This article is part of a series on housing affordability in Portland. Read the other articles:

  1. What's the Matter with Portland?
  2. Distorting Housing Prices
  3. Suspicious Economics in Portland Articles

A wave laps up on the beach. The force of the surge pushes water up against the wet sand. The action is understandable, a rhythm that is quite predictable. Even little children find it easy to discern the areas where their feet will get wet from those places where the effort of building a sand castle won't be wasted.

Up the shore is a seawall. The waves act differently there. When the water hits the wall, it explodes upward, the force of the wave ultimately dissipated by gravity instead of friction. Kids play near the edge of the wall, but not too close (unless they want to get splashed by the mist).

Some Strong Towns readers have been frustrated with me for not acknowledging what you see as the obvious wave of growth impacting housing prices in cities like Portland and Austin. While I've said that I'm not convinced that the housing emergency in Portland in due to these causes, there is clearly a wave of demand that is putting upward pressure on price. What I've reacted to is the seawall, the self-created impediment that is dramatically forcing that wave skyward. That seawall is the city's fetish with high density development.

I've been on the road nearly all of the past two weeks and so I've not had a time to push this conversation forward at the pace many of you would like. As a makeup, today's post is going to be rather dense. As you'll see, however, the density of this post builds incrementally on what came before it; it's the next step in years of conversation we've had here. To make the point even more, this conversation is not an intellectual leap into the unknown, one that carelessly and recklessly skips over necessary iterations of development just to get to the desired end.

Last week I explained how large leaps in the development pattern -- from single family home to multi-story tower -- distorts land values and, in doing so, artificially drives up prices on lands zoned for such a leap. At the same time that a number of you were responding negatively to what I think is an obvious and hardly-even-debatable phenomenon, I was experiencing yet another example of it in San Marcos, Texas.

T-5 zoning in San Marcos, TX. Should be T-2 or, at most, T-3 since that is the next increment of intensity. T-5 simply distorts the underlying land values, jacks up housing prices and stagnates the entire neighborhood. Image from Google.

T-5 zoning in San Marcos, TX. Should be T-2 or, at most, T-3 since that is the next increment of intensity. T-5 simply distorts the underlying land values, jacks up housing prices and stagnates the entire neighborhood. Image from Google.

On a walking tour there, we strolled through blocks and blocks of gaps -- empty and underutilized lots -- just off of their core downtown. I pointed out a nice little home as an example of what the city should be striving for to fill in these gaps and then pointed to the adjacent vacant lot as the perfect place to start. That was when I was informed that the vacant lot was zoned T-5 Urban Center (2-5 story multi-family housing) and that the owner wanted $600,000 for it, making my proposed modest home financially impossible.

I asked why this land was zoned T-5 when there was so much underutilized property in the area, so much dead space. The answer was exactly what I heard in Portland and exactly what I heard in Austin: we're growing.

Supposedly there is so much demand for housing in San Marcos that T-5 zoning is needed -- all that high density development is necessary -- to meet the demand. I walked around for hours and experienced an endless amount of underutilized property, just as I had outside the cores of Portland and Austin. It was more property than would ever be utilized as T-5 and it was sitting there, high priced and waiting for the right buyer to come by and make the owner rich. 

And the property owner had good reason to find this wait rational. It was reported to me that prices had been going up dramatically. There were a couple parts of town where high density development -- in this case some five story apartments -- was going on. With the land consistently going up in value and the cost to hold it minimal -- it is being taxed as raw land -- why not wait for a windfall? San Marcos is growing -- everyone knows it -- so sit back and let the growth make you rich.

Zoning in the downtown core of San Marcos, TX. Enough T-5 to bring population from 54,000 to a couple hundred thousand, at least.

Zoning in the downtown core of San Marcos, TX. Enough T-5 to bring population from 54,000 to a couple hundred thousand, at least.

