End of Sprawl? Part II

Previously in part one of this series I talked a bit about how an obscure issue like land use had made it onto the President's radar.  After all, it's not like he doesn't have other things to worry about.  Yesterday President Obama said:

"I know a lot of you are worried about Iran's nuclear program and the implications it has on Middle East peace, but today I'd like to talk about the proposed strip mall in South Hill."

Ok he didn't really say that, but he has talked about the impact of urban sprawl and it's role in our current economic problems.  So today I'm going to describe the economics of sprawl and how it rears it's head in unexpected places.

First, to understand the problem you have to remember that first rule of real estate.  No, don't believe what Alec Baldwin told you, it's not Always Be Closing.

It's location, location, location.  Though local market conditions vary, as a general rule the closer to jobs and services one is, the more expensive the real estate.  Though things like views, crime, waterfront, quality schools and good antiquing can add value, you're going to save money by moving to rural areas.  That combined with absurdly cheap and convenient transportation in cars drives people further and further from town.

What's wrong with that, you might ask?  By itself, nothing.  Rural living is a part of America and always will be.  In fact it's necessary if you want food to magically appear at your local grocery store.  Someone's got to grow it and the more local, the better.

The problem comes when lots of people decide they're going to get their piece of the good life.  The big lot McMansion complete with rolling green lawn and surrounded by trees is practically the definition of the American Dream these days.  For a developer the business model is simple.  Build a small home in town on a small lot and you'll make a living.  Build giant homes on large lots for the same price and you'll get rich.  Developers, reacting to market demand, look for a piece of dirt that makes this economical for the average consumer.  But to do so you have to head outside of town to the cheap land.  Then they subdivide it into large-ish parcels and build large homes that the market demands.

But what about services?  They'll need roads to get to and fro, water, sewer, and yes occasionally police and fire.  The trouble being there are fewer people to pay for these common needs.  Unlike the farmer they just bought out to build their subdivision, they aren't able to survive on rural services.  These neighborhoods need urban services spread between fewer people.  It doesn't take a math expert to get that fixed costs divided between more people means lower costs.  But a length of pipe or stretch of road doesn't magically come cheaper.  So here comes the paradox.

People want lower taxes, but sprawl stretches resources of local government to the point of breaking.  According to the seminal work on the costs of sprawl, low density urban development can cost as much as $13,500 PER PERSON for infrastructure alone.  There are two ways to pay for this.  Increased taxes or a relatively new tax known as impact fees.

Impact fees are loved by environmental groups and taxpayers because they ostensibly discourage sprawl and force development to pay for the cost of growth.  In other words, a fee to pay for the impact of development.  Clever right?  The trouble is builders really hate impact fees because it adds costs to development without adding value.  The house is worth what it's worth, impact fees aren't like ocean views or upgraded cabinetry.  So it cuts into their profit margin.  And by "cuts into their profit margin" I mean into the campaign donations that fund local office campaigns.

Developers argue, rightfully so, that impact fees add to housing affordability problems.  But they're right for the wrong reason.  Impact fees are simply an attempt to reflect the true cost of that development.  The problem isn't that the fee is making their project unaffordable.  It's that their practices are unaffordable.  Since sprawl is not well suited to make housing affordable to the lower end of the income spectrum, guess what the solution was.  Subprime loans!  People tend to associate subprime loans with poor people or those with bad credit.  In fact most subprime loans were large in value and outside urban cores.  Lenders hooked up with builders to make their new sprawling developments affordable to a larger market by making no money down, interest only, hybrid ARMs.  The result?  Economic collapse.

Barring some external pressure Americans would rather live in the dream home they never thought they could afford rather than the high density housing near work that they can afford.  As the number of people who could buy even with a risky loan dwindled, they turned to even more outrageous strategies including negative amortizing loans.  So not only does sprawl bankrupt municipal government, it also resulted in the collapse of our financial system. 

Ok, we made mistakes.  Now what?  We've designed our zoning around this crazy and unsustainable model so it will require a new approach to land use that many will resist.  Too many people confuse large lot development with community "character."  Density is a bad word to them.  The market will take care of some of this.  The Atlantic had an interesting if a bit dysotopian view of the future of sprawl and paints a picture of the urban fringe or "drive until you qualify" areas of suburban development as the new slums.

Arthur C. Nelson, director of the Metropolitan Institute at Virginia Tech, has looked carefully at trends in American demographics, construction, house prices, and consumer preferences. In 2006, using recent consumer research, housing supply data, and population growth rates, he modeled future demand for various types of housing. The results were bracing: Nelson forecasts a likely surplus of 22 million large-lot homes (houses built on a sixth of an acre or more) by 2025—that’s roughly 40 percent of the large-lot homes in existence today.

Think we have housing problems now?  Imagine a 40% oversupply of housing and what that would do to prices!  Land use seem a little more important now?  This means we have to make a fundamental shift in philosophy away from 40 years of bad land use policy.  In parts three and four we'll look at the environmental impacts of sprawl and what policies should be implemented to prevent it.