The suburban way of life is not the result of free markets

Even as Americans have exercised some agency in choosing to live in suburbs, the whole system cannot truly be described as being the result of free market activity:

I get the concern and rarely disagree with Shelley, but there’s nothing free market about current single-family zoning rules. The suburban landscape largely is a creation of subsidies and zoning rules, which mandate only one house per certain size of lot and require umpteen parking spaces for every new shopping center, restaurant, office and church. Everything is micromanaged in the planning department.

I’m on the building committee of our church and have closely examined many proposed construction projects. It is so hard to build, expand or try any new development ideas because these planning edicts—designed mainly to protect our suburban way of life, and backed by residents trying to bolster their property values—are costly and inflexible…

But the underlying debate is about two visions of our California landscape. One side wants to protect our suburban model and the other side wants to urbanize. It’s a false choice driven by their own personal preferences. We need more apartments and condos. We need more single-family neighborhoods. We need to allow builders to provide the housing products people want, and different people want different things. The same people want different things at different stages of their lives. I live on an acreage, but now that we’re empty nesters, my wife and I plan to move into the city. That’s why I’m squarely on neither side.

After my housing column last week, I’ve heard from readers who oppose the legislation. Frankly, I’m frustrated by some of their arguments. To summarize some comments: If you can’t afford to live around here, then maybe move someplace else. There are too many people here already and too much traffic congestion. If your kids can’t afford California, they should consider less-costly states. Such views transcend political affiliation.

Zoning is a good example of how regulations can dictate what communities can construct and then who can reside or work in such locations.

Add two other other less-than-free-market aspects of suburbia:

1. A legacy of racial and class discrimination in suburbs.

2. Government subsidies for highways and other local services as well as propping up suburban housing in the form of single-family homes.

Americans might not acknowledge the ways suburbs developed and may even resist seeing them as social products. But, addressing tough suburban issues such as affordable housing probably requires thinking and acting at more collective levels than letting the beloved local governments dictate what they want (which can often deliberately lead to exclusion).

Where are the people oriented suburbs?

The book Market Cities, People Cities by sociologists Michael Emerson and Kevin Smiley examines big cities in light of two ends of a spectrum: market cities follow an economic logic and people cities look out for the well-being of their residents first. In their study, Houston is the model of a market city and Copenhagen is the people city exemplar.

This got me thinking about American suburbs. Given their history and priorities, they appear to be market communities. On the whole, American suburbs emphasize single-family homes, private families, driving, and local control over resources. They are generally known as wealthier communities. Additionally, the suburbs have generated a lot of money for developers, builders, the construction industry, and communities through tax revenues. Most of this is private wealth or money that residents hope can be spent on their own lives.

So, are there suburbs that emphasize the welfare of residents over markets? If so, where might they be located? A few ideas:

  1. Inner-ring suburbs. This could be because they located near big people cities or the sets of issues facing such suburbs – often racial and ethnic diversity and more poverty – could prompt a different approach to local governance and community life.
  2. Suburbs within blue states. If this is the case, suburbs in states like New York, Illinois, California, New Jersey, Connecticut, and Washington are more likely to have people suburbs.
  3. Suburbs that have strains of political liberalism. While suburbs are traditionally associated with more conservative political stances, this has been in flux in the last few decades. With new residents in suburbia as well as new generations, some communities may view suburban life through a different lens.
  4. The rare suburb that has experienced a significant crisis – a major development gone awry, the loss of a major employer, severe budget issues – and tried to forge a new path.

If I had to guess what percent of suburbs could be considered more devoted to well-being than markets, I might venture 20% at most.

No cheap homes left at the bottom of the housing market

One downside of increasing housing values is that the lower end of the market also rises:

More telling is that at the start of 2013, when home prices were just beginning to bounce off the bottom of the housing crash, the share of homes sold above $500,000 was just 9 percent of all sales. Today that share is more than 14 percent. The share of lowest-priced home sales today is less than half of what it was then as well.

