New Geography

Category: housing

  • The Decade of the South: The New State Population Estimates

    Much has been made – particularly in the Northeastern press – of the slowing down of migration to the South and West as a result of the recession. But in many ways this has obfuscated the longer term realities that will continue to drive American demographics for the coming decade.

    Americans have been moving from the Northeast and Midwest to the West and South for decades (see US region map). In the first four decades after the Second World War, the warm, dry climates of coastal California were a significant factor. As the nation became more mobile – aided by such things as inexpensive air travel and the interstate highway system and the spread of air conditioning – the larger migration pattern went towards the South. There were, of course, other factors. Business costs, particularly the costs of labor, were often lower in the West and especially the South. Personal taxes in some states were lower than in the Northeast and Midwest. Surely the period from the end of World War II to 2000 could be called the demographic “half-century” of the West and South.

    The New State Census Estimates: The latest (July 1, 2009) Bureau of the Census release of state population estimates indicates a fundamental shift in migration patterns. Yes, even at recession-depressed rates, the Northeast and Midwest continue to export domestic migrants, but they are almost exclusively going to the South now, and not the West (See Table).

    Net Domestic Migration by State
    2009 Rank Net Domestic Migration Rank 2000-2009
    State 2009 2000-2009
    1 Texas    143,423       838,126 2
    2 North Carolina      59,108       663,892 4
    3 Washington      38,201       239,037 9
    4 Colorado      35,591       202,735 10
    5 South Carolina      31,480       306,045 7
    6 Georgia      26,604       550,369 5
    7 Tennessee      20,605       259,711 8
    8 Oklahoma      18,345         42,284 19
    9 Virginia      18,238       164,930 12
    10 Oregon      16,173       177,375 11
    11 Arizona      15,111       696,793 3
    12 Louisiana      14,647      (311,368) 45
    13 Alabama      11,044         87,199 14
    14 Utah        8,623         53,390 17
    15 Wyoming        7,192         22,883 25
    16 Kentucky        6,268         81,711 15
    17 Arkansas        5,298         75,163 16
    18 West Virginia        4,510         17,727 26
    19 District of Columbia        4,454        (39,814) 37
    20 Massachusetts        3,614      (274,722) 44
    21 New Mexico        3,366         26,383 24
    22 Delaware        2,580         45,424 18
    23 Montana        2,410         39,853 21
    24 South Dakota        1,619            7,182 27
    25 Idaho        1,555       110,279 13
    26 North Dakota        1,375        (18,071) 31
    27 Pennsylvania        1,346        (33,119) 34
    28 Alaska           979          (7,360) 29
    29 Missouri          (124)         41,278 20
    30 Nebraska          (956)        (39,275) 36
    31 Vermont          (975)          (1,505) 28
    32 Kansas       (1,242)        (67,762) 41
    33 Iowa       (2,135)        (49,589) 40
    34 New Hampshire       (2,602)         32,588 22
    35 Maine       (2,937)         29,260 23
    36 Nevada       (3,801)       361,512 6
    37 Hawaii       (5,298)        (29,022) 33
    38 Mississippi       (5,529)        (36,061) 35
    39 Wisconsin       (5,672)        (11,981) 30
    40 Rhode Island       (6,172)        (45,159) 38
    41 Indiana       (6,805)        (21,467) 32
    42 Connecticut       (7,824)        (94,376) 42
    43 Minnesota       (8,813)        (46,635) 39
    44 Maryland    (11,163)        (95,775) 43
    45 Florida    (31,179)    1,154,213 1
    46 New Jersey    (31,690)      (451,407) 47
    47 Ohio    (36,278)      (361,038) 46
    48 Illinois    (48,249)      (614,616) 49
    49 Michigan    (87,339)      (537,471) 48
    50 New York    (98,178)  (1,649,644) 51
    51 California    (98,798)  (1,490,105) 50
    Derived from US Bureau of the Census data.

    Moving to the South: Between 2000 and 2009, the South attracted 90% of domestic migrants from other states, with the West accounting for only 10% (see chart below). In 2001, the South attracted 71% of domestic migration but its share rose to 86% in 2002 and accounted for virtually all net migration by 2007. In that year, not only did the Northeast and Midwest lose domestic migrants, but also the West. By 2009, the South’s share of inbound domestic migration fell back to 94%.

    Throughout the decade, the small share of domestic migration that did not go to the South went to the West, while the Northeast and Midwest continued to lose residents. The 2000s are best characterized as the demographic “decade of the South” because the vast majority of Americans moving between states moved South.

    Nearly all states in the South gained domestic migrants during the decade. Only Mississippi, Maryland and Louisiana, along with the District of Columbia, lost domestic migrants. Even before Hurricanes Katrina and Rita, Louisiana was losing domestic migrants. Perhaps the big surprise is Florida, which has led the nation in domestic in-migration for years and has attracted 1.1 million from other states during the 2000s.

    Florida’s peak came in 2004 and 2005, when more than a net 260,000 domestic migrants moved to Florida from other states. Things have changed markedly, however, with Florida rapidly losing domestic migrants in 2008 and 2009, very likely due to the impact of the housing bubble and an overreliance on inbound retirees to drive its economy.

    However, Florida’s recent decline does not weaken the near-monopoly position of the South as the dominant destination of movers. Florida’s rapidly declining domestic migration has been largely replaced by a new domestic migration champion: Texas. In the early 2000s, Texas generally attracted from 30,000 to 50,000 net domestic migrants. Migration from Louisiana from Rita and Katrina propelled Texas to the top in 2006 and the state appears to have consolidated its position as the leader in domestic migration. In 2009, with domestic migration at more modest levels nationally, the Texas gain was more than any year except for 2006 with Hurricanes Katrina and Rita. But it’s not just a Lone Star story. Seven of the top ten states in domestic migration remained in the South in 2009. Throughout the entire decade, 6 of the top 10 states were from the South and 4 from the West. However, most of the gains in the West were simply from moving around (and from California); there was relatively little inter-regional domestic migration.

    Moving Around the West (and Away from California): Most states in the West have also gained domestic migrants in the 2000s, with the exceptions of Alaska, Hawaii and California. California is the real story in the West, having lost nearly 1.5 million domestic migrants, a population greater than that of the city of San Diego. In 2000, California lost nearly 100,000 domestic migrants and for the fourth year in a row led the nation in net domestic out-migration. This includes 2006, when not even Louisiana’s catastrophic hurricanes could drive as many people away as California. During the first year of the decade, California lost only 45,000 net domestic migrants. By 2007, as the center of the worldwide housing bubble, California’s losses were 7 times that amount. In 2009, even with depressed migration rates associated with the recession, out migration more than doubled between 2001 and 2009.

    California is simply not the draw that it used to be. There was a time, in the late 1930s, that the state tried to bar “Okies” from moving to the state, legislation wisely declared unconstitutional by the Supreme Court. Things have certainly changed. The latest Internal Revenue Service data indicates that every year during the 2000s, Oklahoma gained net domestic migrants from California.

    Outside California, there has been healthy domestic in-migration in the West. However, California’s losses cancelled out more than 80% of the West’s gains during the decade. Much of the movement within the region was internal, with Californians shifting to markets where housing was less expensive (but still expensive), such as Arizona, Nevada, Washington and Oregon. More recently the movement to the housing bubble ground zero states of Arizona and Nevada, have all but disappeared, with far smaller gains in Arizona and a small net loss in Nevada in 2009.

    In one year (2007), California lost more domestic migrants than all of the other states of the West gained. Domestic migration in the West remains largely about households moving around within the region: from California to other states, with a far smaller number arriving from elsewhere in the nation.

    Escape from New York (and the Northeast): Domestic migrants continue to leave the Northeast, just as they have for decades. In the Northeast, only New Hampshire and Maine gained domestic migrants in the 2000s. However, it was a bit different in 2009. Both New Hampshire and Maine lost, while Massachusetts and Pennsylvania gained.

