Living in Your Mom's Basement

If you knew a deadly disease was slowly and unstoppably moving toward you, country to country, city to city, neighborhood to neighborhood, you and your community would try to do something to slow or stop its spread. Quarantines, walls with gates to control outsiders, a push, if possible to immunize, triage teams and hospital beds would be prepared. Some would even man the gates with weapons to protect its citizens from this dystopian scenario.

In many respects that is exactly what is happening within the current housing market in the United States. Everyone knows there is a problem, they know there is a massive imbalance, and they do not have a clue as to how to fix it, and many are manning the political barricades to fight it.

The Problem

Rents are now approaching 40% of income in many of the major cities. Historically it had been nominally pegged at 30%. This number varies from city to city and region to region. In Chicago the percentage has risen from 21% to 31%, and in New Orleans it doubled from 14% to 35%. The reasons are as varied as the communities themselves. But in every case from San Francisco to Miami, the increase is putting a profound impact on the region's ability to grow. If more is put into rent there is less for savings, food, transportation, medical care, and even entertainment. The region's soft economic underbelly is threatened.

The percent of income dedicated to housing continues to rise. Vacancies continue to drop to new lows in many regions and the pressure on rents continues to rise at rates much higher than inflation, as much as 4% this year (some cities such as San Francisco are double that). But then again who really believes that inflation is running just a tic above 1%; really, who believes that?

This is forcing many, especially in the middle and lower middle class, to stay home, double up, or find serious alternative housing (micro-apartments). These higher rents are pushing these classes out of the inner urban core to the community's periphery and then pay for transportation to get to their jobs. For the recent college graduate many are stuck where they grew up, in their old room, living like a teenager. Not what they had in mind when they went off to college, this right of passage and their dreams of independence are dashed. The social repercussions are many and worth studies in their own right.

Home ownership is surprisingly more affordable in many of these same communities but the banks are requiring higher down payments, less debt (i.e student loans, etc.), and more stringent financial qualifications. Even with parent's help, home ownership is still a dream for most people under thirty.

Solutions:

Build more housing both rental and ownership. Simple right? But there's a problem with the model. Because land and construction costs are rising across the board the soft costs to bring a unit to market are also rising and rising faster than incomes can keep up the builders are going upscale. And adding the long-drawn-out time to get approvals from municipalities (and their incredible high fees per unit) hasn't helped either. Many builders quickly jumped on the luxury rental market (the cost percentages of improvements and fees were more easily justified). This shift has actually forced rents down in these markets – but what average Joe or Josephine can afford $7,000 per month for an 1,200 s.f. apartment.

And the government isn't there anymore to subsidize housing. Go figure, at some point they will run out of money – and many municipalities have. And subsidized housing is dead-end housing. Once in the tenants never leave, why would you?

Here are some ideas:

• Increase the land available for residential development in cities.
• Change the zoning regulations to allow for more mixed-use developments
• Develop a fee structure that targets middle class and lower middle class with lower development fees and extractions
• Increase fees based on projected rents
• Reduce the approval and entitlement timelines
• Eliminate voter approvals of projects – support the work of city planning staffs and municipal agencies
• Focus and expand on support for urban families – make three and four bedroom apartments affordable, support with schools and services.
• As much as I hate to say it, densify, densify, densify.

None of this is new. We went through much of the same thing in the post World War II years from 1945 to 1955. Significant changes in where we build, how we build, and how we financed housing evolved out of this post-war decade. But these changes came out of the development community not the politicized, cover-my-butt government agencies and their reports and findings. My biggest fear is that the development industry itself can no longer step up to the plate and even bat for average.

More info here in this NYT article 4-14-14

Stay Tuned . . . . . . . . .

The Battle for the Urban Street

Within every major and even minor city a battle is underway between three bodies with specific agendas and very large political constituencies for control of the most important chunk of every community, its streets. The players in this very dangerous game are vehicles, bicycles and pedestrians. And there are no real winners. Reminds me of rocks, paper, and scissors, except for the part about people getting injured and killed.

