Consequences of an auto loan bubble

With more financing options available for purchasing cars, American driving is up:

By increasing access to cars, lax financing standards also appear to be contributing to a national rise in driving, and with it, declining public transit ridership. In the latest edition of its biennial survey of who’s riding buses and trains in U.S. cities, Transit Center, a public transportation research and advocacy group out of New York, notes that the share of households without vehicles fell 30 percent between 2000 and 2015, with foreign-born residents, who are more likely to earn lower incomes and ride transit, posting even sharper declines.

In the survey, respondents who reported decreasing their bus and train use overwhelmingly replaced transit with private cars. And almost half of respondents who said they’d purchased a car over the past two years received a loan to finance it. Of those, 56 percent said that getting a loan “was easier than they had expected.”

Of course, improved car access among lower-income groups might look to be a positive trend on its face, since a personal vehicle can equate opportunity. So strong is the historic link between car ownership and household income that a trio of transportation equity scholars recently called for subsidizing access to wheels for poor Americans. But fewer rides made by public transportation and more by private automobile is a trend with consequences that transcend the U.S. economy: It feeds the planet’s existential problem of rising carbon emissions, especially since SUV and truck sales have become particularly popular during this auto-loan boom. “The rise in auto debt is evidence that we’re dependent on cars in an unsustainable way,” said Cross.

The new high-water line of defaulted auto loans also suggests that personal vehicles aren’t always golden tickets. Instead, for Americans living paycheck to paycheck, they’re a catch-22: If you don’t have the money and can’t buy a car, you’ll struggle to make ends meet. And if you don’t have the money, but still buy a car, you’re liable to fall even further behind. Vehicles may be the table stakes for playing in the U.S. economy, but in so many ways, it’s getting harder to win.

As noted by many, just as homeownership came within the reach of more people in the 2000s due to creative lending options and subprime options, the same is true of the auto industry. Does this mean that a burst bubble in car loans – due to many people being behind on their vehicle payments – would cause Americans to rethink driving and the reliance on personal vehicles?

I would guess no. At this point in American history, the country is too far in on its dependence on driving. It is not just about driving to work; driving offers opportunities to access cheaper housing, independence for drivers compared to utilizing mass transit which works on consistent schedules and requires being around other people, and a host of consumer and recreational opportunities primarily accessible through driving (think big box stores, shopping malls, fast food places, road trips, etc.). This list does not even account for the auto industry and the construction industry which have huge stakes in more driving.

At the same time, while Americans have resisted public housing, would they be more amenable toward government help in obtaining or paying for cars? Few communities or government agencies have provided cars or money towards cars but it may be necessary in a society heavily dependent on getting around via a car.

 

#1 payment priority for Americans: car loan

In a country dependent on and built around driving, perhaps the importance of making car payments is not a surprise:

“Your car loan is your number one priority in terms of payment, “said Michael Taiano, a senior director at Fitch Ratings. “If you don’t have a car, you can’t get back and forth to work in a lot of areas of the country. A car is usually a higher priority payment than a home mortgage or rent.”

People who are three months or more behind on their car payments often lose their vehicle, making it even more difficult to get to work, the doctor or other critical places…

After the financial crisis, there were a lot of restrictions placed on mortgages to make it harder to take out a home loan unless someone could clearly afford to make the monthly payments. But experts warn that there are far fewer restrictions on auto loans, meaning a consumer has to be more savvy about what they are doing when they take out a loan.

This article made me think a little: does this mean that cars come before homes in the United States? This would counter my own claim that suburbs are more about single-family homes then they are about cars – see my rough rankings of Why Americans Love About Suburbs.

Yet, the suburbs existed before cars. By the early 1900s, suburbs existed and utilized transportation technologies like railroads and streetcars. Mass suburbanization certainly occurred on a different scale with the availability of cars in the 1920s and then after World War II. But, the United States would have had some form of suburbs and their emphasis on single-family homes without cars even if that was on a smaller scale.

The whole relationships between cars and homes was cemented in the postwar era when increasing sprawl really did limit other transportation options for many people. And the shift of jobs to the suburbs made this problem even worse. Perhaps we could shift the what-if scenario to the future: could the suburbs go on without cars (hard to imagine) or cars on without suburbs (probably)?

