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Many historic centers in Latin America have been the focus of government and private initiatives seeking to rehabilitate the building stock and position the areas to serve the tourism industry. In most cases these efforts have led to the displacement of lowincome residents or of residential activities altogether, due to gentrification and commercialization of the district (Scarpaci 2005). More recently, the rehabilitation of these historic cores has been framed as part of broader debates and efforts that pursue the recovery of the city centers (historical or otherwise) because of their key role as collective symbols or spaces of social interaction, or because of their potential efficiency as dense, well-serviced urban districts (Pérez, Pujol, and Polèse 2003; Rojas 2004).
This article seeks to advance this discussion based on the experience in Panama City’s historic center, “Casco Antiguo.” It describes some recent, innovative policies that have explored the intersections of tourism, affordable housing, employment, and culture in a historical context, and draws some general insights and lessons.
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Ciro Biderman is an associate professor in the graduate and undergraduate programs in public administration and in economics at Getulio Vargas Foundation (FGV) in São Paulo; associate researcher at the Center for the Study of the Politics and Economics of the Public Sector (CEPESP/FGV); and associate researcher at the Metropolis Laboratory of Urbanism at São Paulo State University (LUME/FAUUSP). He received his Ph.D. in economics at the FGV and his postdoctoral degree in urban economics at the Massachusetts Institute of Technology in 2007.
Biderman was a visiting fellow at the Lincoln Institute of Land Policy from 2006 to 2009, and he continues to teach courses and conduct research with Martim Smolka and others affiliated with the Program on Latin America and the Caribbean. He also consults on the economics and politics of local development for the World Bank and other organizations. His research interests include urban and regional economics focused on public policies at the subnational level, with particular emphasis on land policy interactions with real estate markets and transport costs.
He has published articles in academic journals, and coauthored or coedited three books, including the 2005 volume Economia do Setor Público no Brasil (Public Sector Economics in Brazil). At the Lincoln Institute he has written several Land Lines articles and working papers, all of which are available on the Institute Web site.
Land Lines: As a Latin American scholar specializing in land economics issues, how do you compare the state of the art of research in the region to other countries?
Ciro Biderman: In Brazil, as in most of Latin America, there is a lack of research in urban economics in general and in land issues in particular. The same is true to some extent in the United States and Europe, although the research interests are quite different, and urban economics is more in the mainstream in those countries.
Some relevant characteristics of cities in Latin America are similar to those in other developing countries, and all would benefit from additional research. For instance, despite the large informal market in Latin America, most economists have neglected that sector. Ironically, most urban economics analysis of informality has been conducted by U.S. and other international scholars.
Second, Latin American cities are usually not as sprawling as cities elsewhere, yet their historic downtowns are often deteriorated and we know little about why this is happening. Third, most countries in the region have recently adopted decentralization policies that shifted the responsibility for the provision of public goods to local governments. However, the revenues of local governments are low and most rely heavily on federal transfers.
Land Lines: How did you become associated with the Lincoln Institute of Land Policy?
Ciro Biderman: My first contact was in 1998, when I was awarded a dissertation fellowship to finish my Ph.D. Working with Paulo Sandroni at FGV, I studied the impact on land prices of a zoning change in São Paulo. At the time, the central business district was expanding toward the southwest, but the expansion was blocked by Jardim Europa, then a low-density, high-end residential neighborhood. New office development bypassed the area, moving towards the new Luiz Carlos Berrini Avenue. To reverse this pattern, in 1996 the city changed the zoning in part of Jardim Europa, increasing density and auctioning building rights to encourage new development.
I compared the part of the neighborhood where zoning did not change with that which experienced exogenous changes from being a low-rise residential area to a high-rise, mixed-use area of high-end residential and office space. In an article written with Sandroni and Smolka (2006) we showed that the change in density increased land prices as expected.
The most interesting finding, however, was the local government’s capture of the land price increment through a fiscal mechanism called CEPAC (Certificate of Additional Potential of Construction). These certificates are auctioned as part of the process by which developers obtain building licenses in specified areas. In the adjacent neighborhood where business development had leapfrogged without CEPACs, the incremental land rent generated by the zoning change was instead captured by the developers.
Land Lines: What other research have you pursued at the Institute?
Ciro Biderman: Since becoming a visiting fellow in 2006, I have focused on the economics of informal housing, particularly on the extent to which urban regulation was statistically associated with different measures of informality, including the role of regulation on prices in formal and informal housing markets (Biderman 2008).
In a related study in 2009, Martim Smolka and I discussed the policy implications of how and why different international agencies define informality to reflect one or more housing attributes. The consequence is that different definitions produce different estimates of the incidence of informality. Thus, when governments improve only one informal housing attribute but not the others, they may report a reduction in informality when in fact there is none.
In a new line of research I am looking at the causes and consequences of sprawl in Latin America, focusing on ten large Brazilian cities. Preliminary findings show that these cities are less sprawled than their North American and European counterparts, but more than comparable Asian cities. Transport systems are based on the automobile, as in the United States, except that less than 10 percent of the population owns a car. Yet the socioeconomic spatial pattern is more similar to Europe, with the rich living in the center and the poor on the periphery.
Land Lines: You help the Latin America Program evaluate research proposals submitted for Institute funding. What have you learned from that experience?
Ciro Biderman: I have been involved in evaluating these proposals since 2006, and the number of high-quality scholarly applications has grown steadily. I have noticed that the research questions from Latin Americans scholars are often better presented than the techniques to address them, in contrast to what occurs in the United States.
I think this is a problem faced in many aspects of social science research, and not only in Latin America. Although the origins of urban economics were grounded in the connections among urban equilibrium, transport costs, and land prices, each of these fields has developed almost independently and there is a general need for more integrated analysis.
Land Lines: What do you see as the main strengths of Latin American researchers?
Ciro Biderman: Highly qualified professionals in Brazil and other countries often move between public office and academia. As a result, they are aware of the respective issues and needs in the public sector and academia, and may have a more direct impact on the implementation of urban policies.
Furthermore, researchers can bring to focus what is specific to Latin American cities compared to cities elsewhere, thus expanding the scope of applied research. For example, to the best of my knowledge, there is no economic model for housing demand that allows the quality of the housing to change in order to adjust housing consumption to budget constraints. This is quite a relevant question in Latin America, but not to researchers in the United States or Europe.
Land Lines: Can you elaborate on the kinds of issues facing scholars in different world regions?
