Wednesday, March 31, 2010

Am I Holding Out, or Just Sentimental?

We all know one of THOSE people. The aunt who wears the same hat every day, even if it is threadbare. The brother who is still holding a grudge about the time you took the last corn muffin at Thanksgiving. Sometimes we are the ones who keep boxes of the past piled up around our ears, unwilling to let go of the 3rd grade report card when we got an "A" in art class. Whoever they are, they impede progress, they get in the way, they slow everything down. Can this kind of mentality be the caues of a market failure in land-use?

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.

Other classes talking about Economics...

Not to long ago in an geography class I took at the university we read and article on how cities developed because of the automobile and that the automobile was not the original preferred form of transportation but was developed because of payoffs or financial incentives that were being paid to cities by automanufacturers to develop infrastructure that supported and to promote the use of the automobile. We then discussed in the class how the modern day cities have developed based on this form of technology and how our modern living style is different form what it might have been had these payments never occured. The class alluded to the fact that the reason why cities are the way today is strongly attributed to this influence and felt that it wasn't 'natural'. Oh if only I had taken Urban Economics prior to this class. Although in reality the points that I made were clearly rooted in basic Economic theory and didn't necessarly require our Urban Economics studies to made.

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.

Public pools

I was browsing articles on Colorado connection to see what our city has been up to lately. The latest breaking news...all but one publicly funded pool in Colorado Springs is going to be closed down due to inability to self sustain. The solution that they have come up with....sell the pools to the private sector and let them be privately run. This of course has raised all kinds of chaos amongst certain private lobbying groups who do not want the pools to privatized due to the expense that will prevent low income families from being able to afford membership fees. This does not directly relate to sprawl, but I think it indicates an important flaw in city planning. The pools were originally built by the city in an attempt to increase community involvement in certain areas of the city. By attempting to cater to the income needs of these areas they have priced themselves well below the price of the market and have effectively run out of public funding to make up for the shortfall. If the pools were so greatly desired by the community to begin with, it stands to reason that some enterprising person would have built and provided a pool in order to earn a profit. Instead, the city decided that the pools were a necessity and placed them, most likely in places where profits could not be realized.

The result of this is that, now, the people in those communities no longer have an amenity which they did not seem to particularly desire to begin with, but have now grown accustomed to. The result--further dependence on the government to provide you with what you can't afford and therefore probably shouldn't have to begin with (similar to the poor incentives that allowed too many low income families to purchase homes). In an interesting twist, the private sector is now being asked to purchase and privatize these pools. I suspect however that if the pools have not turned a profit to this point due to too many subsidized members, that the communities in which they have been placed are not profitable for a market priced pool to attempt to operate within.

If community pools are a hot commodity these days, perhaps the city would have been wiser to let the communities sponsor and build them. Perhaps then they would be poised for profit in areas where the members can afford to pay for the privilege, rather than simply creating another drain on tax dollars. Private pools are a popular addition in many communities where the members pay certain fees in order to have them, use them, and keep them maintained. It seems sensible that if they are paying for their own pools and usage, then they shouldn't have to pay for someone else's a concept that could be applied to all city planning and ventures.

Oh Portland, you've done it again.

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

Ecological Economics

In another of my classes, thinking about natural resources and how they are allocated efficiently in the past is very different from today. Natural resources, both stocks (like fossil fuels and minerals) and services (like the hydrologic cycle and solar energy), are becoming more and more scarce and/or depleted and thus need to be looked at in a different economic light. Many natural resources, especially services, are public goods and are hard to distribute efficiently, especially because there are so many externalities that break them down without an associated user cost. With this, there are market failures. However, these market failures are hard to correct for a few different reasons. With our discussion of Coase's Theorm that can solve the issue of externalities, we cannot because these issues occur all around the world and the financial status of most countries are not equal. But on a national level, the same thing occurs. For example, water is a very valuable resource that is essential and cannot be substituted for. But with the increasing development and spacial expansion of the urban areas, there is less and less clean fresh water to go around. While the model land use patterns may still hold, the bid rent curves for these areas will change drastically as a result of the water use for residential, commercial, and agricultural use of the land, regardless of what zoning is in place for the area. Logically, the externalities of the growing urban areas will flow over into the way water is allocated and become an increasingly scarce good with higher user costs associated with this change. But what happens when these costs are too great that most citizens are unable to pay these costs? When all the ground water from tables under ground are contaminated and purification plants aren't enough to fix the problem, what will user costs be able to pay for? The water problem is just an example of different ecological factors that are taken for granted. But even if they aren't currently being ignored, natural resources should be a larger driving factor in the way we think about sprawl and the policies formed around it. In order to look at the way a city can be run efficiently, we need to find "efficient" levels of pollution that we can put up with in order to prevent a serious market failure due to the collapse of our natural resources we depend on.