“On the lower end, there is virtually no property at a very low price level anymore,” said Lawrence Yun, chief economist for the National Association of Realtors. “The same property has been moved up to a different price bucket just because the prices have been rising strongly, over 40 percent price appreciation in the past five years. We are not getting the transactions on the lower end because there is virtually no inventory on the lower end.”

In the wake of the housing crisis, investors bought thousands of low-priced, distressed homes, putting a price bottom on the market but also removing lower-priced inventory. The expectation at the time was that if prices jumped, the investors would sell. For the most part, they did not. In fact, investors continue to buy properties, even at peak prices today because both the rental market and the market to flip these homes are so lucrative…

Homebuilders are continuing to increase production and selling homes they haven’t even built at a historically fast pace. They are not, however, putting up low-priced homes, even though demand there is high. They argue they cannot make the margins work, given the high costs of land, labor, materials and regulation. The median price of a newly built home recently hit a record high.

Two quick thoughts:

  1. I thought letting this go to the markets would solve the problem. In other words, if there is a need for cheaper housing, shouldn’t the market correct? It does not appear this is happening as builders do not want to have smaller margins. Some interventions may be necessary if no businesses see an opportunity.
  2. This makes the issue of affordable housing even more difficult. Many big cities already have major shortages of affordable housing. If prices keep increasing and little is being built at the lower end, might be drastic consequences?

The conservative approach to affordable housing

Richard Epstein of the Hoover Institution summarizes how conservatives might approach affordable housing:

The key challenge is to choose the correct path for housing reform. Many of Carson’s critics think the proper line is to require new developments to save a proportion of units for low-income residents, which will ensure, they claim, “that economically diverse neighborhoods and housing affordability will be preserved for generations to come.” The implicit assumption behind this position is that government agents have enough information to organize complex social institutions, when in fact they are slow to respond to changes in market conditions and are often blissfully unaware of the many different strategies that are needed in different market settings. No one wants to say that governments should not lay out street grids and organize infrastructure. But they operate at a huge comparative disadvantage when it comes to real estate development on that public grid.

Far superior is an alternative view that I have long championed. The first thing to do is to abandon the assumption that there is a systematic market failure requiring government intervention. The second is to remove all barriers to entry in the housing markets, so that supply can increase and prices can fall. These barriers are numerous, and include an endless array of fees, taxes, and permits that grant vast discretionary authority to local officials. A removal of these burdens will allow us to harness the private knowledge of developers who will seek to work in those portions of the market that hold the greatest profit opportunities…

The so-called housing experts all sign on to the general mission of HUD to deal with the various ills of housing shortages, but none of them have the slightest interest in the market solutions that could improve the overall situation. To make the point more clearly, market solutions do not include letting developers steamroll small property owners through eminent domain abuse, or allowing local communities to pass restrictive zoning and permitting requirements that are intended to block low-income housing. Rather, the correct answer is to stop eminent domain abuse, to peel away layers of regulation, and to cut out the extensive network of government grants that impose strings on how housing can be built. Perhaps Carson does not know much about the current programs. But if he puts the necessary reforms in place, he will have no need to master the details of endless federal, state, and local regulations that have created the affordable housing crisis in the first place.

Epstein sees two issues: there is not “a systematic market failure” and too many regulations limits supply and discourages builders. While I am not suggesting federal government programs alone can solve affordable housing (see this earlier post where I discussed this idea with other academics who study public housing), I am skeptical about this line of argument.

First, the “systematic market failure” often discussed by academics is related to race: whites made rules (and then institutionalized them with lending institutions and the federal government) that ensured whites did not have to live with other racial and ethnic groups. Even before some of this was institutionalized, the relatively freer housing market of the late 1800s and early 1900s was already promoting residential segregation. See the case of the Black Belt on the South Side of Chicago or separate black suburbs (see Places of Their Own by Andrew Wiese). And if people didn’t make market decisions about housing based on race, they would do so regarding class. The idea of exclusionary zoning is that wealthier communities set up conditions that do not allow for the construction of cheaper housing. Epstein suggests at the end that exclusionary zoning might have to end but then how would he balance the interests of lower-income residents versus the property rights (often an important cause among conservatives) of existing owners?