This is the same thing I experienced here in my home town in a personal way over the past twenty years. My parents purchased the 80-acre Marohn homestead back when I was a little boy for something like $500 per acre. In the mid-1990's, development was taking off in the Brainerd area and raw land started to skyrocket. The narrative was that all those rich people from the Minneapolis/St. Paul area were moving up and they could afford to pay outrageous prices. Heck, they thought land was so cheap they just threw money at it. 

We heard reports of land selling for $20,000 per acre. Then I, in my capacity as an engineer, worked with someone who paid the insane price of $30,000 per acre for land about a mile away from our farm. A little later, one of the old farms just up the road sold for $35,000 per acre. My parents were convinced that their much nicer property was certainly worth $40,000 per acre, at least. They still own it with the assessor having it worth six figures but with their own balance sheet valuing it in the millions. 

Here's the absurd thing: there is so much land here that the price should be zero. Or, at most, the price of the land should be as if it were used for forestry, agriculture or hunting. Years ago, I did some simple math and showed some bankers that there is over 100 year's worth of supply of developed lots in the area. That excluded the raw land, land that the owners still expect to be worth millions.

John Maynard Keynes observed that wages are sticky. That is, when market conditions falter and businesses start to see profits drop, they are more apt to lay people off than they are to cut wages. People are very resistant to wage decreases because humans are wired to to be very sensitive to loss, far more than we are to gain. Freeze wages for three years and people will gripe. Cut wages for three years and they will revolt.

Land prices are subject to this same human condition. Unless forced to sell -- such as in an estate sale -- many people mentally book gains and will not sell until those gains -- or something near them -- can be realized. This is why rumors of free-spending Chinese, wealthy San Franciscans and tech workers dripping with dollars are so widespread. They are part of a cultural belief system that explain -- in an affirming way -- what we see happening.

Portland grew by 1.5% last year. These are growth rates not seen since before 2008. Just ponder that number -- 1.5% growth -- and contrast that with housing prices and rents that are growing by double digits. Portland has spent billions -- BILLIONS -- preparing for growth. They have built rail lines all over the place, built highways throughout and run thousands of miles of pipe in anticipation of growth. Yet, they can't handle 1.5% growth without blowing up housing prices? Think of any other entity in any other realm that grows by 1.5% per year and contrast the reaction of that system with the hysteria of Portland. If this is only a 1.5% wave, it doesn't make sense. That kind of wave should roll across the sand and dissipate. Something is magnifying it.

In Portland today, there are three types places where this wave is being accommodated. The first is the core downtown, what I've called an urban planning Disneyland, where truly high demand for a unique place combine with high building costs and relative scarcity to price this area out of reach for most. The second place is in the remaining greenfield areas, where single family homes are being built in the insolvent suburban style we see all over North America. Neighborhoods are built all at one to a finished state; there is no next increment of intensity anticipated.

The third -- the spike -- is in those corridors zoned for high density, where the highest and best use is priced into the land. In these areas, the government has already made the investment -- the rail line -- and put in place the regulatory environment that has created a windfall for property owners. All those property owners need to do now is wait around until it is their turn to sell to a developer, someone ready to pay the price to build high density. In the meantime, any scarcity -- real or perceived -- just drives up the price and increases the long term payoff.

Scarcity also helps the high density developer. Assembling the land, acquiring the permits and going through the development process for a condominium tower or apartment complex involves taking on great risk over an extended period. It's best not to get too far out in front of a market -- one only growing 1.5% per year -- so that you don't get exposed if (when) there is a correction. High land prices are a bummer, but you can find good deals now and then and the high price of the finished product gives some added margin for error.

So how do we free up more raw land for development? How do we get these stagnating properties off the sidelines and into the game? How do we get developers to proceed more quickly? There is a very simple answer, but it is counter-intuitive and directly clashes with the planning profession's fetish with density.

The simple answer is downzoning.

