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Tuesday
May102011

Figuring us out

On our Tuesday off day here (we typically publish here on Monday, Wednesday and Friday), I wanted to draw your attention to an important comment left last Friday by one of our long-time, active readers. Hopefully the revelation will help our readers understand exactly what we are doing here (and then help us out).

I finally figured Strong Towns out this morning!

I've been following you guys for several months now, and have really enjoyed the discussions here. I especially enjoy challenging status quo, and what appears to be common sense.

Often when I read what is said and written here, I get frustrated as you don't give us the answers, which you responded to a while ago when someone raised this point.

Sometime after that, I realized Strong Towns is, in part, trying to be a teacher who has given the class an open ended assignment. Some students (or readers like myself) complain with the lack of parameters and want more assistance with the answers.

This morning I realized that Strong Towns isn't a teacher, and they don't have the answers. They are taking part in the discussion, facilitating it really.

Perhaps I should have realized this a long time ago, but this epiphany has been building in me a long time. I look forward to more, and perhaps even participating more now that I think I understand it.

Thank you for your great work!

-George

This was a great insight. Thank you, George. Here is part of my response:

George,

Amen to you, I say.

You have made my day. Yes, we're not being coy when we say that we do not have the answers or know a magical solution. We're not trying to be cryptic so that you figure it out on your own. The reality is that there are things that we can do -- rational responses as JHK would say -- but no real solutions.

You get in a car accident, total out your car and suffer critical injuries in the process. There is no solution to that, just a set of rational and irrational responses. America is kind of in a slow motion car accident right now. I kind of feel like our role at Strong Towns is to help explain it so that we can start identifying and putting in place those rational responses.

-Chuck

Strong Towns is more than just the three of us. The strength of what we are doing here is only going to be realized when it brings others - like you - into the discussion and we can collectively figure out what to do about the situation we now find ourselves in. And this is not a one-size-fits-all type of deliberation either. America today needs the innovation and experimentation we discussed here last Monday (more on that tomorrow).

So consider this a call to rational thinkers everywhere.

Join us.

 

We're just three guys trying to make our cities stronger. Please consider supporting our blog and podcast with a monthly supporting donation of just $5 or $10. Every supporter we sign up gives us the resources and the credibility we need to reach more people with the Strong Towns message.

Monday
May092011

How do we fix the housing problem?

The downward pressures on the housing market continue. The opposing force - inflation brought about by Federal Reserve policy - is a blunt instrument that has potentially explosive side effects. How do we unwind six decades of malinvestment in a development pattern that cannot financially sustain itself?

Last month we started collecting donations to cover the cost of producing a DVD version of the Curbside Chat. Our goal was to connect with 100 of our readers that would be willing to donate $25 each. We've taken quite a bite out of this so far -- we've signed up 31 -- but we still have a ways to go. If you value what you read here or what we produce in our podcast, please do what you can to help us spread this message. We thank you, especially if you are one of our 850+ Facebook connections! It was only a year ago we were still below 200. Thanks for spreading the word. 

Last week, Rob Steuteville of the New Urban Network published a series on the coming housing calamity. (Part 1Part 2) Yes, that is coming, as in yet to happen. The posts were inspired by a presentation from Arthur C. Nelson at the Forum on Land and the Built Environment in Cambridge, Massachusetts, and they describe how the baby boom generation selling their homes combined with shifting preferences and economics amongst potential buyers are going to drive down home ownership rates and the demand for new homes, especially within the current development pattern.

This is a powerful narrative that adds to the growing body of evidence suggesting (a) we have massively overbuilt the number of single-family housing units in this country and (b) housing prices are more likely to move dramatically downward than dramatically upward. When you combine this with the Strong Towns insight that our pattern of development cannot be maintained using the excess wealth it generates, you have a toxic mix.

That should not suggest that we've started to come to grips with reality yet. Our first attempt was to try and prop up housing with first-time homebuyer credits and other gimmicks to artificially create demand. Currently our collective delusion is nowhere more clear than with the talking heads on CNBC and the wishful thinking over the Federal Reserve's ability to solve our problems.

There is a sense in some important circles that we can, through Federal Reserve monetary policy, gently adjust our way out of this problem. Continued low interest rates is one aspect of this strategy. The lower the interest rates we maintain, the greater the buying power of a set housing payment. Historically-low interest rates have certainly kept housing prices from falling faster than they have.

