THE AVENUE OCTOBER 22, 2009
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When the financial history of this era is told, it is possible that it will be seen as the bailout of not just the banks, Fannie Mae, and Freddie Mac, it will also to some extent be seen as the bailout of sprawl. The low density, single family houses on the fringe of American metropolitan areas have experienced high rates of foreclosures and substantial price declines, and we’re still looking for a bottom in many regions of the country. While there is no federal or private (e.g., Case-Shiller) dataset that identifies where exactly in metropolitan areas the most mortgage defaults are, local analyses and some news reports indicate the bulk of the problem is on the fringe. (Probably the best data source is from the Center for Neighborhood Technology database.) Thus, some of the biggest beneficiaries of federal efforts to stem foreclosures and keep families in their homes are those located in exurbia.
My estimates show that if a metropolitan area’s housing price decline has gone down by a certain percentage between 2006 and 2009, prices at the at the area’s fringe have gone down twice as much while close-in housing, particularly in walkable urban neighborhoods, has been flat. A new study by Joe Cortright shows that walkable housing gets a dramatic price premium; my research shows the premium is between 40 to 200 percent per square foot. A generation ago, this price premium did not exist.
America has overbuilt auto-oriented fringe housing well beyond what the market wants. Not that there is not a market for this kind of housing, but we have just structurally overbuilt for that market segment. When the real economy recovers (absent federal stimulus), it is quite possible that this housing stock will continue to have a market price less than replacement value, as it is the case today. If that remains true, there is little financial incentive to reinvest in the housing. Why put more dollars into a house if the homeowner will never get it back upon resale? That is the recipe for the creation of a slum.
3 comments
The sprawl bailout may be a short-term macro-economic necessity, but it is a misallocation of resources to an unsustainable way of life. Economically and environmentally. Something I understand from Finance 101 in business school. Despite all the tax benefits and government subsidies, outer suburbia no longer flies. I pity the financially vulnerable people who have bought homes out there. As a taxpayer and city-dweller, I am dismayed at the waste of our tax dollars. It's money down the drain.
- amidut
October 23, 2009 at 11:03am
The Sprawl Bailout: Will Obama's Economic Policies Finally Kill Suburbs? By Christopher Leinberger: A comment TNR should be embarrassed by Mr. Leinberger's short article. The article's title, "Will Obama's Economic Policies Finally Kill Suburbs?" is subterfuge. A reader is entitled to ask: 1.) which of Pres. Obama's economic policies will "finally kill suburbs?"; 2.) what was killing the suburbs before Pres. Obama's economic policies came into effect?; 3.) why does the article's title refer to suburbs when the focus of the article are the exurbs--the "auto-oriented fringe housing"?; 4.) there is no sense of geographical identity--which parts of our vast country is Mr. Leinberger discussing?; 5.) the URL for the "Center for Neighborhood Technology" doesn't work; 6.) the newspaper article about Minook does not identify which state of the union it is located in; 7.) Mr. Leinberger does not identify which agency of the Obama administration advocates any special or unusual financial assistance for exurbia; 8. ) Mr. Leinberber does not support his argument concerning replacement cost and market value (before or after the crash) with any data. Appraisal 101 instructs that every market area is different and unique.
- LawrenceGulotta
October 23, 2009 at 6:35pm
It's a bit of a jump to declare the Foreclosure Crisis a Fringe Issue. In the Detroit Free Press the largest foreclosure rates, approaching 20%, were in 3 City of Detroit ZIP Codes. Hardly the Fringe. Now by a dollar amount, yes the fringe has substantially more dollars in default. But really, both issues feed each other. The fringe is growing because of the failure of the inner city, and the inner city wants the money heading to the suburbs. During the auto crisis I thought the need for high milage cars was primarily driven by people who had bought house too far out, and were trapped looking for an automotive escape. Not only were we building the wrong cars, but we were building the wrong houses. I think this post is starting to pick up on some of the issues with governing the fringe and how it relates to the Inner Ring and Feds.
- CRS9TNR
October 26, 2009 at 9:11pm