What if along all these rail corridors and at all of these rail stops, instead of being able to build an eight-story condo unit, all a developer was allowed to build was the next increment of intensity? For most of that area, that would mean single family homes. In that case, what would happen to land prices? They would drop. They would crater, in fact. This would free up an incredible amount of land for cheap, affordable development while also taking a substantial amount of pressure off of the existing single-family neighborhoods.

But Chuck....Portland is growing (by 1.5% per year) and pretty soon all of that vacant and underutilized land is going to be built upon. Portland will be built out and we'll be pressured to extend the Urban Growth Boundary for new greenfield development. How you can possibly support single-family homes?

There is no such thing as “built out” in a Strong Town. There is no such thing as being done.

I'm not advocating for single family homes. I'm advocating for incremental development. Portland (and Austin and San Marcos and...) are trying to skip increments. They are trying to have a toned body without proper diet and exercise. They are trying to sprint before they have learned to crawl. They are obsessing over their theories of density and, in the process, they are stagnating their cities and leaving wide swaths of their population behind. There is no such thing as "built out" in a Strong Town. There is no such thing as being done. Cities that grow incrementally are on a continuum of improvement and so, when a block is so-called fully developed, the next increment of intensity must always be available. By right. Everywhere.

And for those of you who have suggested the last couple weeks that I'm a country bumpkin who found himself in the big city and had a sudden flash of crazy, I wrote about a floating height limit two years ago. That article also made people who have a fetish with density quite cranky with me, people who look at build-it-and-they-will-come rail investments in their cities and think the problem is the market not reacting correctly to this awesome public investment, that a little more density could sweeten the pie and get developers off the sidelines. They don't see how land speculators and developers were using the planner's zeal for density to squeeze their communities for low risk, publicly subsidized profit. The problem isn't the developer - it's the premature rail investment. Portland is an extreme example and it was that contrast that made it even more visible to me.

I know there is a lot to unpack here and I'll try -- despite an insanely busy schedule this week -- to be attentive to your comments and feedback, but let me address one final thing before signing off on this one. A comment by @Funktapus last week that received a really high number of upvotes included these rhetorical questions:

Suppose you're right and Portland has invested in transit oriented development, which by some voodoo has jacked up housing costs everywhere, snowballing the demand for more transit oriented development. What's the worst case scenario if growth abruptly halts? We are left with a bunch of high quality, sustainable, resilient neighborhoods with falling rent? That's not exactly a bad thing.

To be clear: I don't think the demand is for transit oriented development, per se. That's just the only development our fetish with density will allow us to consider in these places. You start with that given and @Funktapus's proposition becomes a self-reinforcing one. I don't start there.

Still, the worst case is we spend a couple of decades needlessly squeezing the poorest of Portland's residents further and further to the margins. We appease our guilt and anxiety over this problem by distorting the housing market further with rent controls and inclusionary zoning, things that, if they have worked at all (and I'm highly skeptical), have only worked on the margins. Planners get paid and have fun spouting Jane Jacobs while acting like Robert Moses. Developers and bankers get paid, of course. Corporations that can work at the scale demanded by Portland's development approach also do well while the small, incremental developer is squeezed out (that's okay - she can go be a barista as they are in high demand). 

And after decades of squeezing, economic distortions so great that even middle class and upper middle class people find it hard to make it, the growth stops and all that inflated land adjusts back to normal prices. Hundreds of billions of dollars of wealth are lost, many decent and hardworking people are thrust into extreme financial distress and -- to make matters worse -- at the time of greatest need, the city (which is dependent on the artificially high land values for a large part of its revenue) struggles just to make their debt payments, let alone do anything to make life better for people that are suffering, the people who must -- if the place is to ever prosper again -- continue to find themselves in love with Portland, even when it isn't growing.

But yeah, at least you'll have some high density buildings to enjoy.

Read the next article in this series, "Difficult Choices."

Top photo from Wikimedia.

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