Donjek :: The Cents of Place Blog

@Strib: Foreclosure Continues Regional Damage

Minnesota’s housing market is stabilizing, but prices dropped more here than the national average. Mortgage delinquency is at or over the national average in Isanti, Sherburne, and Chisago counties. These three, as well as Anoka and Scott counties, are among the state’s ten counties currently hardest hit by foreclosure, according to the New York Federal Reserve Bank.

A new study suggests this is consistent with a national trend. Households located in areas far from jobs and services are more reliant on long car commutes and their expense, creating another hurdle for households as job losses have accumulated. These maps illustrate who pays the largest share of household income to transportation and housing costs – exurban residents.

Foreclosure and vacancy is toxic for any community, urban or elsewhere. It’s not particularly constructive to introduce “slumburbia” as a new label for hard-hit exurbs and suburbs. If access to parts of our region is contingent on cheap, subsidized gas prices, people who buy property are exposing themselves to changes in those prices. If many homeowners in one area do so, the effects can be brutal for neighborhoods.

The Twin Cities region has grown by up to 25 acres per day in recent years. Providing houses with water and sewer, roads and other infrastructure demands a long-term and expensive public commitment. The foreclosure wave serves to highlight how households, local and state governments are all leveraged by development that relies on cheap, distant commutes to workplaces and services. As we’ve relearned in recent years, leverage works just as swiftly in reverse as it does moving forward.

Note: This piece is also published on the Star Tribune website in its Your Voices forum. See Commers posts on Your Voices here. 

Velcro, Thorny Devils, and Placemaking

Last April, en route to a conference of the International Economic Development Council in Washington, D.C., I encountered a feature story in National Geographic and became lost in the journey.  The topic? The history of Velcro.

Among other things.

Velcro (photographed up close, at right) was invented in 1948 by Swiss chemist George de Mestral who, according to the article, was inspired by the effectiveness with which burrs would become entangled in his dog's coat.  De Mestral could be counted as a pioneer among modern biomimeticists, who seek to create innovation based on the aerodynamic design of a fish's body, the ability of a thorny devil to "drink" by wicking water up its legs from the ground, or the way a desert beetle collects fog for needed moisture.

The thorny devil, and biomimetics generally, is important to urban planning and development, too. Ecology and the benefits of biological diversity are reflected in modern portfolio theory, which suggests the importance of holding multiple assets whose values fluctuate independently of each other.  Some of the neighborhoods hit hardest by the current wave of foreclosures are those communities with monolithic development patterns - very similar single-family homes with limited or no proximity to commercial or retail services or other assets.  Builders and homeowners alike witnessed the positive side of life without diversification during the real estate boom, with values marching upward.  Today, the same parties are experiencing the negative side of the same approach, because a decline in prices for one type of land use is not mitigated by a diverse mix.

The capabilities of today's biomimeticists to understand the functions of plants and animals inspired a response of marvel from me. Human understanding of the complexity of the relationships among the flora and fauna around us is similarly advancing.  Placemakers shaping our cities and metro areas have much to gain from imitating nature, extending from building healthy human habitat to applying the lessons of diversity to our urban economic thinking. 

Photo courtesy of American Museum of Natural History. Map courtesy of Donjek.

Shiller on the Housing Bubble

Originally, a familial connection to the Netherlands introduced me to Tulip Mania, a 17^th-century example of a financial bubble that reads like a parable. Who would invest in a tulip bulb, wondrous as the blooms themselves can be? As Burton Malkiel documented well in his book titled “A Random Walk Down Wall Street,” many Dutch joined in the tulip phenomenon, and many lost fortunes large and small. Teaching the theory and practice of investment at the College of St. Catherine in recent years, I have made sure to visit this interesting chapter of Dutch and financial history with students.