Vehicles (buses, trucks, cars) own the road, due not entirely to the taxes paid to keep them up, but to the serious issue of two tons (and more) of steel versus 180 pounds of flesh and bone. Drivers want the roads to move quickly and efficiently, have minimal durations at stoplights, and broad spacious lanes. Crosswalks are for pedestrians not just pause and slide zones, we say we are courteous drivers, but we also prove daily that we are inattentive, rude, and in a hurry. Faster is better.

The bike industry (and it is one now both politically and physically) literally wants a piece of the road – for free. They are entitled to it (having paid in as drivers and tax payers), "where our bike lanes?" they demand. Where is our secured parking? We should have separate traffic rules for us and why not? We bicyclists are more concerned about the environment, our health, and our community. Give us eight feet, each side, and we will try not to scare the be-jesus out that 85-year old woman who is trying to pass us as she goes to her eye doctor, really we won't. And if the travel lanes are narrowed by a foot or two so what, it works in Europe!

And the poor pedestrian, the lowliest of the three is safe as long as they stay to their part of the universe, the sidewalk. There, hidden safely behind a row of parked cars, they can stroll, push a baby carriage, talk on their cell phones, enjoy their day – for about 200 feet. For our 85-year old woman that street crossing looks to be as wide as the Mississippi River and just as dangerous. For many it is both an issue of time and distance, how long it will take to cross and how far to the other side, and if can you say a whole rosary during the trip. There are also many injuries and deaths from bicyclists striking pedestrians, again safety first – and this is one is on the bicyclist.

Each participant demands priority, us first. But it also demands an increased level of responsibility. For the driver it's greater care, responsibly, and civility – there are enough battles going on, on the streets, between those who think the Fast and Furious movie franchise as the greatest series ever produced (and a lesson in city driving) and our 85-year old myopic driver.

In my part of the world (Northern California) our prettier neighborhood arterials are taken over by spandex warriors (especially weekends) who think nothing of traveling in packs of 20 or 30 riders like rabid wolves looking for prey who spill out of their designated lanes and into the travel lanes demanding obedience – sorry there, got carried away, but just a little. We know who you are; you wear your colors like a psychedelic street gang with your tags plastered all over the back.

Suggestions:

Drivers must be more courteous and more aware, cell phones down (it's the law, or at least the intention), don’t slide through turns, watch the lights, and remember that that person standing on the corner will do something unexpected, think of your grandmother. In California, starting in September 2014, state law requires a vehicle driver to stay at least 3' away from a bicyclist – try that at 40 mph. And if your neighborhood arterial has become a defacto bikeway – you must slow to 15 miles per hour (won't this be fun) when passing.

Bicyclists should buy a license for their privilege of riding on public streets, a token amount say $25 per year. They can afford it, and I mean every bike. Register the model number (to be required by every manufacturer), enforce the surveillance and tickets, and demand financial participation. This money can be used for enhanced bike lanes and trails, better safety, and better tracking of stolen bikes. Most in the spandex set spend thousands on their bikes; this fee is just a pittance. I know there will be a self-righteous hue-and-cry, but suck it up. You want to play, you must participate. There can’t be a free ride in this.

For pedestrians watch what your doing and where you are – at all times. Where possible, cities should reduce the width of the crosswalks or lengthen the crossing times. And require, in some medians, fencing that will prevent the more bold (or stupid) from crossing mid-block.

In 2011, 17 pedestrians were killed in San Francisco and over 800 injured, some seriously. Whose fault? Each was different but in all cases steel beats flesh.

Stay Tuned.

Get It Through Your Thick Head

Fighting words, I know. Pejorative on so many levels. Insulting even, but that’s what we’ve come to. After reading great posts by Joel Kotkin, Wendell Cox, and some miscellaneous pieces in the WSJ, that support what I’ve been saying for the last few years about regulations and “Feeling Better About Ourselves” (FBAO) ordinances I have come to the sad conclusion we in California are doomed. Doomed like Illinois, Michigan and many other states.