    Pennsylvania has been the subject of more than one “what’s wrong with Pennsylvania” report as analysts inside and out decry its competitive position. In fact, by the ultimate measure of competitiveness, where people choose to move to or from, Pennsylvania has done relatively well in the 2000s. Pennsylvania’s modest loss of 33,000 domestic migrants pales by comparison to the net 2.5 million people who have moved away from neighboring New York, New Jersey, Maryland and Ohio. Like Texas, Georgia and many other states, Pennsylvania largely missed the housing bubble, which probably accounts for some of this surprising phenomenon.

    But the relative success of Pennsylvania should not be touted, as the mainstream media would tend to, as a sign of general Northeastern resurgence. New York alone lost 1.65 million over the 2000-2009 period. This is, in absolute numbers, more than California and a larger percentage loss than Louisiana with Katrina and Rita. Critically, data through 2008 shows that most of the domestic migration losses came from New York City and to a lesser extent its suburbs. Upstate New York, which also missed the housing bubble, experienced comparatively modest domestic migration losses, as Ed McMahon and I showed in an Empire Center policy report earlier this year.

    Hollowing out the Heartland: Domestic migrants are also deserting the Midwest, though in somewhat smaller numbers than in the Northeast. Only Missouri and South Dakota gained domestic migrants in the 2000s, although in 2009, Missouri experienced a small loss and was replaced by North Dakota as a gainer. But it is not a region-wide phenomena. Nearly 90% of the loss in the Midwest was in Illinois and the economic basket case states of Michigan and Ohio.

    Slowing Migration: One of the principal stories out of this year’s Census release is that interstate domestic migration declined markedly in 2009. Indeed, domestic migration was lower than in any other year in the decade, but not by that much. In 2009, 500,000 people migrated between the states, compared to between 570,000 and 620,000 annually from 2001 to 2003. Then, from 2003 to 2007, interstate domestic migration was up to 1.25 million and averaged more than 900,000. The anomaly is not so much that domestic migration is down, but rather that domestic migration got so high in the middle part of the decade, at the very same time that house price differences reached unprecedented heights. It’s no wonder people were moving.

    The Future? What comes next after the chaotic decade of the 2000s? As is suggested above, much of the variation in domestic migration is explained by differences housing prices and trends. Indeed, the price of housing may be a surrogate for the cost of living, which varies principally between areas based upon housing cost differences. This is likely to continue. In coastal California, house prices remained above historic norms, even at the largest “bubble burst” losses,” and there are recent indications that unhealthy price escalation has resumed. Much of the West and most of the country is far more affordable. This would suggest that coastal California’s domestic migration losses will continue and rise in the future.

    By contrast, in much of the rest of California and the other “ground zero” states of Florida, Arizona and Nevada house prices have returned to historic norms, which suggests that after the recession, strong domestic in-migration could resume.

    The future looks very bright for Texas and other states in the South that have done so well (such as North Carolina, South Carolina, Georgia, Tennessee, Oklahoma and even Arkansas). Their biggest challenge will be to resist the siren songs to become more like California, with its disastrous policies appreciated only by proponents and a fawning media.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • The Suburbs are Sexy

    The Administration’s Anti-Suburban Agenda: Nearly since inauguration, the Administration has embarked upon a campaign against suburban development, seeking to force most future urban development into far more dense areas. The President set the stage early, telling a Florida town hall meeting that the days of building “sprawl” (pejorative for “suburbanization”) forever were over. Further, a number of bills have been introduced in the Congress that would attempt to discourage suburban development, some under the moniker of “livability,” which promises to improve people’s lives by enforcing planner-preferred density. The war against the suburbs is by no means new, but the Administration and some members of Congress have proposed their own “surge” in hopes of suppressing them permanently.

    The Mythical “Demise” of the Suburbs: Nearly since the pace of suburbanization increased, following World War II, critics have been foretelling the demise of the suburbs. During the 1950s and 1960s, some planning “visionaries” such as Peter Blake were predicting widespread municipal bankruptcies in the suburbs and for residents. This was occurring even as other urban planners were tearing up cities with urban renewal projects and freeways, setting the stage for “block-busting” and an ever-widening racial divide. The early criticisms have been repeated through the years, justifying a paraphrase of the old saw about Brazil (“Brazil is the country of the future and always will be”): “The suburbs are the wasteland of tomorrow and always will be.”

    The Real Decline of the Cities: In fact, it has more generally been the central cities that nearly went bankrupt, not the suburbs. Examples include New York, Philadelphia, Pittsburgh, Cleveland and that jewel of municipal consolidation, Indianapolis, rescued last year by $1 billion in state taxpayer funds. There are hopeful signs of a renaissance in most central cities, however their financial difficulties remain intractable and large swaths of their land area remain desolate. Meanwhile, the lawns were mowed in the suburbs, the houses painted and a strong sense of community developed among residents that was far too subtle for the prophets of suburban doom to perceive.

    Greenhouse Gas Emissions: More recently, the effort to reduce greenhouse gas (GHG) emissions has given suburban critics new ammunition. A simple mantra was dictated by “planning common sense.” Cars produce greenhouse gases, therefore people must get out of cars and live in more dense conditions, where they will not need to drive as much. Further, they will live in smaller, multi-family dwellings, which planning common sense teaches are more GHG friendly than the despised – except by those who choose to live in them – detached housing in the suburbs.

    But a funny thing happened on the way toward GHG inspired desurburbanization. Some academics actually began looking at data. The reality of the suburbs turned out to be rather different from that portrayed by the conventional wisdom of the planners. The most comprehensive research comes from Australia, some of which has been previously covered here.

    University of South Australia: The most recent (and new) offering comes from a University of South Australia report thatallocates transportation and residential energy produced GHGs by location and housing type in the Adelaide area. The researchers found that the most GHG friendly sector of the urban area was the inner suburbs, which are dominated by single-family attached housing. GHG emissions per capita from housing and transportation were estimated at 7.0 metric tons of GHG emissions per capita annually.

    However, the outer suburbs, principally with detached housing, were not far behind at 7.4 tons GHG emissions per capita. The highest GHG emissions per capita, by far, were in the central area, with its predominance of multi-unit housing. There the annual GHG emissions were estimated at 10.0 tons per capita (See Figure). The University of South Australia study includes an element missing from virtually all other examinations of transportation and residential GHG emissions: “embodied emissions.” Embodied emissions are the GHGs from construction or manufacturing materials, and from building cars, transit vehicles and buildings. Embodied GHG emissions are ignored by much research, but are a significant factor in GHG emissions. For example, multi-unit housing, with higher use of concrete and more complex construction methods, tends to be substantially more GHG intensive than building detached housing or townhouses.

    GHGs from Common Energy: Previous work by Sydney researchers reached similar results – townhouse development was the most GHG friendly, followed closely by detached housing. Both were substantially less GHG intensive than high-rise condominium development. A principal reason for this conclusion stems in part from the fact that this research included GHGs from common energy, such as the electricity used to power elevators, parking lot and common area lighting, building-provided heating, air conditioning and water heating. American and Canadian research attempting to quantify GHG emissions by residential building type generally has not accounted for common energy and its GHG emission. Yet a gram of GHG from a residential elevator has the same impact as one produced by driving to the local Target store.

    GHG Friendly Suburbs: The most comprehensive research was conducted by the Australian Conservation Foundation. This was not the typical, incomplete or theoretical study of greenhouse gas emissions. The study included virtually every gram of greenhouse gas emissions in Australia and allocated them to consuming households in small residential zones within urban areas and around the nation. Suburban locations, with their greater use of cars and higher percentage of low density detached housing, had lower GHG emissions per capita than the core areas, with their greater use of transit and walking and their high-rise multi-unit housing.

