, be the responsible thing to vote for a bailout, but it is irresponsible to allow such a meltdown to happen again. And it will happen again if banks, investment houses, and insurance companies are allowed to grow this big once again. Adding another layer of regulations and record-keeping will make work for more lawyers and more accountants, but if the basic business model survives—gambling with other people’s money, and lots of it—then we will right back into deep doodoo soon enough, except that the dollar totals will have a few more zeroes. Remember Sarbanes-Oxley? What good did that do?

    As my colleagues at the New America Foundation, Sherle Schwenninger and Michael Lind, have argued for years, we need different kinds of banks to do different things. So the Depression-era Glass-Steagall Act—which solved this problem once before—should be restored, so that the bank down the street once again is limited to only accepting deposits from its neighborhood and only making loans to locals. That’s a boring low-margin business, to be sure, but it’s mostly a safe business. Meanwhile, on Wall Street, investment bankers and speculators would be free to speculate, but they wouldn’t be free to speculate with the capital base of Main Street.

    In addition, the states should reclaim their role as laboratories of democracy—and laboratories of the economy. Leaders of each state should figure out how much money they are losing in this deal—that is, how much of that projected $1 trillion they are “contributing.” Or, to put it another way, how much of an income transfer is the state of New York reaping? How much is Manhattan gaining at the expense of all the rest of us?

    Politicians across the 50 states might be tempted to demagogue these wealth-transfer data, but there is the not-so-little concern of avoiding a depression.

    Instead, politicians should say, “I will vote for this bailout, AND I will also insist that we compartmentalize, or federalize, the solution. How? We should establish a state bank, or a regional bank, to keep capital right here in (fill-in-the-blank) state or region.” If South Carolina and North Dakota keep more of their money in the first place, to be invested in local projects, that will be good news for South Carolinians and North Dakotans. And it will be bad news for money-hungry Manhattanites, plotting their next incomprehensible derivate swap; they will be free to gamble their money, and nobody else’s.

    And that would be good news for the rest of us.

    This was originally posted on politico.com.

    James P. Pinkerton worked in the White House under Presidents Ronald Reagan and George H. W. Bush. Since leaving government in 1993, he has been a columnist for Newsday, a contributor to the Fox News Channel, and a regular on Fox’s Newswatch show.

  • Heartland Development Bank – a New Vehicle for Growth

    America, the world’s most advanced continental nation, could be on the verge of a great resurgence, much of it based in regions largely unacknowledged by many pundits, academics and the media. What is needed now is an infrastructure strategy to make it happen.

    So say New Geography contributors Delore Zimmerman and Joel Kotkin in recently released white paper proposing a new method of infrastructure financing for the heartland of America: a Heartland Development Bank.

    In order to capitalize on emerging economic opportunities and to rebuild America’s productive capacity in energy, agriculture and manufacturing enterprises we propose the creation of the Heartland Development Bank. The Bank is envisioned as a $10 to $25 billion source of financing for infrastructure development projects. The Bank would serve as a lead lender on projects of economic significance in the Heartland and leverage considerable co-investment from the private and public sectors.

    Delore and Joel recently led a round table discussion on financing heartland infrastructure. The discussion is available on Youtube, or check out the case laid out in the policy paper.

  • Time to Reinvent College Towns?

    By Joel Kotkin and Mark Schill

    For much of their history college towns have been seen primarily as “pass through” communities servicing a young population that cycles in and out of the community. But more recently, certain college communities have grown into “knowledge-based” hot spots — Raleigh-Durham, Madison, Cambridge and the area around Stanford University — which have been able to not only retain some graduates but attract knowledge workers and investors from the rest of the country.

    But a large proportion of college towns do not seem to be doing so well. For one thing, they often lack the historically high levels of aerospace and other technology investment — and simply the scale — that characterize the most successful university communities. Simply put, there are not enough large-scale high-tech opportunities to seed and sustain significant growth in most college towns.

    This does not mean there are not great opportunities for college communities to evolve in the next century. Many more possess the potential to become legitimate centers of technology, innovation, risk capital and cultural efflorescence. The key, we believe, is tapping the energies of the baby boomer generation. The baby boom generation far outnumbers its successor, Generation X, by roughly 76 million to 41 million. Due largely to boomers, by 2030 nearly one of five Americans will be over 65.

