Wednesday, March 31, 2010
Thomas J. Miceli and C.F. Sirmans wrote an article in the Journal of Housing Economics in 2007 where they argue that the "hold-out" problem is a contributor to urban sprawl. At this point, it would be beneficial to mention that while the authors seem to believe that sprawl leads to many other negative social and economic problems, they are using a definition of sprawl for the purposes of their paper that involves lower density development on the outskirts of a city that is somehow less effecient thanit would be to develop further in.
Miceli and Sirmans argue that when developers need to purchase a parcel of land that is currently in the hands of several different and dispersed users, the costs increase because one or more of the current owners could try to "hold-out". Essentially, for either sentimental reasons or to try to steal profit/surplus from the developer, some of the current owners will hold themselves out from selling when the rest of the group does. These increased costs, and the risk of losing the entire development if even one current owner refuses to sell at any price, push developers of larger projects to bid for parcels at the outskirts of a city. (The typical monocentric city model indicates that lot sizes grow smaller toward the center of the city because of increases in price)
Because of these stubborn codgers holding out, we find ourselves forced into a position of sprawl. Developers must move outward if they want to build for a profit, because the true costs are not captured when there is a "hold-out". Now, is this a market failure? I believe it is more likely not a market failure, but an unfortunate risk of doing business. If we believe that the land will go to it's most highly valued use, it is clear that the current owner, however much a stick in the mud, values the land more highly than the developer is willing to pay. Just because you neglect to factor for a risk of doing business, it is not an automatic failure of the market.
This is something of a 'reverse' situation to the paper we discussed in class, where the idea that the government subsized roadways and the automobile industry was discussed and analyzed. The argument that was being made in class is only partially right, it begins in this analysis with the idea that even if automobile manufacturers did have some influence on the development of cities and their infrastructure that this was 'unnatural'. I agree that it is unnatural but not because the incentives were made, that is probably the most 'natural' or market based portion of the scenario (I know I know it's not a true market transaction because of the governments involvement but the motivations behind it were market based on the side of the automobile industry thus my use of the term 'natural'). The fact that the city and it's planners were involved at all with the process should be the percieved failure. The automobile industry was making a calculated transaction that was driven by market forces even though one end of the deal was not an ordinary market participant. Their funds were derived form market interests and the desired outcome was to remain competitive in the marketplace. Had a private infrastructure been established then they would have most likely attempt a similar market based transaction, the factors and it's success may have differed but the motivation behind the attempt would have been the same. We might also assume that the trolley and rail car industry who was described as being the major competitor at the time would have made similar attempts had they had the financial resources and business acumen from their market transactions to do so.
Even despite the automobile industries exertion of these forces the idea that this was the 'moment' that created the market for cars and developed the modern city system is somewhat far fetched. It leaves out the idea of trial and error we've discussed and totally neglects to consider the fact that the consumer, the market participants will ultimately decide through their market transactions what industries will succeed and which will fail.
This article explains that Metro in Portland have divvied up the land in Clackamas, Multnomah, and Washington counties in Oregon. They have urban reserves, rural reserves, and some areas that haven’t been designated yet due to disagreements. They have allocated 27,000 acres to urban reserves, and 270,000 acres to rural reserves. This will be an 11% increase in urban reserves, and it is supposed to sustain for the next 40 to 50 years. Unfortunately, the population of the region is expected to grow 60 to 70% in the same time. Those numbers don’t quite add up very well, even if all they build is big apartment buildings. However it is believed that this will create “compact, vibrant communities”. Meanwhile conservation groups are asking for more rural reserves, and the people of Portland are trying to convince Metro that it didn’t work the first time and they don’t want to wait another 50 years to find out it didn’t work the second time.
What was more entertaining than the article were the comments made on the article. While not quite credible there were some good points made, along with some crazy points made. One woman talked about how they owned land that had been in her husband’s family for over 100 years. Oregon put a highway through the middle of it and a section was reduced to 18 acres and didn’t have a ‘legal dwelling’ on it. Her family rents the land out to a farmer for $800 a year, which doesn’t quite cover the $80,000 that they have to make off the land to live there. Interestingly enough, if they set such high amounts as the requirement, perhaps not in this woman’s case but in other farmers, it may cause them to raise the prices on renting the land out, or raise the prices of the crops the farmers grow, obviously raising the prices of food. Good job Portland! This article, along with the comments indirectly shows how really the only thing that these urban growth boundaries are doing is raising prices. The prices of housing, land, and food are rising because of planning taking place.
Another person made a pretty valid comment. He was at first saying how people being condensed caused crime, unhappiness, and that this was just the government trying to tell people how to live. What I felt to be the most valid point he made was why are we preventing urban sprawl rather than preventing urban decay. If you make a city a place where people want to live they will. Instead of pumping money into planning and restrictions why not pump it into things like schools, or amenities to attract people?
On a side note, it was also said that economists are fanatics of our religion (economics), and we’re out to destroy all other. This was after this person compared economists (really free-market capitalists, but I think this person saw those as the exact same thing, though they said that free-market capitalists use force) to Christians. I have yet to see the church of economics though.
Tuesday, March 30, 2010
Monday, March 29, 2010
Sunday, March 28, 2010
This trend toward mega-cities has "helped the world pass a tipping point in the last year, with more than half the world's people now living in cities." The main concerns the article cites is that "the growth of mega-regions and cities is also leading to unprecedented urban sprawl, new slums, unbalanced development and income inequalities as more and more people move to satellite or dormitory cities." The author fails to explain how this will "significantly affect...wealth in the next 50 years." He did say that it leads to an increase inequality between the rich and the poor. But isn't it possible for the gap to increase but for both the rich and the poor to be better off? I think it is. Rich and poor are subjective terms and both parties could experience increase in personal wealth even while the gap increases.
