A "Structural Shift" Away From Suburban Model

Christopher Leinberger argues that the fundamental cause of the mortgage meltdown was a "structural shift in market demand" from low-density suburbs to walkable urban housing.

As the federal government prepares to release a series of recommendations to restrucuture Fannie Mae and Freddie Mac, Leinberger believes many people still do not understand the fundamental cause of the meltdown.

"If you do not know the cause of the meltdown, how can you know what to fix to avoid it from happening again?"

Leinberger also discusses the need for reform of the mortgage market to include attention to what he calls "location effiecient mortgages," which take both housing and transportation costs into consideration when underwriting.

Full Story: Federal Restructuring of Fannie and Freddie Ignores Underlying Cause of Crisis



good intentions; faulty analysis and faulty policy prescriptions

Unfortunately, Mr. Leinberger is continuing the refrain of his Atlantic article from a few years ago. He didn't offer any hard evidence then of his claim that sprawl was a principal cause of the mortgage crisis. Nor does he now.

The notion that reckless and weakly regulated capital and mortgage markets were somehow only ancillary causes of the crisis - and secondary factors to location-inefficient development -- is not supported by the evidence. There are now scores of rigorous studies identifying highly engineered securitization, deregulation, and other dominant forces as primarily responsible for the subprime and related foreclosure crises.

I have tested Leinberger's thesis quite directly in a recent article in Urban Affairs Review (http://uar.sagepub.com/content/46/1/3.abstract), and find that, once controlling for levels of high-risk loans during the boom, location-inefficient areas did not experience greater foreclosure rates during the crisis than other areas. Of course, some of these areas happened to have seen disproportionate amounts of development (and home loans) during the subprime boom, but it was the subprime lending that was the driver of the foreclosures, not the location. Moreover, many of the hardest hit neighborhoods across the country were inner-city locatins and relatively location-efficient.

I am no fan of sprawl or location-inefficent development, and I generally agree with many parts of Leinberger's arguments or goals, but just as it is silly to blame land use planning for the crisis (e.g., Randall O'Toole) it is almost as silly to place principal blame for it on poor land use planning.

If planners do not recognize the importance of regulated financial markets - which requires advocacy at the federal level - to provide a critical context for stable, sustainable development, local action and wise planning will routinely be undermined by these larger forces.

-Dan Immergluck

Dan Immergluck
Associate Professor
School of City and Regional Planning
Georgia Institute of Technology

Real Estate Booms & Busts

Dan Immergluck is correct that reckless and weakly regulated capital and mortgage markets were major causes of the recent economic meltdown. Yet, it is also true, that economic booms and busts occur with some regularity, and each one is generally preceded by a boom and bust in the real estate market.

Leinberger is correct that sprawl has contributed to the boom and bust cycle. Part of the problem lies in our property tax system that encourages land speculation. Property owners who improve or maintain buildings are punished with high property taxes while those who allow buildings to deteriorate are rewarded with lower taxes. Those who own boarded-up buildings and vacant lots pay the least.

Real estate speculation can become a self-fulfilling prophecy. The more speculators buy land and hold it off the market (in hopes of future price escalation), the fewer sites are available for development. This artificial shortage of development sites drives up land prices. High land prices, particularly near valuable urban infrastructure, push many developers to cheaper, more remote sites. When folks occupy these remote sites, they don’t have the infrastructure they need. Infrastructure is then extended to their location – and the cycle begins again. Not only does sprawl destroy the environment, it destroys state and local budgets because much more infrastructure is needed than would be required for more compact development.

Eventually, speculators outbid users for most sites. With speculators buying from one another, it is only a matter of time before the self-fulfilling prophecy becomes a self-defeating one. The boom goes bust. Problems with mortgage securitization and lax underwriting practices accelerated this process, but the underlying forces that reward real estate speculation are primarily at fault and have remained a factor in boom and bust cycles over the last century.

Property users (residents and businesses) don’t do well during either phase of the boom and bust cycle. During the boom, they are outbid by speculators when they try to access property. During the bust, they can’t get speculators to sell because these speculators paid more for the land than it is worth in today’s market, and the speculators are reluctant to sell at a loss.

Policy makers would be wise to re-orient our tax system to favor property users more than speculators. This can be accomplished by reducing the property tax on building values while increasing the tax on land values. This makes constructing, improving and maintaining buildings less costly. It also removes the profit from speculation and helps keep land prices low. Without losing revenues, state and local governments could incentivize the construction, improvement and maintenance of buildings, create jobs and reduce future sprawl.

This is primarily a responsibility for state and local governments. But, there is a role for the federal government as well. Property taxes are deductible from federal income taxes. If only the tax on land values were deductible, state and local governments would have a strong incentive to shift their property taxes off of buildings and onto land.

For more information, see http://www.justeconomicsllc.com

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