Ciro Biderman: As with most social phenomena, patterns of land use have evolved historically. For instance, sprawl in the United States is closely related to the movement of high-income groups to the periphery of metropolitan areas. In Latin America the movement of income groups is usually in the opposite direction, with poor people seeking affordable land on the periphery.
Although fundamental principles of urban economic theory might apply, the consequences are quite different. Studying different patterns using the same theoretical framework would advance our understanding of urban economics.
Land Lines: What topics or issues are especially lacking in strong empirical work?
Ciro Biderman: In terms of land policy, in my opinion, we need more research on property taxation; the interactions of fiscal and regulatory policies with land use planning issues; socioeconomic patterns of sprawl; and the connections between land use and transport. The lack of research on the economics of the informal housing market is surprising since informal settlements represent more than one-third of the total urban housing stock in some countries. Although this problem could eventually be solved with subsidies, the amount of resources needed is probably prohibitive for most countries.
Currently there is a branch of the literature studying the impact of tenure security on general welfare, suggesting that titling programs may be improving welfare, but there are few similar studies on the impacts of slum upgrading programs. While some evidence suggests that inappropriate regulation may induce more informality, we do not yet fully understand the economic nexus between formal and informal housing markets. We also lack systematic cross-country studies.
Land Lines: Do you think there a trade-off between policy experience and technical research capability?
Ciro Biderman: As an economist, I know the virtues of the division of labor and gains from trade, so it is important that academics and public officials complement each other. Thus, researchers need to be as rigorous as possible and able to expose the unintended consequences of public policies, and policy makers must ensure that their policies are designed so they can be implemented effectively and efficiently to reach the intended goals.
For example, a major policy issue is how to increase the supply of affordable, high-quality housing for the poor in developing countries, which requires understanding the opportunity costs between affordability and quality. The trade-offs may be technical, but the alternatives are clearly political. How can this housing imbalance be fixed? Who has to pay the cost (the residents or the society)? What are the consequences of different policy options? These are practical questions. Empirical evidence that helps to evaluate current policies might be a major resource for a policy maker.
Land Lines: How do you think the Lincoln Institute can contribute to narrowing the gap between rigorous empirical research and policy relevance?
Ciro Biderman: I believe that the Institute is already doing that by working with both scholars and policy makers in a variety of programs and fellowship opportunities. Classroom and online courses offer training to policy makers to help improve their dialogue with researchers, and to young scholars to expand the pool of policy-sensitive researchers. The intensive courses in methods for land policy analysis also inform researchers about advances in urban economics theory and strengthen both their methodological skills and their knowledge of new analytical techniques.
References
Biderman, Ciro. 2008. Informality in Brazil. Does urban land use and building regulation matter? Working Paper. Cambridge, MA: Lincoln Institute of Land Policy.
Biderman, Ciro, Paulo Sandroni, and Martim Smolka. 2006. Large-scale urban interventions: The case of Faria Lima in São Paulo. Land Lines 18(2).
Smolka, Martim, and Ciro Biderman. 2009. Measuring informality in housing settlements: Why bother? Land Lines 21(2).
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Los Estados Unidos están emergiendo de una gran recesión, cuya característica principal ha sido el colapso de los precios inmobiliarios nacionales, los cuales aumentaron en un 59 por ciento de 2000 a 2006 y luego descendieron un 41 por ciento para el año 2011 (siempre en dólares constantes). A nivel nacional, los verdaderos precios inmobiliarios en 2011 se encontraban un 6 por ciento por debajo de los niveles del año 2000. El colapso de los precios inmobiliarios tuvo efectos contagiosos inesperados que contribuyeron a la crisis financiera resultante y al deterioro económico más grave desde la Gran Depresión. La proporción de hipotecas de los EE.UU. en mora por 90 días o más aumentó de cerca del 1 por ciento en 2006 a más del 8 por ciento en 2010. Los costos económicos y sociales derivados de esta burbuja de precios inmobiliarios y su consecuente colapso han sido enormes.
La prevención de futuras burbujas de precios inmobiliarios evidentemente conlleva grandes beneficios, aunque lograr dichos beneficios requerirá que los legisladores aprendan a detectar las burbujas de precios a medida que éstas se van formando y luego implementen las políticas necesarias que logren atenuar o mitigarlas. En un reciente informe sobre enfoque en políticas de suelo del Instituto Lincoln, titulado Cómo prevenir las burbujas de precios inmobiliarios: Lecciones de la explosión de 2006–2012, sus autores, James Follain y Seth Giertz, abordan los desafíos a la hora de diagnosticar y tratar las burbujas de precios en el mercado inmobiliario. Este informe representa un aporte al amplio análisis estadístico que se encuentra disponible en varios documentos de trabajo del Instituto Lincoln.
Aunque es muy común resumir la reciente explosión del mercado inmobiliario en términos de indicadores nacionales (tal como se indica en el párrafo anterior), dichos indicadores no toman en cuenta las grandes variaciones tanto en los niveles como en los cambios en precios inmobiliarios entre diferentes áreas metropolitanas. Por ejemplo, de 1978 a 2011, los precios inmobiliarios en dólares constantes en Dallas, Texas y en Omaha, Nebraska experimentaron una variación menor al 20 por ciento comparados con los niveles de 1978; los precios en Stockton (California) casi se triplicaron de 1978 a 2006, aunque para el año 2011 volvieron a los niveles de 1978. Los mercados inmobiliarios locales se encuentran influenciados por las políticas y condiciones económicas y financieras a nivel nacional, pero estas grandes diferencias entre los mercados metropolitanos indican que las condiciones locales también juegan un papel muy importante en este sentido.
Un elemento clave en el trabajo estadístico llevado a cabo por Follain y Giertz es utilizar mercados inmobiliarios metropolitanos como unidad de observación para sus análisis, que están basados en datos anuales (desde 1980 hasta 2010) y en datos trimestrales (desde 1990 hasta 2010) de hasta 380 áreas metropolitanas. Según el trabajo econométrico realizado por los autores, las burbujas de precios inmobiliarios pueden detectarse comparando las diferentes áreas metropolitanas, y los precios y el riesgo crediticio resultante varía en gran medida. Las pruebas de estrés, tales como aquellas utilizadas para evaluar el riesgo de crédito hipotecario, pueden llegar a ser indicadores útiles de posibles burbujas de precios a nivel metropolitano.
