Comparing the costs of tearing down versus renovating a home

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Could it cost less money to buy and teardown a home than to renovate it? Here is one data point from a 2015 story about teardowns in the Chicago area:

The teardown candidates aren’t just tiny bungalows this time. Developers are targeting larger houses as well, particularly if they sit on coveted property. Antiquated plumbing, the absence of upscale amenities such as media rooms, and the high cost of gut rehabbing (roughly $300 a square foot, versus $200 for new construction) are pushing homes on North Shore lots near the lake into early retirement. Two properties that sold for around $4 million each in 2014—one in Wilmette and one in Winnetka—are on their way to the scrap yard, says Berkshire Hathaway HomeServices KoenigRubloff agent Joseph Nash. Both were on three-quarter-acre lots with private beaches, and the Winnetka house had seven bedrooms—big and nice, but apparently not nice enough.

At various points, I’ve thought about what might happen to much of the aging suburban housing stock in the United States. Many of those homes, small or large, will be slowly renovated over time. Depending on the neighborhood as well as the desirability of the individual homes, renovation could take place at faster or slower rates. Yet, will there be a point when many of the older suburban homes will be demolished? How long can they be maintained or renovated? If they need to be demolished, who has the money to replace them and if they are replaced, will the residents be able to stay?

From an economic perspective, presumably the money spent renovating the older homes will at some point surpass the cost of building new ones (that may also be of better quality and more up to code) and living in those. Yet, this ignores a lot of features of homes and their construction:

  1. They are part of neighborhoods and communities. People often enjoy having a certain character when they purchase in a particular place. This character is often related to the homes present as well as to a unified character on streets.
  2. Some will want to keep renovating them. (Clearly, however, others will not – hence, we have teardowns.)
  3. They may be able to last a lot longer than critics gave them credit for. (One of the common complaints about mass produced suburban homes is that they are of poor quality. While this may be true, it does not necessarily mean that they are uninhabitable or cannot be improved over the decades.)
  4. Replacing large swaths of suburban housing requires both foresight and funds. Who is willing to look that far into the future? Who has the resources to undertake large projects in this domain rather than working with the occasional house here and there?

For now, most of the news we hear about replacing suburban homes tends to be in wealthier communities where teardowns are desirable. This may change in the near future.

More details on Google’s urban plans for Toronto development

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Google’s plans for a Toronto neighborhood have been in the works for a while and here are more details:

A self-contained thermal grid would recirculate energy from non–fossil-fuel sources to heat and cool buildings, while a food-disposal system would keep food waste out of landfills. For cars and trucks, Quayside would be less hospitable than other areas in the city: Part of the neighborhood would prohibit non-emergency vehicles entirely, while bike-share stations, transit stops, and cycling and walking paths—kept useable through the Canadian winter with sidewalk snow melters and automated awnings—would offer “efficient alternatives to driving, all at lower cost than owning a car.” An autonomous transit shuttle would rove some streets. (Waymo, a leading developer of self-driving-vehicle software, is also an Alphabet subsidiary.)

Buildings would be largely prefabricated using eco-friendly materials, to cut back on waste. With a “strong shell and minimalistic interior,” they could be adapted to multiple uses, morphing from residential to retail to industrial, and back again. To support such a futuristic vision, Quayside would test a novel “outcome-based” zoning code focused on limiting things like pollution and noise rather than specific land uses. If it doesn’t bother the neighbors, one might operate a whiskey distillery in the middle of an apartment complex…

Yet what has drawn the most concern and curiosity with regards to Quayside is a uniquely 21st-century feature: a data-harvesting, wifi-beaming “digital layer” that would underpin each proposed facet of Quayside life. According to Sidewalk Labs, this would provide “a single unified source of information about what is going on” to an astonishing level of detail, as well as a centralized platform for efficiently managing it all…

It’s the kind of all-seeing urban omniscience that would stir the heart of any utopia builder. But to whom, and how, would this data be made available? And what would such an arrangement mean for any Quaysider who doesn’t wish to be monitored? In Toronto and beyond, the depth and details of the data collection have sparked public debate. At the first public forum on the project, and in a list of questions related to the project compiled by the journalist Bianca Wylie at Torontoist, privacy questions and fears have come up again and again.

