Friday, September 24, 2010

The Three Cornered Hat

All housing built in the United States during the last fifty years or so, is a result of difficult compromises between three partners: local governments, builders, and buyers. These compromises have resulted in the finest homes built anywhere in the world. Improvements to the basic housing stock, like airbags and ABS in cars, have created safer, warmer, more cost effective and more durable homes than at any time in the past.

The continual push and pull between these three has forced up the price of homes and driven them into the ground, created surpluses and shortages, and put more enough politicians in jeopardy (or worse, jail) than prohibition. Billions of taxpayer’s dollars have gone into local and regional planning to try and conjure a strategy for the future placement of homes and other land uses. It can be more profitable for some than winning the lottery. Just put the right color on the map over my property and bingo – “Johnny we have a winner!”

The builders (it really makes no difference whether they build twenty custom homes a year or are the mega-giants), have to find the land. Like 21st century prospectors, their search pushes them into the hinterlands and marginal areas trying to keep their basis low, or into strange alliances with base closures, derelict urban properties and surplus school sites.

But the real power, as we have seen these past three years, is held by the buyer. Argue all you will about the banks and the manipulations that went one, point the finger everywhere, but the fundamental collapse of the market is due to the buyer – the marketplace – stepping away and saying enough. And this “enough” ripples through builders and governments like the Black Plague through Europe in the 14th century; even the fittest were thrown down.

Currently governments are trying to consolidate their positions, and for the smart ones, prepare strategies for the next push of the marketplace. General Plans are being updated and new ordinances that tend toward the Green Movement are being passed – solar, water quality, water use, and density are high on their agendas. Most are benign or at worse preemptive; governments hope the systems will be affordable and available when this turns around.

The builders are either hiding out in Hawaii or prospecting, very few are building. Each believes they have the model for success for infill properties or old school sites. They will dance with the devil (local and/or federal partners) and hope to not get their toes stepped on. Or maybe they can invent profits from thin air, like ancient alchemists. For now, the smart ones are drinking Mai Tais on the beach.

The buyers are also sitting this one out – for now. But their numbers are steadily growing. According the last census (2000) and modified by adding ten years to the count, there are 40 million citizens between the ages of 20 to 30 and many are starting families. And I would guess a good chunk of them are living at home or renting. This is a huge demographic to anticipate for both the building industry and city governments - and it is a good bet these people will not be buying McMansions. How this demographic groups acts with respect to housing will determine what the next song on the dance floor will be. Will it be the Texas two-step, the jerk, or a new form of break-dancing? My guess - a combination, watch your back.

Stay tuned . . . .

Friday, September 17, 2010

Own or Rent — Controlling the Chaos

We have owned a home for over thirty years (my wife would successfully argue as to who the property manager is); it is both a source of pride and value. None-the-less, from a meager down payment in the late 1970s we have significantly leveraged that payment into a comfortable home and not unreasonable sum of equity – I said equity not cash – ah . . . there is the rub.

The Wall Street Journal notes this week that Fannie Mae (now there is a reliable source) says that the percentage of people who consider a house a safe investment has declined from 83% in 2003 to 67% this past July. My guess it corresponds to number of foreclosures, unemployed, and speculated homes – but that is just my guess.

To own or rent is a debate that will never end. In the mid-1940s articles were written in Harper’s Magazine and others saying that home ownership would be a disaster to your personal finances and implied that the buyer didn’t know what they were getting into. Other types of housing were offered as the solution: rentals, apartments, mutual associations, and the like. At the time there seemed to be a fear of homeownership – fifteen years of almost no ownership construction will do that. This obviously passed as all irrational fears do. Americans built and bought millions of homes since then.

The current debate is more economic than challenging the fulfillment of a dream. In America there has been a cultural, economic, and social desire to plant your flag on a chunk of ground and call it your own. It is a visceral desire – in fact many of the current sad stories are a direct result of this yearning. In other times and different economics, this longing would not have caused the chaos of today. Many competing and opposing forces came to bear to create this disaster.

But markets try to balance themselves. When inexperienced or even experienced homeowners are sadly forced out, other opportunities appear. The foreclosed house now becomes a rental, and large suburban tracts are changed to horizontal rental complexes, street after street meeting the need of the marketplace. Good or bad, I am not sure, only time will tell. But what is critical is the residential structure is preserved and can be adjusted to reflect later market forces, from owner to rental and back to owner.

Rental and ownership are perceived differently across the country. New York City, where almost everyone rents (or more cultural appropriate leases) a residential unit; extreme allowances made and tolerance giving to rent control, obituary diving, and under the table rentals. But there is no stigma to the renter – all are in the same boat. But that is an entirely different market than the suburban foreclosed homeowner who is forced into a rental property. Iowans would not understand.