But California is the worst offender because it is so correctable and obvious. It is the simple fact that state is controlled by those who wish to give away what others have earned. And when that runs out you end up with a Michigan and Detroit or an Illinois and Chicago. Sad but true, but FBAO.

California, when I emigrated back in 1971 from Illinois and Michigan, was the place to be. It was the greatest and coolest spot on earth with an endless coastline, bustling cities that were affordable, a sane politic, and an adventurous soul and an expectant population for its future.

What happened? FBAO.

There is no easy answer and yet I will try to give a small opinion, my own. One word comes to mind, self-satisfied. We no longer reach for the stars whether Hollywood or Vandenberg, we have become a creator of toys (IPads, Google, Facebook). We no longer dig in the soil for wealth (gold, silver, cotton, oil, and even lumber), we let George, or Juan, or Chin do it. We became a state of renters and preservers, even though our history is less than two centuries old. We became self-centered as well, FBAO. Sad.

The state is now striven in two. A coastal state that is no more than fifty miles wide, a coastal zone unaffordable to all but the richest and oldest (equity my dear, equity). A zone that does its best to restrict, shun, prevent, and obscure every attempt to grow and deal with changes to its population and economy. “Let Silicon Valley do it,” seems to be the most common hope. Even the Southland dreams of redemption in its own version called Silicon Beach. We are now just cute, not cutting edge.

And most of this is due to over-regulation and protectionism. In 1970 there wasn’t a Coastal Commission, Water Quality Control Board, Bay Conservation and Development Commission, Air Resources Board, affordable housing laws and agencies, waste management agencies, Environmental Impact Reports, and so many other agencies they bump into each other like teenagers at a Rave. And somehow we managed to built a great state. While the ordinances have done some good and in many cases a lot of good, they have also slowed the engine of the state to a dead stop crawl. When there are no expectations, no hope, entrepreneurs move on taking jobs and capital with them. I see Texas waving its flag on the horizon.

What is left is chaos. Drug labs hidden in derelict valley towns and dying orchards, an empty landscape where hundreds of thousands of acres of crops once grew, battles over how much water someone gets versus building greater and greater water supplies, a sad pleasure in returning to the native, and the belief that denser and denser urbanization is the future. FBAO.

We are squandering our resources and capital. Witness the battles over city and county land use boundaries that drive up housing costs, a high speed rail that will fly through counties desperate for jobs and growth, fracking that will produce thousands of jobs and billions for the state, new land laws (by coastal legislators) making Central Valley growth more costly and difficult, and the ongoing subsidies for coastal housing that tries to create affordable housing instead of expanding the overall housing count and thus making housing more expensive and unaffordable, and of course the omnipotent power of the public unions as we have seen in the BART strike. Much of this driven by entrenched political and cultural groups with specific agendas and a relentless and tightening grip on the state’s purse.

It is very hard to accept that at some point this state will run out of credit, it can’t print money (though it does try, by proxy, to sell bonds for its future), and it can only expand taxes on its people and businesses for so long. It will begin to lose those people it needs to retain. California will still grow but is it the type of growth that this state needs? I believe in demographics, but what kind of demographics is important. Education is paramount, so is affordable housing, and so are jobs. California desperately needs adult supervision, even though, I guess, the adults along Coastal California seem to like it the way it is and they of course FBAO.

Stay tuned . . . . . . . . .

If You Build It, Will They Come?

Last weekend the Wall Street Journal posted a story (click here) about a ghost city in China. The town, six miles down the road from Tieling in northeastern China, is designed to hold 180,000 residents and it is a long way from accomplishing that goal. Chinese central planning, the build first find residents later model is not new. Ten years ago Shanghai went through this same spurt of growth and then took years to fill in the towers, apartments and offices. But Tieling is not Shanghai (see my last blog with Shanghai's videos below).

99% of development and growth in the United States is entrepreneurial and generally responds to market forces and supply and demand. When we mess with this through too much money flowing into a sector or government meddling we end up with 2008 to 2013: too much of everything (supply) and not enough users (demand). Balance will take years.