    Compact Development: These findings provided the impetus to review the potential impact of compact development policies. Compact development policies (also called “smart growth” or “growth management”) generally seek to densify urban areas, by drawing urban growth boundaries, outside of which development is prohibited, and by trying to force people to drive less and to use transit more. Again, “planning common sense” clearly indicated to planners that compact development would yield substantial benefits in GHG emissions, principally because people would drive less.

    Yet the more recent research on compact development finds something much different. Densification scenarios from two recent reports, the congressionally mandated Driving and the Built Environment and a smart growth coalition’s Moving Cooler, showed that by 2050, compact development could reduce GHG emissions from driving by only 1% to 9%. At the high end of the range, the most new development would be directed to only a small part of present urban footprints, a policy outcome less believable than a balanced federal budget next year.

    Moreover, these projections have to be considered overly optimistic, because they make no allowance for the higher GHG emissions that occur as traffic slows and stops more in higher density conditions.

    The President Discovers the Suburbs? Meanwhile, on December 15, President Obama took the opportunity to visit a suburban Washington Home Depot, a chain that is a very symbol of American suburbanization. The President could have taken the opportunity to orate further against the suburbs in the insulation aisle, urging households to abandon the suburbs and move to high rise condominiums in the city.

    That was not to be. The President instead proposed providing incentives to people to make their houses more energy efficient, which would reduce greenhouse gas emissions and save money on consumer energy bills. In particular, he cited insulation, saying that “insulation is sexy”. It is worth noting that the Home Depot’s insulation is principally sold to suburban homeowners who can readily arrange for its installation. Residents of high-rise condominiums must rely on their building managers, who tend to purchase their insulation from wholesalers, rather than retailers like Home Depot and Lowes.

    The President explained why insulation was sexy, noting that saving money is sexy. Indeed, saving money is what the suburbs are about. The economic research is clear that housing costs are far less where suburban development is not limited by the compact development strategies that artificially create land scarcity. That’s why places like Dallas-Fort Worth, Atlanta and Houston, without compact development, had little, if any housing bubble, while housing bubbles of economy-wrecking proportions occurred in California and Florida, with their compact development.

    Yes, Mr. President, insulation is sexy. Saving money is sexy. And, the suburbs are sexy.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • Demographics May Be Destiny, but Mind the Assumptions

    Demographic projections have become an essential tool of national, state and local governments, international agencies, and private businesses. The first step in planning for the future is to get a picture of what the terrain is going to look like when you get there. That’s mainly what I do for clients, audiences and subscribers, and demographics provide the frame (like assembling all the straight-edge pieces of a jigsaw puzzle first). But here’s the thing about projections: a small change at an inflection point, or the inclusion (or exclusion) of salient variables, can result in big changes to the future you are trying to describe. So like all treatments of the future, everything depends on the underlying assumptions, and the salience of the variables chosen for inclusion.

    Demographics and Depression?
    For example, a couple of recent essays on demographic trends start with different assumptions, consider different variables, and come to wildly divergent conclusions. David Goldman, associate editor at First Things, says the housing market has collapsed, and will remain in depression, because of the dearth of two-parent families with children.

    Goldman asserts that only a a policy to restore the traditional family to a central position in American life can work to save the housing market. Without this, he says, ”we cannot expect to return to the kind of wealth accumulation that characterized the 1980s and 1990s.“

    Goldman’s argument centers on the idea that the US housing market is driven by one variable: two-parent families with children. And since that variable has not been growing, neither can housing demand. Yet, obviously, other household types besides two-parent families with children desire, can afford, and live in detached houses. Indeed, 55.2% of all single-person households owned homes in 2007, up from 49% in 1990.

    There is also a large population of empty-nest households (people who have already raised their kids), but who choose to continue to live in houses. Other demographic trends that will contribute to the continued preference for detached houses: increased longevity, better health, later childbearing, more home-based businesses, the presence of “delayed launch” kids (or those who boomerang to live at home before “final launch”), or a desire to have room for grandkids to visit. There is also the reality that many people will not want to move because of proximity of neighbors, churches, clubs and work.

    One must also note that foreign immigration and domestic migration, even under lowest-variable projections, will still be substantial in coming decades, fueling housing demand.

    In addition, other demographic trends suggest family and household formations will, once employment and income conditions improve, again provide a demand for houses. For example, there are more people entering their 20s now than in any time since the 1960s and early 1970s. True, we have just passed through a period of slow growth in family-age household formation, but once this Millennial generation start making money in an improving economy, they will start forming families and households, and will start buying houses.

    The World’s New Numbers
    Another recent essay on demographic projections starts with different assumptions, looks at different variables, and comes to different conclusions. Martin Walker, writing in The Wilson Quarterly, notes that something dramatic has happened to the world’s birthrates: they are up in developed countries, and down in developing countries (the opposite of what most dire forecasts project).

    Walker starts by debunking the assumption that mass migration and low birthrates are transforming the ethnic, cultural and religious identity of Europe. He notes the decline of Muslim birthrates across the globe, and rising birth rates in Western Europe – albeit from very low levels – and consistently higher rates in the United States. He then explains that aging populations in Europe and the US will not place intolerable demands on governments’ pension and health systems, if we are willing and able to both raise the retirement age and increase the workforce participation rate.

    These two steps (not easily achieved, but simple in conception) will result in a very manageable dependency ratio, similar to those of the 1960s, writes Walker. In the United States, the most onerous year for dependency was 1965, when there were 95 dependents for every 100 adults between the ages of 20 and 64 (“dependents” include people both younger and older than working age). By 2002, there were only 49 dependents for every 100 working-age Americans. By 2025 there are projected to be 80, still well below the peak of 1965. The difference is that while most dependents in the 1960s were young, most of the dependents of 2009 and beyond are older. But the point is that there is nothing outlandish about having almost as many dependents as working adults.

    The assumption underlying this more favorable scenario is that given freedom and information, that is to say, given the choice, the continuum of progress and development is uniform and universal: people in all places and of all backgrounds desire middle-class lifestyles (which include single-family detached houses, by the way). And while the planet’s population is expected to grow by about one billion people by 2020, the global middle class will swell by as many as 1.8 billion, with a third of this number residing in China. The global economic recession will retard but not halt the expansion of the middle class.

    The economic transition that development brings is accompanied by the demographic transition to lower birth and death rates (social, cultural and political transitions then occur too). Industrialization, urbanization, suburbanization: that is the pattern of how middle-classes grow. First-world countries have traversed this path, and now emerging countries are following.

    Trends can and do change. In fact, it may even be said that every trend sows the seeds of its own reversal. But it has always been my goal to identify the constants across history, as a way to establish a baseline for evaluating the likelihood of future scenarios (again, the straight-edged pieces). I believe the “aspirational model” to be one of these constants.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Will New Urbanists Deliver A Home-Win With Miami 21?

    By Richard Reep

    “A walkable city, more like… Manhattan, Chicago, or San Francisco,” is how The Miami Herald characterizes the future of Miami under Miami 21, the new form-based code adopted on October 22nd by the Miami City Commission. This seems to be the hot new dream not just of Miami, but of all cities struggling under corruption and greed, codes and regulations, with an imagined underground urbanity, yearning to breathe free. Citizens may now expect to see Miami remodeled after cities that grew before the car came, but the lyrics to The Who’s “Won’t Get Fooled Again” echo in the minds of some: “Meet the new boss…same as the old boss.”

    Miami 21, controversial for nearly four years and over 500 public meetings, met a critical need for citizens who were tired of the corruption and greed that seemed to result in an increasingly ugly, congested quasi-urban nightmare. Planning and zoning regulations, which were originally designed to protect property values, could be reinvented when enough power and money was at stake, and the code enforcers allowed more and more bizarre juxtapositions of high rises among low-scale residential neighborhoods. During the recent condo boom, variances became business as usual for the Miami City Commission and the Mayor. Now that the condo boom is over, it appears that both are rushing in to make amends to voters by passing this new form-based code.