When the landlord for a single-family home is an institutional investor…

Alana Semuels explores what happens when you rent a house from an institutional investor:

I talked with tenants from 24 households who lived or still live in homes owned by single-family rental companies. I also reviewed 21 lawsuits against three such companies in Gwinnett County, a suburb of Atlanta devastated by the housing crash. The tenants claim that, far from bringing efficiency and ease to the rental market, their corporate landlords are focusing on short-term profits in order to please shareholders, at the expense of tenant happiness and even safety. Many of the families I spoke with feel stuck in homes they don’t own, while pleading with faraway companies to complete much-needed repairs—and wondering how they once again ended up on the losing end of a Wall Street real estate gamble…

As the industry started to grow, the major players all described their desire to standardize and improve the business of being a landlord. But even to the companies’ employees, the effort to become more efficient started to look more like craven attempts to squeeze tenants. “It shouldn’t be just about making money, but that’s what it turned into,” Shanell Hanson, who was a property administrator for Colony American Homes in an Atlanta suburb from 2014 to 2016, told me. Hanson said the company had six maintenance workers for 2,100 homes in the area she managed. Residents would frequently call with substantial problems: Sewage was overflowing, or the house was full of mold. But with such a small staff, Hanson could rarely deal with the problems quickly. And the law was on the corporations’ side: If tenants want to seek financial remedy for a landlord not keeping the property in adequate condition, under Georgia law, they have to take the landlord to court, a costly and lengthy process. “It’s almost impossible to do without an attorney,” Lindsey Siegel, an attorney at Atlanta Legal Aid who works on housing issues, told me…

Many other single-family landlord companies were cutting corners on maintenance and repairs. “As the corporation got bigger, it just got worse, in terms of what we had to work with and how we had to deal with problems,” a former Los Angeles leasing agent who worked for Waypoint between 2015 and 2017 told me. (She spoke on the condition of anonymity because she still works in real estate.) Regional teams received bonuses for keeping costs low, she said, which incentivized them to skimp on spending. Instead of responding to tenants personally, supervisors would send calls for maintenance to out-of-town call centers—which would in turn assign maintenance workers dozens of repairs in a day, not realizing that Los Angeles traffic could mean that relatively short distances could take hours to traverse…

Tenants also say that rather than taking advantage of economies of scale, the rental companies are taking advantage of their clients, pumping them for fines and fees at every turn. This impression is backed up by the financial reports of the companies themselves. American Homes 4 Rent increased the amount of money it collected from “tenant charge-backs” (essentially billing tenants for repairs after they move out) by more than 1000 percent between 2014 and 2018, according to company earnings reports, though it only grew the number of homes it owned by 70 percent over that period. In some states, Invitation Homes keeps the utilities in its name, and charges tenants a monthly $10.99 “utility service fee,” which is in addition to the cost of water, gas, and electricity. The company increased its “other property income”—the amount it collected from resident reimbursement for utilities, service charges, and other fees—by 114 percent between the first nine months of 2017 and the first nine months of 2018, despite only growing the number of homes it owned by 71 percent. On an earnings call in 2017, Invitation Homes’ then-CEO John Bartling said that “automated charges to residents” drove profits in the quarter, leading to a 22 percent increase in “other income.”

I wonder how much of these issues are due to overwhelming emphasis in the United States on homeownership rather than renting. Do large companies think they can do this to renters because the long-term goal is to sell the property for a large sum to a homeowner (or another investor)? Similarly, do renters put up with this for a longer period of time because they expect to leave the rental market? Or, perhaps in markets where renting is more common and more rental units are available, renters would leave these situations sooner and institutional investors would have to do more to keep renters?

I would also be interested in more information on the profitability of such companies. How lucrative is it to purchase thousands of homes? While Americans historically are opposed to government involvement in housing (unless it is subsidizing suburban single-family homes), stories like these seem like they could be used to justify more government intervention in regulating housing. But, what if regulations cut into profits? The housing industry is a large and profitable one.

Another angle to take here would be to examine how these institutional investors do or do not contribute to local communities. One justification of homeownership in the United States was that it gave owners a stake in their local community and government. Yet, much capital in the world today is global and real estate decisions made thousands of miles away could heavily influence smaller communities that look like – they are full of single-family homes – they are constructed to emphasize local control.

