NewGeography.com blogs

One of the starkest impacts of smart growth policies is the huge differentials in property prices that occur on virtually adjacent properties on either side of an urban growth boundary.

The extent to which regulatory restrictions can drive up prices is illustrated by the differences between the values of undeveloped lands just a few steps from each other, but across the urban growth boundary. Research from more than a decade ago in Portland indicated that land on which development is permitted inside the urban growth boundary tended to be 10 times as valuable per acre as land immediately outside the urban growth boundary, on which development was not permitted. In Auckland, New Zealand, recent research found virtually adjoining undeveloped land value differences at 10 times or more as well. Research in the London area by Dr. Timothy Leunig of the London School of Economics indicates that this difference can be as much as 500 times.

Recently (February), I examined tax assessment records for all parcels in Portland's Washington County that abut the urban growth boundary to see if value differences exist. The properties had to be 5 or more acres and be undeveloped. Research was conducted based upon Internet information in February 2010. Property along 25 miles of the urban growth boundary from Cedar Hills to Hillsboro to southwest Beaverton was included in the analysis.

A sample was also taken of more remote developable parcels of more than 5 acres, on which development would not be permitted. These parcels, which were from one to five miles outside the urban growth boundary, had a value of approximately $8,500. Thus, the developable land inside the urban growth boundary was 21 times as expensive as the more remote land.

These data indicate the impact of urban growth boundaries on the price of raw land, which is inevitably passed on to buyers of new housing. Without an urban growth boundary, it would be expected that land on both sides of an urban growth boundary would have similar values. Further, land would be expected to drop in value beyond the urban fringe, but not by the drastic amounts indicated in Portland, Auckland and London.

----

Photograph: (By Author)

A recent editorial in The New York Times lamented the latest housing market woes, this time resulting from various banks’ disregard for, or inattentiveness to, a legal foreclosure process. As the article correctly states, “It is hard to be shocked.”

Further fueling uncertainty is of immediate concern, adding another layer of doubt to what may end up proving to be a formerly nascent recovery. While President Obama is calling for more thorough analysis to determine if foreclosure or modification is more prudent, and a provision in the Dodd-Frank bill authorizes government aid for troubled homeowners to assist with legal services, neither gets to the heart of the problem.

Homeownership is not an inalienable right, and should be reserved for those who are in the financial position to shoulder the burdens that come with the supposed pride. The banks reviewing loan applications should be the final bastion of culpability in assessing prospective buyers’ financial wherewithal.

This creates a moral conflict in many cases, as banks make money by lending money. In the interest of financial stamina, however, the banks have overlooked the simple fact that they only make money by lending money if the borrowers can pay them back. While there will always be some percentage of borrowers that fail to pay back their loans, it is all too well documented now that those levels are excessively high in today’s economic environment.

Most troubling is the realization that many bank REO departments (for “real estate owned,” the class of property that goes back to lenders upon unsuccessful foreclosure auctions) are not staffed by real estate minds. While it is not fair to make a wholesale categorization of REO departments nationwide as real estate deficient, there are multiple cases where simple real estate fundamentals are unknown.

Examples here include law firms, architecture firms and real estate advisory firms being engaged to teach real estate 101 to national banks’ REO departments. There have been cases where those making the decisions between lending or not lending, or foreclosure or modification, are unable to effectively comprehend sale and purchase agreements, site plans and floor plans, inspection reports or market analysis documents. This is not to suggest that these are bad people. But, as clerks, statisticians and analysts who are not educated or trained in the intricacies, or even general principles of real estate, they simply do not get it. How can such fragile issues with widespread economic and social ramifications be addressed by anything less than experts?

In other words, these last bastions of culpability are unable to perform the simple tasks that even a reasonably responsible borrower should comprehend. Banks are in the business of making money, and that, in and of itself, is not a crime in a capitalist economy. But they should at the very least properly train those who are making decisions on lending millions upon millions of dollars to aspiring, whether ready or not, homeowners.

On election day, the voters of Hillsborough County, Florida (Tampa) will vote on a one-cent sales tax that would fund transit (75%) and roads (25%). Part of the funding would be used to build a new light rail line, which is the focus of campaigns on both sides.

The proponents are the usual well financed coalition of business, rail construction companies and consulting engineers, who could well profit from the program going forward.

The opposition, however, is unusual. It is a direct outgrowth of the growing citizen involvement from the TEA Party and 912 Project. These groups have broken new ground in raising general issues of government waste and public expenditure policy. This could be an important step toward balancing the spending proclivities of special interest groups with taxpayer interests in spending no more than is necessary to provide essential public services.

In Tampa, the rail opposition goes by multiple names, including "No Tax for Tracks" and Smartmoms. The more interesting of the terms is Smartmoms, or "Suburban Moms Against the Rail Tax." They might have just as accurately called themselves "Soccer Moms Against the Rail Tax," reflecting the demographic that has been so important in recent elections.

I recall being told by a disappointed former federal official that one of his greatest disappointments was to learn that there was no constituency for economic efficiency. This may be changing, if the developments in Tampa are any indicator.

