The impatience of the development industry and its municipal regulators clearly contributed to the Meltdown, and a case could be made that impatience was actually the prime culprit. Developing impatiently means building large swaths of similar product efficiently and quickly. The public and private sectors each need to learn some lessons from the ways most great old places developed because those ways are far more sustainable and require a lot less debt, as we discussed recently. Here are the forces at work today that prevent us from building patient and sustainable places today:
Bankers usually require developers to provide market surveys showing that there is a need for the developments they're proposing. Typical market survey firms do what seems like the logical thing and look both at what has sold in the past and also at economic forecasts for the market in question. But there are two serious flaws in the system: First, this "rear view mirror approach" will almost always predict some combination of the previous best-sellers. It is incapable of predicting what people would prefer if they were given a choice. So they usually call for small variations on the "sweet spot house." The second problem is that if a survey calls for 500 new houses in the market, 5 developers might take that same survey to 5 different banks and get approved to build 5 x 500 = 2,500 houses. So market surveys can be wildly deceptive, and they are a major force for homogenizing new housing offerings.
Appraisers base their work on "comps," which is short for "comparable sales" of properties in the same market in the recent past. If you're building a house type that hasn't been built in recent years (or ever) in your market, appraisers don't have any recent sales to compare it to, so they kick into their "dark side mode" of ultra-conservative appraising. When Wanda and I built our house in the 1980s that didn't need a conventional heating and cooling system because it conditioned itself passively, the appraiser assigned it a ridiculously low value of $25 per square foot, forcing us to finance a large part of the house on credit card debt, which financially burdened us almost to the breaking point for several years thereafter. Most people would have done the sane thing and abandoned their dream of building a sustainable homestead. The appraisal system, then, has a similar effect to market surveys: forcing the development industry to build what it has built before by severely discouraging anything new. And of course, building many of the same types of houses plays right into the industrial homebuilders' impatience because it allows them to carpet the land with subdivisions quickly.
Because we distrust new development, our city planning departments require developers to show exactly what the final development will look like. They are then required to build everything out to its climax condition from the beginning, burdening developments with millions in infrastructure costs before any real estate is sold. Many developments, including several well-designed ones I'm aware of (and more that I certainly don't know about,) have failed in recent years because of this huge front-end burden coming during the Great Recession. So it should come as no surprise that once that "interest clock" starts ticking on their loans down at the bank, developers have little choice but to be impatient in everything that they do to develop their property. There's no ill intention here; they simply have no choice.
Bankers play a role at both the scale of the neighborhood and the scale of the home. If we built houses in small increments that we could afford to pay for at the time, then we wouldn't need home mortgage bankers very often. Thomas Jefferson, for example, built and lived in one of the two small cottages behind Monticello while he built the rest of the house over nearly a decade. But because our whole system is impatient, we are forced to build the complete house from the beginning. And so we're forced to make our biggest lifetime purchase: the home mortgage.
Because those mortgages on the big house we might never fully need are so large, the bankers have no choice but to force us to insure our homes against all sorts of threats. And because we're insured, we don't have the incentive to build durable buildings that would survive most of those threats. Durability is a special kind of patience, because it extends a building's life long into the future.
Once, you merely had to persuade your local banker to loan you the money to build your home, but no more. Now, mortgages are bundled and sold to investors, so the bankers are limited not only by their own judgement, but also by the investors' guidelines. Mortgage bundling is the biggest iron fist in the homogenization of housing into just a few house types. Bundling is also one factor broadly blamed for creating the Meltdown for several reasons that have been written about by many experts… just Google it if you're interested.
Real estate agents foster housing homogenization in a very direct way: Talk to most agents about buying a house and they'll steer you to houses with a whirlpool tub, for example. They'll tell you that you need it "for resale." In other words, even if you never get in a whirlpool tub, you need to buy a house with one anyway because someone else might want one. Never mind the fact that if you polled the public, only a tiny percentage use a whirlpool tub on a regular basis.
Combine all these factors, and it's crystal clear why we've built the way we've built in recent decades. But as we look at how the system is now so broken, it's also clear that American development needs a strong does of patience… don't you think?
It reminds me of the attitude towards one-bedroom houses. Everyone says to stay away, you'll never be able to sell it, what if you have guests over? Of course it becomes self-fulfilling if everyone says they're bad, but if I want one then surely some others will too. Not having that extra square footage means that much more attention and money can be focused on making the rest of the house nicer.
Sometimes I wonder if the real estate market doesn't need to melt down even more. Maybe then people will stop treating houses as investments where only resale matters, but rather as places to live, which is after all what they really are. In that situation people will only buy what they really need and can realistically afford.
I agree with Jeffrey. We should stop seeing homes solely as an investment. I'd be willing to live in a one bedroom house as a starter home. It seems absurd that a $100,000 three bedroom (or more) house is considered a starter home even after a recession. When did we lose sight of the fact that real wealth usually has to be built over time and that a home is more than an investment? I also imagine there are more people like me who would rather have a live/work situation over anything else.
There is a push for smaller houses among environmentlists, at least, and hopefully it will last.
One thing I wonder about is how often market surveys and appraisals consider the quality of the neighborhood. Is it only about the house, and what are the implications of that?
Excellent commentary, Steve. Many homeowner associations also stand in the way - by requiring build-out within a certain amount of time and/or by not allowing accessory buildings to be constructed first. Plus they lead the way in use restrictions, such as two-family units which allow rentals and help owners make payments. Governments tend to "follow the market" and often carve these needless pressures into zoning regulation.