The Census Bureau notes in an August release that renters pay a higher percentage of their income for housing than do owners – go figure. In most cases the age and the structure of the family has something to do with it. As these families mature, incomes and stability increase, homeownership follows – it is the long term that is often thought of by the homebuyer. The renter tends to be transient, mobile, socially and culturally looser – age changes these actions. Rents try to reflect the current marketplace, ownership costs do not – they are often fixed at the time of purchase and incomes increase reducing the relative percentage. Today’s foreclosures do tell a different story for some, but the trend will always go back to the mean – consider your own home and situation if you bought prior to 2000.

To rent or own will always have its champions and rationalizations will be made that prove, without a doubt, their position is correct. As I noted above the desire to own is visceral – the reason for renting may be cerebral. Rationalize away . . . .

Stay tuned . . . . .

Friday, September 10, 2010

1920 to 1940 – Is It Déjà Vu all over Again?

The 1920s brought on one of the greatest housing booms in U.S. history. The post-World War I depression and low numbers of homes built during the war only exacerbated the problem. The 1920s saw great changes in the character and look of America whose population in 1929 was 121.5 million people and the federal budget was $3.13 billion dollars:
• Annual housing production accelerated from 449,000 units in 1921 to 937,000 units in 1925.
• For the entire period from 1921 to 1928, production totaled 6.3 million units, an annual average of 785,000 units.
• The non-farm population increased 2.2 percent annually from 1921 to 1928.
• Immigration, while somewhat curtailed, still continued with 707,000 immigrants arriving in 1924.
• Average household size dropped from 4.20 to 4.00 persons.
• The average non-farm income rose 22 percent from 1920 to 1928.
• Automobile ownership rose from 6.8 million in 1921 to 17.5 million in 1928.

The 1920s were not known for social reforms, but concepts and advances in housing made prior to World War I at the state and local level were extended and refined. These areas included building and housing codes, city planning legislation, and zoning ordinances, and the government actively supported these actions. Local zoning was upheld by the U.S. Supreme Court in the Euclid case, and other federal agencies promoted the use of model statutes for city planning, zoning and building codes.

The collapse of the stock market and banks in 1929 through the early 1930s destroyed most of what was accomplished in the 1920s. Significant planned communities, such as Radburn in New Jersey, failed after completing less than half of their intended plans.

In the spring of 1933, four years after the development of Radburn was stopped, Franklin D. Roosevelt was inaugurated. As he held up his hand to swear to the American people his fealty as their new President, more than ten million American workers were unemployed, great numbers were homeless and many were on the verge of losing their homes. That same year, in Germany, Adolph Hitler was appointed chancellor by President von Hindenburg.

In an effort to promote housing, using the need for jobs as one of the justifications, Roosevelt placed Rexford Guy Tugwell, a member of his inner circle or “brain trust” and a true believer in the English Garden City idea, in charge of the Resettlement Administration. Tugwell was teaching economics at Columbia University when he was selected by Roosevelt as an assistant secretary of agriculture and would coauthor the Agricultural Adjustment Act. It was under his authority the Greenbelt Communities would be designed and built. The creation of these communities, due to the usual federal reorganizations, later found a home within another agency formed within the Resettlement Administration, the Suburban Resettlement Division (great name!).

Tugwell had been very interested in the concept of the satellite city regardless of its social impacts. “My idea,” he wrote in 1935, “is to, just outside centers of population, pick up cheap land, build a whole community and entice people into it. Then go back into the cities and tear down whole slums and make parks of them.” The Suburban Resettlement Bureau was set up in a mansion on Massachusetts Avenue in Washington D.C.

All government projects of that time (as now) needed justification, and the purposes for the Greenbelt Communities were officially stated:
1. To give useful work to men on unemployment relief.
2. To demonstrate in practice the soundness of planning and operating towns according to certain Garden City principles (Ebenezer Howard and the English Garden Cities).
3. To provide low-rent housing in healthful surroundings, both physical and social, for families that are in the low-income bracket.

Tugwell rejected the concept of individualism and believed that Americans had a “cooperative mentality”. He proposed a collectivist economic policy. He believed that this could be achieved through planning and public control of the economy. It was his belief that the idea of the Greenbelt Community was closer to the habits and aspirations of the American people. He was blunt and, at times, tactless in the presentation of his gospel and soon became a target of the press and a political liability for Roosevelt. Tugwell’s important legacy focused on the strength of suburban resettlement areas which he thought were more consistent with the current trends in American growth. Tugwell initially proposed that twenty-five Greenbelt towns be built close to existing urban employment; only the three (Greenbelt, Maryland, Greenhills, Ohio, and Greendale, Wisconsin) were built. It was in this decade and during the worst economic time the country has ever known, that some of the best and most creative talents in community and residential planning were hired (by the hundreds) and brought to Washington to design and develop these communities. (Excerpted from my book America’s Original GI Town, Park Forest, Illinois – new edition)

It is my great concern that the Obama administration is on the verge of trying the same thing that failed in the late 1930s: Government sponsored, designed, and built housing. It will take the form of a number of specific needs already stated by the government:
• The need to lower unemployment in the construction industry (unions)
• Repair the financial industry and the building industry (Fannie and Freddie)
• Show the American people THEY know how to do things better than private builders (the Green Movement)
• Fix housing problems as the population grows and there are no residential units to meet the need (sizes of immigrant and minority families)
• The implicit desire of academics to show they know more than the entrepreneurial builder (profits – we don’t need no stinking profits).