    The code places height limits on neighborhoods similar to the old, Euclidean code, ominously named 11000. But this time around, uses are not segregated; instead, a mix of retail and other uses is intended to encourage increased pedestrian activity and a taking back of some of the city from the car. For citizens, there has been much to like about the arguments in favor of this code. As a result of the change, the pleasant weather that drew so many to the city will now perhaps be enjoyed on the boulevard; fear of shadows from looming high-rises will, according to the plan, now recede a bit. And a more organized, easy-to-understand building pattern should replace the Rube Goldberg-like zoning code full of special exceptions, arcane “bonus” rules, and a process all too easily subverted by tax-hungry politicians.

    With private development comatose, it is a perfect time for many jurisdictions to perform a much-needed overhaul of their development regulations. In the boom-bust atmosphere of Florida, most of the development industry sees this cease-fire as simply a pause to reload, and the Department of Community Affairs – Tallahassee’s growth management gatekeeper – is busy helping developers get ready for the next boom by making the Rural Land Stewardship Areas, a regulation designed to protect rural areas from development, officially optional.

    The American Institute of Architects chapter in Miami proposed to reform the old code, rather than start from scratch, arguing that the new code is complicated, fussy, and inhibiting. Reform of the existing 11000 code never seemed to be an option, and instead the Miami 21 code, written by New Urbanist gurus Andres Duany and Elizabeth Plater-Zyberg of DPZ, replaces the old code. Citizens of Miami, when presented with this new code, seemed ready for a change.

    This was an important home-win for DPZ and for New Urbanism in general. Increasingly associated with greenfield prettyboys like Celebration and Seaside, New Urbanism seemed to be losing ground and losing relevance at solving real-city problems. With the support of a massive public relations campaign, New Urbanism has now been given a chance to deliver on its promises of a “a clear vision for the City that will be supported by specific guidelines and regulations so that future generations will reap the benefits of well-balanced neighborhoods and rich quality of life.”

    Arcane spreadsheets, full of formulae and footnotes, have been replaced by transects. These silhouettes of buildings and streets – a sort of cross-section through the city – begin with the way a natural, un-built environment might look, progress to how a rural road looks, and go all the way up to how high-rise canyons might look. Patterning a city on a consensual, pre-approved notion of order is what New Urbanism is all about. There are no surprises – no high-rises in your backyard – but, as some local architects worry, there’s no spontaneity either.

    Walkability is another promise of the new code. Ideas such as transforming blank walls, promoting urban infill development, and lining parking garages with retailers, are all illustrated with magical dissolve images that change ugly parking garages into charming shopping districts. If it were only that easy.

    Transit-oriented development is a strategic goal of the code, creating density clusters that get people out of their cars and into alternative forms of transportation. Buses, bicycles, vanpools, and Miami’s Metrorail are closely interlinked with Miami 21.

    The marketing website for Miami 21 makes it impossible to be against the code. Opposing Miami 21 would be like opposing lifesaving drugs or opposing the blue sky. New Urbanism won this victory because there weren’t any compelling counter-arguments to their basic argument for urban hygiene. And Miami 21 comes at a time when the city has been egregiously abused at the hands of the free market; its citizens disenfranchised and suffering from an environment of ugliness, traffic and congestion.

    As noble as Miami 21’s goals are, however, they are only as good as the politicians in whose hands they will be used. Making new laws, rather than enforcing the old laws, is a favorite activity of politicians who, backed against the wall by irate voters, seek a grand solution. Much harder work will come when developers try to seek waivers against Miami 21, and if the history of Florida is any guide, it is not likely things will change much. For Miami 21 has some inherent costs that will split the haves and the have-nots of Miami-Dade County even further apart than they are now.

    For the haves, the higher cost of development under Miami 21 is already a concerning factor. The code promises increased regulation, and the density transects favor already high-value districts. At the last minute, for example, City Commissioner Marc Sarnoff switched his support to be in favor of a 35-foot height limit in Miami’s MiMo historic district, to the chagrin of property owners seeking higher buildings. Whether he stays on one side of the fence, or switches back at the behest of a developer, remains to be seen.

    In Miami, the validity of New Urbanism’s principles of how cities are regulated will finally be put to the test. By spelling out the city’s form in detail, through technical images, watercolor perspectives, and mock-historical drawings, Miami 21 is illustrating a preordained vision of itself. The public’s trust in its elected officials has been so broken by the recent capitalistic building frenzy that, by consensus, an agreed-upon “ideal city” has been created on paper. Now it is up to the building officials to deliver this vision when the next building boom hits.

    Instead of exploring how to improve the planning process, as AIA Miami suggested, Miami 21 seems to have avoided confronting the planning and process issues that no one seems to know how to solve. Have our cities become so complex that we are unable to manage their growth through the traditional public planning process? An even bigger question is whether the village-planning model at the core of New Urbanism is a valid model? Will it achieve the lofty goals that have been promised?

    Miami 21 will be a fascinating experiment to watch during the coming years. Miami is already known for taking risks: it built an elevated rail system in a suburban, multipolar city and encouraged an international development binge that resulted in a dozen or two empty skyscrapers. Now it has added formal prototyping to its use regulations. As Miami 21 is implemented and tested, other cities like St. Petersburg, Denver, and Philadelphia are following suit, hoping that the increased regulations will be the quick fix needed to assure the public that the civic realm is being cared for.

    Richard Reep is an Architect and artist living in Winter Park, Florida. His practice has centered around hospitality-driven mixed use, and has contributed in various capacities to urban mixed-use projects, both nationally and internationally, for the last 25 years.

  • The Fed and Asset Bubbles: Beyond Superficiality

    There is considerable discussion about tasking the Federal Reserve Board with monitoring and even taking actions to prevent asset bubbles. Before they move too far, the Fed needs to understand what happened in the housing bubble to which they responded after the world economy was decimated.

    Any initiative on the part of the Fed to seriously understand, much less do anything about asset bubbles requires that their causes be comprehended at more than a superficial level. To this day, the Fed appears to presume that the housing bubble was simply the result of financial factors, such as loose money and loose lending. In fact, however, the housing bubble was far more complex than that.

    The averages on which the Fed and much of the business press have based their analysis hide the dynamics that were at the heart of the price explosion. The housing bubble inflated with a vengeance in only one-half of the major US metropolitan markets, and inflated very little in the others.

    There is no doubt that the bubble would not have occurred without the loose monetary policies. However, where the bubble inflated the most, it was in a metropolitan environment of excessively strong land use controls or artificially constricted land supply (called compact development or smart growth). In these markets (such as in California, Florida, Phoenix, Las Vegas, Portland and Seattle), regulation is so strong that when the loose credit induced expansion of demand occurred, the housing market was not permitted to respond with a supply of new affordable housing, and there was a rush to purchase existing stock, which drove prices up.

    On the other hand, in the traditionally regulated markets, including fast growing metropolitan areas like Atlanta, Dallas-Fort Worth and Houston, there was comparatively little escalation in house prices. In short, one-half of the country had a housing bubble, the other half did not. In the more highly regulated markets, the Median Multiple (median house price divided by median household income) increased to from 4.5 times to more than 11 (compared to the historic ratio of 3.0). In the traditionally regulated markets, the 3.0 standard was generally not exceeded. Thus, as Nobel Laureate Paul Krugman of Princeton University and The New York Times noted more than three years before the crash, the United States was really two nations with respect to house price escalation, and the difference was land use regulation.