But I guess these rules of business and economics don’t apply in China. When you are sitting on billions and billions of yuan (much of it from trade imbalances with the US and the West) it has to be put somewhere and infrastructure can be a good home. A new city here and a new city there, why not? Stimulates the local economy, makes some people rich or richer and others well, just get out of the way. 

Some hard numbers: China has 1.3 billion people, that is about four times the number of people in the United States. They expect that 350 million will leave the countryside and move to cities in the near term. That is the more than the current population of the United States. It is an unprecedented movement of people never seen in the world’s history. If this can be accomplished without political or social disaster the economic benefits are beyond measure.

Watch this video from Australia.

 (I could not post the video image so just click above)

or click here: http://www.youtube.com/watch?v=InqAzvX6UrI

This new city planning has aggressive Western architects salivating at their AutoCadd stations. Unstoppable growth, no planning commissions, not planning boards, no little-old-ladies at design review meetings berating you over fenestration details – I have died and gone to heaven.

There is no wrong or right in this. China faces unreal demographic changes and this is one way to anticipate the future. Sure there will be maintenance issues, utility issues, power supply and even short and long term health issues, but taking a fifteenth century economy into the twenty-first century in less than thirty years is difficult at best. But unlike many aging western economies they are trying.

Stay Tuned . . . . . . . .

Noodling Housing and Economists

Nood-ling (nōōd’lĭng) n. 1. Fishing for catfish using only bare hands, practiced primarily by crazy people who cannot afford proper fishing gear. 2. The intentional annoyance by bloggers who are skeptical of the news as it’s reported, as in “Noodling bureaucrats is more fun than fishing bare hand for catfish and a lot more surprising.” This is now an end of the month feature.

Megan McArdle in a brief article arlier this week in The Atlantic Home asks the question, “Are There Too Many Homes in America?” She goes on to say that the issue is not that too many homes, there is, at the moment, not enough buyers. As I have argued in earlier blogs, we are silently developing an extreme shortage in housing units especially when considered against an almost invisible and growing household formation curve. Potential buyers are living at home, renting, sharing, etc. and the housing supply is not meeting any level of a projected demand. As with any product when a tipping point is reached, such as an expected increased demand spike (see the years 1946-1956), bubbles can grow.

Brendan Lowney, macroeconomist with Forest Economic Advisors, said a week ago that there is an oversupply of about 2.5 million homes on the market. This is putting downward pressure on home prices as well as consumer demand. Well, duh! I do ask, and argue though, how can the housing oversupply put pressure on consumer demand. The only pressure I can see would be on prices and that would result in a good result for the consumer. The real issues are the retreat of the buyer from the marketplace (fear), their inability to find a loan (acceptance), and unemployment (qualification). These three factors must be overcome to restart the housing engine.

I have been and will continue to be a firm believer in demographics. Simply put, I believe that people will: 1)continue to be people and have children, 2)grow older and wealthier, 3)tend to want to live where it’s nice. I went to college to come to these conclusions. But since the development industry is more complex than my in-depth knowledge of the human condition, they look at trends, buyer groups, age brackets, and other esoteric issues. The fundamental issue is this: Where is the next customer going to come from? Who are they? and, “How can I meet this consumer and sell them my product? It is, as my economist hero, Lugwig von Mises wrote in Human Action, “The market is supreme.”

My second favorite economists are good friends and fellow associates on many projects; they are Claude and Nina Gruen. Neither has let time push them around, they are still as feisty and irreverent as ever when it comes to the failings of our anointed leaders. They both continue to produce excellent books and studies on the development industry. Claude’s recent Rutgers University imprint is New Urban Development (buy here). It attacks the church of entitlements and points a finger at those that allowed all of the past five years of silliness to happen. It is an economic history course on America’s development past, thorns and roses all.