This is a good mini test case for tech companies entering the urban development realm. The questions raised by residents and local officials should not be surprising: does such a company have the best interests of the community and residents at heart or is this primarily a profit-making enterprise based on intense data collection?It is interesting to consider how this might go in an American city. The proposed project is in Toronto, a prosperous Canadian city that is now larger than Chicago. How would such plans for Google be received in San Francisco or Austin, cities known as tech hubs? Or, in contrast, might there be more open arms in a city that needs development help, such as Cleveland or Detroit? I suspect the move to develop property in Toronto was very intentional yet the outcome could be quite different if positioned in a different North American city.

 

Wide buildings ripe for use for wide-open workplaces

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Several recent high-profile deals for large Chicago buildings suggests spacious floor plans are in:

The recent deals demonstrate how perceptions of those buildings and others with ultrawide floor plates, such as the Merchandise Mart and the former Apparel Center next door, have evolved. Long considered inefficient albatrosses, with too many large columns and not enough natural light, the buildings today are coveted by employers such as technology and creative firms.

Wide floors allow firms to have hundreds, or even thousands, of employees together on one floor. Open layouts and abundant meeting areas are designed to promote collaboration.

As a result, seven of the 17 largest new office leases in downtown Chicago since 2012 have been in buildings with floors of at least 50,000 square feet, according to a study by Chicago office leasing broker Matt Ward of Newmark Knight Frank. Those deals of 200,000 square feet or more include relocations or large-scale expansions within a building.

“This thinking of different floor, different planet is finding its way into every boardroom,” Ward said. “The idea of us getting out of our offices and being together is seen as a necessity in today’s business.”

The trend continues toward open floor plans where employees can interact and discuss ideas beyond their immediate isolated tasks, both theoretically leading to an outpouring of creativity and cross-pollination. This evolution of office design is chronicled well in Cubed.

At the same time, I have read about enough feedback from workers in response to these open plans to know that this is not universally beloved. The open plans limit privacy and inhibit focus. Some of the organizations that went to radically open plans later had to scale back to once again provide some more private spaces.

It would be worth going back to some of these wide structures in a few years to see how firms have organized the large spaces differently.

Percent of homes worth over $1 million quadruples in last 15 years

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Rising housing values, particularly in certain markets, mean that there are now more American homes worth over $1 million:

The share of homes valued at more than $1 million has surged more than fourfold since 2002, according to new data from real estate site Trulia, which analyzed the luxury real estate market in the top 100 U.S. metropolitan areas. Across those regions, about 4.3 percent of homes are now worth at least $1 million, compared with about 1 percent in 2002, said Trulia senior economist Cheryl Young…

The share of homes valued below $1 million is “decreasing at a rate we’re surprised by,” Young said. “It was 98.9 percent in 2002, and now it’s 95.7 percent. That is pretty shocking.”

Rising real estate values, tight inventory and a lack of new construction are contributors the surge in million-dollar homes. Yet another factor may be at play: rising income inequality, which has benefited the bank accounts of America’s richest families…

It may explain why the share of homes worth $5 million or more is growing even faster. This segment is what Trulia describes as “the most luxurious homes available.” To be sure, it remains a tiny part of the real estate market, accounting for just 0.28 percent of overall sales. Still, that figure is five times higher than in 2002, Trulia said.

In the abstract, who is opposed to rising housing values and the benefits that confers to homeowners and communities? Yet, the flip side of rising housing values is that more homes might then be out of reach for average or even well-off residents.

Three related thoughts:

  1. While those fighting for more affordable housing have discussed this flip side for decades, I wonder at what point it may be viewed as immoral to live in an expensive dwelling.
  2. Expensive homes do not usually exist in isolation. For example, it would be very unusual to drive down a street of low-value homes and all of the sudden see a large expensive home. Expensive homes are often part of larger projects – buildings or developments or subdivisions – that give way to a whole wealthier lifestyle that include expensive homes. In other words, this is not just about the value of individual homes: it is about clusters of homes and locations that help elevate some housing values.
  3. Related to both #1 and #2, can we expect some residents to underestimate their housing values or sell at lower price points than they could get?