    We have estimated that the house value losses were overly concentrated in the compact development markets, accounting for 85% of the peak to trough declines. Without these artificial losses, which were the result of unwise policy intervention, the international Great Recession might not have been set off or it certainly would have been less severe. All of this is described in the last two editions of our “Demographia International Housing Affordability Survey” and related items (the 6th Annual Demographia Housing Affordability Survey will be available early in 2010).

    The purpose of compact development and smart growth is to stop the expansion (the ideological term is “sprawl”) of urban areas. Clearly, given the distress that has occurred in the US housing market and the wave of additional losses in both the domestic and international economy that followed, the price of stopping urban expansion (or attempting to) has proven to be immensely larger than any gains.

    At least in housing, until the Fed understands what happened, it will be powerless to effectively apply whatever new powers it employs to control future housing bubbles.

  • When Granny Comes Marching Home Again… Multi-Generational Housing

    During the first ten days of October 2008, the Dow Jones dropped 2,399.47 points, losing 22.11% of its value and trillions of investor equity. The Federal Government pushed a $700 billion bail-out through Congress to rescue the beleaguered financial institutions. The collapse of the financial system in the fall of 2008 was likened to an earthquake. In reality, what happened was more like a shift of tectonic plates.

    *******************************************

    The driveway tells the story. The traditional two-story 2,200 square foot suburban home has a two-car attached garage. Today’s multi-generational families fill the garage, the driveway and often also occupy the curb in front of the home. The economic crisis that is transforming America is also changing the way we live. The outcome will change the way America views its housing needs for the balance of the 21st Century.

    As is often the case, we can more clearly see the future by looking into our past. That is because time and time again America has reverted to its roots when confronted with a challenge. The root of the American family is the home. A century ago, America was an agrarian nation. Most Americans grew up on the farm or in a small town often tied to agriculture. A century ago, our census was 92,000,000, less than one-third of today’s population. Los Angeles was a city of 319,000. Cleveland was the fifth largest city with 560,000. The tenth largest city in 1910 was Buffalo NY with 423,000 souls.

    A century ago, parents, children, grown children, and grandparents lived together in America’s homes. In 1910, the vast majority of kids did not go off to college. They stayed home and worked the farm. Mom certainly did not drive and usually she did not work outside the home. Grandma – who then as now usually outlived grandpa – did not go off to an active senior housing project or nursing home at age 55. With the average life expectancy at just 49 years, there was little market for such facilities. A young Grandma lived in the family home and helped with the cooking, the sewing and the child rearing.

    Along the way, we fought in two world wars, America industrialized and the great Middle Class exploded. Our children went off to college and did not return. Our cities exploded. By the end of the century, Los Angeles grew to 3,700,000. The tenth largest city was Detroit with 1,000,000. Children were expected to leave the home shortly after high school and never come back, except to visit.

    Big changes occurred on the other end of the demographic curve. As life expectancy grew to 75. Grandma had her choice of active senior living, congregate care or a skilled nursing facility when she hit 70 and slowed down.

    The expectations of greater family dispersion – with young people leaving home early and grandparents on their own – drove much of real estate thinking at the end of the 20th Century. With empty-nesters and young people both heading back to the city, urban planners were focusing on high-rise apartments and condominiums in dense urban areas. Many eagerly anticipated the death of the suburbs since the number of young families declined. Across the country, and even in suburban areas like the City of Irvine, CA brilliant urban planners began rezoning industrial land into high density housing. The face of America was thought to be changing in predictable ways.

    Then, along came 2008 and the economic crisis. The plates under our feet began to shift. The mass migration to dense urban living evaporated as people stayed put and speculating in condos lost all economic logic. The shiny new urban corridor in Irvine now lined with high rise housing sits empty, with many units vacant and foreclosed. In nearby Santa Ana, twin 25-story residential towers sit eerily vacant with not a single unit sold or occupied. Central Park, a giant new urban project in Irvine that boasted dense high-rise, townhouse and mid-rise units, sits vacant behind green security fences.

    Where did the buyers go? Many young people moved back home with their parents when their high paying jobs in real estate or mortgage brokerage disappeared. With their jobs and income gone, they sought refuge in the safety of their childhood homes. Their parents ended any speculation of selling and down-sizing when their children returned. With job creation non-existent, they do not plan on leaving anytime soon. In one recent Pew study, 13 percent of parents with grown children reported one of their adult offspring had moved back home in the past year. Roughly half of the population 18 to 24 still lives with their parents.

    This stay-at-home trend predates even the recession. According to the U.S. Census Bureau, the national relocation rate in 2008 was the lowest since the agency started tracking the data in 1948. The rate was 11.9 percent in 2008, a decline from 13.2 percent in 2007. The 2008 figure represents 35.2 million people, which is the smallest number of residents to move since 1962. The number was 38.7 million in 2007.

    What about Grandma and, increasingly, even Grandpa? Our parents, thanks to the miracle of modern medicine, are living longer than ever. If she has reached age 65, she can expect to live another 20 years. Unfortunately, her retirement account and savings plan may not. Many Americans are living well into their 90s and we will see the first wave of centurions in our lifetime. No one expected this to happen and we are unprepared for it. Grandma will not be able to afford the $3,000 to $4,000 a month expense of a quality retirement facility – for 20 years.

    This changing dynamic will alter movement of Americans, which has now been slowing down for a generation. In 1970, nearly 20 percent of Americans changed their place of residence every year. But by 2004, that figure had dropped to 14 percent, the lowest level since 1950. The tough economy and aging demographics will slow migration down even more. Mom and Dad will not find it easy to take that new position in another city with the kids at home and now Grandma, and even Grandpa, too.

    This will have profound impact on the kind of housing Americans will want. Homebuilders may find lower demand for single family houses as America doubles up but it will be the much ballyhooed drive to urbanize America with dense high-rise units that is most in danger.

    Extended families will want larger – not smaller – houses. They may not be able to afford McMansions, but conventional suburban houses will be changed to meet the demands of extended families. Granny flats, consisting of self contained ground floor units, will be in demand as the baby boomer generation moves into retirement. Smaller single floor homes called Casitas will need to be mixed into planned developments so that the Grandparents can live closer to the children.

    City staff and urban planners, already grappling with a mandate to accommodate global warming and carbon footprints, will have to rethink existing zoning rules which have not yet responded to the new reality. This reality will be driven by aging demographics, diminished capital and the shifting plates of our economy. The baby boomer “bubble” that is now beginning to retire is a well established fact. Lesser known is the impact of the financial crisis on young workers who simply have been priced out of the housing market. Along the pricier coasts and Northeastern cities, they will need the down payment from their parents – who in exchange will live with their kids – to purchase their own home.

    The kids have already come home. Like the financial downturn, they will not be leaving anytime soon. Grandma is next in line. When she comes home, the circle will be complete, with consequences few in the real estate industry have yet to contemplate seriously.

    **********************************
    This is the sixth in a series on The Changing Landscape of America. Future articles will discuss real estate, politics, and other aspects of our economy and our society.

    Robert J. Cristiano PhD is a successful real estate developer and the Real Estate Professional in Residence at Chapman University in Orange, CA.

    PART ONE – THE AUTOMOBILE INDUSTRY (May 2009)
    PART TWO – THE HOME BUILDING INDUSTRY (June 2009)
    PART THREE – THE ENERGY INDUSTRY (July 2009)
    PART FOUR – THE ROLLER COASTER RECESSION (September 2009)
    PART FIVE – THE STATE OF COMMERCIAL REAL ESTATE (October 2009)

  • A Threat To Home Owners Associations

    In the 1990s, just about the only site amenity that most suburban developments offered was a fancy entrance monument. Usually, there were no other additions beyond ordinance minimums and even those weren’t generally elaborate. Some of these monuments did cost millions, but once past the gilded gates, the seduction ended, and residents were greeted by familiar monotonous cookie cutter subdivisions.