Still looking for innovative solutions to empty big box stores

As some South Side Chicago residents lament the closing of two Target stores, the Chicago Tribune calls for the city of Chicago to follow the lead of other communities and find productive uses:

In Waukegan, Cristo Rey St. Martin College Prep, a Catholic school that serves mostly middle-income and minority students, refurbished an old Kmart for a modest $10 million. Architects added windows and skylights, flooding the space with natural light while economically redeploying the building’s existing features.

In Cleveland’s Collinwood community, the city bought an empty Big Lots store and turned it into a recreation center with fitness classes and an indoor water park.

Milwaukee lured a light manufacturing company to an abandoned Lowe’s store. In another part of the city, Children’s Hospital of Wisconsin opened a clinic inside a former Office Depot.

In Muncie, Ind., U-Haul opened an office and storage facility in a former Kmart.

Wisconsin Rapids, Wis., hosts a senior citizen resource center with adult day care in a former Walmart. You’d never know, looking at the creatively adapted space, that it once included a garden center and aisles of baby diapers and toys.

These are all good examples but it downplays the difficulty of the task at hand: everywhere from Manhattan to suburbs to small towns are dealing with empty retail and big box locations. Just a few of the issues at hand:

  1. Will the new use generate taxes in the same way as the retail use? Religious groups and community centers are not going to bring in similar monies even if they are helpful sites for the community.
  2. What will it cost to redevelop the property for other uses and who will pay that cost?
  3. Will neighbors always approve the new use? They moved next to what they thought was one thing and even the exit of a big box store may not automatically lead to a more desirable land use in their eyes.
  4. In the long run, how can a community overcome the loss of status and revenues from losing businesses? Again, community uses are good but many communities build their reputation on having businesses and certain revenues.

Perhaps one of the best answers to this issue is to not approve as many retail and big box uses in the first place or to require that the buildings be built or connected to surrounding neighborhoods in such ways that a new use would not be a major shift. The typical warehouse, strip mall, concrete box option surrounded by large parking lots is not easy to fix up.

When a mall needs reviving, add residences, mixed-use places, dining, and entertainment

As shopping malls face difficulties, there is now a common script for how to revive them. Aurora, Illinois is discussing what to do to help Fox Valley Mall and the proposed playbook exemplifies the new script:

That plan, unveiled last fall, called the Route 59 corridor “tired.” It noted that two of the four anchor spaces at the mall are vacant, with the departure of Sears and the closing of Carson Pirie Scott. People’s shopping habits have changed, it says, with people buying more of their items online instead of in person.

The plan suggests adding multifamily housing and “Main Street” mixed-use developments, with smaller stores in a pedestrian-friendly environment around the mall. That would beef up the mall’s potential customer base.

Market studies suggest adding more restaurants, particularly high-end ones. Entertainment venues, such as a theater and a public plaza several acres large, could be added.

Build it and they will come! Seriously, though, each of these proposed elements is intended to bring a different element to a flagging mall: more people, a different scale and harkening back to traditional shopping areas, and giving people more reasons to come to shopping areas through food and entertainment. Put these all together and it might create a new kind of synergy around the clock.

Of course, none of these are guarantees. And plenty of other shopping areas are trying this (just a few examples here, here, and here). Perhaps the best thing going for the proposed changes at Fox Valley Mall is its location just west of Naperville and plenty of nearby wealthy residents. While some shopping malls will not be able to be revived with these techniques, the Fox Valley Mall will likely change some and continue to do okay or even thrive.

Linking Microsoft giving $500 million for Seattle area housing to tech companies and declining gov’t support for housing

Microsoft is pledging a substantial amount to address the important issue of housing in Seattle:

Microsoft plans to lend $225 million at subsidized rates to preserve and build middle-income housing in six cities near its Redmond headquarters. It will put an additional $250 million into low-income housing across the region. Some of those loans may be made through the federal programs that provide tax breaks for low-income housing.

The company plans to invest the money within three years, and expects most of it to go to Seattle’s suburbs.

The loans could go to private or nonprofit developers, or to governmental groups like the King County Housing Authority. As the loans are repaid, Mr. Smith said, Microsoft plans to lend the money out again to support additional projects.