Another aspect of this is the loosening of the money supply and the higher acceptable rate of inflation. The Federal Reserve is tasked with maintaining the stability of the currency and, at least in theory, tries to keep the inflation rate as close to zero as possible. An inflation rate of zero means that prices are stable and are not being artificially driven upward by an excessive amount of money in the system (resulting in cheap or easy credit and a financial boom or bubble).

The Federal Reserve has raised inflation expectations and has actually suggested, as part of their quantitative easing program, a target inflation rate of 2%. In other words, they are adding money to the economy (largely by giving it to banks, which largely give it to the U.S. Treasury) in the hopes that it will get things moving again, get people spending and "kick start" the economy.

Let's look at how this might impact the housing market. Take a homeowner who purchased a $300,000 home at the height of the bubble with just 10% down payment. That house has dropped in value for three years in a row and is now probably worth around half of its peak value. If the house now started to inflate in value by the target rate of 2% per year, here is how that would impact the ability of the homeowner to get out from underneath their underwater mortgage.

Assuming a static economy (no further housing correction) with inflation driving "growth", in twelve years, this home owner would be solvent again. If you ramped inflation up to 4%, you could get there in nine years.

Of, if we had a much higher rate of 10%, we could cut that to 5 years.

So why not just print money, inflate this debt problem away, restore mobility and let's just get on with it? We could get back to building homes, adding new highway lanes, selling cars, employing all of those people in the construction-related industries and basically get our American mojo back again. We can just reset right back to 1990 and do this thing all over again (but we'll be smarter this time and not allow subprime CDO's).

First, there is no evidence that a higher inflation rate would actually wind up reflecting in the housing sector. Steuteville's post of Nelson's research shows that there are so many downward forces on housing right now that it is not clear that a higher overall inflation rate could save the housing market. There is a strong chance we would get lower housing prices anyway, but after a long bout of inflation everything else would cost more too. That is not a good combination.

Second, instead of housing, higher inflation is likely to show up in other sectors of the economy, particularly commodities and imported products. Here is our theoretical inflation rates as applied to gas prices at the pump.

You can see that with 10% inflation we could help homeowners get out of their bad mortgages, but we would also be paying over $6 a gallon for gas (and that assumes we stay in the same spot on the supply/demand curve, which we won't). Again, what do high gas prices do to the value of our suburban and exurban housing stock? That's right: it drives it downward. So inflation likely creates this downward feedback loop because of the energy-reliant nature of our development pattern.

Third, it is important to understand that inflation is a tax on savings and investment. Any inflation-based bailout of the housing sector is simply a tax on people who have saved prudently and did not buy the McMansion they could not afford. How strong of a society would we create by bailing out all of the wasteful decision-makers and their malinvestment at the expense of the prudent and the wise?

Finally, there is nothing to suggest that we can fine tune such a complex economy in this way. While the Federal Reserve and many economists are confident they can add just the right amount of money in the system to get it sloshing around at a 2% inflation rate, others suspect the flow of money might be like water building up behind a dam. You can add and add and add and see no impact to the downstream flow, but once the dam breaks, the money spills out everywhere and you have a flood of hyperinflation. 

For me, I am not sure what is going to happen, but the risks of really high inflation do not seem to be justified by the potential that we just might be able to bail out bad housing investments, paying much higher prices for everything from gas to groceries in return. I think most people would agree with that in theory, but it is not like the opposite is a great scenario either. Massive housing default, bank failures, a drying up of credit and capital and likely much higher unemployment for a significant amount of time.

How do we unwind six decades of malinvestment in an American development pattern that cannot be financially sustained? That seems to be the question of our time. While we are trying to figure it out, we have huge segments of the work force sitting idle waiting for a recovery in construction that is not going to happen. Most of the rest of us worry about the impact high gas prices will have on our commutes and our trips to Wal-Mart. It seems as if we collectively acknowledge that massive change is necessary, but seem intentionally oblivious to the extent it is going to impact what we have come to know as the American way of life.

None of this is more evident than in the leadership of our cities and towns. We've stripped these places of any substantive ability to innovate and respond to stress. And now, in what has to be considered the best case scenario, they will have their tax base - which has been effectively cut in half - recover to 2008 levels by 2023 while their cost of doing business increases by 30%. It is time to focus on building Strong Towns.

