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Is America Subsidizing 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.

3092780579_c08488ee04.jpgSign of the times? Sde-by-side foreclosures in Massachusetts. (Photo: Yovani via Flickr)

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

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.

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

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:

While there is no federal or private ... dataset thatidentifies where exactly in metropolitan areas the most mortgagedefaults are, local analyses and some news reports indicate the bulk ofthe problem is on the fringe...Thus,some of the biggest beneficiaries of federal efforts to stemforeclosures and keep families in their homes are those located inexurbia.

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.

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

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?

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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?

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