    As neighborhood planners, we educate our developer clients regarding the virtues of building site amenities that improve Quality of Life (trails, gazebos, decorative ponds and fountains, etc). You would think these amenities were an easy sell to the cities approving the developments. After all, great developments create a great city, right? It’s not that simple, because all of these amenities require maintenance, and that places a burden on tax payers. No city wants to create a tax burden for all, when the likely benefit accrues to the few within the development.

    The solution to that problem was simple: The Home Owners Association. We are not talking about the type of Stepford-like association where lifestyles and flower plantings are strictly dictated, but the more limited type that adds a small monthly fee to service the common outdoor site amenities. In other words, only those extra amenities are cared for. Private yards still remain the financial burden of the individual homeowners. In the North, with snow removal, these neighborhood association fees are likely to be higher if the trails and walks are cleared. Since these Associations do not have to maintain private yards or address maintenance of buildings typical of townhome projects, the monthly fees are minimal. Some associations were formed in the North that did give options for snow removal on private driveways, at a very reasonable cost (after all, why not clear a few extra driveways while you are out clearing the trails?).

    The developer could now offer a much higher living standard and create more valuable lots that would be easier to sell. The majority of the neighborhoods we designed in the late 1990s through 2006 (the recession) offered the advantages that these minimal cost Associations could provide. We encouraged developers to spend less on elaborate entrance monuments and instead spread real value through the development where people lived.

    How HOAs May Be At Risk The recession has not just brought about massive foreclosures and reduced home prices. It has escalated real-estate taxes (the home value may be 40% less but the tax remains at pre-recession rates) and put the very idea of a Home Owners Association at risk. With failed development, there are often also failed Associations. With little or no maintenance of a development that was once cared for by private funding, cities may have to take over the burden until the economy recovers, and in some areas, if it recovers. Comprehensive associations that maintain all of the grounds (where there are no privately maintained yards),including the building exteriors and rooftops, as well as the streets, are at the greatest risk. The limited Associations that were typical of the neighborhoods we designed are not as much of a problem, but could easily be lumped into “all Associations are bad news” category in the minds of those approving future developments, after the economy returns.

    This affects all types of residential development.

    Developments that exceed minimum standards typically offer site amenities to make the development more enticing. Someone must maintain these extras. Fear of HOA failures will certainly be more on the minds of cities after the recession, but without HOAs, who will maintain the amenities? A two million dollar entrance monument does not make a neighborhood sustainable. Spreading value through the neighborhood with features that enhance quality of life, is a better investment. The Homeowners Association must not fall victim to the recession.

  • So Much for Evidence-Based Planning

    Has evidence-based planning fallen from grace in favour of catchy slogans and untested assumptions? In the case of urban planning, arguably that is just what’s happened. The evidence, in Australia at least, is worrying.

    “We must get people out of cars and onto public transport.” “We must stop urban sprawl and the consumption of valuable land.” “We must build higher density communities to achieve sustainable environmental outcomes.” Phrases like this are now de rigueur across many discussions about urban planning in the media, in politics and in regulatory circles in Australia. They are rarely challenged on the basis of what the actual social, economic or scientific evidence is really saying. It’s produced an Animal Farm like dogma: ‘Four legs good, two legs bad.’ Or ‘Napoleon is always right.’ Denial, followed by ‘pass the buck’ and ultimately ‘shoot the messenger’ are responses to legitimate questions.

    But given the far reaching social and economic changes which will invariably flow from some of the regulatory planning schemes now being legislated, we should at least ask whether the various policies will actually achieve their stated goals. After all, these regulatory planning schemes are intended to govern our urban growth over the next 20 years. It would be a shame to get it badly wrong, simply because assumptions weren’t tested.

    The rise of the big plan

    Since the late 1990s, there has been a raft of Australian regional planning schemes dealing with urban growth in our major centres. The common theme has been the creation of urban growth boundaries and increased density in established urban areas, with an emphasis on public transport as opposed to the private vehicle.

    Typical of these schemes is the recently released ‘South East Queensland Regional Plan 2009-2031’ (SEQRP) which aims to ‘manage growth and protect the region’s lifestyle and environment.’ The plan, like others of its type, is influenced by a desire to contain urban growth and implicitly assumes that we are at risk of reckless growth if we don’t. But Australia’s total population is currently around 24 million people, in a land mass roughly the size of continental USA. This puts us below Nepal and Uzbekistan but ahead of Madagascar in population rankings. Reports that Australia’s population may reach 35 million in another 40 years (the current population of Canada) have raised domestic fears that we might become over populated. (See my blog post ‘Australia Explodes’ for more on this).

    The State of Queensland is the second largest state by area, but contains only 4.4 million people in total. Its population growth rates have in the past been amongst the highest of any region in Australia, growing at up to 1500 people per week (close to 80,000 per annum). Much of this growth has occurred in the south east corner of the state, surrounding the capital city – Brisbane. While modest by global standards, this rate of growth has thrown governments and some sections of the community into apoplexy. How will we ever cope? The region of southeast Queensland (population 3 million) has even been compared to California (population 38 million) in terms of its growth rates and population pressures.

    Against this context, the SEQRP identifies the need to provide a further 750,000 dwellings in the period to 2031, with roughly 50% to be developed in established urban areas via infill, and the balance through new detached housing development on land within an urban growth boundary. The challenge for infill is greater in Brisbane, where 138,000 new dwellings are expected to be developed in established urban areas, especially around transit centres (typically rail).

    One of the many assumptions that underpin the core strategy of the SEQRP have to do with
    the risk of sprawl. This suggests that modest and manageable growth rates of 1500 people per week are somehow tipping the big end of the global scale. The region’s current population of 3 million shows obvious signs of urban expansion as a result of growth to date, yet, with some notable exceptions in recent years, infrastructure has generally kept pace with the growth. Even at the urban fringe, new housing development has been at higher rates of dwelling density than in years past (lot sizes are shrinking).

    There is also an assumption that we are running out of land. But South east Queensland has vast tracts of land suitable for urban expansion and has several established regional centres readily capable of servicing new expansion with infrastructure and town centres already in place and capable of upscaling. The urban growth boundary imposed by the SEQRP is approximately 300 kilometres in length as it curtains the urban area. An expansion of this boundary by as little as a kilometer (under a mile) would create a notional land supply suitable for an additional 500,000 detached homes at 15 to the hectare (or six to the acre).

    Behind the plan lies an accepted wisdom that demand for ‘the quarter acre block’ is driving excessive expansion. The evidence, however, suggests this is now ancient history: lot sizes have not been anywhere near a quarter acre since the 1960s. The typical lot size now is 400 square metres, or around one tenth of an acre, hardly an irresponsible over-consumption of land for housing.

    It is also assumed that all this growth imperils quality farm land. This assumption can only come from those with a vague understanding of farming practices. In the south east corner of Queensland, typically two types of land have been conserved for this reason. The first is land devoted to growing sugar cane which is no longer economically efficient. This agriculture produces a biodiversity desert and is far better suited to the more tropical north.

    The second type of land conserved under this rationale is land historically devoted to cattle grazing. This was always marginal grazing land in the main – dry, shallow soils that struggle to hold moisture or grow pasture. As technology improved and transport economics developed, more efficient grazing country has been opened up further from city markets. But as farmers are prevented from selling their land for housing, despite its logical location for that purpose, herds of bony cattle continue to roam the urban fringes of the metropolis.

    This assumption also seems to hold dear the notion that, for sustainability reasons, regions should source their food needs from within a nearby catchment, minimizing transport costs. Were this true, Queenslanders would not enjoy apples (grown in southern temperate zones) and neither would Tasmanians (our cool climate southern state residents) ever enjoy bananas (two thirds of Australia’s crop of which are grown in Queensland). It would also mean our agricultural industries, which rely heavily on export, would fail.