I had the privilege of speaking at one of their rallies recently and wonder whether Tampa might represent a new birth of citizen questioning of large spending projects. Their revulsion at the "if we don't take the federal money, Baltimore will" line of thinking was refreshing. One key to restoring a more prosperous America will be to minimize this mutual plunder, by which Washington seduces local areas to buy things they never would with their own money. A new day could be dawning.

----

Photo: Downtown Tampa (by the author)

The former Olympic athlete's village in Vancouver is in the news again, but this time no one is celebrating. The billion dollar plus development, originally built to house athletes then converted to a residential housing development, was primarily financed by a loan from the city of Vancouver. Millennium Development Corp., developer of the project, currently owes the city $731 million. Millennium was scheduled to pay back the first $200 million by August 31st, but came up $8 million short. They managed to find another $5 million by September 20th, but they are still $3 million short. On top of this, they have another $75 million due in January. The city is considering legal action against the developer.

This isn't the first we've heard about financial troubles with the project. The city actually took over the loan from Millennium’s initial lender due to cost overruns. The repayment schedule was considered feasible, given the strength of the Vancouver real estate market. Unfortunately for them, sales have been slow. While 223 units sold during the presale, only 36 units have moved since. This leaves more than half of the units. 454, lingering on the market. The city has actually been forced to take over the 252 units of social housing that were required to be built due to the city's inclusionary zoning laws.

Amidst this turmoil, the city is doing everything it can to ensure that the remaining units are neither sold off cheaply nor rented out, since this would reduce the long run selling price. Their solution is to wait for the market to rebound. Councilor Raymond Louie stated that “the benefit of being the city is that we are lasting and we can stay forever...it's a paper loss for now, but we can wait for the market to recover.” Of course, if this were a wise decision, why are private brokers and developers not doing the same? The answer is simple: the assets are depreciating anyways, so they may as well cut their losses. The problem here seems to be that the sitting government is afraid that it will look bad for them if the sale of the units doesn't cover the full loan amount. By telling the developer to sit on the assets, they can claim that the debt will be repaid when the market recovers (and they are happily retired from council).

The British Columbia government reported that the cost of the Olympics to BC taxpayers was $925 million. The original estimate was $600 million. On top of this, the federal government kicked in $1 billion for security costs. That also doesn't count the $700 million they spent on highway upgrades, $2 billion for a light rail extension, or $885 million for a convention center. Millennium’s financial troubles threaten to add to the losses incurred by taxpayers. Reports claim that the development is worth between $150-200 million less than what they owe the city. On top of that, at least 15 of the pre-sale buyers are trying to back out of their purchases. The bad news for taxpayers just keeps coming.

While the city was forced to back the loan in order to live up to its Olympic commitments, there is a clear lesson here: cities should not be in the housing business. Even though they've managed to keep housing prices artificially high, they can't break even on a housing development that was advertised to the whole world. Either the housing market will overheat again, and the project will become solvent, or the taxpayers will lose a couple hundred million dollars. Potential home owners in Vancouver can't seem to win. The best thing the city can do at this point is admit failure, and allow Millennium to have a fire sale. It won't do much about the cost of living in the city, but at least a few people will pick up bargains. Of course, politicians aren't likely to cut their losses. Better to pass the buck to the next council.

Is it any wonder why California’s economy has been so sluggish during the recession? According to the 2010 Kosmont-Rose Institute Cost of Doing Business Survey, one-third of the nation’s forty most expensive cities are located in California, deterring businesses from setting up shop in the state. The increases in sales, income, and vehicle taxes in 2009 further depressed the business climate and exacerbated the problem of unemployment. Though local governments are trying to cut costs and boost local businesses, they have not been able to reverse the effects of outrageous taxes and fees.

As one would predict, the ten most expensive cities in California in 2010 are located almost exclusively in the Bay Area or Los Angeles Area. Berkeley, Oakland, and San Francisco round out the Bay Area localities with San Francisco actually making the top ten national rankings as well. Beverly Hills, Culver City, Inglewood, Los Angeles, San Bernardino, and Santa Monica all represent Los Angeles County while Rancho Santa Margarita fills the final spot. However, none of these cities joined San Francisco on the national list.

There is one thing missing from Kosmont’s national list of most expensive cities: the Great Plains states and Midwest. With the exception of Chicago, there are no cities on the list from the area between Arizona and Ohio. Even in the West, there are only three cities, San Francisco, Portland, and Phoenix, that made the top ten.

Where do we find the least expensive cities? They are in the middle of the country, of course. Five of 2010’s least expensive cities are in Texas, one is in Nevada, and one is in Wyoming. Texas has fared surprisingly well during the recession, as have states like North Dakota. Low business costs and a bustling energy industry have made these states havens for new businesses and job seekers alike.

Companies in California are now packing up and moving north and west to save money. Friendlier and more stimulating business climates in states such as Arizona, Washington, Oregon, and Colorado are luring companies like Google, Hilton, and Genentech. As Larry Kosmont, President and CEO of Kosmont Companies, commented, “Just being located in California, cities are at a ‘cost’ disadvantage right out of the gate.” If California wants to keep the companies that bolstered its success during the beginning of the decade, it must reconsider its recent tax hikes and have faith that improving the business climate will stimulate the economic growth that the state sorely needs.