Sunday, February 24, 2008

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?


  1. I've been trying to imagine how the suburban problem that you describe can be exploited. Could suburbs turn into mini-cities, isolated from their metro urban centers by high fuel costs and thus lack of commuters? Perhaps those mini-cities could organically develop their own services and amenities rather than depending on those of their parent metro city?

  2. Strategic Investor3:31 AM, February 27, 2008

    Me too.

    I guess it depends on the perspective from which we approach the problem. Are we talking about town planning boards or real estate investors?

    I think the basic problem is that the (vacant) housing that has been built is aimed at a certain middle class corporate two earner couple. While a downtown could be populated with professionals and small firms and some restaurants and maybe some boutique shops, the issue will be that most of these people have to go where the jobs are.

    I guess one could attempt to convert some of these developments into telecommuter paradises. Or maybe build a colony for the creative class (usually though this has worked in cities). The real issue is that walkable cities tend to have buildings that sit next to each other - people need spacious apartments, not detached SFR.

    Perhaps some of these communities could be converted to a campus - but for what institution? A college? It would have to be an insitution that creates a closed environment.

  3. Strategic Investor3:31 AM, February 27, 2008

    I'm open to suggestions.

  4. I was imagining more of an emergent investor/resident centric evolution, not the top-down central control of a town planner board. (Boards aren't good at creativity.)

    The structures are there. At the right price or other incentives, people will figure out how to adapt the structures and/or adapt themselves to those structures for their own purposes.

    Concur re: where-the-jobs-are. Telecommuters would have to seed the place, followed by local businesses to service them, followed by employees to grow those businesses.

    Local light rail and expanded Amtrak service could help to break the personal automotive "respiration" of US metro areas. High speed rail could even save the situation for "regular" commuters.

    Concur with you on dense-buildings vis sprawled SFRs. Instead of walkable, the converted suburbs would have to start as bikeable. Why not outright convert secondary roads to bike-only, leaving the primary roads for commercial and the "rich"/"wealthy" car owners?

    Are we playing Simcity-2020-via-blog-comment now? ;-\

  5. One more comment on the sprawl: I visited Chapel Hill NC in 2006. They have a superb, free, residential bus service to the "downtown". Hits almost every neighborhood. I'd allow free buses on the bicycle-only secondary roads.

  6. Strategic Investor7:22 AM, February 28, 2008

    That's an interesting idea. I agree with the planning boards point: no creativity and that is what is requried here.

    With your hub and spoke transportation system, developers could build local service hubs near the stops, much like Europe has a baker and a butcher and usually a "supermarket" near every major transit hub that serves the locals, in addition to the walkable downtown.

    I might take a different tack and make downtown completely pedestrian. Then you can relax the frontage rules a bit or open lots of al fresco restaurants.

    I would honestly look to see what could be done to simply reduce the stock of housing and increase the size of the yards. In many cases, it might be better to purchase adjacent lots and knock down one of the units. Done effectively you might at least break even on the demolition, while being able to offer a house and a real yard. If these developments had half the houses they do, they'd be far more attractive.

    Problem is, as a small investor, even if you did this, you'd still be staring at the vacant houses across the street.

    Another idea would be to convert some of the units into a park for the community residents. It puts the emphasis on families, which is where it has to be. This could pay, but of course, you would have to have control of many of the properties to make it worthwhile.

    Yes, I definately feel like I am playing simcity (though I never got past the first one, before moving on to Civ and Colonization).

    Do you blog?

  7. I see what you are getting at with the knock-downs, but wouldn't that defeat the ultimate value of high-density housing in re-invented, self-sufficient mini-urb? Perhaps you believe that the ugly density now could not attract a seed population capable of generating the mini-urb future?

    I like your teardown to green park idea. I'm trying to imagine seeding a mini-urb not just from the residential/family perspective, but from the commercial perspective (too). What would it take to get metro-located large downtown companies to relocate whole business units to a cheaper mini-urb? How about companies using some of the savings to float their employees below market-rate mortgages for homes within walking distance of the new mini-urb mixed commercial/residential district?

    No, I don't blog. I do bcomment though. I like to help out with the traffic of my favorite bloggers, vis stealing it from them. ;-\ (Just kidding, of course.)

  8. I take your point - teardowns certainly don't create high density living. Thing is, I don't think the current housing stock really suppots it.

    Small shops need a certain market reach, thing is, they have to be relatively nearby to have it work. It's great in Munich, where everyone lives in apartments of 650-900sq ft. We just pack 'em in. 3000 people can live in a few small blocks, because of the density. 4000 sq ft SFRs don't really fit the bill.

    That's why, in many of these developments, the only solution may be to reduce the housing stock to meet demand, to prevent large amounts of vacant housing. Then resell the thing with the additional property to people who really want/need a good sized yard.

    Or, create small community parks for the developments. And bike paths. This is an excellent idea.

    But it's window dressing unless one can find the people who are going to want to live in big homes. Utility bills and taxes are huge. I suspect that there are not enough people who want to make this a lifestyle choice.

    I apprecite the comments, keep them coming.

  9. Here's an idea for the big houses, even the ones with large tax and heating bills: stuff large extended families into them. I realize that is not necessarily what native-born citizens want in the US, but in the cultures of some immigrant communities in the US, isn't this conventional / preferred?

  10. yup, i think you have a point.

    maybe special lending for these folks? but yes, it makes sense to put big families there, so long as they can get to work afterwards.