As during the Roosevelt years, there is an unquenchable need by this current administration to show that they are smarter than your average five year old and when it comes to the housing market they know best. Granted after the debacles and failures of the building industry, banks, congress, and the speculative buyer, I sometimes believe that a roomful of first graders, bartering over candy and ice cream, could have come up with a better system.

There will be an effort, I believe, by this administration to do the same thing that Tugwell and Roosevelt attempted to do in the late 1930s. They will enlist the building industry as their facilitators (they will find willing partners due to potential free land, egos, and fee issues), they will be marketed as the best examples of LEED building with all the administration’s pet projects included (i.e. solar, wind, water quality and reuse, global warming, green, green, and green), and they will be shown as egalitarian and wholesome places to live (I can imagine the brochures showing the Al Gore cul-de-sac).

An aside: Why is it the latest green communities I am working on have so little green in them, plants and landscaping that is – oh never mind?

The greenbelt communities failed for a number of reasons. The most important, I believe, was the then current market for homes/rentals was about $3,500 per unit. The government’s units, as badly and brutally designed as they were, cost taxpayers at least $18,350 each to produce.

Sound familiar, and I bet they can beat that number, which way – guess.

Stay tuned . . . . .

Friday, September 3, 2010

The Urban Umbilical Cord - Part 2

The electric car will arrive and be in your garage or more likely the garage of your children. It is foretold and prophetically announced here. The current politics and your tax dollars are pushing this as the savior to all our problems: the Middle East and Venezuela (we will show them), the oil companies (the unfeeling bastards), pollution (that ol’ CO2 thing), and the car companies (we will force them to make them). Now if we could find a way to make them run on static electricity like John Galts’ motor.

The biggest difficulty the automobile consumer has with the electric vehicle is the fear of no power and a too short extension cord. This anxiety cannot be breached by government grants, free plug-ins for your garage, or assurances that there will be a power station just a short push down the road. It was the same in 1915, gas stations were few and the rise of the automobile forced the market to supply the product – gasoline. No government grants back then, just Standard Oil and Sinclair to name two.

I suggest, quite strongly, that the current designs with their self-contained battery are just plain wrong. Think of it as a rechargeable flashlight, you need the flashlight when there is no electricity to light your household – yet you cannot recharge the flashlight because there is no electricity. That is why they have replaceable batteries (rechargeable or not). Two major industries: the flashlight makers and the battery makers and throw in the bulb manufacturer as well – each trying to make the best product. The electric car can be exactly the same.

Imagine a system where, as you are getting low on power for your snazzy electric car (the one with the cool cup holders), you pull into your neighborhood power station. There you are guided by laser sensors (not unlike the self parking features of today), that align the vehicle with an exchanger that uses hydraulics to slide out battery packs from a tray under you car, and then slide in replacements – fully charged. The cost is charged to your credit card. You are on your way in less time then it take to fill up your old gas-guzzler with its 20-gallon tank. The power station makes its profit by recharging the packs with electricity the station buys wholesale and what it charges for the pack to be placed in your car. In effect the pack is like the old milk bottle (bear with me youngsters), it is returned and refilled, you may never see the same bottle twice in your icebox. This system is less complicated than the current car washes out behind the gas station of today.

The electric car is exactly the same as your gasoline or natural gas powered car. The only difference is the power plant. I have often heard that the electric car companies are more concerned about the batteries in their cars than the car itself – why should they even need to worry. Did Henry Ford spend his fortune trying to build gas stations for his cars? The solution is simple - there must be standardization of interchangeable batteries for the electric car industry. Put that annoying pink bunny in undercarriage of the Leaf or Volt or whatever silly name you want to call them. Let the battery industry develop efficient and rechargeable power packs under international standards – these can be leased or owned to an oversight company – and each recharge sends a small payment to the manufacturer and the oversight manager. In many ways it is like the shipping container industry – those steel boxes are independent of what they carry – funds are allocated to the box owners each time they are used. I can imagine companies that own millions of these power packs, each receiving payment each time a charged pack is sold.

Well that’s off my mind. The system is no more complicated than the current gasoline supply system – except for that Middle East and Venezuela thing, those damn oil companies, pollution (except for that pesky nuclear waste thing), and the car companies (private and government owned) who will again compete for the best cup holder category.

Next week let’s take a look at what the government will do to promote housing – it was tried in the 1930s.

Signing off from Alaska's Inland Passage