How to fix the American housing system

[Pragmatic Idealist]

True, which is why this adjustment needs to happen in steps. But you do see why 1-2% tax-effected cash flow (rental yields) on housing valuations doesn't work mathematically right, as an asset class? And why that means you have to have some type of rebalancing in rental vs ownership demand? The point is that these subsidies create a policy bias that allows speculators to transform residential real estate from a cashflow game into an asset appreciation game. Correctly functioning, real property has more bond-like characteristics, than, say, gold.. The only other way for restroing this measure of sanity is to outlaw purchases of third and fourth homes as investments, as they are now doing in China. And that would deflate house prices more than anything I've suggested. Any property market that relies primarily on asset appreciatio as opposed to cashlow (rental yields) is, by definition, dysfunctional and unsustainable. That we now think that such a thing can even possibly be the norm is a testament to the cumulative effect of market distortions in housing.

And yes, I think deflating house prices is absolutely necessary, to bring back yields into sustainable territory. The question is, what is the best way to make this happen.

I have a two-word answer: gas tax.

[btrage]

And yes, I think deflating house prices is absolutely necessary, to bring back yields into sustainable territory. The question is, what is the best way to make this happen.

If I'm not mistaken, it's happening as we speak.

[Pragmatic Idealist]

Obviously, gas taxes and pollution fees are more complicated than two words. There is a politically-palatable way to institute these kinds of policies, though.

First, people need to understand where the tax revenue is going.



And, second, separate revenue-neutral pollution fees, which are presented as such, must be returned to citizens in the form of rebates. Below-average users of gasoline and Diesel fuel would be rewarded while above-average users would be penalized.

The rebates need also to be tied to income.

[Cismontane]

If I'm not mistaken, it's happening as we speak.

fine. I stand corrected.

What I intended to say is the best way to make it happen gradually and in a manner that doesn't involve a national descent into barbarism, a Teabagger coup, and Sarah Palin as our president. Happy election day.

[jswanek]

.

In 2007, a Washington Mutual loan officer told me that he was instructed to loan anyone almost anything they wanted on a single family residence, having been told "we can always sell the loan if endless inflation does in fact seem ready to end".

As a result, we had homes sell for $700,000 that are now $136,500. On my own street, there is one home with $550,000 in mortgages now selling for $50,000. The many appraisers never bothered to check to see if the house was even situated entirely on its own lot. Turns out part of it is in the National Forest, and a big chunk is in the County road ROW.

.

[DetroitPlanner]

I'm not quite sure what gas taxes would do about home affordability. I do know that the Toyota Prius, combined with the Chevy Volt and Nissan Leaf are going to have a profound impact on how we fund transportation in this country.

We fund public transit, and walkable bikable projects with the assumption of increased gasoline consumption. These trends are leading to decreased consumption. Driving and using roads are a priviledge and all users need to share in paying the cost.

[ColoGI]

.

In 2007, a Washington Mutual loan officer told me that he was instructed to loan anyone almost anything they wanted on a single family residence, having been told "we can always sell the loan if endless inflation does in fact seem ready to end".

As a result, we had homes sell for $700,000 that are now $136,500. On my own street, there is one home with $550,000 in mortgages now selling for $50,000. The many appraisers never bothered to check to see if the house was even situated entirely on its own lot. Turns out part of it is in the National Forest, and a big chunk is in the County road ROW.

.

I used to have a career in banking, we were the major rival of WAMU. Even after Glass-Steagall was repealed and banks and insurance and finance and all of FIRE went crazy, our bank refused to act this way. We looked at acquiring Countryside and our analysis of their books was not to our liking and we recommended passing, and we did. Anyway,

Many of us got out in time before we got eaten by this maelstrom of greed and corruption. This maelstrom has knocked us down a notch or two and we are denying it happened. This denial will prevent our rising back up.

And I don't know what gas taxes have to do with home affordability either. Unless there is a supposition that this will send clear market signals about true pricing, and some people will choose to migrate to denser areas. If so, the desire for walkable areas will have to become saturated, and that has a way to go yet.

[Cismontane]

We fund public transit, and walkable bikable projects with the assumption of increased gasoline consumption. These trends are leading to decreased consumption. Driving and using roads are a priviledge and all users need to share in paying the cost.

