Has the Government Been Bailing Out Sprawl?

One of the themes of the financial and economic crisis we've faced over the past two years is that government, pressed into responding to serious economic pain, has often found itself supporting the activities that got us into this mess in the first place.

Sign of the times? Side-by-side foreclosures in Massachusetts. (Photo: Yovani via Flickr)

Irresponsible behavior by banks led them to the brink of collapse -- a collapse which would have sent the global economy into a terrifying period of decline -- and so the government stepped in to prevent bank failures (after learning a lesson from the dreadful experiment with Lehman). But these interventions have put banks in a situation where they stand to gain enormously from taking large and dangerous financial bets.

Similarly, government policies such as low gas tax rates and import protections on light trucks encouraged the development of a bloated domestic auto industry focused on the production of inefficient SUVs.

When high oil prices and deep recession then threatened to push General Motors and Chrysler into bankruptcy, leading to hundreds of thousands of lost jobs, the government felt it had no choice but to step in to keep the companies afloat.

Now the government owns large stakes in companies that will only profit if the American public goes car-buying crazy over the next few years.

The list goes on. The economic crisis that currently afflicts us has made it clearer than ever that we need to change the way we do many things, but because the economy is in such difficult shape, it is hard to pursue anything other than policies designed to keep the economic engine from stalling out completely. Big transitions must wait for later.

Can the same be said for sprawling urban development? Have government interventions essentially bailed out the very places that proved most vulnerable amid oil shocks and housing busts?

Chris Leinberger argued that very point in a recent blog post at The New Republic's Avenue:

He has a point. Foreclosures have been concentrated on urban fringes, so federal efforts to modify mortgages and otherwise reduce defaults have tended to direct more aid to exurbs than inner suburbs and city centers. In addition, rates of home ownership and car ownership are higher in the suburbs than in city centers, so federal housing subsidies (including the new home-buyer tax credit and low interest rates generally) and automobile subsidies ("Cash for Clunkers") have had a geographic bias toward suburbanites.

To a certain extent, this has been unavoidable. Most Americans live in auto-oriented areas in suburban places, and a large share of those Americans are facing financial difficulty. Any measure that helped stressed households, including checks of equal value cut to all workers, would tend to benefit suburbanites more than urban dwellers.

One should also be careful not to oversell the value of the interventions. Efforts to reduce foreclosures have actually had pretty depressing results.

But certainly the government might have done things differently -- and pursued policies designed to help households as much as possible -- rather than those aimed at keeping households in homes they couldn't afford, or moving families into homes in unsustainably sprawling locations. So it's important to ask: What can we expect for exurban areas and how will the government's policy choices affect them?

First, it's important to understand the dynamics of the bubble. For a number of reasons, among them low interest rates and innovations in mortgage finance, the residential real estate market began to experience a boom at the beginning of this decade. This energy in housing markets manifested itself in different ways in different places.

In areas where housing supply was tight -- where it was not easy to respond to increased demand by building more -- prices rose sharply. In areas where housing supply was more elastic, prices rose some, but construction exploded. In general, it's tough to build in dense center cities, and easy to build on the low-density fringe.

As a result, rising housing demand led to construction on the urban fringe. It also led to higher prices in center cities, which pushed many low- and middle-income families to move to places with cheaper housing markets, which increased demand for homes on the fringe and led to even more construction. Rising demand for exurban living led to construction of exurban housing, and rising demand for urban living led to construction of exurban housing.

When the crash came, it quickly became apparent that housing inventory on the fringe had grown out of all proportion to the actual demand for such housing. Meanwhile, there continued to be excess demand for homes in center cities.

So while the bust ended up being painful for everyone, it was far less painful for urban centers. In those places, price declines brought in buyers, helping to keep inventory down and price declines orderly.

In exurbs, by contrast, falling prices went hand in hand with huge numbers of vacancies. Prices fell chaotically and dramatically as inventory overhang led to falling home values, which contributed to foreclosures, which added to inventory, which further depressed home values and led to still more defaults and foreclosures.

Another way to say this is that center-city housing markets experienced a correction, while exurban housing markets entered a vicious cycle leading to wrenching housing price declines that will likely push prices below replacement costs in some areas.

This is a dangerous place for neighborhoods to be. Vacant homes will begin to deteriorate, and occupied homes unlikely to sell for more than replacement costs (or more than the value of the owner's mortgage) will suffer from disinvestment. The housing stock will become second-rate.