Towns that restrict road access to app users only address the symptoms and not the bigger issue

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The decision in a New Jersey suburb to fight back against drivers directed to their streets by apps raises all sorts of questions:

In mid-January, the borough’s police force will close 60 streets to all drivers aside from residents and people employed in the borough during the morning and afternoon rush periods, effectively taking most of the town out of circulation for the popular traffic apps — and for everyone else, for that matter…

But Leonia is not alone. From Medford, Mass. to Fremont, Calif., communities are grappling with the local gridlock caused by well-intentioned traffic apps like Waze, which was purchased by Google in 2013 for $1.15 billion.

Since Waze uses crowd sourcing to update its information, some people — frustrated at the influx of outside traffic — have taken to fabricating reports of traffic accidents in their communities to try to deter the app from sending motorists their way. One suburb of Tel Aviv has even sued Waze, which was developed by an Israeli company….

“It’s a slippery slope,” said Samuel I. Schwartz, the former traffic engineer for New York City known as Gridlock Sam, and the author of the early 1990s book “Shadow Traffic’s New York Shortcuts and Traffic Tips.” “Waze and other services are upsetting the apple cart in a lot of communities. But these are public streets, so where do you draw the line?”

See an earlier post about a Los Angeles neighborhood that raised similar objections.

I can see the reasoning by small communities: the roads are partly or mostly paid for through local tax dollars and thus they should primarily be reserved for the use of locals. These sorts of situations can become big deals in suburbs where residents are often resentful of ways that their local tax monies serve others.

At the same time, this hints at a larger issue: efforts like this by single communities could end up having deleterious effects on the region as a whole. What if every suburb or community employed such tactics? Traffic would only be worse. This then suggests a metropolitan approach is needed to tackle these congestion issues. This might be difficult to do considering how local residents like to hold onto their own monies but drivers across the region might be too mad at that point to care if there are no alternative routes. The best way to tackle this issue may be to lobby for more mass transit and decreased reliance on cars in the New Jersey suburbs.

Thriving construction industry in 2018 will primarily build for wealthier firms/residents?

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The recovery from the housing bubble and Great Recession of the late 2000s continues in the construction industry:

For all of 2017, construction added 210,000 jobs, a 35 percent increase over 2016.

Construction spending is also soaring, rising more than expected in November to a record $1.257 trillion, according to the Commerce Department. That was up 2.4 percent annually. Spending increased across all sectors of real estate, commercial and residential, with particular strength in private construction projects. The only weakness was in government construction spending.

Construction firms are clearly looking to hire more workers. Three-quarters of them said they plan to increase payrolls in 2018, according to a new survey from the Associated General Contractors of America. Industry optimism for all types of construction, measured by the ratio of those who expected the market to expand versus those who expected it to contract, hit a record high…

Contractors are most optimistic about construction in the office market, which has seen little action since the recession. Transportation, retail, warehouse and lodging were also strong in the survey. Respondents were less encouraged by the multifamily apartment sector, which is just coming off a building boom.

Although this article does not say much about this topic, it would not surprise me if most of the gains in new structures in 2018 tend to go to (1) wealthier areas and (2) wealthier occupants (whether companies/organizations or residents). A thriving construction sector could theoretically float all boats but it sounds like the bifurcated housing market (and perhaps office and commercial as well) will continue.

It is interesting to see that the office market could see some significant construction. How much of that new office space comes at the expense of older structures that are less desirable because of less popular locations or because rehab costs would be too high?