Debido a que los niveles y cambios en los precios inmobiliarios varían en gran medida entre las diferentes áreas metropolitanas —algunas de las cuales presentan aumentos de precios del tipo burbuja, y otras experimentan precios básicamente estables— Follain y Giertz concluyen que las políticas destinadas a mitigar las burbujas de precios inmobiliarios deberían ser formuladas a medida para las áreas o regiones metropolitanas, en lugar de ser aplicadas uniformemente en todas las áreas metropolitanas a nivel nacional. De esta manera, la política monetaria representaría una intervención poco atractiva para hacer frente a los aumentos de precios inmobiliarios en algunas áreas metropolitanas, ya que afectaría los términos financieros tanto en los mercados inmobiliarios efervescentes como en aquellos que son estables. En cambio, Follain y Giertz son partidarios de las intervenciones consistentes en políticas dirigidas a aquellas áreas metropolitanas que presentan grandes aumentos de precios. La política por la que abogan los autores aumentaría el coeficiente de reserva de capital que deben poseer los bancos en relación con las hipotecas que financian en dichas áreas. Estas políticas anticíclicas respecto del capital desalentarían los aumentos de precios inmobiliarios a la vez que fortalecerían las reservas de los bancos emisores, lo que mejoraría la capacidad de estos últimos de soportar cualquier conmoción financiera inesperada.
La aplicación de políticas prudentes en cuanto a los mercados inmobiliarios a nivel metropolitano parecería ser algo obvio… entonces, ¿por qué no se han implementado antes? Gran parte de la respuesta tiene que ver con que el análisis del mercado inmobiliario está siendo beneficiado por una revolución en la disponibilidad de datos desglosados espacialmente a nivel metropolitano, del condado e incluso por zona de código postal. Los datos necesarios para informar acerca de las intervenciones mediante políticas a nivel metropolitano que se encuentran ampliamente disponibles desde hace muy poco tiempo, y dichos datos sustentan el trabajo empírico llevado a cabo por Follain y Giertz. Para más información sobre el análisis realizado por los autores, ver http://www.lincolninst.edu/pubs/2245_Preventing-House-Price-Bubbles.
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A New Yorker cartoon by Jack Ziegler captures the essential irony of buying into condominiums, cooperatives, and other homeowner associations. A car is entering a driveway that leads to a group of townhouses in the distance, and a sign by the entrance proclaims, “Welcome to Condoville and the Illusion of Owning Your Own Property” (Ziegler 1984).
Despite this ambiguity, about a quarter of the American population now lives in association housing situations, collectively known as common interest communities (CICs). Figure 1 shows the tremendous increase in CICs over the past several decades. From 1970 to 2013, the number of housing units in such communities spiked from about 700,000 to 26.3 million, while the number of residents multiplied more than 30-fold from 2.1 million to 65.7 million.
With their growing popularity, common interest communities have raised policy challenges and legal issues that require ongoing resolution. These conflicts generally reflect either external concerns that CICs segregate the wealthy from the rest of society or internal disagreements between individual owners and their associations’ governing bodies. This article examines some of the controversies associated with the CIC model and its governance, and suggests approaches for enhancing the benefits of common interest communities for both property owners and society at large.
The Rise of Common Interest Communities
With increasing industrialization during the 19th century, the intrusion of pollution, traffic, noise, and disease led many planners and citizens to favor the separation of residential, commercial, and industrial uses. (Zoning had not yet emerged as a planning tool and would not be validated by the Supreme Court of the United States until 1926.) Some residential developers thus imposed “servitudes”—covenants, restrictions, and easements—on their subdivision projects. Servitudes generally restricted the properties to residential uses and often created shared rights to communal facilities and services in exchange for fees. Lot purchasers agreed to the servitudes, and once the restrictions were recorded, subsequent purchasers were also legally bound. The common law proved to be an effective vehicle for creating high-end residential areas, including New York City’s Gramercy Park (1831) and Boston’s Louisburg Square (1844).
After a slowdown during the Great Depression and World War II, construction of CICs began to boom in the late 1960s, after the Federal Housing Administration (FHA) recognized the condominium as an insurable ownership vehicle, and state statutory authorization followed. FHA mortgage insurance encouraged developers to build middle-class condominiums, which gained market acceptance as a result of the “new town” movement—exemplified by early planned communities such as Reston, Virginia (1964), and Columbia, Maryland (1967). The passage of California’s Proposition 13, the initiative that limited property taxation in 1978, and similar measures in other states also spurred an increase in CICs, as cash-strapped local governments, under increased pressure to provide more services, were unwilling to absorb the infrastructure and service costs from new development. As a result, they tended to approve new developments only in CIC form, where the developer (and ultimately the owners) covered the costs.
Today, CIC owners are generally subject to a variety of constraints related to their private units, from limitations on the layout and design of buildings and the type of construction materials used, to restrictions on visible home decorations, ancillary structures, and landscaping. There are often controls on the owner’s behavior and use of the property, which is typically limited to residential occupancy. Noise, parking, and traffic rules may also be imposed, along with vehicle restrictions. In some cases, political signs, leafleting, and related activities are also prohibited.
In exchange for their association dues, owners have access to common facilities, such as roads and recreational areas, and to private services, such as security, trash collection, street cleaning, and snow plowing. The CIC is usually administered by a private residential government and various committees, elected by the owners and subject to the law of contract rather than public administrative and Constitutional law (see Box 1).
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Box 1: Common Interest Community Models
CICs typically create a private government elected by the owners to administer and enforce contracts, and to promulgate rules to advance community interests. While the exact form of the arrangement may vary, the basic concepts are similar.
Homeowner Associations
Unit owners hold fee title to their individual properties, which are usually single-family or townhouse homes. The association holds title to common areas and grants the owners easement rights for their use. These can be created by common law or under statutes in some states. Homeowner associations make up more than half of community associations nationally.
Condominiums
Unit owners receive fee title to their units plus a percentage ownership in the common areas. The association administers the common areas but does not hold title to them. Condominiums may be vertical (high-rise) or horizontal (single-family or townhouse homes), and they are created exclusively pursuant to state statute. Condominiums represent 45 to 48 percent of community associations.
Cooperatives
A cooperative corporation owns the building, and the owners receive shares in the corporation and automatically renewable, long-term leases on their individual units. Unlike condominium and homeowner associations, the corporation can control transfer of leases and shares by cooperative owners. Only 3 to 4 percent of community associations are organized as cooperatives.
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Economic Benefits of CICs
CICs bring substantial economic benefits to owners and to society at large. Residents who buy into these communities have determined that shared facilities, such as recreational areas, are a better value than, say, personal swimming pools and other private facilities. Similarly, those joining CICs have determined that certain restrictions—such as a prohibition on parking mobile homes in driveways—increase property values.