As I said earlier in the thread, forcing developers to pay the full concurrency costs of development will go a long way toward discouraging the more rapacious form of speculative behavior in the 'burbs. The point is they could sell homes anywhere at the edges of any city (or even well beyond the edge) so long as they could get a Federal mortgage subsidy slapped on it. If only they had to, out of their own pockets, finance the concurrency costs (road, sewage, water pipes, etc) they might've been a bit smarter about where they deployed Uncle Sam's money.

This all comes back to the question of risk. For a long while there, builders were able to build anywhere with downside transferred to the public whilst retaining all upside themselves. Somehow, one way or another, risk needs to be reallocated. The current system, where all risk is effectively born by the government and the consumer while both credit and locational decisionmaking rests primarily with private lenders (who, for the most part, lend the government's money, not their own) and builders (who rely on this nearly riskfree lending), makes little sense.

I agree with DetroitPlanner and ColoGI that consumer gas taxes won't do the trick in helping reallocate risk between the Feds, private lenders (now a nonexistent player as far as residential mortgage risk is concerned), and consumers. It may change some locational decisionmaking on the consumer's part, but not enough in my opinion. Perhaps, instead, we need to capitalize and tax resident gas payments into concurrency calculations, which should be fully charged back to the developers in impact fees that, in turn, could be considered non-financeable by FHA/Fannie and Freddie when they are passed back by the builders onto homebuyers. In other words, when you buy a home, you will pay a purchase price with four components: a downpayment, a subsidized mortgage component, an unsubsidized mortgage component, and a supplemental non-financeable equity component based purely on the pass-through of concurrencies (including gas concurrencies). That may be something to think about!

[Cismontane]

Turns out part of it is in the National Forest, and a big chunk is in the County road ROW.

That must've been a fun fraud lawsuit.

[JimPlans]

As I said earlier in the thread, forcing developers to pay the full concurrency costs of development will go a long way toward discouraging the more rapacious form of speculative behavior in the 'burbs. The point is they could sell homes anywhere at the edges of any city (or even well beyond the edge) so long as they could get a Federal mortgage subsidy slapped on it. If only they had to, out of their own pockets, finance the concurrency costs (road, sewage, water pipes, etc) they might've been a bit smarter about where they deployed Uncle Sam's money.

Not so sure about this. When I worked in Florida, what you describe is essentially what occurred. There were some indications that impact fees weren't high enough to cover all the costs, but most larger developments were on the hook to pay for all internal roads, external road improvements leading into a development, all water and sewer infrastructure serving the development, stormwater systems, and sometimes even entire water treatment and sewerage plants. The also would offer free land for schools, fire departments, parks, etc.

One of the major contributors to sprawl in Florida IMHO is growth management policy itself, which placed monetary costs on the effect of various development types and, as long as those costs were paid, development could go ahead. In other words, pre-negotiated impact fees make development easier and more predictable, therefore making sprawl easier to create.

[Cismontane]

Not so sure about this. When I worked in Florida, what you describe is essentially what occurred.

mind you, I don't think that full concurrency pricing is nearly enough. All those other measures I and others have suggested here are necessary to dull speculative excess and bring order to the market. I was just trying to respond to the gas tax comment here, to show how a tax itself doesn't even begin to be enough. Concurrency is only a small part of the overall puzzle: restraining the the 3-Fs, repealing the mortgage tax dediction, increasing lender reserve requirements, and finding ways to increase the downpayment component, are all thigns we need to do. A full concurrency mandate - ilke Florida sort of has - is just another layer.

You're right that developers want certainty and Florida's concurrency requirements give them some certainty. What Florida did not have were the other necessary measures of restraint... although having haggled with DCA more than a few times I can say that, toward the end of the last expansionary cycle, concurrency requirements did kick in with some teeth for the first time, and some abusive proposals were halted (wow! if I want to build 30,000 (!) units outside of the next largest city, well beyond the urban development zone line, I might actually have to pay to expand the turnpike for all 50 miles? maybe I do need to rethink this asinine proposal of mine!). hehe.

[DetroitPlanner]

The point is they could sell homes anywhere at the edges of any city (or even well beyond the edge) so long as they could get a Federal mortgage subsidy slapped on it. If only they had to, out of their own pockets, finance the concurrency costs (road, sewage, water pipes, etc) they might've been a bit smarter about where they deployed Uncle Sam's money. ....