This article frames the giving as part of the housing issues wrought by the actions of tech companies:

Microsoft’s money represents the most ambitious effort by a tech company to directly address the inequality that has spread in areas where the industry is concentrated, particularly on the West Coast. It will fund construction for homes affordable not only to the company’s own non-tech workers, but also for teachers, firefighters and other middle- and low-income residents.

From this point of view, the health of a region matters for companies. If workers, whether ones employed by a particular company or organization or others, cannot find affordable housing, it will be harder for the region to find and hold on to workers. Whereas businesses often focus on a good business climate (low taxes, tax breaks, business-friendly governments, etc.), housing is a big factor in finding a strong work force. Additionally, Microsoft can help show through these actions that they care about local conditions in ways that tech companies are often said to ignore because of their global status. Would Microsoft be the same if it were not in the Seattle region?

Another way to view this is that private companies are now taking on what the federal government should address:

The government spent about three times as much on housing programs in the 1970s as it does today, according to the National Low Income Housing Coalition. In the years since, the government has gotten out of the business of building public housing. And capital funds to repair the remaining public housing stock have been cut in half over the last 15 years.

Over this time, federal resources have increasingly shifted away from subsidizing the construction of affordable housing to subsidizing renters who find housing in the private market. And now most new below-market-rate housing is built not by public agencies, but by nonprofit developers leveraging tax credits. The value of those credits has declined recently as well, as a result of changes in the tax bill passed in 2017.

In a sense, Microsoft’s proposal is an extension of this story, as private actors continue to step in where the government once stood.

Ed Goetz, a professor at the University of Minnesota who has studied the history of public housing in America, said: “I don’t want to diminish the magnitude of what they’re doing. I think it’s important, and it will help. But it won’t solve Seattle’s problem.”

This argument suggests that private actors can only do so much to address housing issues. Because so much money is involved and the issue is so widespread, even $500 million may not do much in a single metropolitan region with high land and housing costs. Of course, the government is involved in the housing industry: the federal government for decades has supported single-family homes, primarily in the suburbs. At the same time, the government and the American people have always been more ambivalent about public housing. It is not as if  the housing market is a free market: the United States subsidizes mortgages.

At the least, this will be an interesting experiment: can Microsoft make even a small dent in the housing needs of the Seattle area? Will this help strengthen the metropolitan region or primarily serve as good publicity for the company?

Two-thirds of Chicago area jobs in the suburbs

The demise of Sears and its suburban headquarters, once famously downtown in a building that was the tallest in the world, does not mean that suburban jobs are disappearing:

Sears’ move to northwest suburban Hoffman Estates symbolized a trend: The economic ascendance of Chicago’s suburbs, which even in the early 1990s accounted for more than 60 percent of the region’s jobs.

At first glance, that dominance appears to be slipping as companies like McDonald’s make headline-grabbing moves back to the city from leafy suburban campuses.

But it would be wrong to point to Sears’ latest struggles, which eased Wednesday when the company’s chairman won a bankruptcy auction that prevented a liquidation of Sears, and conclude that the suburbs are down and out.

People working in the suburbs still provide two out of every three Chicago-area jobs, according to data provided by regional planners.

While the emphasis of this article is on the suburban Sears campus, the suburban jobs numbers stuck out to me. There are (at least) two ways to interpret the number that two-thirds of the jobs in the Chicago region are in the suburbs:

  1. Of course the majority of jobs in the Chicago region are in the suburbs: more than two-thirds of the region’s population lives in the suburbs. All those residents both help generate nearby jobs with their various consumer needs (from retail to food to building and construction) and help fill those jobs.
  2. This is a surprising figure. Chicago is a leading global city; how could so many jobs be in the suburbs when what really matters in the region is the strength of the Loop and nearby neighborhoods? Plus, it would be better if employers started in the city or moved back to the city to help create a strong base for the region as well as take advantage of the city’s economies of scale (including mass transit access) and cultural opportunities.

These figures are part of a larger trend that I think is underappreciated in the rise of American suburbs: the suburbs are jobs centers, not just a collection of bedroom communities. While the stereotypical American suburb is a community of subdivisions with occasional businesses, the suburbs are full of companies and firms doing all sorts of things. And it has been this way for decades.