These communities help to achieve efficient use of land as well. The costs of organizing and administering a private residential community are lower than in a public system (Nelson 2009). Transaction costs and rent-seeking through the political system are also reduced. Finally, because it is free from statutory and constitutional restraints, a private community has greater flexibility in the substance of its rules and operations, freeing it from adherence to public guidelines when entering into contracts with service providers and suppliers.
American courts have recognized these efficiency benefits when enforcing CIC arrangements and the owners’ reliance on them. As one court noted, “It is a well-known fact that [covenants] enhance the value of the subdivision property and form an inducement for purchasers to buy lots within the subdivision” (Gunnels v. No. Woodland Community Ass’n, Tex. Ct. App, 17013 [1978]).
External Concerns: Secession from the General Community
Despite these benefits, various commentators have argued that the services and private facilities of CICs are available only to those who can afford them and facilitate the separation of the wealthy from the rest of society. The rest of a CIC’s municipality is forced to do without, creating a permanent, two-tier system of housing. Critics also claim that privatization of infrastructure and services isolates CIC residents and reduces their stake in broad communal issues.
By this logic, CIC dwellers are less willing to engage with public government on civic matters and more likely to resist tax increases, given that the CIC rather than the municipal government provides many services. Where community associations are part of suburban developments, isolation from the urban core may be acute. These concerns often center on a fear of class and economic segregation. As former Secretary of Labor Robert Reich wrote in a New York Times article called “Secession of the Successful”: In many cities and towns, the wealthy have in effect withdrawn their dollars from the support of public spaces and institutions shared by all and dedicated the savings to their own private services. . . . Condominiums and the omnipresent residential communities dun their members to undertake work that financially strapped local governments can no longer afford to do well (Reich 1991).
Freedom of Choice
This characterization of community associations, however, is at odds with the fundamental American values of freedom of contract and freedom of association. It is a shared value that people may spend their money for lawful purposes as they wish and enter into contracts as they please. The law intrudes on freedom of contract only in rare instances when major policy considerations are at stake. Courts have recognized freedom of contract as an important consideration for upholding private servitude arrangements: We start with the proposition that private persons, in the exercise of their constitutional right of freedom of contract, may impose whatever restrictions upon the use of land which they convey to another that they desire to impose (Grubel v. McLaughlin, D. Va. [1968]).
CICs also reflect the American belief in freedom of association, exemplified in a long tradition of utopian communities and other belief-centered networks. Residents in modern CICs might share common interests, such as the homeowners living in golf or equestrian communities. Other residents may simply share a desire for neighborhood tranquility or character. In Behind the Gates, Setha Low suggests that CICs allow “middle-class families [to] imprint their residential landscapes with ‘niceness,’ reflecting their own aesthetic of orderliness, consistency, and control” (Low 2004). Whatever the reason, community associations are consistent with de Tocqueville’s observation about American interactions: Americans of all ages, all conditions, and all dispositions, constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds—religious, moral, serious, futile, extensive or restricted, enormous or diminutive (de Tocqueville 1835).
Moreover, the available evidence indicates that CIC residents are generally happy with their choice. In a 2014 survey conducted by Public Opinion Strategies for the Community Associations Institute, 64 percent of owners were positive about their overall experience, and 26 percent were neutral. While 86 percent of respondents indicated that they wanted either less or no additional governmental regulation, 70 percent maintained that association rules and restrictions protect and enhance property values.
The Issue of Double Taxation
While the rise of CICs reflects a variety of factors, the constrained finances of municipalities following the property tax revolts in the 1970s were key. In fact, a different take on the “secession” narrative is that some owners in common interest communities believe that municipal government abandoned them.
CIC owners pay property taxes at the same rates as other citizens, even though they privately purchase services such as trash collection, street cleaning, and security with their community association dues. This amounts to double taxation, charging association owners for a service they are not receiving.
If a no-service policy were in effect before an owner purchased a unit in a CIC, theoretically the buyer could lower the offer price to reflect the lack of municipal services and the double-taxation-effect. The unit owner would be protected, and the developer would absorb the loss. But if a municipality reduces services but not taxes after the unit purchase, the owner suffers an uncompensated loss. This outcome would be bad policy in that it permits rent seeking, allowing the majority of citizens in the town to select one group of residents to bear an extra tax burden even though they do not create extra costs. This offends notions of both fairness and efficiency, and it’s antithetical to community building and civic trust.
It is especially important for legislatures to avoid the use of double taxation as a matter of policy, given that judicial challenges are unlikely to succeed. The few courts that have entertained attacks on double taxation have been unsympathetic to claims that it violates due process of law, offends the equal protection clause of the Constitution, or works a taking of property without compensation. While double taxation may be bad policy, it is not unconstitutional. The courts should not overturn such legislative decisions, because these are essentially political outcomes that the public should challenge at the ballot box.
The Question of Inequality
The “secession of the wealthy” argument appears to be based on the notion that only higher-income owners with higher-value homes live in common interest communities. The available data, however, do not clearly support this assumption. As Figure 2 indicates, prices for condominiums and cooperatives—half of the units in CICs nationally—are below those for all existing homes (including condominiums, cooperatives, and single-family homes inside and outside of community associations). While these estimates are not deeply segmented (for example, they do not break out single-family homes inside and outside CICs), they do show that the values of condominiums and cooperatives are consistent with those of homes generally.
Housing affordability and access are significant challenges in the United States, but community associations are not necessarily the cause of these deep-seated, complex problems. Employed before CICs became popular, exclusionary zoning imposed by local governments in the form of large lot requirements has prevented developers from building affordable housing. CICs have in fact been found to lower the costs of home purchases. Multi-unit housing, such as condominiums and townhouses, is more affordable than single-family homes because it cuts the cost of land, infrastructure, and building (Ellickson & Been 2005). Affordable housing cooperatives permit restrictions on resale prices and owner income, thus ensuring that housing opportunities remain available for lower-income families. For these purposes, developers operating under city requirements or incentives often designate condominium units within a project as affordable units.
It is therefore simplistic and counterproductive to see community associations as a battleground between rich and poor. Similarly, pejorative use of the term “gated” communities to describe those CICs with limited public access does not advance understanding. Indeed, a moderate-income cooperative with a front door locked for basic security reasons falls within the definition of a “gated” community.