Second, regulations may discourage builders. But, loosening regulations does not necessarily mean that they would suddenly build cheaper housing when they could make more money on larger houses. This is a common conservative argument about the Bay Area in California: if regulations protecting land could be done away with, more housing would be built and prices would drop. This could happen broadly though I suspect some of those existing homeowners would not like this (and property values are of utmost importance to many homeowners) and it is not clear that builders would construct housing that is that much cheaper (even if they are contributing to increased supply). Perhaps Epstein could provide some examples where this – builders have moved to fill cheaper niches in the market – has happened. And it may be hardest to do this in places where there are already a lot of regulations; moving to a lot fewer regulations or no regulations requires a major shift on everyone’s part and probably must be demanded by a majority of the public (requiring some sort of political movement).

Come to think of it, there are ways these arguments could be evaluated with data. Are there places in the United States that have more or less housing regulations and whose housing outcomes can be compared? Are there any truly free markets in housing that working in providing affordable housing?

Additionally, it may be time for some more creativity regarding housing. Could we have different locations – cities, states – try different approaches and see what works?

 

Updating the last few years of (private sector) history of Chicago’s public housing

By now, a number of scholars have effectively explained the problematic history of Chicago’s public housing. But, as this new piece from Curbed Chicago suggests, the most recent years have involved a lot of change. Here are some interesting tidbits from this recent history-in-the-making:

Holsten’s answer is emphatically yes. He specializes in mixed-income and affordable housing, and has developed $500 million worth of it since 1975. But building a mixed-income building is one thing. Forming an actual community across racial and class lines is another. “Our job as developers is much more than financing buildings and property management,” he says. “It’s trying to build community. That’s the hardest part.”…

One sticking point is the issue of density. Chicagoans feel burned by their past experience with high-rises. And the city has a tradition of homeownership that’s different from other very large American cities. Chicago’s famed “bungalow belt” of brickworker cottages built in the early 20th century offered waves of immigrants affordable single-family homes, and preservationists have formed a nonprofit to protect them.So the CHA’s residents would prefer a house and a porch of their own, but that desire often runs counter to the need to accommodate the thousands who have been displaced…

Between 2008 and 2012, the CHA issued about 14,000 fewer vouchers than HUD funded, building up a surplus of $432 million and earning a rebuke from HUD Secretary Julian Castro. (The CHA says its reserves have since been cut and will be spent down by the end of 2017.) A Chicago Sun-Times and Better Government Association investigation found that four out of 10 voucher units have been cited for building code violations in the last five years.

I am skeptical that the private sector alone can solve these housing issues. The free market tends to lead to exclusion and profit-seeking. It doesn’t provide many solutions to correcting existing inequalities, which in the United States tend to connect race, social class, and housing. See an earlier post for a number of the bad outcomes that can result from a free market approach to housing.

On the other hand, the Chicago Housing Authority has done little good. And Americans from the beginning have been ambivalent about involving government in housing. There is little chance that the government will do much more to provide housing – even as the need for affordable housing is great in many cities – because it is a difficult issue in which to find much support.

Perhaps there is a third approach: the US government props up the mortgage industry! Probably not a good long-term solution but this is what we have and it is a system that privileges homeownership.

The difficulty in returning to public housing

Once people left public housing high-rises in Chicago so that they could be demolished, it was difficult for them to return to new (and limited) public housing units:

Despite the promises that everyone could come back, the numbers don’t add up. The decrepit, infamous Cabrini-Green had 3,600 public housing units. When the rebuilding is complete in 2019, there will be around 2,830 units. Only 30 percent are for families in public housing. Got that? Fewer than 900 units.

The screening process is the next barrier. People are kept out of the new neighborhood if a family member has a single arrest record—even if no charges were pressed. Public housing residents have to submit to mandatory drug testing every year. They can have no record of rent and utility delinquency. They cannot take in friends and relatives. New rules in the neighborhood include no smoking, no barbecuing, no loud music, no washing cars on the street…

But coming back to Cabrini was a huge disruption to her family. Her 17-year-old daughter had a misdemeanor for fighting at school. Brewster had to send her daughter to live with relatives in order to keep her lease…

Another reason most people from Cabrini haven’t come back: finances. Moving is expensive and disruptive, and poor families can’t easily absorb these hits twice when they move away from bulldozers.