Monday, March 29, 2010

Urban Sprawl Around the World?

Looking at all the developed nations around the world, there is at least one major city in each of these countries that is experiencing rapid, uncontrollable growth. This growth follows the usual patterns of city development, which thus takes on similar characteristics of what we call sprawl. However, examining the parts of the cities that are growing and how the city is expanding, and in which directions, takes on an interesting view of what we see here at home. The differences in the economic status of most of these countries and their citizens plays a role, but none less valuable, and perhaps learn from it.
The patterns of growth in major cities of the developing world take on predictable characteristics, but an underlying factor that contributes to the effects of sprawl around these cities is money. Those who have no money moved near these major, international cities because of the opportunity to make money, just as we all move closer to the city in which we obtain a job. However, the poorest do not have high means of transportation and thus live very near to the city. Just on the outer skirts of the main city, large slums are found. But the wealthier live further and further away from these slums, but not too far from the city center, because they still work there and transportation too far from the city becomes limited. What about the very rich citizens? They are able to own cars, which as we know is the major contributor to sprawl, and move the furthest away from the poverty stricken lower classes. This type of growth pattern can be seen in major cities such as Delhi and Cairo, where there are VERY poor people living in the same area as some of the richest people in the world, but in different locations around the same city. But how are the rich able to move so far away from the city without the proper infrastructure? This is where I think our discussion of private roads would begin.
In other countries where they don't have very developed tax structures and ways of collecting money from even the poorest of their citizens, where do they get the money to expand transportation infrastructure? And if the rich prefer not to live close to their poor counterpart, how do they get roads out to where they want to live? The answer to the first question is to reurbanize. Many of the slums near these large cities get overridden, too dirty to live in, and then abandoned, and naturally the people that live in them move further down the river. But they can only move so far as to not have to have a means of transportation like a car, so in order to correct this, they start over in the old slum, thus reurbanizing on their own.
As for the second, the rich want to live the furthest from the slums and live in the pristine beauty of the landscape their country has to offer. But, in order to do so, they need a road to get to their house. But for the government to build them a private road to their house, this would seem absurd. For them to be able to live out there, they would need to build their own road and maintain it themselves. The privatization of roads would seem the most efficient.
With these two discussions, we can see how government intervention inhibits urban sprawl. Even though these countries are still developing, they have room for change and to learn how their practices now can save them in the future.

Sunday, March 28, 2010


I read an article that makes the statement that urban sprawl is and will continue to lead to mega-cities and mega-regions. The author states that these mega-cities will lead to decreased wealth over the course of the next fifty years. The author is not a economist but rather an environmentalist. Which, in my opinion, means he has different value judgements about wealth than an economists does.

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

Open Space

I recently found a document online that is interesting to me because it might have an effect on my "horse showing way of life" directly; along with any eventers (type of horse showing that I do), this plan might effect people living in this area of Highlands Ranch. This document was created for a public meeting, which was to address several issues that are in the planning stages at the equestrian park. These issues include the development of a new fence around the park, and new service center yard lights; along with these issues the document highlights some overall concerns of the plan with Spring Gulch Equestrian Area.

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

Local Knowledge and Intervention: Real Life Example

My professional life revolves around real estate. And although I am dually licensed as an agent and as a real estate appraiser my appraisal business accounts for 80-90% of my income and for all intensive purposes I consider myself a real estate appraiser. The real estate appraiser is purported to be the local market expert for real estate in his area. Even more so then the real estate agents the appraiser studies trends, news, data and keeps up to date with what is going on in their local real estate market. They are supposed to be an impartial entity that has no direct interest in any given transaction. It is their local knowledge that is supposed to contribute heavily to their expertise requiring them to be geographically competent in the areas they are appraising and familiar with the markets that service the property types they are appraising.

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.