Guiding Principles
In what ways should the “secession of the successful” critique affect our understanding, acceptance, and authorization of common interest communities? The issue is complex and does not lend itself to binary choices. Instead, it is a matter of accommodating competing interests according to the following principles:
Internal Conflicts: Individual Owners vs. the Community
In his groundbreaking book Privatopia: Homeowner Associations and the Rise of Private Residential Governments (1996), Evan McKenzie warned that: CICs feature a form of private government that takes an American preference for private home ownership and, too often, turns it into an ideology of hostile privatism. Preservation of property values is the highest social goal, to which other aspects of community life are subordinated. Rigid, intrusive, and often petty rule enforcement makes a caricature of . . . benign management, and the belief in rational planning is distorted into an emphasis on conformity for its own sake.
Conflicts between residents and CIC associations or boards often revolve around two general issues: the substance of the restrictions and the procedures for enforcement (see Box 2). As Figure 3 shows, disputes may focus on a range of topics, from landscaping restrictions to assessment collection. Indeed, 24 percent of CIC residents responding to the 2014 Public Opinion Strategies survey had experienced a significant personal issue or disagreement with their associations. Of this group, 52 percent were satisfied with the outcome and 36 percent were dissatisfied; in 12 percent of cases, the issue was still unresolved.
There are indeed certain risks that community associations can overstep with respect to the substance and enforcement of restrictions, but legislation and judicial supervision can address these substantive and procedural policy concerns.
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Box 2: Conflicts Make Good Copy
While the following headlines fail to represent the myriad positive interactions between individual owners and associations, they do suggest some of the difficult interactions that can occur.
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Freedom of Choice
As discussed earlier, individuals exercise their freedom of choice by purchasing homes in CICs and agreeing to be subject to their rules. Association living may not be for everyone, but the expectation of people who choose the CIC life should generally be respected and not be frustrated by someone who subsequently seeks to violate the compact. The courts generally reflect this view, as suggested by this 1981 ruling: [The original] restrictions are clothed with a very strong presumption of validity which arises from the fact that each individual unit owner purchases his unit knowing and accepting the restrictions to be imposed. . . . [A] use restriction in a declaration of condominium may have a certain degree of unreasonableness to it, and yet withstand attack in the courts. If it were otherwise, a unit owner could not rely on the restrictions found in the declaration . . . since such restrictions would be in a potential condition of continuous flux (Hidden Harbour Estates v. Basso, Fla. Ct. App. [1981]).
There are several scenarios, though, where homeowners may have no freedom of choice. First, it is possible that the only new housing available to buyers would be in CICs—i.e., developers are no longer building new homes outside of associations. Indeed, a recent report found that in 2003, 80 percent of all homes being built at that time were in associations (Foundation for Community Association Research 2014). In addition, municipal government may require developers to create associations as a condition for subdivision approval. (Recent legislation in Arizona prohibiting this practice indicates that it still occurs.) Finally, some courts have suggested that while rules in place at the time of purchase should be enforced, a rule subsequently enacted by the association or board under a reserved power should not be enforced if an owner can show that it is “unreasonable.” Other courts disagree: Homeowner should not be heard to complain when, as anticipated by the recorded declaration of covenants, the homeowners’ association amends the declaration. When a purchaser buys into such a community, the purchaser buys not only subject to the express covenants in the declaration, but also subject to the amendment provisions. . . . And, of course, a potential homeowner concerned about community association governance has the option to purchase a home not subject to association governance. . . . For this reason, we decline to subject the amendments . . . to the “reasonableness” test (Hughes v. New Life Development Corp., Tenn. Sup. Ct. [2012]).
Guidelines for Protecting Personal Autonomy
Association restrictions raise concerns when they threaten the personal autonomy and fundamental individual rights of owners. Constraints of this type might include prohibitions of political signs or messaging, and restriction of occupancy to “traditional” families.
Courts should enforce restrictions if they limit spillovers (also known as fallout or externalities) from one owner to the rest of the community. They should not, however, enforce restrictions that limit the nature or status of the occupants or the behavior within a unit that does not create externalities. This approach is based on the theory that the primary purpose of CIC regimes is to enhance economic value and encourage efficient exchanges. Thus, if the owner creates no externalities, the courts should not enforce bans on the particular behavior. Moreover, some values of personal autonomy are too important and trump the usual rules of contract. We do not, for example, permit contracts of indentured servitude or the sale of human organs.
By this standard, limiting noise and banning smoking (because of seepage of odors) in multi-family units would be legitimate, but restrictions based on the marital status of residents would not. Some situations are trickier—for example, restrictions on pets. Under the suggested guidelines, it would usually be legitimate to bar pets because of the potential noise and the reluctance of some residents to share common areas with them. In the case of service animals, however, the unit owner’s health needs may trump community concerns.
First Amendment–type issues present special challenges. Free expression—such as political or issue-related signage, leafleting, demonstrations, or other manifestations—can cause spillovers that may include noise, aesthetic interference, and disruption of the community’s general ambience. At the same time, however, free speech is fundamental to our republican form of government, arguably whether it is addressed to the larger public government or the private government. In expression cases, courts might apply the longstanding doctrine that prohibits covenants that violate public policy, rejecting total bans on speech in favor of reasonable restrictions on time, place, and manner. This would allow expression but limit, if not eliminate, spillover on the community.
Religious freedom is another fundamental American value. Restrictions on the placement of a mezuzah on doorposts and the display of crèches, statues of saints, and Christmas lights limit free exercise of religion. While it would open a Pandora’s box to engage in balancing the religious importance of colored versus white Christmas lights against CIC standards, it would nevertheless be appropriate for the courts to impose a general standard of reasonable accommodation on CIC regulations that affect religious practices.
Finally, in the development and enforcement of association rules, CIC property owners have a right to expect certain behavior from associations and boards. This expectation traces from the obligation of good faith and fair dealing that is incumbent on all parties to a contract. Thus, an owner should have a right to fair procedures, including notice and an opportunity to be heard; to be treated equally to other similarly situated owners; and to be free from bias, personal animus, and bad-faith decision making by the board and its members.
Conclusion
Common interest communities are a large part of the American residential landscape, currently providing homes for a quarter of the U.S. population. While CICs bring great economic advantages to residents and society in general, these types of housing arrangements do require nuanced interactions between the community association and the municipal government, and association rules can impinge on the personal autonomy of members. However, strategies are available to mitigate if not overcome these problems. Indeed, these approaches can make ownership of a home in a CIC less of an illusion and more of a reality.