And is there any surprise that some residents at Cabrini-Green fought the demolition? The alternatives to even bad public housing high-rises are often not much better. As is also noted in this article and backed up by research, vouchers only go so far as well as many former public housing residents end up in other poor neighborhoods.

It does seem that once the HOPE VI program started in the 1990s, public housing has become less and less of a public issue. Public housing has never been popular in the United States – it took quite an effort to even start a federal program – and efforts in recent decades have moved to decentralize public housing units, limit who can access benefits, and reduce funding for programs. Yet, there is still significant need in the United States for reasonably-priced housing in decent neighborhoods (for example, see the waiting list in Chicago). I would suggest the free market hasn’t done too well in this area; many builders and developers will go for more money rather than supplying needed housing, many residents don’t want cheaper housing or certain kinds of residents nearby, and local regulations including zoning laws often make it difficult to pursue affordable housing or innovative solutions.

Just how much historical preservation is too much?

The source of this information is on one side of the issue but it is an interesting question to consider: just how much historic preservation of buildings is too much?

New York City’s Landmarks Preservation Act was intended to protect about three or four “historic districts”—Brooklyn Heights, Greenwich Village, etc.—preservationist James Van Derpool told the New York City Council in 1964. That’s all “anyone had seriously considered.”

The Landmarks Act  was passed the following year thanks in part to Van Derpool’s testimony. A half-century later the city has protected 138 historic districts. Nearly a third of the structures in Manhattan have been landmarked. As I argued in a Reason TV video published last year, entire swaths of New York City may as well be encased in a life-sized historical diorama. Out-of-control landmarking is undermining the process of creative destruction that made New York, well, New York…

What justifies these two designations? Landmarks Commission Chairwoman Meenakshi Srinivasan was left straining. She lauded the Pepsi sign for “its prominent siting” and “frequent appearances in pop culture.” The Park Slope blocks are part of an area, Srinivasan explained, that “owes its cohesiveness to its tree-lined streets, predominant residential character, and its high level of architectural integrity.”

If “prominent siting,” “tree-lined streets,” “residential character,” and “architectural integrity” are grounds for landmarking, what’s to stop the Commission from declaring every square inch of the Big Apple too precious to ever change?

Here are the two sides of the issue:

  1. The preservationists will argue that buildings and streetscapes need protecting because (1) capitalism and free markets tend to bulldoze meaningful structures for current residents and future generations in pursuit of progress and (2) residents of particular places should expect that features of the location that helped draw them there should remain there.
  2. Reason and others would argue that such restrictions limit the free market, stopping progress and natural processes of neighborhood change. Such regulations constrict the market for property which can drive up prices as well as freeze areas in time even as the world has moved on to better things.

Perhaps there is some middle point or range where both parties can get what they want? This opinion piece suggests nearly a third of Manhattan is simply too much but where is the empirical evidence to support this? Is Manhattan development suffering because of this? As is common in social life, neither side will likely get all that they want – no such designations vs. always having to get approval from the neighbors when building a new structure – so some compromise should be reached.

It would also be interesting to look at the level of historic preservation in wealthier vs. poorer areas. Can more of Manhattan be saved because there are resources to do so versus an inability to save many noteworthy structures in poorer American neighborhoods because there are few organizations who could handle the burden? In other words, perhaps historic preservation is an issue largely faced by wealthier communities who can afford to protect some of their gloried past.

Soccer won’t make it big in the US because it doesn’t have enough time for commercials?

Forget cultural differences; perhaps soccer won’t make it big in the United States because there is not enough money to be made.