.... Perhaps, instead, we need to capitalize and tax resident gas payments into concurrency calculations, which should be fully charged back to the developers in impact fees that, in turn, could be considered non-financeable by FHA/Fannie and Freddie when they are passed back by the builders onto homebuyers. In other words, when you buy a home, you will pay a purchase price with four components: a downpayment, a subsidized mortgage component, an unsubsidized mortgage component, and a supplemental non-financeable equity component based purely on the pass-through of concurrencies (including gas concurrencies). That may be something to think about!

Damn Commie Planner!

[Pragmatic Idealist]

Imagine the effects of doubling or tripling the current price of fuel for large, fast, and/or heavy long-range vehicles, especially those that generate air, noise, and water pollution.

At those levels, consumers would have to factor transportation cost into their housing decisions and into home prices.

[wahday]

Imagine the effects of doubling or tripling the current price of fuel for large, fast, and/or heavy long-range vehicles, especially those that generate air, noise, and water pollution.

At those levels, consumers would have to factor transportation cost into their housing decisions and into home prices.

Certainly, we do not pay the true cost of fuel in our society. Whether its through fuel costs for our vehicles or as a percentage of goods we purchase (how can all that stuff from China STILL be so cheap when it has to get transported across the globe?!).

But there are also people who live in rural settings (as opposed to exurbs and suburbs) who would be deeply impacted by at least a sudden change in fuel costs. 21 percent of Americans are "rural" (though how much of these are truly rural versus those that live in exurbs but still gain their livelihood from an urban center is not clear) which amounts to about 51 million people.

In other countries, mass influxes of people to urban centers from rural areas is often a problematic shift that leaves many unemployed or worse. What would be the impact in the US of hitting farmers and ranchers and other rural inhabitants with a big fuel cost increase like this? Would it drive more people to the cities? Would it be problematic?

I don't really have an opinion on the answers to this, but I know that rural to urban shifts around the globe have historically been challenging for countries to deal with. What would an increase in fuel costs (deliberate or simply as a result of changing markets) look like in the US beyond the suburban impact?

[ColoGI]

Certainly, we do not pay the true cost of fuel in our society. Whether its through fuel costs for our vehicles or as a percentage of goods we purchase (how can all that stuff from China STILL be so cheap when it has to get transported across the globe?!).

But there are also people who live in rural settings (as opposed to exurbs and suburbs) who would be deeply impacted by at least a sudden change in fuel costs. 21 percent of Americans are "rural" (though how much of these are truly rural versus those that live in exurbs but still gain their livelihood from an urban center is not clear) which amounts to about 51 million people.

In other countries, mass influxes of people to urban centers from rural areas is often a problematic shift that leaves many unemployed or worse. What would be the impact in the US of hitting farmers and ranchers and other rural inhabitants with a big fuel cost increase like this? Would it drive more people to the cities? Would it be problematic?

I don't really have an opinion on the answers to this, but I know that rural to urban shifts around the globe have historically been challenging for countries to deal with. What would an increase in fuel costs (deliberate or simply as a result of changing markets) look like in the US beyond the suburban impact?

I'm with you on the rural bit as I prefer to practice in rural areas. Nonetheless, we know the per capita carbon footprint is much, much higher in rural areas. This is due to driving everywhere and my observation that rural folk let their internal combustion engines run run run run run run run run.

We need to have the rural life. We need to have much higher gasoline prices. Despite much evidence to the contrary, we can figure out how the twain shall meet.

[Pragmatic Idealist]

In the comment I provided about pollution fees above, I mentioned that they need to be offset transitionally with across-the-board rebates that would also be tied to income.

I'm sure that such rebates could also be configured in such a way to win support from rural constituents. Clustered Land Development and hamlets are still very rare in the United States, but. as development patterns change, more transportation alternatives like walking, cycling, and Neighborhood Electric Vehicles, as well as car sharing, would become available.

Ideally, we need more Garden Cities. High-speed rail, as well as airports, can help create such places in those areas that are currently more rural (exurban) and sub-urban. Regulating Transects, then, is, ultimately, the key to getting us to a situation that will work for everyone.

[Pragmatic Idealist]

I should also say that raising gas and Diesel prices will also result in more conversion of existing vehicles to run on alternative fuels.

Diesel engines can run unmodified on bio-Diesel. And, gasoline engines can run unmodified on butanol. Moreover, flex-fuel capabilities only cost manufacturers a little more than $100 per vehicle.

Lastly, with production electric cars and gasoline-electric hybrids a reality, substitutes for internal-combustion engines are becoming increasingly available for buyers of new cars and trucks.