About the Author
Gerald Korngold is Professor of Law at New York Law School and a visiting fellow at the Lincoln Institute of Land Policy. He teaches and writes in the fields of property and real estate law.
References
De Tocqueville, Alexis. 1835. Democracy in America. London: Saunders and Otley.
Ellickson, Robert C. & Vicki L. Been. 2005. Land Use Controls. New York, NY: Aspen Publishers, 3rd edition.
Foundation for Community Association Research. 2014. “Best Practices. Report #7: Transition.” www.cairf.org/research/bptransition.pdf.
Foundation for Community Association Research. 2013. “National and State Statistical Review for 2013.” www.cairf.org/research/factbook/2013_statistical_review.pdf.
Grubel v. McLaughlin Gunnels v. No. Woodland Community Ass’n, 17013, Texas Court of Appeals (1978).
Hidden Harbour Estates v. Basso, Florida Court of Appeals (1981).
Hughes v. New Life Development Corp., Tennessee Superior Court (2012).
Low, Setha. 2004. Behind the Gates: Life, Security, and the Pursuit of Happiness in Fortress America. London: Routledge.
McKenzie, E. 1996. Privatopia: Homeowner Associations and the Rise of Private Residential Governments. New Haven, Connecticut: Yale University Press.
Nelson, R. H. 2009. “The Puzzle of Local Double Taxation: Why Do Private Communities Exist?” The Independent Review. 13 (3) (Winter) 345–365.
Public Opinion Strategies. 2014. “Verdict: Americans Grade Their Associations, Board Members and Community Managers.” Falls Church, Virginia: Community Associations Institute.
Reich, Robert. 1991. “Secession of the Successful.” The New York Times Magazine. January 20.
Treese, C. J. 2013. Association Information Services, Inc., compiled from National Association of Realtors data. https://docs.google.com/document/d/1I_2LgTIYSqR4nLPRxN-HtCV-oOFK_QqN1AcO5JJTw-g/edit.
Ziegler, J. 1984. The New Yorker. September 3.
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In a report titled A Rise in Downtown Living, the Brookings Institution and the Fannie Mae Foundation (1998) highlighted an emerging land use movement in 24 U.S. cities. The release of the 2000 U.S. Census data verified the progress in those cities in another brief, Downtown Rebound (Sohmer and Lang 2001). While these publications alerted the nation to a possible trend, they did have some limitations, which inspired Eugenie Birch’s follow-up study, A Rise in Downtown Living: A Deeper Look, funded by Lincoln Institute, the University of Pennsylvania and the Fannie Mae Foundation.
This study, initiated in summer 1999, employs census data analysis, survey research, personal interviews and field visits to the sample cities. Birch draws on a larger and more representative sample of 45 cities, including 37 percent of the nation’s 100 most populous cities selected for balanced regional distribution, and of these 100 percent of the top 10 and 62 percent of the top 50. The sample includes 19 percent of the 243 cities having a population of 100,000 or more. Birch defined each city’s downtown by census tracts to create a baseline for mapping and collected data on nine population and housing factors for the downtowns and their cities and Metropolitan Statistical Areas (MSAs) over three decades. Birch administered two mail surveys, in 1999 and 2001, of city officials and business improvement district leaders to identify their respective roles in encouraging downtown housing, and she is currently making site visits to all 45 cities to verify the census data and survey results.
In this article, Birch summarizes seven key findings of her research, which were also presented at a Lincoln Institute lecture in March 2002 and reported in the APA Journal (Birch 2002).
The Definition of Downtown
Although most people think they understand what downtown is, there is no single socioeconomic meaning or geographical definition for the term. While U.S. downtowns share several common characteristics (a central business district at the core, access to substantial transportation networks, a supply of high-density buildings, expensive land), they differ dramatically in their age, size, functions, contents and character. Furthermore, downtowns are in a state of flux as their boundaries and contents are changing. Tracking downtown boundaries over time reveals that in almost all the cities in the sample, the downtowns of today are remarkably different in size (measured in the number of census tracts included) than they were 20 years ago. Downtowns that are incorporating residences are also attracting more community-serving facilities, such as supermarkets or cineplexes that used to be in neighborhoods. Maps of the several downtowns, created as part of this study, illustrate the size variations.
Residential Populations by the Numbers
The rates of increase in downtown residential populations vary enormously among cities. While downtown growth rates are impressive, numerical counts for MSAs still overshadow those of downtowns. Measuring the growth against basic benchmarks (1970 population levels for the defined downtowns and comparative growth rates with city and MSA) reveals just how fragile this movement is. For example, only 38 percent of the sample cities had more downtown residents in 2000 than in 1970. Only one-third had a downtown population growth rate between 1970 and 2000 that was greater than that of their cities. For the same period, 42 percent of the sample showed a negative downtown growth rate even when their cities had positive numbers. Finally, only seven cities (Chicago, Cleveland, Los Angeles, New York, Norfolk, San Francisco and Seattle) had downtown growth rates that exceeded those of their MSAs in the entire 30-year period.
Looking at the data decade-by-decade tells a different story. Not surprisingly, downtown population declined most severely in the 1970s, when 89 percent of the sample showed losses that ranged from 2.4 percent (Des Moines) to 60 percent (Orlando). In contrast, by the 1990s more than three-quarters (78 percent) of the sample posted increases. However, only four cities (Los Angeles, New York, San Diego and Seattle) had gains in all three decades. Comparing city and MSA data shows similar nuances.
Downtowns also vary in the amount and level of residential development. In 2000 for example, 24 percent of the sample cities had 20,000 or more downtown residents, while 20 percent had fewer than 5,000, and a great deal of diversity exists within the categories. Denver’s downtowners number just over 4,200, but most observers perceive the city’s record in attracting residents as a stand-out success, while Cincinnati, with about 3,200 downtown residents, is struggling to maintain a critical mass. At the other end of the scale, Chicago’s 73,000 and Philadelphia’s 78,000 downtowners are integrated into their larger metropolises.
Differences in the proportion of a city’s population that lives downtown are also striking. For example, Boston and Philadelphia have roughly equal downtown populations, but Boston’s comprises 14 percent of the total while Philadelphia’s is only 5 percent. Finally, a simple numerical listing of the sample downtowns is misleading. Downtown population growth has occurred at varying rates with some cities experiencing the phenomenon for a longer time than others. This may account for the greater success of some cities. Also, given the varying geographical size of the different downtowns, density measures as well as demographic analysis should be added to any assessment in order to gauge the potential impact (economic, political, social) of new residents.
