Will Suburbs be the Slums of the 21st Century?

Christopher Lineburger writes for the Atlantic that the huge rise in foreclosures, particularly in those expensive developments where 4000 sq ft of house is shoehorned onto half an acre of land, is leading to a massive crime wave in suburbia.

"At Windy Ridge, a recently built starter-home development seven miles northwest of Charlotte, North Carolina, 81 of the community’s 132 small, vinyl-sided houses were in foreclosure as of late last year. Vandals have kicked in doors and stripped the copper wire from vacant houses; drug users and homeless people have furtively moved in."

And again

In the Franklin Reserve neighborhood of Elk Grove, California, south of Sacramento, the houses are nicer than those at Windy Ridge—many once sold for well over $500,000—but the phenomenon is the same. At the height of the boom, 10,000 new homes were built there in just four years. Now many are empty; renters of dubious character occupy others. Graffiti, broken windows, and other markers of decay have multiplied.

Massive amounts of building, heavily focused on a specific type of house (large, SFR, suburban or exurban) are creating huge vacancies. Worse, the article goes on to suggest that there may never be enough demand for these houses, because lifestyles are changing. People are increasingly interested in living in urban communities with walkable centers. This trend has been building since "regentrification" of several urban communities in the 1980s (think projects like Boston's Quincy Market). The trend is likely to accelerate because now the primary consumers of large homes, Boomers, are interested in scaling down. If energy costs continue to remain at these levels, or even move higher, the costs of heating, lighting, cooling and commuting will further tip the balance in favor of cities.

To me, this story demonstrates the why an owned home is not an asset in the normal sense, but rather a lifestyle choice and should be seen as such by the prospective home buyer. For decades, people chose to pay much higher prices to live in the suburbs, generally inconvenient out-of-the-way places, than they were willing to pay to live in cities, which almost always had better infrastructure and convenience. Of course, homes in cities were often old and small. People wanted new appliances, modern kitchens, more bedrooms than people and more televisions than bedrooms. Mostly, though, I think what they really wanted was to live near people like themselves. This meant that they would go to church with people like themselves, go to Little League games and PTA meetings with people like themselves and be able to assess their success and status against their peers. It's a biological impulse, but it doesn't mean that it's investing.

In order to accomodate this inconvenient location, people began to take on large additional "operating" expense - lawn/garden services, paid cleaning services, heating and the like. The biggest cost, in time and treasure, were the capital expenditure for private transportion and the related operating expenses (insurance, gas, repairs, etc).

I don't mean to suggest that somehow living in the suburbs is wrong. I don't really get my jollies off of trying to manage or constrain other people's lifestyle choices. I see nothing wrong with making the decision - so long as one is aware that it is a lifestyle choice and not an investment that one is making. The problem that I see is that many fail to see that realizing their "investmetn gains" from their home will necessitate a major lifestyle change. That is all well and good, if that is the goal. But why not instead pursue an investing strategy that doesn't FORCE a lifestyle change?

In any event, the trend toward suburbanization is changing, which suggests that there is more money to be made in urban real estate. Purchasing foreclosures and rehabbing or doing flat-out knockdowns to speculate in urban land may be extremely profitable. This invites much opportunity to rethink one's real estate strategy in cities. Most people I know are doing modest rehabs with a goal of renting to students or lower income folks. Might make more sense to go more upscale. Or to look for some knockdowns and hold the land: even better if one can get contiguous properties that can really be redeveloped.

On a macro level, what I find interesting is the impact that the move toward reurbanization will have on these large home prices - and how that will affect near-retirees' behavior. Contrary to their plan, which was to sell their (expensive) suburban McMansion and move to an (inexpensive) urban setting, realizing a tax free capital gain and freeing equity to provide income, they may find that they are stuck with a large home, or that the price at which they can sell it is comparable to that small 2 bedroom condo near the shops and city center that they were planning to move to.

Your thoughts?