[DetroitPlanner]

I'm sure that such rebates could also be configured in such a way to win support from rural constituents. Clustered Land Development and hamlets are still very rare in the United States, but. as development patterns change, more transportation alternatives like walking, cycling, and Neighborhood Electric Vehicles, as well as car sharing, would become available.

What is your suggestion to pay for the improvements needed to finance such infrastructure because these are currently largely through gasoline taxes and driver's fees. When you reduce consumption you reduce the revenue that has traditionally paid for this these travel demand strategies.

[mendelman]

What is your suggestion to pay for the improvements needed to finance such infrastructure because these are currently largely through gasoline taxes and driver's fees. When you reduce consumption you reduce the revenue that has traditionally paid for this these travel demand strategies.

And I don't see the nexus between PI's points and fixing the national housing system. PI seems to simply be pushing the typical "reduce cars, reduce sprawl" argument. That does not automatically fix our system, which, really, is about financing and not land use/transportation.

You can still have extreme asset bubbles and all public transportation.

But PI's digression has inspired a new thread.

[Cismontane]

You can still have extreme asset bubbles and all public transportation.

Only up to a point. Remember, it costs more per unit floor area to build at higher densities, there's more floor space per unit land, and the infrastructure (include transport) is, in some measure, already there. This means that a greater proportion of the total cost of urban infill development is the building whilst, in exurban greenfield deveopment, the greater proportion of the total cost is a combination of the land and infrastructure. Infrastructure (without forced concurrencies) tends to, at least in part, become the financial responsibility of the municipality/county/ state/Feds, on which builders - and homebuyers - can be said to free-load: infrastructure endows homes with additional value and higher purchase prices, which a developer may capture without corresponding investment and yet a homebuyer must pay for.

This may mean that greenfield, outer suburban development is more amenable to bubbles in this country, although the verdict is still out on that. Clearly, there's a big bubble in Miami-area beachfront condos, for example, but that may be some type of weird exception, which I can only explain with a lengthy digression. More to the point, there are some examples of smaller urban bubbles where urban infill development is heavily subsidized (e.g., Brooklyn, San Diego, Denver, Boston), but such bubbles just aren't that big and tend to have a greater equity component (which makes them easier to manage).

Essentially, it is possible that anything which decreases the infrastructure subsidy (or, on the flip-side) the infrastructure free-loading effect, would, in theory, improve the overall health of the system and leach costs out of the system. Put another way, if you assume that housing should yield (after-taxes) a healthy 4% off theoretical rental yields (I'm not saying that the homes should be rental, just that the easiest way to value any real estate is through the use of rental cashflow yields, whether captured in a cap rate or a cash flow capitalization model), then a $400,000 suburban house (based on its listed sale price) now capable of cash-yielding a typical bust-market 1%, for $4,000 a month in rental cashflow, only has $100,000 of house+cash flowable land value in it. The non-cash flowable land "residual" and the infrastructure subsidy togother comprise the remaining $300,000. Take away the infrastructure subsidy (people can't drive to the house and the pipes, roads and sewers must be paid for by the homeowner in cash), that value might come down, say hypothetically, given a theoretical homeowner's utility, by a capitalized $100,000, leaving, say, $200,000 in surplus land residual (just making up numbers here the illustrate the concept). The question is: would that house have still have been built where it is if the developer had to pay $200,000 to build the house, instead of $100,000?

The problem today is, with the infrastructure/transport subsidy, that a homebuyer or investor can only capture 1% theoretical yields whilst a developer captures a much higher effective annualized return on the same property since he gets the infrastructure piece of the value for free or at least at a steep discount. This creates yet another imbalance in the system. This is why I always get frustrated with the Wendell Coxers, Joel Kotkinites/Urban Geography jokers, and Heritage Foundationers out there when they argue that suburban sprawl represents the American free market ideal. It really doesn't. It's the most highly subsidized, socialized form of development imagineable. And the political romanticism of "home ownership" is really not home ownership at all in a financial sense when 90%+ of it is financed by debt... and debt largely underwritten by Uncle Sam at that. If you want to encourage citizens to earn capital returns on their money, get them to risk their money in the stock market and actually finance some innovation and economic competitiveness with it, not by engineering a type of land ponzi scheme for them, out of a set of contrived subsidies for excessive land residuals and public infrastructure. From this perspective, roads and loans are just the flip side of the same problem.