Approaches to Creating Downtown Housing
Over the past decade, policy makers and investors have relied on six types of approaches to create downtown housing, and they often blend more than one of these:
To accomplish these ends, cities have engaged in creative financing, leveraging public funds, tax credits, gap financing pools and other tools at their disposal. Philadelphia, Boston and Lower Manhattan present examples of the office conversion trend, while Atlanta, Minneapolis, Cincinnati and Cleveland have employed warehouse store adaptive reuse. Charlotte represents a combination of HOPE VI, new construction and historic preservation. The found-land approach is seen in Milwaukee with its riverfront redevelopment (including brownfields remediation), Cincinnati with its expressway diversion/riverfront development, Des Moines with its construction of a new downtown neighborhood, and New York at Battery Park City. Chicago is the king of mixed-use new construction. Columbus (Georgia), Lexington and Chattanooga have fostered historic districting as a means to protect older, downtown residential neighborhoods.
Deep Roots of Success
Today’s growth in downtown living is the fruit of more than five decades of sustained attention to downtown revitalization. It has come about because cities have steadily improved their environments through downtown planning and additions of new elements to reinvent their old central business districts. In so doing, they have transformed their downtowns into new, hip places, thus making them competitive and attractive for housing. Although specific municipal policies such as favorable tax treatment, zoning amendments and infrastructure investments have, without doubt, flamed the private market activities in downtown housing, public investment in large-scale projects dating from the mid-1950s to the present have helped create a sympathetic climate for this investment. Preliminary evidence shows a strong relationship between investor choices and the presence of new downtown amenities. For example, developers in Los Angeles, Denver, Baltimore, Detroit and Memphis cite the presence of stadiums or sports arenas as important factors in their location decisions.
Demographic Characteristics of Downtowners
Downtowners are more affluent, more highly educated and more white than the city dwellers overall, but more diverse than those in the MSA. Singles, empty-nesters, gays, and childless or small households are more highly represented in downtowns than in MSAs. Families with children are present but not dominant. Other submarkets are students and the elderly. In some cities where the housing market is tight, notably Boston, New York, Chicago and San Francisco, low- and moderate-income groups are reporting difficulty in finding space for affordable housing. In other cities like Charlotte that have an excess of downtown land, much of it devoted to parking lots, the issue is not space but cost. In these contexts, questions arise as to what resources should be devoted to high-rent downtown units.
Private Development Efforts
Promoting downtown housing has emerged as a central strategy of private downtown groups, mainly business improvement district (BIDs), working with municipal government, often city planning and/or economic development departments. In 59 percent of the sample, BIDS or other privately sponsored organizations have engaged in pro-housing campaigns. As membership organizations their internal needs drive the agenda, so the amount and nature of their efforts vary widely.
Contribution to Citywide Growth
Downtown growth has contributed to the numeric changes in citywide populations in many cities. While the percentage contribution to overall municipal growth is often quite small, in 53 percent of the sample cities the downtown numerical contribution is a significant portion of the total, and in another 22 percent of the sample cities the downtown portion has offset losses in other parts of the city. In other words, without the downtown population growth, 60 percent of the sample would be worse off. In Boston, for example, downtowners constituted 25 percent of the increased number of people living in the city, while in Pittsburgh the additional downtowners reduced the city’s population loss by only one percentage point.
Conclusions
Reviewing these seven findings reveals a few themes. Downtowns are ever-changing places. Their functions, their boundaries and their very characters have been evolving in the postwar period. They are like complicated jigsaw puzzles with players (urban leaders) fitting the pieces together slowly. Just as assemblers first frame a puzzle and then fill in the center, city leaders have provided infrastructure outlines—streets or street improvements, schools, redeveloped river edges, improved open space—and now are adding other parts. Downtown living is one of these. In many places it has fit very well, especially in the past ten years. In a few cases, new downtown residents contribute significantly to the numerical growth of their city’s population. Just as certainly, many downtowns have not really kept up with their MSAs, and a majority of cities have yet to recover their 1970 populations. Nonetheless, having formerly vacant and/or abandoned buildings occupied (and eventually paying taxes) and having more (and more diverse) people on the streets night and day, weekday and weekend, are positive factors for urban life.
Making sense of this housing phenomenon requires not only placing it in the context of contemporary metropolitan development but also making it part of an evaluation of past urban redevelopment programs. Downtown living is not a silver bullet for curing urban ills but one element of an ongoing planning and investment effort for a part of the city.
Public/private partnerships have been essential in achieving changes in downtown living. The existence of productive interplay between focused interest groups, especially the growing number of business improvement district leaders, and public planning and economic development units has resulted in bold, imaginative, creative and thoughtful approaches to creating housing opportunities.
The findings and themes in this research give rise to other questions related to individual downtowns. These include an evaluation of the costs and benefits of attracting different types of downtowners and an assessment of the reasons why some places have been more successful than others in gaining the populations. This information that would be useful, for example, for policy makers in cities having less developed downtowns who first must decide whether a downtown living approach is appropriate for their cities and, second, must determine whether supportive incentives or complementary activities are needed. Other questions revolve around how to spread downtown progress to nearby neighborhoods without provoking displacement or unwanted gentrification and how to resolve the inevitable political disputes that will arise with the newcomers.
All in all, the rise in downtown living is as complex and layered as any urban issue. While widely reported in the popular press, it deserves a balanced, scholarly appraisal. This study raises important planning and development issues that still need attention: for example, information on the critical mass of residents required to make a difference in downtown life, the relationship between downtown housing units and employment, and the number of households needed to support community-serving functions. All of these issues lead to questions of balancing appropriate density for new development and quantity for adaptive reuse with other downtown functions like office, parking, retail and entertainment. No one really knows the proper composition of a balanced downtown.
Eugenie Ladner Birch is professor and chair of the Department of City and Regional Planning at the University of Pennsylvania.
References
Birch, Eugenie Ladner. 2002. Having a Longer View on Downtown Living. Journal of the American Planning Association 68 (1):5-21.
Brookings Institution Center on Urban and Metropolitan Policy and Fannie Mae Foundation. 1998. A Rise in Downtown Living. Washington, DC.
Sohmer, R.R., and Lang, R.E. 2001. Downtown Rebound (FMF Census Note 03, May). Washington, DC: Fannie Mae Foundation and Brookings Institution Center on Urban and Metropolitan Policy.
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Gated communities are residential areas with restricted access designed to privatize normally public spaces. These developments occur in both new suburban developments and older inner city areas retrofitted to provide security. We estimate that at least three or four million and potentially many more Americans are seeking this new form of refuge from the problems of urbanization.