 

Construction of apartments increases in the Chicago suburbs

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The pace of apartment construction is at the highest in the Chicago region since 2004:

Rental construction reached its highest level in more than a decade last year in the Chicago suburbs, and 2018 is shaping up as another busy year. More than 4,200 units were completed in 2017, and about 3,900 more units are projected for this year, according to data from Marcus & Millichap and MPF Research…

The rental resurgence is the result of several factors, including a rising disparity between suburban and downtown rents, pent-up demand after little new construction over the past decade, and declining home ownership, industry experts say…

Unlike downtown Chicago, where much of the development is clustered together, many suburban projects are miles from another new development, meaning they face minimal competition for new renters…

“Now, with condo development just about going away, you’re seeing towns and cities giving building permits to apartment projects they wouldn’t have considered a few years ago. Also, I think apartments have lost some of their stigma because now they’re so damn nice.”

Three quick thoughts:

  1. While this may be an increase in apartment units, this is still behind the construction of single-family homes. For example, the Chicago region had 6,000+ new housing starts for single-family homes in 2016.
  2. It is interesting to note where the apartments are being built: probably in desirable communities (relatively wealthy, close to jobs and amenities) and often in downtown areas (this is cited in this same article). To flip this around, apartments are not desired everywhere or by all suburban communities.
  3. Will the trend toward apartments in the suburbs continue to increase? This might be a correction to a lack of apartment construction in the last decade or it might represent an enduring change as suburban residents desire more rental units.

Overall, apartments in the suburbs are relatively unique compared to the overwhelming preference for owner-occupied units. Thus, the numbers regarding apartment construction in the suburbs bears watching.

Using humorists to predict the future because they can push beyond plausibility

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Predictions made by experts are often not very good so why not let humorists try their hand at looking at the future?

This is not because “Simpsons” creator Matt Groening and his teams of writers through the decades are sinister geniuses. They are, of course, but the phenomenon of jokes coming uncannily true is not at all unique to “The Simpsons.” So at this time of year, when lots of people are making forecasts or looking back at how last year’s predictions went, I’d like to make the case that humorists may make the best futurists of all.

The writers of “The 80s” would not have won one of Philip Tetlock’s forecasting competitions: The great majority of their “predictions” were wildly wrong. Congress didn’t ban the consumption of meat, Muhammad Ali didn’t become chairman of the Joint Chiefs of Staff, Disney didn’t buy the United Kingdom, a musical version of “1984” starring Leif Garrett, Tracy Austin and Marlon Brando (as “Big Brother”) did not become the movie of the decade, cancer was not cured with “a substance secreted in the cranium of the baby harp seal when its head was struck repeatedly.” But given that the aim of the book was not to make predictions but to entertain, that was OK. It’s like with “The Simpsons”: You’re not watching it to get a rundown on the world to come; the fact that you sometimes do is a happy bonus…

The humorist’s approach to looking into the future bears some resemblance to scenario planning, a practice developed in the 1950s and 1960s at the Rand Corp. and Hudson Institute. Scenario planning involves coming up with alternative story lines of how things might plausibly develop in the future, and thinking about how a business or other organization can adapt to them. It’s not about picking the right scenario, but about opening your mind to different possibilities.

To make stories about the future funny, they usually have to be pushed beyond the bounds of plausibility. If they’re not pushed too far beyond, though, they can sometimes come true — with the advantage that few “serious” forecasters will have predicted them. The Trump presidency is a classic case of this. He had been talking about running since the late 1980s, but those in the media and political circles had learned over the years not to take him seriously. So it was left to the jokers.

Looking into the future is a difficult task since the future is a complex system with many variable at play. Even with all the data we have at our disposal these days, future trends do not necessarily have to follow in line with past results. This reminds me of Nassim Taleb’s writings from The Black Swan and onward: there are certain parts of reality that are fairly predictable, other areas that complex but more knowable, and other areas that we do not even know what we do not know. See this chart adapted from Taleb by Garry Peterson for an overview:

Taleb's quadrants

This also gets at an important aspect of creativity: being able to think beyond existing realities.

Another bonus of looking to humorists to think about the future: you might get some extra laughs along the way.

