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Tuesday, June 10, 2008

Oil Prices and Sprawl

Back in December, I wrote an op-ed for the Washington Post suggesting that rising oil prices might be having an impact on Americans' taste for exurban homes.  At the time, the data in support of this thesis was still very anecdotal.   In the six months since then, more data has been gathered, and it points in the direction one would expect.  The housing crisis, while severe, is not being experienced the same way by all homeowners.  Owners of homes near urban centers and accessible to public transit are finding that their homes are holding their values pretty well.  On the other hand, the largest declines in property values are being experienced in more far-flung developments, where the only way to get anything done is to hop into the car.

This makes good sense.  In the debate over sprawl, proponents of the status quo have argued that suburban development has delivered for American homeowners a lot of home for very little money.  Setting aside questions of taste and focusing on square footage, there's a great deal of truth to this. But when you factor in the cost of transportation, the issue becomes far more complex.  Housing that provides owners with no alternative to the private car is more expensive than it at first appears.  That cost remained largely out of view when gas was $1.50 per gallon, but with gas prices nearly tripling over the past five years, and threatening to continue to increase for the foreseeable future, that hidden cost has jumped out into the foreground.  (The average American family of four consumes roughly 1500 gallons of fuel per year, so, barring a shift to more fuel-efficient vehicles, every $1 rise in gas prices costs about $1500 per year, per family.)  The people at the Center for Neighborhood Technology have put together a great interactive map that allows you to compare the cost of housing in different parts of various metropolitan areas with the cost of housing+transportation.  The (predictable) consequence is that, when you factor in transportation, housing far from urban centers becomes much more expensive, and in many cases more expensive than housing in or near downtown.

In addition to causing people to sell (or to refuse to buy) housing in the exurbs, high gas prices are causing other behavioral changes as well.  People are driving less by reducing the number of trips they take (e.g., by combining their tasks into as few round trips as possible) or consuming less gasoline by switching to more fuel-efficient cars.  But (at the moment) gas prices are rising faster than car-makers can increase efficiency, and not everyone can afford to purchase a new car, so shifts in land use patterns promise to remain a vital coping strategy for cash-pressed families struggling with high gas prices.

This is interesting to me as a land-use teacher because it draws attention to a number of important questions.  Key among them is the cost of delegating our system of land-use regulation to local governments.  William Fischel's influential theory of local government behavior predicts that local governments in fragmented metropolitan areas will regulate for artificially low residential densities, both to exclude land uses that consume more in government services than they generate in property tax revenue and in order to capitalize within home values the value of certain local government services, such as good public schools.  Fischel recognizes that, given the incentives local governments face, fragmentation is likely to lead to increased sprawl.  (This predicted relationship between fragmentation and dispersion is by and large, though not universally, borne out by the empirical studies.  In the words of a 2006 memo by the Federal Reserve Bank of Boston, "research findings generally converge on the conclusion that fragmented government structure correlates with wider dispersion, i.e., more sprawl.")

Sprawl notwithstanding, Fischel defends fragmented government because of the savings he thinks are generated by competition among local governments.  Critics of (aspects of) Fischel's  theory, such as Lee Fennell, have pointed towards some of the pernicious social consequences of auctioning off certain  services (such as education) through suburban housing markets.  And many first-year property students have read the Mount Laurel line of cases, in which the New Jersey Supreme Court attempted to grapple with some of those consequences by requiring suburban governments to accept their "fair share" of low-income housing.  Transportation costs represent a neglected piece of this puzzle.  One of the downsides of dispersed, fragmented local government is heightened dependence on the private automobile to get from place to place.  As gas prices go up, so do the costs of that dependence.  Even if Fischel is right that fragmented local governments deliver certain services more efficiently than would a consolidated metropolitan government, in an environment in which rising gas prices exceed our ability to adapt by switching to more efficient automobiles, at some point the higher cost of moving people around within such a system will swamp out those benefits.  (The problem of climate change represents another cost of this auto-dependent system.  Thus, even if gas prices come down, or automakers come up with a cheap, electric car, we will have to grapple with the energy costs that fragmented local government encourages.)

Unless we are to consign lower-middle class Americans to a life on the sprawled out metropolitan fringe (or in tent cities), spending an increasing portion of their income to fuel their cars , we need to find ways to develop more affordable housing within the existing metropolitan footprint, where pedestrians, cyclists, and strap-hangers have a fighting chance.   Given the  incentives Fischel describes local governments as facing, it is unlikely that they will consent on their own to the provision of much low- and moderate-income housing within their borders.  The solution seems to be either the creation of legal doctrines, like Mt. Laurel, that impose obligations on local governments to consider the good of the region in their land-use decisions or the shifting of land-use decision-making authority to higher levels of government, either at the regional or state level.   (Of course, fights over schools are going to be a huge part of this.)  Each solution has its pluses and minuses, but I've already frittered away enough time this afternoon, so I will have to save that issue for a future post.