 

Additional Reading 

 

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Friday
May062011

Friday News Digest

Last Friday my girls and I spent the day playing outside. We planted a couple of trees in the yard and even put some strawberry plants to soil. It was a bright, sunny and glorious day and I wore shorts and sandals. I even got the grill going, got the outdoor table from the shed and cooked us all a great meal to eat out on the porch. As dinner time approached, the clouds crept in and the wind picked up. By the time we ate, we were stubbornly defying logic, bundled in our sweatshirts, shivering while eating our meals. The snow came that evening and when we woke up the next day the ground was covered. Thus we welcomed in May to Minnesota. This weekend is officially a "do over". Here's hoping the mercury flows in the other direction.

Enjoy this week's news:

  • Minnesota Public Radio's Dave Peters explained the machinations a small town - in this case, St. James, MN - will go through to react to their budget problems. You'll notice the list is generally full of relatively minor adjustments with little long-term impact. Nothing that would mean a restructuring like, for example, a change in street standards or the preparation of a multi-year budget (see our post Starter Strategies for a Strong Town). I did find this characterization in his reference to Monday's post on consolidation kind of funny:

Chuck Marohn is too relentlessly critical of the status quo for some people but in this post Monday he makes a plea worth reading for new approaches and innovation.

  • I guess if I have to be labeled, being called "too relentlessly critical of the staus quo" is one I can accept. It is certainly better than the opposite: too relentlessly supportive of the status quo. The latter is an accurate description of the human condition - resistance to change - while the former at least acknowledges that change is inevitable and that we can do better. The whole story is worth reading, although -- sadly -- this quote kind of sums it up for me:

"I'm holding my breath to see what the state does," says city administrator Joe McCabe [relentlessly?].

  • The PA5113 course at my old haunts, the Humprhey Institute at the University of Minnesota, did a technical writeup on the Old Economy Project the Refuses to Die (aka, the St. Croix bridge) that included Strong Towns as a source. I'm proud of my school to see that they reached the right conclusion on this one as well.

This is not the right bridge and definitely not the right price. While alternative financing is an option, the true cost of the project is out of scale considering the number of vehicle crossings per day, the environmental impact, and the opportunity cost of other projects. Stillwater needs a new bridge, but not this bridge.

  • In our Wednesday post (What it takes to be a planner) I recommended reading the Economist. If you want an outsider's insightful summary of the current problems we face with infrastructure, then read their article that deals with the issue in their latest edition. Here's a small sampling from an analysis full of eye-opening insights:

The federal government is responsible for only a quarter of total transport spending, but the way it allocates funding shapes the way things are done at the state and local levels. Unfortunately, it tends not to reward the prudent, thanks to formulas that govern over 70% of federal investment. Petrol-tax revenues, for instance, are returned to the states according to the miles of highway they contain, the distances their residents drive, and the fuel they burn. The system is awash with perverse incentives. A state using road-pricing to limit travel and congestion would be punished for its efforts with reduced funding, whereas one that built highways it could not afford to maintain would receive a larger allocation.

Formula-determined block grants to states are, at least, designed to leave important decisions to local authorities. But the formulas used to allocate the money shape infrastructure planning in a remarkably block-headed manner. Cost-benefit studies are almost entirely lacking. Federal guidelines for new construction tend to reflect politics rather than anything else. States tend to use federal money as a substitute for local spending, rather than to supplement or leverage it. The Government Accountability Office estimates that substitution has risen substantially since the 1980s, and increases particularly when states get into budget difficulties. From 1998 to 2002, a period during which economic fortunes were generally deteriorating, state and local transport investment declined by 4% while federal investment rose by 40%. State and local shrinkage is almost certainly worse now.

  • But here in Minnesota we are "boldly" seeking to spend an additional $400 million in highway funding in an initiative Mn/DOT Commissioner Tom Sorel is calling "Better Roads for a Better Minnesota". Most of the money is borrowed, but even so, according to Mn/DOT's own figures, the $100 million per year over four years is just 4% (1/25th) of the $2.5 billion they would need to spend each year to keep up with the state's needs. I'm not sure whether to laugh or cry. 
  • Rob Steuteville published an excellent two-part series this week at New Urban Network on the pending housing collapse. Yes, that was pending, not past. (Part 1, Part 2) Rob presented some excellent analysis from housing market researcher Arthur Nelson to support a conclusion that the worst is yet to come from the housing sector. A follow up article by Sarah Goodyear in Grist was, as to be expected, equally insightful. But my favorite was the cutting analysis by our friends over at Walkable DFW. Here's a taste: 

So if they're [suburban McMansions] not well built and likely can't last more than a decade or two without essentially being "totalled," if they can't be reasonably well subdivided w/ shared formal entry because of the asymmetrical design, and they can't grow food (unless you expand property), and they are in the middle of nowhere, where those that will still be able to afford to drive every/anywhere can choose to also live anywhere, why would they live there? What is the impetus to maintaining the house?

