The year is 1945. Americans are returning from war and demobilizing from a war economy, as the only leading nation whose geography and industrial capacity are not tragically compromised as part of the conflict. The war was proceeded by the worst period of economic depression the country has ever experienced, a hardship only war spending seemed to alleviate. What to do with all this might? What to do with all this capacity?
In retrospect, it is easy to see the shortcomings, but at the time, redirecting our industrial might and power towards improving the quality of life for (almost) all Americans had to have been the obvious thing to do. A chicken in every pot was so 1930’s. The thing to do – the thing that would solve the persistent problems of the industrial city while bringing about the greatest increase in living standards ever experienced by what would become the middle class – was to put Americans in new homes on the outskirts of cities, employing millions of people from (nearly) all walks of life in the process.
What would you do if you wanted to get the housing construction market going?
On Monday, I described how incrementally rising land values prompt natural redevelopment, particularly when the improvements on the land are in decline. Traditional cities grew incrementally up, incrementally out and become incrementally more intense on a continuum of improvement. Yesterday, I explained how incremental private and public investments create a virtuous cycle that drives property values higher. The Improvement to Land Ratio (I/L) is an indicator of stability (9:1) and high redevelopment potential (< 3:1). This is how cities grow strong and resilient.
In a traditional city, housing growth takes place incrementally over a broad area. There is some redevelopment in the center of existing neighborhoods. There is some new construction out on the edge. Ultimately new neighborhoods form around new centers of activity. They connect and merge and form a greater whole. This is what had been happening for millennia.
The Beginning of the Suburban Experiment
For the unprecedented challenges America faced, to keep the economic momentum of the war going, we needed something grander. What was needed was more land to build upon. Cheap land. Land prices that set a low bar for what was needed to prompt development. This wasn’t going to happen at the necessary scale in the center of town – land prices were too high and kept rising with each success – and we could build out on the edge, but we would run into the same constraints of working incrementally (start small and grow incrementally over time as rising land prices prompt).
This is the ultimate Catch 22 of the Suburban Experiment. New development needed cheap land. Yet, cheap land is antithetical to the interests of existing property owners and local governments. For them, rising land values and incremental development/redevelopment was a path to sustained prosperity. Devalue the land and destroy your own tax base. Don’t devalue the land and watch the macro economy slip back into depression (or that's the belief of macro economists – we don’t really know for sure).
In a prior age, the interests of local governments and existing landowners likely would have prevailed, if only because federal and state governments lacked the power – let alone the macroeconomic theories (and hubris) – to induce broad-based land devaluation. Following the Great Depression and World War II – a pair of national challenges we responded to with increasing centralization and a growing faith in proactive government – the balance of power had shifted. We chose growth today over long-term resiliency. We devalued land by massively increasing the supply.
Of course, that’s not how we think of it today. It’s probably not even how they thought of it then. They were simply making more land available for development. In a nation as land-rich as the United States, there was something self-evident about having enough land for everyone to be able to build upon. Detroit – the Motor City – had been experimenting with the concept since before the Great Depression, with much apparent success. Their approach was a model American cities would follow.
You can see how they struggled at first to break that land value connection to the core. Those initial post-war suburbs were often simple expansions of the existing grid. The homes started more “complete” than shacks on the outskirts in an earlier era, but their designs contemplated additional incremental growth. They were still subtly connected to the traditional value equation of an incrementally expanding city, even if the underlying land values were never going to rise as they once had.
The Side Effects of Growth
Eventually, the highways running through cities out to the edge of town severed the tie completely. Now abundant, cheap land was made available for all while the high-value land in the core was financially decimated. Nobody was thinking about future redevelopment anymore. Cities stopped growing that way. Now, it was all horizontal. So long as we kept building highways, cheap land would be available so America could experience growth.
We were done focusing on building wealth. All that wealth built slowly and incrementally in our cities through prior generations hadn’t kept us out of another depression; it was only our commitment to growth that had accomplished that. And it provided (almost) everyone a house and a yard and a car in the garage. It’s not that hard to understand why this generation – our Greatest Generation – did this and why much of our culture is still nostalgic about it today.
Shifting the focus from wealth creation to growth would have long-term, pernicious side-effects. Consider the standard suburban development. All the homes – maybe hundreds in a single development – are built within a very short period of time. They are built to a finished state; they are not assembled incrementally and there is no thought that the neighborhood will ever grow into anything more than a collection of single family homes. These new norms would be codified as zoning regulations, especially once decline started to set in.
Remember, it is rising land prices that naturally prompt redevelopment, but in suburbs – where development is built all at once to a finished state – there are no rising land prices. Once the land is developed, it is, as real estate people like to say, at its highest and best use. There is no upward pressure because there is nothing more than can be done with it. Ever. It’s done.
The Decline Phase
That’s just fine initially when everything is shiny and new, but what happens two decades later when all the houses need new paint? What happens when everyone’s roof fails at the same time? What happens when the appliances – all purchased on the same date – start failing in succession and need to be replaced?
In a neighborhood built incrementally, this financial hardship would be spread out; it would not hit everyone at the same time. Some would manage it and some would not. Those who did the maintenance would see their Improvement Value remain stable. Those who did not would have their Improvement Value decline.
Only, without rising land values, the decline doesn’t prompt redevelopment. Consider the Little House example from yesterday. Instead of the Land Value rising from $10,000 to $25,000 while the Improvement Value dropped, here’s what happens when the land value stays the same.
The I/L ratio is not near redevelopment levels of 3:1. Despite the decline of the improvements, the I/L ratio stays at 7.5. Financially, this is a stable situation. In the Suburban Experiment, decline is a stable situation. Not until the improvements decline to $30,000 would there be any natural redevelopment pressure and, at that point, the neighborhood has completely fallen apart.
Without the incentive to intensify brought about by rising land values, without the financial incentive to grow incrementally to the next level of intensity, there is a cap on the upward potential of neighborhoods. That cap is generally set the moment the neighborhood is finished. Decline starts from that point and accelerates over time. Where improvement is not an option, stagnation and decline are all that remain.
Note that, long before things fall apart, most of those with affluence have seen the writing on the walls and chosen to depart because they can afford to. There is a new development up the highway that has a good two or more decades before decline sets in there; that looks like a better investment, especially when “those people” (however defined in your community) start to move into the old neighborhood. And understand, in very affluent development, “those people” might simply mean people in the working class. A defining characteristic of the Suburban Experiment is its natural but relentless obsession with dividing us all from each other in as many ways as possible.
Zoning has codified much of the stagnation, decline and obsession with social division, but I’ve become convinced that it was a reaction and not the primary cause. The primary cause is that we ended the virtuous cycle of redevelopment brought about by continually rising land values. In a world where supply and demand equilibrate at a price, massively increasing the supply of land drives down the price. Without rising land values, without natural redevelopment, all we are left with is stagnation and decline.
Tomorrow we will look at unnatural redevelopment – it’s all we have left – but, before I finish, I want to make note of one last thing. In a city where land values are rising and redevelopment happens naturally, the interests of local government are completely aligned with the interests of property owners. They all want wealth to broadly increase because it is good for everyone. In a city where land values stagnate and there is no natural redevelopment, the local government becomes a transactional entity – like a bank more interested in originating bad loans to sell on the secondary market than prudently investing the deposits of savers – and this puts it at odds with what is best for people living in the city.
Until we properly align our objectives and reestablish positive feedback loops, we’re going to struggle to build a nation of strong towns.
(Top photo source: Orange County Archives)