As neighborhoods fall apart, wealthier and more mobile homeowners will move away, while excess inventory and rock bottom prices will attract low-income households. The tax base will fall and so services will decline, and the general desirability of such areas will drop. Some, and perhaps many, of these neighborhoods will become slums.

How do we know? Well, this is a storyline we've seen before, both in center cities during the decades of urban decline and in depopulating Rust Belt cities for much of the past half century. It is a process that is very difficult to reverse.

And in some ways, suburban slums may be far worse for the poor than the previous urban version. In center cities, density and public transit provide a basic level of mobility for the working poor; in suburbs, by contrast, lower income families cannot survive without an automobile. And even with massive suburbanization, inner-city decline could never entirely escape public attention, thanks to lingering employment concentrations in center cities, as well as historical and cultural attractions there. As a result, there was always some pressure for renewed investment in center cities.

But suburban neighborhoods are relatively remote; the very idea of the places is that residential neighborhoods remain well away from employment concentrations and other destinations. Remoteness may well allow suburban slums to decline in obscurity.

These changes will not be universal, just as previous decline in urban centers was far from universal. Rich suburbs will likely stay rich, and denser suburban areas may well experience great success by shifting to greater walkability and density. But many suburban neighborhoods may find themselves in circumstances that once characterized urban slums -- poverty, deteriorating services, failing schools, and rising crime.

Given all of that, how do the federal government's assistance programs measure up? Not particularly well, unfortunately.

The mortgage modification programs have primarily been oriented around keeping people in their homes (and loans). These have generally not been that successful; a surprisingly large number of modified mortgages still wind up in default. Keeping families who cannot afford their loans in their homes is likely to be bad for the families themselves and may lead to disinvestment, as those homeowners will continue to be cash-strapped and may suspect that they'll be unable to sell the home for more than the value of their mortgage.

Meanwhile, the housing tax credit is tailor-made to get relatively low-income buyers -- and first-time buyers -- into suburban homes. That's the intent; the thinking is that bringing buyers into the market will support prices and end the cycle of decline.

But this effort may well fail. Housing inventory in hard-hit neighborhoods is too substantial to be much reduced by an $8,000 credit (particularly one put in place when one-fifth of the population is under- or unemployed). And by encouraging lower income families to move to these neighborhoods, the government may actually be accelerating the process of decline. Higher income families already in those areas may not be willing to stay alongside the newcomers, and their departure will reduce the tax base.

In short, the government isn't just subsidizing sprawl. It's subsidizing the deterioration of sprawling areas.

What should the government be doing? Well, for starters, it should recognize that the housing crash has meant an increase in the relative price of center city homes, which were already unaffordable for many families before the bust. It is important to provide opportunities for affordable center city housing (for its own sake, and to reduce the rush of lower-income families to the fringe), and that means encouraging construction in center cities.

In particular, since it is clear that safe, walkable neighborhoods are in very high demand and are therefore holding their value well, it is important to build more such places.

Next, the government needs to stop subsidizing home ownership and focus on increasing mobility. Home ownership in an area where prices are declining is an anchor on a household. It can trap families in declining neighborhoods or in metropolitan areas where jobs are scarce. If keeping struggling owners in their homes is a priority, then policy should focus on getting them out of their loans and keeping them there as rent-paying tenants.

Third, government officials should learn the lessons of urban decline -- particularly that allowing the decline of the tax base to lead to an erosion in service quality will create negative social outcomes that will be very difficult and costly to address in the future. Once poor schools and high crime levels become the norm, it will take years and overwhelming investments to turn things around. It will be better for all involved to step in and continue to support services in deteriorating neighborhoods.

And finally, policy should focus on improving physical mobility and urban design in these places, for two reasons. First, greater mobility -- including walkability and transit access -- will be of great use to poorer families which may have irregular or no access to an automobile. And second, efforts to improve the design and connectivity of these communities will make them more attractive and less likely to suffer from complete collapse.

The problem is that these represent substantial changes -- a transition away from the prior way of doing business -- and it is difficult to do anything other than keep fingers in the dam at this point. This is understandable.

But with our approach to the housing crisis (and to the crisis of home and transportation affordability generally) as with the banking crisis and the crisis of consumer spending, and so on, the problem is clear -- putting out the fire is not enough. Absent real reform in banking, another crisis will hit us, and soon. Absent an increase in savings rates, over-indebted households will paralyze the American economy.

Without addressing the serious imbalances in the way we plan and build our communities, we can expect a serious, long-term crisis in exurban neighborhoods. It took us 40 years to begin to get declining urban centers back on the right track. Do we really want to repeat that experience?