  • Star Tribune blogger and columnist James Lileks this week talked about the changing face of student housing. My wife sent me this article because his descriptions perfectly fit our experience with the unscrupulous slumlords near the University of Minnesota. But not anymore. With the advent of "luxury" student housing (which I caught a whiff of as I saw it going up in my last days of graduate school), students today face some more difficult choices over what to do with their student loan money.

If you live in a lousy college apartment, everything else will be a step up. If you take out substantial loans to live in a luxury apartment, you will end up in the lousy apartment, because you have to pay off your loans. You'll spend some time there eventually. Choose wisely. 

  • A couple of weeks ago, S&P issued a warning on U.S. sovereign debt indicating that it could face a downgrade from its AAA rating, the highest rating possible. We pointed out that S&P gave China - a country with massive cash reserves - a lower credit rating of AA-. Well, this week Weiss Ratings, an independent ratings agency (meaning they are not licensed by the U.S. government) gave U.S. debt a C rating, which is equivalent to S&P's BBB- and is dramatically lower than AAA. The Weiss models also give China an A rating based on their growth rates, lack of debt and reserves. I understand the notion that S&P factors in political stability and Weiss does not, but stability alone cannot explain this discrepancy. After all, while a bank may balk at lending to a family that they know has an abusive and dysfunctional home life, they will certainly decline to lend to the really nice family that has the massive debt and insolvency problem.

  • I'm really excited to hear Ed Glaeser speak at CNU 19. I have a birthday coming up and his recent book is at the top of my list (or so I told my sweet mother-in-law, who asked for a list about a month ago). I'm not sure if Mary Newsom - who blog's beautifully - will be there, but you should read her writings on Glaeser's Truimph of the City.
  • Of course, I'm also excited to hear one of CNU's founders, Andres Duany, speak in Madison. Here is a piece he wrote responding to some criticisms of the New Urbanist movement. It gives a good history and overview of New Urbanism and contains the following insight, which sums up succinctly how I became involved in the movement:

As always, there are no prerequisites for acceptance of any notions that pass that good old American pragmatic test: “Whatever works best in the long run.” This aspect of New Urbanism has famously exasperated our only well-informed critic, Alex Krieger, who once accused us of being “impossible to debate, as you instantly assimilate all good ideas.” And why not?

  • Michigan has become the canary in the mineshaft for many states. Here is an article about their effort to take over and restructure failing cities, or as the article calls it, impose "financial martial law". Will it work? I have no idea, but it is an interesting approach and is worth watching.

On Apr. 14, Joseph Harris, the emergency manager of Benton Harbor (population 11,000), test drove his new powers—by stripping all of Benton Harbor's elected officials of what remained of theirs. A former chief financial officer of Detroit, Harris had been overseeing the community near Kalamazoo since April 2010. He's one of four emergency managers appointed by the former governor, Jennifer Granholm, under a 20-year-old law that granted managers less authority. (Pontiac, Ecorse, and the Detroit school system currently have emergency managers.) "The local elected officials constantly passed resolutions against Harris. They threatened lawsuits. They impeded his ability to do the job," says Pscholka, who represents the area that includes Benton Harbor. "Harris put them in the timeout chair."

  • And finally, growing up on a farm in rural Minnesota while dreaming about being a drummer in a rock band, I can't tell you how many times I played out rhythms in my head synched to the monotonous grind of farm implements. I never imagined a drummer being entirely replaced by the farm implement.

May your entire weekend stay in perfect time.  

 

Last month we started collecting donations to cover the cost of producing a DVD version of the Curbside Chat. Our goal was to connect with 100 of our readers that would be willing to donate $25 each. We've taken quite a bite out of this so far -- we've signed up 31 -- but we still have a ways to go. If you value what you read here or what we produce in our podcast, please do what you can to help us spread this message. We thank you, especially if you are one of our 850+ Facebook connections! It was only a year ago we were still below 200. Thanks for spreading the word.