Nina, on the other hand, has coauthored (with Alan Billingsley of Americas Research) one of the best and most readable essays on the current marketplace in America, titled; Boomers, Echo’s and X’s:Generational and other Structural Shifts and Their Impacts on Future Demand forReal Estate in the Coming Decade.   Nina has forgotten more than most of us have learned about development. I won’t go into the broad study in detail but it does look at the three most dominant generations (i.e. those with the money), listed in the title. She takes a broad cross section through the development industry and teases out interesting details that will be helpful in the coming decade. A caveat that runs through the paper is the development industry’s Prime Directive: “Location, location, location” as always, drives regional markets. I will add just one more word, “and Timing.”

I am also reminded of the old Star Trek Prime Directive, General Order #1 of the United Federation of Planets. “There can be no interference with the internal development of alien civilizations, consistent with the historical real world concept of Westphalian sovereignty.” Oh, if only the tweakers, meddlers, and diddlers in Washington (that includes politicians and industry wonks and lobbyists), understood this directive and allowed the marketplace to be truly free.

Stay tuned . . . .

Vancouver Redux

As a follow-up to last week’s missive about our travels in the American and Canadian Northwest, I will throw out a few points that I picked up regarding Victoria and Vancouver. We were in Vancouver last August (see this), and it is a treat to spend more than just a few nights in these delightful and very interesting cities.

Random thoughts:
Victoria, B.C. is connected to the rest of the world by either boat or plane, you can drive there but it requires a ferry at some point during the trip. Victoria is actually south of the primary latitude that splits the U.S. from Canada (Bellingham, Wa. is further north). It sits at the southern end of Vancouver Island, which is the world’s 43rd largest island. It was named for Queen Victoria, and, as North American cities go, is very young, founded soon after its settlement in 1841, and it is the capital city of British Columbia. There, the geography lesson is done!

This is a government town and a tourist center. You get both bureaucrats and visitors from around the world. Winter was long this year, and even the famous flower baskets that are hung on lamp standards throughout the town hadn’t been placed yet. Even at the world renowned Butchart Gardens, the tulips were still in bloom, maybe a month later than normal. A must visit.

Butchart Gardens

We stayed at the Fairmont Empress, a wonderful hotel and a jewel in the Fairmont Hotel chain that includes The Plaza in New York and the Savoy in London among many others; High Tea is a delight.

It is a comfortable and enjoyable town, there are the usual touristy things and shops, but it carries an international grace about itself. I recommend it and it’s the gateway to the rain forests of the western side of the island.

B.C. Parliament Building and Victoria Harbor

Vancouver
After our visit last August, we took the opportunity to spend four days in this world class city. I mentioned in last February’s blog that the future for American cities could be seen in Vancouver and I still believe it. It is a prosperous and dynamic city that rivals, and in most cases surpasses, anything below the 49th parallel. It is continually ranked as one of the best places to live, in the world. Its climate is mild (compared to Denver and Chicago and others in Canada), and even with its reputation as a rainy city, it does not dampen the outlook of the residents.

But it is also expensive. It has one of the highest housing costs to income ratios in the world. The HST (Harmonized Sales Tax) is 12%. Food and restaurant costs are not much different than Seattle or even San Francisco, but still expensive. It is a diverse and financially driven economy. It has one of the largest Chinese populations outside of China and is a gateway city into the Chinese market for Canada.

It has, for the last twenty years or so, pushed heavily into becoming a vertical city. These glass and steel residential towers dominate the southern and northern parts of the core of Vancouver. They add density (people) into what were formally low density neighborhoods. This city planning has had its fights and detractors but it has also allowed a growth in jobs and commercial uses that American cities would die for. One example is Yaletown, in the southeast corner of the urban core.

Yaletown, Vancouver

This former heavy industrial area with its warehouses and rail yards is now one of the densest neighborhoods in the city. It fronts on False Creek and includes marinas, converted warehouses (high end shops and restaurants), apartments and condominiums. There are few other cities in North America like it.

