Friday, February 20, 2009

Bob's and Eric's Ideas for the Economy

My friends Eric Weaver and Bob Palmer wrote some good opinion pieces on the current economic troubles in the US. Eric argues that stimulus dollars flowing to banks should include money for commmunity development banks, not just because their work is important, but because they've been fulfilling their mission while the rest of the financial services sector has been buttering its belly. Bob lays out a plan for mortgage relief. Nice job, guys.

I'm not normally an iconoclast or crank, but I can't understand why the land purchase program I have described in this blog is not being taken up. Here's an op-ed I submitted to the NY Times:

I keep reading that a rebound in the housing industry will be a balm for bank and household balance sheets and a potential key to ending the US economic crisis. This formulation glosses over the fact that housing is two competing industries, both sick. Curing both, however, may not be what's best for the economy. The housing industry includes the sales of new and of existing homes. In fact, the credit crisis and the foreclosure crisis both stem from the decline in the price of existing homes. The decline in the new home construction industry hurts homebuilders and their employees, but that pain does not radiate out to the financial system or American homeowners generally. In fact, there are a lot of benefits from a decline in new home construction.

The contraction in credit markets has led to sharp reductions in investment and consumption and a broad fiscal stimulus is now necessary to sustain businesses and households through the worst of the slow-down. But a targeted plan identifying existing homes as the root of the problem, and protecting or restoring their value might have saved us from this monumental effort. At this point, a targeted initiative increasing the value of existing homes might be one of the most efficient investments of stimulus dollars, and would accomplish a variety of other worthy aims. To achieve this aim, the government should provide dollars to states for the purpose of buying undeveloped land to be set aside for conservation. Removing potential home lots from the marketplace would immediately add to the value of the existing lots, adding to homeowners' wealth and increasing the value of the home mortgages on bank balance sheets.

Homebuilding is an important industry in the United States. Americans prefer newer homes and economic vitality depends on the existence of affordable, appealing places to live located close to desirable jobs. New homes, though, can come from already developed property as well as from forest or farmland. Industrial and commercial property can be converted into lofts and apartments. Old houses can be torn down and rebuilt, remodeled, added to, or just renovated. The fact is, though, the large homebuilding corporations sell new homes on a very large scale. Their business model depends almost entirely on new home construction. The proposal here is to push back on that business model, increase the ratio of reconstruction to new construction, and give existing homeowners some much-needed market power.

New home construction has been too easy for a long time. In addition to the familiar story of the financial encouragement, the regulatory environment has also been helpful in that home-building permits are awarded at the local level. The metropolitan areas we live and work in are ungoverned. Changing land use and traffic patterns have a regional impact, but permitting is handled locally, and the narrow aim of increasing the local property tax base is usually a significant factor. The resulting sprawl strains city and inner-ring suburban economies and tax bases, and leads to longer commutes, more traffic, and more air pollution, while legacy mass transit systems are made less and less relevant.

Buying undeveloped land is a simple solution to a complex problem. Many states and localities have "land banks" in place. Their traditional role is to take temporary possession of blighted properties and eventually resell them to owners who put them to good use. With sufficient funding they, or other land conservation groups, could fight blight before it happens, rather than after a decade or two of disuse and decline. If a homebuilder sells, say, 2,000 acres of land outside a metropolitan area for $30,000,000 and undeveloped land is made more expensive by the program, the builder would dial down new home construction on undeveloped land in favor of investing in existing homes or other properties and transforming them into more desirable properties. The program could make reinvestment along these lines a condition of the sale. This would be a great benefit for the owners of existing homes, who have seen years of price declines and with inventories at very high levels, face difficulties selling their homes at all.

For 10 months in 2008, the inventory level of existing homes for sale in the United States, was more than 4 million, representing more than eleven months of sales, according to the National Association of Realtors. The annual rate of housing starts (new homes) in December 2008, twelve months into the recession and three months into the credit crisis was 550,000, according to the Census Bureau. That's 45% below the rate of housing starts one year ago, but it's still adding to the available inventory. In December of 2008, the inventory of existing homes for sale finally dropped below 4 million, dropping in fact by 490,000 even though only 360,000 homes were sold. The difference must be a result of would-be sellers giving up. That's not surprising as sales prices in December were 19% below the 2007 level.

One could argue that the time to guard against oversupply of housing has come and gone. New construction has slowed down tremendously, and the four million people who want to sell their homes have little to fear from the half a million new homes currently being made. But the question is, how do we turn the problem around? The key may this: home prices reflect expected appreciation in addition to current supply and demand. The home-making machine is humming quietly today, but the volume will certainly get louder if home prices start to stabilize. Home-builders have substantial amounts of land inventoried, have debt service payments to make, and have an incentive to make and sell houses as soon as and as long as the sales price is greater than the cost of construction. Given this possibility, why buy now? A nationally funded land purchase program would give us a tool to steer, to some extent, new home-buying dollars toward much needed home price appreciation and redevelopment of languishing existing property, rather than toward unneeded additional home construction.

1 comment:

Bob Palmer said...

Very worthwhile, provocative idea as it addresses housing, environmental-related crises but too controversial for the Obama administration Homebuilders, local governments, Realtors, agro industry and others would freak out and it would undoubtedly undermine the bipartisan support the Obama administration has been been trying to build for the stimulus plan.

On a much smaller scale than what you are proposing, developing green space and land banking are allowable uses for the Neighborhood Stabilization Program that was part of the Housing and Economic Recovery Act passed during the Bush administration. However, the funding is targeted at areas that are already developed but suffering from high rates of foreclosures rather than areas at the edges of metropolitan areas. See