    The ultimate locations chosen by those whom demographer Bill Frey calls “downshifting boomers” will be critical in terms of new residential and commercial development. This will be particularly true for college towns once the current “echo” generation — currently 15 to 25 — grows into adulthood and leaves college for other destinations.

    To understand the opportunity, we have to see the real situation of boomers. Despite the hype about a massive “back to the city” movement by aging boomers, this is a very small phenomenon, restricted largely to a small, usually highly affluent sub-set. Generally speaking, the further over the age of 35, the greater the chance an individual has of living in the suburbs or exurbs. Far more seniors, in fact, migrate from city to suburb than the other way around. It appears that a handful of relatively wealthy older suburbanites do establish residences in some inner-city locations, but overall the prime destination for those who move is the suburbs.

    Recent research by Gary Engelhardt found that if central city dwelling boomers without kids moved, only 35 percent would remain in a central city region. Of those moving from a suburban home, just more than 11 percent decided to move into the central city.

    The most critical factor is the boomers’ tendency to “age in place,” at least until they become too old to care for themselves. Roughly three-quarters of retirees in the first block of boomers, according to Sandi Rosenbloom, a professor of urban planning and gerontology at the University of Arizona, appear to be sticking pretty close to the suburbs, where the vast majority reside. Those who do migrate, her studies suggests, tend to head farther out into the suburban periphery, not back towards the old downtown. Most continue to use single-occu¬pancy vehicles; few rely on public transit.

    The reasons vary, Rosenbloom suggests, and include job commitments or the desire, as they age, to live close to and spend more time with children or grandchildren. Perhaps most importantly, the majority of boomers have spent most of their lives in sub-urban settings. They are, for the most part, not acculturated to the density, congestion and noise of inner city life.

    Yet if they are not heading en masse to the inner city, Rosenbloom and other experts see a significant proportion heading to smaller towns. Many of the areas with the fastest growth in senior populations are already on the outward fringes of the metropolitan areas, but also in some of the more remote areas of country, including parts of the Rocky Mountains, the Sierra Nevada, and even Alaska. Indeed by 2030 Montana and Wyoming are expected to have among the highest percentage of seniors in the country.

    Compared to most metropolitan areas smaller towns — including college communities in places like the Great Plains, the South and interior California — have remained remarkably affordable, and should continue to be so. Many baby-boomers may eventually consider an “equity migration” from the coasts. These households can enjoy a significant capital gain, and achieve a large reduction in debt, while still engaging in economic activities made possible by the Internet. [see Figure 2]

    As a rule, small town residents pay less of their income for housing than those in metropolitan areas, even though their incomes tend to be less. In 2003, even before the peak of the current housing boom, roughly 15 percent of all metropolitan households spent over half their income on housing while only 10 percent of those in non-metro areas suffered this same level of burden.

    Quality of life considerations also could play a critical role in attracting newcomers to college towns, both in terms of cultural institutions and providing walk-able communities. College towns can also offer “continuing education” opportunities for an economically active population, many of whom plan to remain engaged in the economy well into their 60s and 70s. They can become a source of useful expertise as well as capital for those recent graduates who seek to start or expand local companies.

    Colleges could maximize their real estate and financial position if they can bring in boomers as full or part-time residents. This is true not only in metropolitan areas but in broad parts of the country including the rural south, Midwest and places like Pennsylvania. Many boomers do not view retirement as a permanent vacation but as a place to start a “second life.” In many case they are turning to nontraditional and less expensive retirement spots.

    Successful college towns will connect with both the well educated, increasingly well connected younger workers already in town and the downshifting experienced professionals looking to balance livability with more urban amenities. Combined with well-educated boomers, this could create a powerful labor and knowledge base.


    Done correctly, in accordance with a sound economic strategy, many college communities could find a new way to prosper and thrive in the years until 2020 during which the number of potential students is likely to drop. It may also provide some protection against other forces that threaten college growth, notably the increase in on-line classes, private colleges with numerous satellite locations and the growing problems with student debt.

    Given these factors, college towns need to be reinvented in order to thrive in emerging environment. Most importantly, they must learn to take advantage of emerging demographic trends, particularly by taking advantage of the energies of an increasingly vital aging population.

    Joel Kotin is Executive Editor of NewGeography.com. Mark Schill is Managing Editor and a community strategy consultant with Praxis Strategy Group.