Yaletown, Vancouver

Little of the original housing stock remains, the new housing is exciting. Yaletown is well-connected regionally by a portion of the transit system that is underground through the main part of the city (yes a subway, but very different than what you might think of – they call it Sky Train). It goes above ground after it leaves the core and does reach the airport to the south and to ferries going north.

I will be back, if for nothing more than the seafood (I have to admit this is not a drinking town, they pour by the ounce. If you want to drink - go to Chicago!).

Stay tuned . . . .

Re-Urban Balance – The Quest for the Future Downtown

I live in a delightful small town twenty-six miles east of San Francisco. The village was once a Spanish ranchero, that beget cattle ranches, that beget walnut and fruit orchards– hence the name Walnut Creek – that beget housing, that beget freeways, that beget BART (regional transit), that beget a regional crossroads, that now has beget one of California’s most successful urban retail and commercial developments. Sounds almost biblical.

I remember during an Urban Land Institute presentation a number of years ago, a past mayor of our village remarking, as a part of a panel I was moderating, about a regional mayor’s conference she attended. “Well, the mayor of Alameda walked up to me all puffed up and said they had just acquired a Trader Joe’s, well I said congratulations, we haven’t achieved anything so large in our down town, we just got Tiffany’s.” Yes, size sometimes does make a difference. Trader Joe’s is a go to and leave store, Tiffany’s is contagious like a plague (the good kind), it will infect every store and building owner. It will bring more buyers to the downtown, all profit.

The difficulty with much new urban (faux-retail) development is its lack of history, variety, and texture. I am always looking for friction in my designs, things rubbing against each other, close by shops, near and available parking – (but not too much - it can push apart uses and lose friction), a broad mix of retailers and restaurants. It’s extremely difficult to achieve this in a new retail center, and almost impossible in the old enclosed mall. We are lucky here in Walnut Creek.

While this is, and all downtowns are, in a constant state of renewal through creative destruction (stores fail, owners lower and raise rents, cities try to nudge land uses around such as restaurants and retail, and developers try to find the best mix for their centers), Walnut Creek is lucky to have a broader rental base and a diverse number of building owners. Ain’t completion great!

The old part of town was a classic California “valley” town. Main Street flanked by mostly one story buildings (most insubstantial), somewhat narrow sidewalks, adequate parking (for 1930), and a low surrounding population. But now the town sits at the intersection of two major freeways and a regional transit center with BART. The streets have trees that stand fifty to sixty feet high and as each old building is renovated, new walks and street improvements are made. The city has built discrete parking garages with retail and restaurants on the street, and, most importantly, supported the expansions of the Macerich urban mall on the south side of the downtown core. There is a symbiotic relationship between the north and south sides of the downtown core, the old and the new, the large floor plates to the south and the privately owned shops and stores to the north. Restaurants are tucked between things, there is the beginning of a good sidewalk restaurant trade, and there is enough of a downtown to make a day of it – not just drive to, shop and leave.

New retail centers try to build in history and texture, it’s almost impossible to achieve. A new car takes fifty years to be a classic, and not all classics are high-end, the ’57 Chevy Belair was the vanilla of its time, it now turns heads. It’s tough to achieve maturity and success. But with an older and very competitive area of the downtown mixed with the draw and high end values of the Macerich portion, the downtown is richer and more exciting. There is now a night life (go find that in your downtown), there is Nordstrom, a new Forever 21, a Neiman Marcus will open soon, an Apple store with its usual customer line outside each morning, and some really, really great food.

I’m reminded of the old Yogi Berra comment, “Nobody goes there anymore, it’s too crowded!” That can be said for our downtown, everyone complains about the traffic and lack of parking, as if that’s a bad thing. Would you want to own a business with no traffic problems and plenty of available parking right outside your front door? I was discussing downtowns with a city planning director of a community near San Jose, he was charged with creating a downtown out a disparate jumble of strip malls, regional centers, and six and eight lane main streets. He had no traffic or parking problems anywhere. “I would kill for a traffic level of F,” he said. “But if I said it, I’d be fired.”

There’s the rub, or lack of it.

Stay tuned . . .