There’s nothing Dutch or historic about the bubble now known as the housing and mortgage crisis. Robert Shiller’s assessment of the flagging housing market concludes not just with pessimism but also recommendations about information in the real estate market. Here’s an excerpt of the article the economist (whose Case-Shiller housing index has gained fame in recent years) published in the latest Atlantic magazine:

We also need to get better—and more—information to more-sophisticated investors and financial professionals. In real estate, one important way of doing that is by further developing the financial market rather than focusing only on regulating it or reining it in. For instance, real-estate futures markets, which have existed since 2006 but are still in their infancy, have the potential to tame future housing bubbles. Without them, there is no way for skeptical investors who think they see a rising bubble to express that opinion in the market, except by selling their own homes. If futures markets grow, then any skeptic anywhere in the world could profit from a bubble in, say, Las Vegas, by short-selling real estate there. Substantial short-selling would reduce bubbles, and provide information to home builders, ratings agencies, and others. In turn, builders, for instance, might not overbuild if they see that most of the money in the futures markets is being bet on price declines.

Subsidized financial advice and the encouragement of real-estate futures markets are just two examples of the sorts of actions that could limit future bubbles. The larger point is that increasing the amount, accessibility, and reliability of information about investments should be a high priority for policy makers. Epidemiology suggests that even very small changes to the transmission rate of a disease can make the difference between an epidemic and a low-incidence disease. If better information inoculated even relatively few people against boom thinking, that could prevent many bubbles from rising.

Such an article is surely cold comfort to colleagues hit hard in the architecture field and others, but these ideas belong in the debate about how to proceed with mortgage industry reforms and housing market stabilization. If pointing fingers at anonymous speculators is the extent of the reform, the financial bubble will be historic, but certainly not extinct.

Donjek Project: Coordinating the Management of Vacant Property

Against the backdrop of continued reeling in the residential real estate market, New York-based Local Initiatives Support Corporation (LISC) hired Donjek this winter to develop a review of the barriers to a coordinated, large-scale response to endemic vacancy in neighborhoods. 

The emphasis of the inquiry has been on reducing the costs of vacancy in residential areas – which range from increased public safety expenses to property devaluation – by acquiring property prior to or at the time it becomes unoccupied.

At this point, fundamental challenges to a coordinated approach include:

• Policy makers, investors and housing advocates do not currently have an effective way to deal in batches of properties with unclear title, rather than on a case-by-case basis.

• We are unable to provide the kind of rapid response required to prevent vacant properties from further deteriorating, due to the scale of the challenge, lack of communication and centralized leadership. 

• The level of capital or liquidity required to deal with stress in multiple neighborhoods simultaneously is not in place.

The report focuses in particular on the land bank models exemplified by the Genesee County Land Bank (operating in and around Flint, Michigan), and the Atlanta Land Bank.  Click here to download the full Donjek report to LISC.

Photo:  Courtesy of Flickr.

Study Suggests "Generational Housing Bubble"

“The housing market has a new problem:  aging Americans” suggest the editors of the Economist magazine in a recent article.  A study released recently by researchers at the University of Southern California suggests that the approaching conversion of baby-boomers from net home buyers to net home sellers will effect a significant shift in the residential housing market.  According to the study, the trend will likely last until at least 2030 when the last boomers turn 65.

The premise of the paper is that an ongoing, robust supply of buyers aged 30-34 who are able to afford housing stock at current pricing is essential for a balanced market.  With sellers potentially outnumbering able buyers by a significant number by 2010, the study’s authors suggest this slack will cause the “generational housing bubble” to pop.  The result:  Downward correction in the price of houses in many states.  Younger buyers’ growing reticence about buying in a downward market may compound this trend, creating a painful cycle for sellers.  And, of course, the erosion of retirement savings locked in housing equity will create additional issues for boomers individually and all of us by proxy.   

Donjek was recently hired by the Local Initiatives Support Corporation (LISC) to examine promising models nationwide for cushioning neighborhoods from the impact of foreclosure-related vacancies.  In the preliminary phase of this project, I’ve encountered an excellent 2006 study of the impact of foreclosure on neighboring property values, and a more recent analysis of the same topic.  These kinds of analytic methods, and the kinds of programmatic responses that LISC seeks to develop, may have additional value – 30 years into the future.

Graphic:  Courtesy of Economist magazine.