The article reminded me of the "The World is Spiky" article and the chapter on why firms cluster (economies of agglomeration) we read for class several weeks ago. As mega cities emerge, people benefit from the clustering of firms and economies of scale. Choices for goods and services and where to purchase these goods and services increases making people better off. I fail to see why mega-cities such as Hong Kong-Shenhzen-Guangzhou (the world's first mega-city) are a bad thing. I do not see this new type of cities as they do. I do not see rampant uncontrollable urban sprawl that as "not only wasteful" but also adding "to transport costs, increase energy consumption, requires more resource, and causes the loss of prime farmland." Allow the market to function and an efficient allocation of all resources will emerge.
Wednesday, March 24, 2010
I found the concerns to be the most interesting part of this document. The document claims that there was at least one concern, issued by homeowners in the Highlands Ranch area, about "Residential property was purchased because it faced open space [and] loss of property value due to development of the open space behind home."
These concerns are similar to some of what we have talked about in class these past weeks; the idea of open space causes an externality. That is, the people who buy the houses are usually willing to pay more money to have access/view/closeness to open space. This extra money paid for the property backing the open space is the market responding to this externality. So because people are willing to pay more for land near open space, they believe that their property is more valuable because of the open space. I think that the land is more valuable in the eyes of the particular land owners, but not more valuable to the market in general; I also think that their property value will not go down because the open space is being developed or changed in some way. So, if a resident purchased property because it faced open space and at some point this open space is different or changed in some way then this person should move to somewhere else, maybe somewhere where there is more "satisfactory" open space. The fact that some people believe that their property value will go down, or that they will be unhappy because their property no longer faces the open space they "fell in love with" is a reason to stop the Spring Gulch Equestrian Area plan is just crazy.
Monday, March 01, 2010
In the real estate purchasing process there are several professionals involved in the process. For this post there are three that we’re going to focus on, the buyer, their lender and/or loan originator and the real estate appraiser. The appraiser is hired as a third party unbiased professional to provide an opinion of value of the home to help assure the lender that the home which is the collateral for the loan is worth a certain amount in respect to the loan. The key here is the third party unbiased opinion of value the appraiser provides. Their impartiality and being free of influence is the key to the profession and their involvement. Until recently the appraiser was hired by the broker who originated the loan directly with that contact. In this manner the appraiser was able to build a working relationship with their clients and compete for their business. Now as I mentioned this was until recently. Thanks to a lawsuit from the Attorney General of New York regarding Fannie Mae’s appraisal quality assurance guidelines, a trend which was initially agreed upon by Fannie Mae (the largest purchaser of mortgages on the secondary market) has been forcefully adopted by the majority of the industry and is now being taken fully into the system through FHA loans. This trend is that appraisals have to be ordered with no contact from the mortgage originator to the appraiser, meaning that the originator has no contact, knowledge, choice in or otherwise influence on the appraiser that is going to be utilized. This comes from the fact that prior to these regulations forms of collusion existed in the marketplace between some appraisers and some loan originators. The concept is by removing the contact between appraiser’s and originators collusion on values and appraiser pressure to omit and overlook negative factors of a home will be eliminated. And this is all well and good but it comes with a tradeoff. It assumes to negate risk on the part of the lenders through regulation (which is another discussion for another post – think... no bail out, let them fail and they’ll wise up. Moral hazards anyone?).
So what has happened as an offspring of this is the rise of AMCs (Appraisal Management Companies). These are third parties that the loan originators order appraisals from. These AMCs and have a roster of appraiser’s from across the country. The benefits are negligible but do include the desired erection of a barrier of communication between the loan originators and the appraisers. This has, definitely reduced the influence and pressures on the appraisers. I can testify to that from firsthand knowledge and it is the surface reason for this legislation. However the true intention of the legislation is to provide more accurate and honest appraisal products. That is where the failure of the industry standard which was born out of government force or threat of force comes in. AMCs are little more than order shuffling and processing companies who hire appraisers with minimal vetting. There incentives and business volume are almost exclusively based on turn time of the appraisal product and competitive pricing which in and of itself is not an issue if that is what the market demands. However at least initially the lack of vetting has changed the structure of the product received by the lender and has been a serious dampener on competition for appraisers. How good an appraiser is how knowledgeable they are and how it contributes to the accuracy range of their valuation have now become non-competing factors. The market showed that until the new regulations were introduced these were important to lenders (this was derived from the fact that these are what lenders were rostering appraisers for during the free market competition era of appraisers). Now several appraisers have left the industry due to regulation after years of being in the same business losing most of their clients overnight. Furthermore appraisers with a smaller skill set and less experience are being employed as they will often compete on price and speed while producing a product of what has in the past been lower quality. If this was a result of a shift in the industry based on a calculated trade off of accuracy vs. time and speed on the part of the clients and appraisers then that would be fine, and in the future the market will most likely adjust to accommodate that. However this has arisen from intervention politics and is resulting in a government failure of policy trumping local knowledge. So this legislation has ‘solved’ a surface issue and in doing so created a new face for the same core problem and most likely in a proportion of risk that the market would not normally produce. They have forced a regulation that squashes the benefits of local knowledge and market competition and created the growth of something else.