Posted by Eduardo Penalver on June 10, 2008 at 03:20 PM | Permalink


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Eduardo -

I'm all for affordable housing in an absolute sense. But surely lower and middle income folks will naturally choose the relatively cheaper urban areas - even if that housing is, in an absolute sense, expensive - when their alternative is the relatively more expensive exurban areas, no? Unless the suggestion is that this increased cost of exurban housing will simply move these folks out of the housing market altogether, which I suppose is possible at the extreme end.

Posted by: Mark McKenna | Jun 11, 2008 7:42:24 PM

Mark -- I agree that urban housing is become more affordable in a relative sense, but not in an absolute sense. And I think that is a problem. Caps on density closer in (even in already dense areas) have put a crimp on the supply of affordable housing in these areas. The price of housing in Manhattan, for example, is well above the cost of building the marginal unit, and this is due, at least in part, to artificial constraints on the supply of housing as a result of zoning.

Posted by: Eduardo Penalver | Jun 11, 2008 11:21:36 AM

Eduardo -

Interesting post. There's some tension between your proposed solution of finding ways to create more affordable housing in the urban centers and the fact that "when you factor in transportation, housing far from urban centers becomes much more expensive, and in many cases more expensive than housing in or near downtown." If that evidence is correct, and if the data you're pointing to regarding home values in urban vs. exurban areas is correct, then it seems like, as a relative matter, housing in urban areas is becoming more affordable on its own.

The difficulties being felt in the exurban areas are partly a land use issue, as you say - it was development built on an expectation of cheap gas, and that expectation is no longer reasonable. The inevitable consequence of increasing development in this pattern was to make us a more oil-dependent society and much more susceptible to the problem we're having now. But one could come at the problem from a land use perspective - regulating land use to fit better patterns - or from an energy policy perspective. We could, for example, force natural changes in land use by artificially raising the cost of gas (through tax) in order to depress consumption.

Posted by: Mark McKenna | Jun 11, 2008 11:14:58 AM

Isn't this just one more of those problems that would be easily solved in one generation by putting some birth control in the water supply?

Posted by: jimbino | Jun 11, 2008 10:15:29 AM

Dave -- Thanks for the comment. I agree that these other factors are important as well, and I don't really agree with the Cortright's assertion that high gas prices CAUSED the housing bubble to pop, but a couple of thoughts come to mind reading your comment. First, the 1500 gallon figure is the average for a family of four. Presumably, families living out the exurbs use more, and so are hit harder by the run up in prices. And a couple hundred a month in extra expenses can be extremely disruptive, particularly for families earning close to the median household income. I think the NY Times article I linked to in the post does a nice job of describing this. Second, your point about the LA counter-example is interesting. The Cortright study also concludes that housing has held up better near cities with strong urban cores. I wonder if the counter-examples you are describing are explained by that factor. In any event, I don't think gas prices will explain everything. Real estate is, after all, quintessentially local, but I do think transportation costs are an increasingly important part of the affordable housing equation.

Posted by: Eduardo Penalver | Jun 11, 2008 9:30:23 AM

The nexus is likely a factor in the housing downturn, but I wonder if it isn't overstated. Certainly high fuel prices raise the costs of living in an exurb, but even a $2 increase in prices amounts to a couple hundred a month for a family of four. It seems that the real driver of the housing crash has to be larger shocks that can't be accommodated by a recalibration of the household budget: unemployment leading to the loss of an income; irresponsible lending practices; resetting ARMs that push mortgage prices out of range. Plus, prices in central cities tend to stay steady because the housing stock is generally better and the owners are wealthier (so they can afford to ride out the housing crash rather than having to sell immediately). Nor is it always true that housing in central city areas holds its price better; in LA, places like Beverly Hills are doing fine, but condos in West Hollywood and SFRs in lower-income but proximate areas (each of which skyrocketed during the housing boom) are suffering significant declines in value. Gas prices can't explain either of those trends.

Posted by: Dave | Jun 10, 2008 11:45:24 PM

I'm fascinated by this nexus myself. It'll be interesting to see if it holds longer term (as the mortgage crisis fades (hopefully) and it is easier to compare tightly engineered communities w/ housing stock to their opposites. I wonder: Stiff's data (which NPR reported) seemed entirely cued to commute times -- which may or may not be synonymous w/ "compact" and "transit-friendly" metro areas. It takes about as long to ride the subway from Morningside Heights to Wall Street as it does to drive there from a lot of relatively far flung places. And this may become true in other cities with high subscriber transit systems, too. (?)

Posted by: Jamie Colburn | Jun 10, 2008 8:54:22 PM

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