[The One]

How about a graduated gas tax?

Fuel sold at stations within a 2009 MSA's includes a 100% increase in the gas tax at all levels. Stations located 50 or more miles from the geographical center of the MSA have a 50% increase (or 50 miles from the official MSA center?). Rural stations located outside the MSA's are subject to a 25% increase in the gas tax.

[mendelman]

Yes, modern suburban lower density subdivision development is/was most prone to the asset bubble across the nation. But there is still alot of asset bubble fallout in highrise and neighborhood mid/low rise condo developments in central public transpo heavy areas in Chicago and I sure in other places where such overdevelopment of the segment occurred. It's just that the low density suburban developments are certainly a higher proportion of the all the over-developed real estate in the nation.

Chicago's South Loop which is packed with eixsting bus, commuter train and rapid transit stops is dying from over-building of mid/high rise condo development.

Really, the major cause of the mess we are in is/was too easily accessible financing products and a mass culture/delusion of neverending asset appreciation.

The easy money is at the root of the entire bubble, and that easy money was created through unintended and intended consequences.

[wahday]

The housing debacle was brought about in no small part by the introduction of dubious financial products and the activities of Freddie and Fannie, all of which had the effect of helping to grant loans to people who perhaps shouldn't have oughta bought a particular house. In the case of Freddie and Fannie, because much of the risk they were playing with was backed by the feds, there were not only lending on low rates, but were also more generous with these loans and with projections of increasing income or home values to put people in those loans. Careless lending that led to toxic assets which American taxpayers now own in an attempt to lessen the severity on banks and stimulate renewed lending.

That all seems to be a pretty standard issue assessment of the situation we find ourselves in now.

Given that, I have two questions:

1) In the scenario we saw unfold over the last decade or so, if suburban or greenfield development had already been curtailed and more people looked to the urban center for their homes, are we not likely to have had the SAME problem of people being loaned money at high risk to occupy homes they cannot sustain the payments for? I am not convinced that our current housing problem as far as the financial disaster it has created would be any different if people had purchased urban homes they couldn't afford instead of suburban ones. The atmosphere and dynamic of lending during this troubled period was marked by a climate that encouraged people to purchase beyond their means. I'm not interested in blaming any particular party for this, but just pointing out that many of the same people who have been or will be foreclosed on who own suburban homes may simply have purchased too expensive urban homes had things been more dense and clustered from the get-go. I just don't think WHERE the homes were located is really the problem as far as the financial crisis goes.

2) Assuming the kind of intensive urban development being discussed here were the way to move forward, one of the big problems right now remains the issue of lending. So much money is still tied up with the fallout of the housing market that banks are simply not taking the same kinds of risks they were (especially as they struggle to figure out exactly how much they are going to lose on all of those foreclosures and abandoned building projects). So, how will private developments on this scale be financed? Perhaps the infusion of money by the feds recently announced will do what it is intended to - keep interest rates low to inspire more lending to fuel economic growth - new construction, business loans, manufacturing loans and mortgages. But if not, where do we go from here?

Again, a very stimulating discussion!

[DetroitPlanner]

How about a graduated gas tax?

Fuel sold at stations within a 2009 MSA's includes a 100% increase in the gas tax at all levels. Stations located 50 or more miles from the geographical center of the MSA have a 50% increase (or 50 miles from the official MSA center?). Rural stations located outside the MSA's are subject to a 25% increase in the gas tax.

If I am reading this proposal right then there would be a penalty for buying gas in the urban area, and those who drive more will pay less per gallon. Hardly a solution 'to fix housing' as there are less folks sharing in the real cost of using rural roads to access the properties. A flat per mile driven will make people think twice about long commutes and where they live in relationship to where they work.

[The One]

If I am reading this proposal right then there would be a penalty for buying gas in the urban area, and those who drive more will pay less per gallon. Hardly a solution 'to fix housing' as there are less folks sharing in the real cost of using rural roads to access the properties. A flat per mile driven will make people think twice about long commutes and where they live in relationship to where they work.

Sure, rural tax payers don't get back all of the money they put in, so why not cut them some slack? Why not reward people living in rural areas for not promoting sprawl by living in a some suburb?

On the other hand, aren't people living in rural areas just the precursor to sprawl on a national level???

This post reminds me of that guy on Princess Bride trying to decide which goblet isn't poisoned, when in reality either drink will kill him.....