THE AVENUE OCTOBER 22, 2009
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.