    The cost of infrastructure provision is a subject that preoccupies governments in growth regions. Perhaps for this reason, the suggestion that infrastructure is more economically deployed in established urban areas, as opposed to newly provided in outer growth areas, found much support in treasury corridors. However, the evidence suggests otherwise: established urban areas‘ essential services (electricity, water, sewerage, stormwater) are ageing and incapable of serving significantly higher demand loads. The replacement and upgrade cost of retrofitting these services is demonstrably higher than the cost of installing new services in new growth areas.

    It is also assumed outer suburban growth will mean worsening urban congestion. Yet relatively few residents of new outer suburban growth areas are employed in inner city areas: according to the Census and other official government data, most jobs are in suburban locations – 90% of all jobs in fact. The CBD (our downtown) is a high density focus area for many headquarter operations, but at 2 million square metres of office space, it cannot by any stretch of the imagination provide sufficient space for the majority of the region’s workers.

    There is the assumption that infill and higher density will get more people using public transport. Current public transport usage represents under 15% of all trips. With higher density housing in established areas, especially in and around transit nodes (TODs), that figure could theoretically increase. But even the most heroic of assumptions would put the future rate at little more than 30%. Meaning 70% of new residents will still be auto dependent. There is also an unanswered question on the capacity of existing rail and bus services to cope with additional demand (frequent reports mention chronic overcrowding) combined with the high level of public transit subsidies per passenger, which will somehow have to be funded.

    Finally, it’s assumed that high density housing is more ‘sustainable.’ But according to several Australian University studies, unit and townhouse dwellings actually consume more energy than equivalent detached dwellings. Common area lighting, lifts, clothes driers and airconditioning are all more commonplace in high density dwellings than detached (where natural light, cross flow ventilation and solar power for drying clothes are the norm). Factor in the higher number of persons per dwelling in detached housing, and the per person energy consumption of inner city, high density housing looks ordinary. No less an authority than the Australian Conservation Foundation actually proved this in their Consumption Atlas which revealed that inner city high density residents had much larger carbon footprints than their suburban cousins.

    On balance, many of the assumptions that underpin the central strategic intent of regulatory planning schemes such as The South East Queensland Regional Plan, just don’t stand the test of evidence. Indeed in many cases, the evidence suggests the opposite of what is assumed. But evidence, it seems, is out of favour and slogans are in.

    Four legs good, two legs bad. Napoleon is always right. Why consult the facts when the mantra will do?

    About the author: Ross Elliott has 20 years experience in the property and development field, including stints in research, advocacy and urban economics. He writes an occasional blog, which you can find here and works as a consultant in marketing, strategy and business development, specializing in the property sector.

  • Housing Bubbles: Why are Americans Ignoring Reality?

    Dr. Housing Bubble (based in California), in “The comprehensive state of the US housing market”, asserts that of the 129 million residential units in the United States, some 15,950,000 are vacant, resulting in a huge oversupply of residential stock across the country.

    Other United States commentators are making the same assertions, such as Colin Barr of Fortune magazine with “Housing market still faces a big glut”.

    However – after a close read of the “US Census Residential Vacancies and Homeownership Report” released October 29, 2009, the figures are hardly cause for alarm.

    As of the 3rd Quarter 2009, Table 3 illustrates that there are an estimated 130.302 million housing units in the United States, of which 111.459 million (85.5%) are occupied, with 75.339 million (57.8%) owned and 36.119 million (27.7%) rented. The balance, being some 18.843 million (14.5%), is described as “vacant” (with a revised 3rd Qtr 2008 18.448 million units alongside). The “vacant” are loosely broken out in to year round, for rent, for sale only and seasonal. There has been no dramatic shift in these figures over the past 12 months.

    The US Census Population Clock states that the present US population is 308 million.

    The Census Bureau Residential Report illustrates that in the 3rd Quarter 2009, the estimated vacancy rate for usually occupied rentals was 11.1% (9.9% 3rd Quarter 2008) and 2.6% (2.8% 3rd Quarter 2008) for homeowner housing. There is nothing much to get excited about there, and in fact the somewhat elevated “rental vacancy” could prove a boon to the poor, particularly in regions with grossly excessive rents.

    The importance of “vacancy cushions” cannot be over emphasized, as they provide the necessary time for the construction industries to gear up, so that unnecessary property inflation does not occur.

    The US Census Quickfacts (Texas page – with US figures alongside) states that the 2008 US population for persons per occupied household in 2000 was 2.59.

    As societies become more affluent, people per household should fall (note: Texas persons per household is slightly higher on these 2000 figures at 2.74 per household, likely due to the higher Hispanic population with larger families).

    Conversely – through these economic downturns, it is likely that household sizes would also increase somewhat.

    For example, in using the US Population Clock as a rough guide with the 308 million population figure (and deliberately ignoring, for the purpose of this discussion, those in institutional care etc), if the people per household overall increased from, say, 2.59 per household requiring 118.53 million residential units – to, say, 2.79 people per household (as economic conditions worsen), just 110.03 million residential units would be required for occupation. Around 8.5 million less were occupied during the peak of the boom.

    Furthermore, significant numbers of second/vacation homes would no longer be required, as households struggle to lower their expenses through this economic phase.

    As an example, during the decade of the 1990s in Australia – as people became more affluent and family sizes decreased – household sizes moved from around 2.8 per household to approximately 2.6 per household, which was a big driver of the residential construction industry in that country. As they became more affluent, they bought or built more second/vacation homes as well. Australia’s population increased by about 12% through this period, as its housing stock increased by in excess of 22% (access Australian Bureau of Statistics for further information).

    Property commentators’ “estimates” are always interesting of course, but as with my own, should be treated with greatest caution. The critical issue in terms of housing is not necessarily demographics but THE ONLY TRUE MEASURE OF SCARCITY AND ABUNDANCE: PRICE.

    Over the years, Dr. Housing Bubble and many other American commentators have persisted in ignoring the glaring contrasts of the California and Texas housing markets. They have treated all markets as the same, without looking into profound regional differences.

    The latest “Houston Association of Realtors Sept 09 Monthly Report” makes very interesting reading indeed. For the months of September 2008 and September 2009, the numbers are as follows: property sales from 4,336 to 5,654 (+30.4%), dollar volume from $0.877 billion to $1.102 billion (+25.7%) and median single family sales price $155,920 to $156,200 (+0.2%).

    This performance reflects the reality that Houston (as with Texas and most of American heartland) is a “normal market” where supply is not purposely constrained and politicized. I touched on these matters in an article in February this year.

    Now let’s turn to discussing some numbers about “abnormal markets” and what is accurately referred to as the “Failed State of California” (“Failed states: Washington Examiner”), where it appears the politicians are determined to wipe the residential construction industry off the map.

    The state of the residential construction market in California can only be described as “horrific”.

    On October 26 2009, the California Building Industry Association released its report on the residential construction permit activity for the month of September 2009, stating that there were just 2,920 permits issued for the month, and that they have lowered their permit estimates for 2009 to an appalling 37,700 units.

    These are unbelievable figures when one considers that the estimated population of this State is 37 million.

    The internationally recognized measure for housing production and permitting is the build/permit rate per thousand population. The California residential permit rate for 2009 is therefore a shocking one unit per thousand population. I cannot recall a permit rate this low in recorded history anywhere in the world.

    Yes – it’s that bad.

    If Texas was permitting at the same rate for 2009, just 24,000 permits would be issued (Houston 5,600). On an international basis at 1/1000 population the figures would be: the United States overall 307,000, Canada 37,000, Australia 21,000, the United Kingdom 61,000 and New Zealand and Ireland around 4,400 each.