Truth in Housing: Cooling Market Impacting Homeowners, Cities, Developers

Yesterday I attended a lunch sponsored by the Sensible Land Use Coalition, a gathering of developers, consultants and municipal officials. The featured speaker was former Minnesota Commissioner of Transportation (and likely 2008 Congressional candidate in Minnesota’s Sixth District) El Tinklenberg. I discovered talking with colleagues before and after the lunch that while transportation was on the program, the housing market dominated the collective brain. A few reasons why that’s the case:

Construction Down – Suburban and Urban Alike
The trends don’t appear positive on the national or regional level. In the Twin Cities, year-to-date building permits have dropped 51% since the high in 2004; the number of permitted units has dropped 47% in the same period. The value of the building-permitted construction undertaken so far in 2007 has fallen 44% (over $1 billion in today’s dollars) from the level experienced in 2004.

Local Governments Feel the Permit Pinch
The St. Paul Pioneer Press this week published a story (reg. req’d) examining the reliance of some cities on permit fees for revenue to finance development and in some cases, administration. As the market cools, local governments are experiencing rapid drops in fee revenues, while buyers of recent construction are placing additional demands on city services and infrastructure.  Combined with cuts to local government aid and county program aid enacted at the state level, diminished permit fees will fuel the fire of what is already looks a lot like a property tax revolt in Minnesota.

Prices Down Among Many Metropolitan Areas Across Country
Rating agency Standard and Poor’s reported this week the results of a national study which indicate that home prices in major markets are falling at the briskest pace since 1991. As opposed to market chatter over the previous year that significant declines were limited to previously high-growth areas on the coasts and in the Southwest, the S&P analysis profiles a much broader dynamic. From twelve months ago, price declines include: San Diego (-7.8%), Las Vegas (-6.1%), New York (-3.8%), Minneapolis (-3.4%), and Chicago (-0.9%). Cities with positive appreciation include Dallas, Portland and Seattle.

Investigations Abound
The Washington Post today reported (reg. req’d) on a tempestuous hearing of the Senate Banking Committee yesterday; the committee heard testimony from executives of major rating agencies including Standard and Poor’s, Moody’s and Fitch Ratings. At issue:

The Securities and Exchange Commission said an investigation of credit-rating companies was focused on whether bond issuers put pressure on the raters to win higher rankings for subprime-mortgage bonds.

Once originated, loans are bundled together into “tranches” and securitized, meaning the principal and interest revenue from loan repayments are purchased by individual and institutional buyers as mortgage-backed bonds. The investigation focuses on whether the companies bundling the loans and securitizing them influenced the rating agencies for a higher credit rating, thereby increasing the value of the bonds to be sold.

Spiros Pina, a Whole Loan Analyst at GMAC ResCap, described the process without equivocation:

Looking back a few years from now, some things will begin to come into focus: the perfect storm of easy money, excessively sloppy underwriting, and the agencies dozing at the switch. And let’s not forget that agencies make money rating credit risk and have an interest in seeing deals go to market...

Hungry for More?
Dig a bit further into the economic prospects for the housing market at EconBrowser, a blog written by two professors of economics at the University of California and University of Wisconsin.  Read more about the foreclosure wave here.

Foreclosure News Points to Long-Term Issues

I spoke yesterday with a financial advisor who remarked on the subprime mortgage crisis using past tense. More indications emerge today that he will be adopting present and future tenses to talk about the lending crisis, no doubt:

- President Bush today announced measures designed to mitigate the wave of defaults, including expansion of an FHA program to include 80,000 additional households. According to a March, 2007 equity research report of the housing lending industry compiled by Credit Suisse, FHA and VA loans as a percent of the market have dropped from 28% in 1990 to 17% in 2000, and 7% in 2006. There are structural and funding issues in place that will undermine a simple fix. Listen to NPR’s analysis here.

- Residential lending has been in my professional peripheral vision, but a couple of items from the Credit Suisse report merit particular comment.  The report notes that interest-only (IO) and negative-amortization loans as a percentage of total purchase mortgage originations rose from 2% in 2000 to 29% in 2005, and 23% in 2006. Roughly one of four mortgages originated in the last two years are structured with static or increasing principal.

- What will be long-term consequences? We have a significant clue about the answer to that question in the graphic at the top of this post, which represents the par amount of adjustable-rate loans scheduled to have rates reset over the coming four to five years. The data reflect January, 2007 figures; it appears that over $40 billion will hit reset dates this month and for several to come. What happens when resets occur? An article in yesterday’s Christian Science Monitor provides a helpful glimpse.

Dealing with the mortgage crisis and its damage is going to require some serious barn-raising in the coming years.