“[T]he federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”

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The recent changes to the American tax code signal a shift toward homeownership:

It may be a few years before experts can accurately assess how the new tax reform law will affect each city’s individual housing market, but one thing is clear: For the first time in a century, the federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”…

“It’s very hard to come up with how this is helpful to housing,” said Jonathan Miller, President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm “It’s either neutral or negative; there’s no positive, at least that we’re aware of at the moment. All this does is make everything more expensive, at least in high-cost housing markets.”

As a result of the bill, Moody’s Analytics estimates that housing prices will drop about 4 percent nationwide relative to projections in which the law doesn’t exist, and those drops are more pronounced in high-cost housing markets.

A lower sale price is good news, though, right? Not necessarily. Average home prices will drop because of the lowered cap on the MID (from $1 million to $750,000), and a new cap on SALT deductions. These two tax deductions were baked into the price of homes-for-sale, so without them, prices will seem lower. But homeowners and buyers could end up with less mortgage interest to deduct, and a potentially astronomical property tax bill. Previously, there was no cap at all on property tax deductions.

Several things to keep in mind:

  1. The context – the specific address of the residence – matters a lot for this bill. And, local communities and states can respond uniquely to how the changes affect local homeowners.
  2. A lot of urbanists have criticized the subsidies from the federal government for single-family homes and suburbanization. Might these tax code changes help encourage more density in certain locales (and these high-price/high-tax locations are also ones where affordable housing is sorely needed)? Of course, since context matters here, some of those who prefer more sprawl could move to cheaper states where the disappearing SALT deductions matter less. But, isn’t this good for limiting Americans deducting mortgage interest?
  3. Could this help some communities move away from such reliance on property taxes? As one example, some have argued for decades that school funding needs to be more equitable and this is directly tied to property values and taxes: wealthier communities can draw in more tax revenue. (I would argue this is a red herring to as there are bigger issues at work.) Could these federal tax changes encourage more revenue sharing within counties, regions, and states?

Perhaps the best thing to keep in mind is the first sentence of the article quoted above: it could take years to see how this all plays out.

Many Americans are in the muddled political middle of the suburbs

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A CNN digital vice president describes how the American suburbs defy easy categorization:

Most Americans are neither coastal elites nor inhabitants of flyover country (both objectionable tropes on their face). Most Americans live in the suburbs, a geographic term the US government is curiously loath to define. But suburbanites are not; a survey by an economist at Trulia, the online real-estate site, finds that 53% of Americans say they live in one. The suburbs mirror US demographic trends; minorities represent 35% of suburban residents, and in 2010, the share of blacks in large metro areas living in the suburbs surpassed 51%, meaning the majority of black Americans are suburbanites, according to Brookings.…

Political scientists talk about the rural-urban divide as the defining issue of the 20th century, but the suburbs in America defy this simple categorization. Some areas exhibit the same traits of cities, where neighbors don’t know each others’ names, let alone their politics. Schools in urban areas are more segregated than ever, some worse than before Brown vs. Board of Education. Suburbs, in contrast, have created more diverse spaces, from schools to soccer leagues to the local Olive Garden…

But America does not live on Facebook, even if it sometimes feels that way. Americans live in places that care about jobs and schools and taxes. Issues such as health care and anti-corruption efforts seem to matter to suburban voters more than immigration. Brookings also reports the suburbs are growing faster than urban areas, partly because of the lack of affordable housing in cities, making them younger, more diverse. Their outlook — and values — feel increasingly cosmopolitan.

The implication at the end of this is that suburbanites are a reasonable lot who just want good things for themselves and their communities. But, although they are a majority of Americans, they are stuck between polarized far-right/left groups that dominate the conversations.

Is this true? My quick answer is yes and no. Indeed, American suburbs are quite different from the stereotype of white nuclear families living in the 1950s mass-produced housing. The demographic changes have been impressive. At the same time, the suburbs are not an ideal landscape where residents always want the best for others: they are often marked by limited interactions and relationships, hoarding of resources, and exclusion.

There is little doubt that the suburbs are the battleground for American politics right now. But which way they will lean, which parties and candidates will be able to appeal to them, and how they will continue to change remains to be seen.