“Soccer is the least profitable sport on the planet,” says Stefan Szymanski, professor of sports management at the University of Michigan and co-author of Soccernomics. “The whole structure of soccer is totally at variance with the America model.”…

In America, TV contracts have a lot to do with a sport’s profitability. MLS recently took a step toward the big leagues with new contracts that will generate around $90 million in revenue per year, the most ever for the league. But that’s puny compared with leagues such as the NFL, which takes in about $5 billion per year from TV rights. The visibility generated by saturation TV coverage helps the NFL earn even more revenue from sponsorships, ticket fees and licensing deals.

It might be unfair to compare the MLS with the NFL, which is the world’s most profitable sports league and an almost unexplainable phenomenon. But pro soccer in the U.S. may face a chicken-and-egg problem that prevents it from ever following in the NFL’s cleats. Most NFL, NBA, MLB and NHL teams manage to be profitable whether they win or lose. That’s because of revenue-sharing deals, salary caps and other equalizers meant to keep leagues competitive and owners satisfied…

“The MLS is pursuing the America business model, which means it’s not pouring billions into making it successful but is actually limiting player spending,” Szymanski says. “There are probably 30 soccer leagues that spend more on wages per team than the MLS — including the Romanian soccer league.”

I wonder how American sports fans would react to the idea that sports “work” in the US because owners can make lots of money. Sure, the sports may be interesting and the athletes impressive but the owners have to make money and there have to be lots of commercials. The average football game has about 11 minutes of gameplay. It’s more like the sports play around the commercial breaks.

Does this mean American sports don’t really follow a free market model? It sounds more like team owners work together to guarantee their profitability and then others on the outside, like various corporations and television networks, can try to make money.

WaPo op-ed suggests sociology degree are the antithesis of Wall Street

An opinion piece a few days ago in the Washington Post contrasts those working on Wall Street and sociology majors:

How nice it would be if the 99 percent had never heard of Wall Street – perhaps if it didn’t exist at all.

There would be no need to be jealous of your college classmates’ $10 million paydays while you majored in sociology. No egg on your face if, as a hot-shot investment manager, you had poured $100 million of widows’ and orphans’ money into securities called collateralized debt obligations that you didn’t understand. There would be no collapse in the value of the home you bought in 2005. Several million people who lost their houses to foreclosure might still be proudly mowing their lawns. And your retirement savings would not be shattered because of all those high-flying technology firms that your mutual fund bought back in the 1990s.

The rest of the opinion piece goes on to talk about the downside of Wall Street. But the comparison of wealthy Wall Street employees versus sociology majors is interesting. The main point seems to be that sociology majors don’t make much money. My response: sociology majors aren’t at the bottom of the heap for median earnings.

A more latent point might be that sociology majors might be the most recognizable discipline that is opposed to the free-market capitalism represented by Wall Street. Is there any other discipline that would be even close? This animosity between sociology and neoliberalism or free-market economics could come from two areas:

1. Different explanations for human actions. Economists tend to go with rational choice explanations that humans are motivated by incentives and self-interest. Sociologists would suggest things are more complex and include factors like values, emotions, ideology, social networks, and altruism.

2. Different values: money and resources flowing freely versus a greater sense for a need for economic and social equality.

There are ways to bridge these two approaches, perhaps in subfields like economic sociology. At the same time, it is interesting to see the choice to contrast Wall Street and sociology.

Does the failure of urban renewal necessarily mean that the free market could solve the problems of poor neighborhoods?

Reason looks at what happened to one New York City neighborhood in the name of urban renewal:

In 1949, President Harry Truman signed the Housing Act, which gave federal, state, and local governments unprecedented power to shape residential life. One of the Housing Act’s main initiatives – “urban renewal” –  destroyed about 2,000 communities in the 1950s and ’60s and forced more than 300,000 families from their homes. Overall, about half of urban renewal’s victims were black, a reality that led to James Baldwin’s famous quip that “urban renewal means Negro removal.”

New York City’s Manhattantown (1951) was one of the first projects authorized under urban renewal and it set the model not only for hundreds of urban renewal projects but for the next 60 years of eminent domain abuse at places such as Poletown, New London, and Atlantic Yards. The Manhattantown project destroyed six blocks on New York City’s Upper West Side, including an African-American community that dated to the turn of the century. The city sold the land for a token sum to a group of well-connected Democratic pols to build a middle-class housing development. Then came the often repeated bulldoze-and-abandon phenomenon: With little financial skin in the game, the developers let the demolished land sit vacant for years.