    The reason of course for these unbelievably low California permit rates, is because the Governments at all levels in the State have essentially banned the construction of affordable housing. Essentially the planners have erected a Berlin Wall around the state, all but stopping the building of housing, particularly single family units vastly preferred by the population.

    Meanwhile, back in the normal market of Houston, they are merrily building starter homes of 235 square meters (2,529 square feet) for $140,000 on the fringes ($30,000 for the lot, $110,000 for actual house construction).

    The Annual Demographia Surveys (5th Annual Edition), the Harvard Median Multiples and many other income-to-house price studies (e.g. Randal O’Toole of Cato’s extensive work), clearly illustrate that when house prices exceed three times annual household income it causes inevitable supply constraint issues.

    It appears too that Dr. Housing Bubble is “baffled” why California had such an inordinate share of sub-prime, Option ARMs and other grossly distorted mortgage structures, and delights in blaming the Bankers (banksters as he sometimes refers to them) for the unholy mess that is California (the epicenter of the Global Financial Crisis).

    Households should not spend any more than three times their gross annual household income to house themselves, and importantly, not load themselves up with any more than two and a half times their gross annual household income in mortgage debt. As the California bubble inflated, financial institutions simply had to increasingly lend outside these historic norms, if they wished to maintain market share.

    The financial institutions – not all dumb, and no doubt acutely aware of the risks – were very keen to securitize it and off load the risks to others.

    The only mistake they made was not offloading the risks adequately or fast enough! Herb Greenberg outlines this financial circus in Straight Talk on the Mortgage Mess from an Insider on his MarketWatch blog. Professor Robert Shiller of Yale University noted he was “terribly conflicted” about what is happening in his recent extraordinary Fox Business television interview (Shiller on Housing: ‘I am Terribly Conflicted’ (Glick Report))

    What is really needed here is the understanding – as is being developed in Australia and New Zealand – that structural changes need to be put in place to ensure that these disastrous housing bubbles don’t get underway again (refer to Performance Urban Planning for access to New Zealand Government statements. For recent Australian news and reports: Bottlenecks choking recovery | The Australian, More houses, not taxes | The Australian, AdelaideNow… Home ownership dream fading, say Flinders University researchers).

    These issues are not “ideological” or “environmental”, but have much more to do with deliberately misleading information being generated by professionals in collusion often with political and commercial elites, who are keen to promote housing bubbles for their own ends.

    Yet most Americans seem to persist in ignoring the real structural issues – and instead are choosing to “paper over the cracks” by financially bailing out everything in sight. This is an exercise in futility if ever there was one, as the Japanese have learned to their cost, following the collapse of their property bubble in 1989.

    It is to be hoped that the Americans belatedly start getting the public conversation underway, in working together exploring real solutions – like unnecessary supply constraints – to these unnecessary housing bubbles. We have done this in Australia and New Zealand these past five years and it is beginning to work.

    Hugh Pavletich is a New Zealander with thirty years experience as a commercial property development practitioner. He served as President of the South Island Division of the Property Council during the early 1990’s. In 2004 he was elected a fellow with the Unban Development Institute of Australia for services to the property industry. He has been involved with changes to local government financial management, heritage and land supply. During 2004 he teamed up with Wendell Cox of Demographia to develop and co author the Annual Demographia International Housing Affordability Survey. The 5th Annual Edition of this Survey was released January this year. His website is www.PerformanceUrbanPlanning.org.

  • When the Fat Lady Sings: The Fate of Commercial Real Estate

    During the first ten days of October 2008, the Dow Jones dropped 2,399.47 points, losing trillions of investor equity. The Federal Government pushed TARP, a $700 billion bail-out, through Congress to rescue the beleaguered financial institutions. The collapse of the financial system was likened to an earthquake. In reality, what happened was more like a shift of tectonic plates.

    ***********************************

    Like the Roaring Twenties of a century ago, the real estate bull market of the last ten years crashed in dramatic style in late 2008. The collapse of the residential market was led by massive defaults in ill-conceived “sub-prime loans”. Millions of American homes are now in default and in the process of loan modification, abandonment or foreclosure. There is no end in sight as Prime, Alt-A, and Option ARM loan resets come due beginning in 2010.

    Lurking around the corner, literally unnoticed by the average American worried about keeping his home, is a similar crisis in commercial real estate. For over a year commercial property values have been plummeting and have not begun to recover. A drive through both major cities and suburbia tells the story. Vacant stores, empty shopping malls, cancelled mixed use developments and eerily empty car lots presage bad things to come.

    We have discussed the origins of the housing crash before and the role played by feckless politicians and over-ambitious bankers. Now this crisis has spread to the commercial sector. Banks and commercial lenders saw in the new housing starts an equally promising demand for new shopping malls and suburban offices. Lenders forgot about pre-leasing requirements and made speculative loans on buildings that had no pre-leasing. As with housing, the rule book was thrown out the window. Like the aftermath of any wild party, there is hell to pay in the morning. It is morning in the commercial marketplace and the fat lady is singing.

    Depository institutions hold about half of the $3.2 trillion of debt on US commercial property. The default rate in the first quarter of 2009 was just 2.25%. Sounds OK until you do the math and realize that $36 billion was in default and it is just beginning. The FDIC puts troubled banks on “the problem list”. In early 2008, there was one bank on the list. At the end of June 2009 there were 416, up from 305 at the end of the first quarter when the default rate was just 2.25%. Total assets at these problem institutions total $299 billion. The problem is that the total reserves of the FDIC are just $42 billion. The FDIC has closed over 100 banks and one good estimate is that they will close around 10% of US banks, 500 to 1,000, before the crisis runs its course. The losses will dwarf the $394 billion of the RTC and may surpass a trillion dollars. Is there any wonder why banks are loathe to make new loans?

    So what happens to commercial real estate? With prices plummeting, there must be some great buys out there, one must assume. But do not bet on it. This was not just an earthquake. The plates shifted, and like musical chairs, when the music stops there will be fewer chairs and many people left standing. Consolidation is the next step. There will be the inevitable drop in rents and with it property values. The better and stronger tenants will flee the less attractive Class B and Class C space and move to Class A properties. Class A properties will survive due to full occupancy and stable cash flow. But the lesser properties that were leased will empty.

    Like the suddenly quiet auto malls with the empty Pontiac, Saturn and Chrysler dealerships, lesser properties will lose their anchor grocery stores, Targets, and big box users. With the anchors gone, and traffic with it, the mom and pop small businesses cannot survive. There is no future for the marginal Class C shopping center. Tenants will flee to better locations and more affordable lease rates. Class A offices will survive. Well located and attractive Class B properties may muddle through at reduced revenues – if they can survive the refinancing maze. But, the poorly located Class C office will remain a “see-through” for years to come. Old, tired, and mostly vacant Class C office buildings line the crumbling freeways of Detroit, Cleveland, Youngstown, and countless smaller rust belt cities where excess capacity has eliminated the need for new development.

    A year from now, the landscape of America will be forever changed. The office and retail markets will be vastly different than they look today. Not much of it will be good. Five years from now, will empty shopping centers and auto dealerships remain shuttered or will they be rebuilt or torn down and their use converted to something more productive? Will our politicians cease their meddling in the market and allow the market to heal itself? These are questions that will haunt our economy for the next decade.

    ***********************************

    This is the fourth in a series on The Changing Landscape of America. Future articles will discuss real estate, politics, healthcare and other aspects of our economy and our society.

    Robert J. Cristiano PhD is a successful real estate developer and the Real Estate Professional in Residence at Chapman University in Orange, CA.

    PART ONE – THE AUTOMOBILE INDUSTRY (May 2009)
    PART TWO – THE HOME BUILDING INDUSTRY (June 2009)
    PART THREE – THE ENERGY INDUSTRY (July 2009)
    PART FOUR – THE ROLLER COASTER RECESSION (September 2009)