The community destroyed at Manhattantown was a model for the tight-knit, interconnected neighborhoods later celebrated by Jane Jacobs and other critics of top-down redevelopment. In the early 20th century, Manhattantown was briefly the center of New York’s black music scene. A startling roster of musicians, writers, and artists resided there: the composer Will Marion Cook, vaudeville star Bert Williams, opera singer Abbie Mitchell, James Weldon Johnson and his brother Rosemond, muralist Charles Alston, writer and historian Arturo Schomburg, Billie Holiday (whose mother also owned a restaurant on 99th Street), Butterfly McQueen of “Gone with the Wind” fame, and the actor Robert Earl Jones.

Designating West 99th and 98th Streets a “slum” was bitterly ironic. The community was founded when the great black real estate entrepreneur Philip Payton Jr. broke the color line on 99th Street in 1905. Payton, also credited with first bringing African Americans to Harlem, wanted to make it possible for a black man to rent an apartment, in his words, “wherever his means will permit him to live.”

While Reason is a conservative website, there are plenty of others on the other side of the political aisle that also agree that urban renewal had a negative impact on many neighborhoods. Ultimately, this policy was used to clear “slums” and to use that land for more profitable development, typically for wealthier residents and businesses. Additionally, what actually counted as “blight” or as a “slum” was contentious as it tended to frown upon cheaper, ethnic or non-white neighborhoods. Blacks weren’t the only ones displaced; Herbert Gan’s classic work Urban Villagers looked at the fate of an Italian-American neighborhood which was ripped apart by urban renewal.

Since this comes from Reason, I assume that this is a critique of liberal policy and of eminent domain: you can’t trust the government with these kinds of powers as they will use it to trample people they don’t like. But can we swing all the way in the opposite direction and suggest that the free market will eventually get rid of the issues that poorer neighborhoods face and that lead them to be ripe for urban renewal?

I would argue no. Left to its own devices, the free market can also result in harmful policies that hurt less than wealthy neighborhoods. Here are a few examples:

1. Redlining. This was based on the practice of marking urban neighborhoods in terms of the security of their real estate by the Home Owners’ Loan Corporation which arose out of the New Deal. But this practice really took off when private lenders and institutions adopted the government agency’s markings and then only made loans to the better neighborhoods, effectively shutting out poor neighborhoods from mortgages.

2. Exclusionary zoning. After the Fair Housing Act of 1968 ruled out discrimination in the sale or rental of housing, exclusionary zoning became a hot topic in the 1970s. A number of court cases looked at how the zoning guidelines of communities and counties effectively kept poor people out of suburban locations. By only allowing higher priced housing or certain kinds of housing (like single-family homes on a minimum of 2 acres), these zoning guidelines were very effective in maintaining the exclusivity of certain areas.

3. Still existing discrimination in obtaining mortgages and other loans. There have been plenty of studies that show when equally matched whites and blacks apply for a mortgage or a car loan or another loan, blacks are rejected at higher rates. Similar research has shown this also applies to jobs. Read an overview of this research in a 2008 Annual Review of Sociology article.

4. The ongoing presence of residential segregation in the United States. Many of our major cities, particularly in the Northeast and Midwest, are still very segregated. View maps of some of these cities here.

5. Gentrification. While the influx of residents may “improve” a neighborhood, it often has the effect of pushing the poorer residents into other poor neighborhoods because of increased housing prices and property taxes.

So urban renewal was not the answer. But it is unlikely that a completely unfettered free market is as well. So perhaps the real question to address is how to craft effective public policy that provides aid to neighborhoods and their residents so that these neighborhoods truly improve, add jobs, and experience revitalization. The key here is “effective,” policy that does not become cost prohibitive, works with local residents and organizations rather than just applies a top-down approach, and achieves attainable and worthy objectives while minimizing unintended consequences. This is likely a difficult task but swinging the pendulum all the way to the free market side isn’t the solution.