This rapidly growing phenomenon has become ubiquitous in many areas of the country since the late 1980s. While early gated communities were restricted to retirement villages and the compounds of the super rich, the majority found today are middle to upper-middle class. Along with the trend toward “forting up” in new developments, existing neighborhoods of both rich and poor are using barricades and gates with increasing frequency to isolate themselves.
Gated communities can be classified in three main categories based on the primary motivation of their residents. Two types of “lifestyle” communities provide security and separation for the leisure activities and amenities within. These include retirement communities and golf or country club leisure developments as one subgroup and suburban new towns as another.
In “elite” communities the gates symbolize distinction and prestige. Through both creating and protecting a secure place on the social ladder, these communities become enclaves of the rich and famous, developments for the very affluent, and executive home developments for the middle class.
The third type is the “security zone,” where fear of crime and outsiders is the key motivation for defensive fortifications. This category includes middle-class areas where residents attempt to protect property and property values; working-class neighborhoods, often in deteriorating sections of the city; and low-income areas, including public housing complexes, where crime is acute.
Urban Problems Stimulate Trend to Gating
High levels of foreign immigration, a growing underclass and a restructured economy are changing the face of many metropolitan areas and fueling the drive for separation, distinction, exclusion and protection. Gated communities are themselves a microcosm of America’s larger spatial pattern of segmentation and separation by income, race and economic opportunity. Suburbanization has not meant a lessening of segregation, but only a redistribution of the old urban patterns. Minority and immigrant suburbanization is concentrated in the inner ring and old manufacturing suburbs. At the same time, poverty is no longer concentrated in the central city, but is suburbanizing rapidly.
Gated communities are not yet the normal pattern in the nation. They are primarily a metropolitan and coastal phenomenon, with the largest aggregations being in California, Texas and Florida. However, gates are being erected in almost every state. Real estate developers suggest that the demand for homes in gated communities is increasing, and there is evidence that housing appreciation in such developments is higher than outside the gates.
Fear of crime is the strongest rationale for this new form of community. According to recent reports in Miami and other areas where gates and barricades have become the norm, some forms of crime, such as car theft, are reduced. On the other hand, some data indicate that the crime rate inside the gates is only marginally altered by barricades. Nevertheless, residents report less fear of crime in such settings. This reduction in fear is important in itself, since it can lead to increased neighborly contact, which can reduce crime in the long run.
Policy Issues for Community Life
The development of gated areas is related to the uncoupling of industry from cities and of professionals from the industrial core. Geography compounds current trends toward fragmentation and privatization by undercutting the old foundation of community and providing a new rationale for the lifestyle enclave or gated community based on shared socioeconomic status. This narrowing of social contact is likewise narrowing the social contract.
Privatization- the replacement of public government and its functions by private organizations which purchase services from the market- is promoted as a “benefit” of gated communities, but it may have serious impacts on the broader community. Private communities provide their own security, street maintenance, parks, recreation, garbage collection and other services, thus relieving taxpayers of additional burdens. However, they may also have the unintended consequence of reducing voter interest in participating in tax programs or voluntary efforts to deal with community problems or additional public services such as schools, streets, police or other city and county government programs.
The resulting loss of connection between citizens in privatized and traditional communities loosens social contact and weakens the bonds of mutual responsibility that are a normal part of community living. As a result, there is less and less talk of citizenship. The new lexicon of civic responsibility is that of the taxpayers who take no active role in governance but merely exchange money for services. Residents of privatized gated communities say they are taking care of themselves and lessening the public burden, but this perspective has the potential for redistributing public costs and benefits.
Walled and gated communities are a dramatic manifestation of the fortress mentality growing in America. As citizens divide themselves into homogenous, independent cells, their place in the greater polity and society becomes attenuated, increasing resistance to efforts to resolve municipal, let alone regional, problems.
The forting-up phenomenon has enormous policy consequences.What is the measure of nationhood when neighborhoods require armed patrols and electric fencing to keep out other citizens? When public services and even local governments are privatized and when the community of responsibility stops at the subdivision gates, what happens to the function and the very idea of democracy? In short, can this nation fulfill its social contract in the absence of social contact?
Edward J. Blakely, a visiting fellow of the Lincoln Institute, is dean and Lusk Professor of Planning and Development for the School of Urban and Regional Planning at the University of Southern California. Mary Gail Snyder is a doctoral student in the Department of City and Regional Planning at the University of California at Berkeley.
Additional information in printed newsletter:
1. Map of the United States showing concentrations of Gated Communities.
2. Table showing Social Dimensions of Gated Communities.
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The Lincoln Institute sponsored a wide-ranging international conference in June on “Land Policies for Urban Development.” A few of the major themes and messages from the presentations are summarized below.
The three most populous developing countries, China, India, and Indonesia, with 40 percent of the world’s population, are entering the stage of rapid urbanization simultaneously. By 2030, they are projected to add an additional 2.2 billion persons to urban areas, increasing the world’s urban population by nearly 80 percent over the 2000 figure of 2.8 billion. The related infrastructure investment needs are likely to reduce or eliminate any perceived savings surplus in the world. Economic growth and urbanization in most East Asian countries have occurred in coastal regions and near ports. In India, however, urbanization and growth are currently focused on inland cities and on information technology rather than on labor-intensive manufacturing. This may be due to weaknesses in traditional infrastructure services, particularly in transport.
A review of property tax practices across 25 countries found an extremely wide range of practices in terms of tax base definitions, tax rate levels, and assessment practices. In most developing countries property tax rates are very low (a fraction of one percent of market values). Nevertheless, property taxes are one of the few revenue sources under local control and are an important component of local government revenues. Simplicity was found to be a virtue of property tax regimes in developing countries, because complexity raises administrative costs and erodes public support for property taxes.
Efforts to measure land values in urban areas of the United States—either by analyzing vacant land sales or by subtracting the value of the structure from property sales—indicate that they have appreciated more rapidly than construction costs since 1985, with a 2005 value between $12 and $24 trillion. This compares to estimates for 1980 of about $3 trillion, suggesting that land values have increased four to eight times in a period when consumer prices have increased only 2.4 times. In addition, land values have been volatile, falling by around 40 percent from 1989 to 1995 in many urban markets before increasing rapidly in the past 10 years.
While average housing prices across the United States have increased faster than construction costs, increases in housing prices have been particularly sharp in urban areas on the West Coast and on the East Coast from the mid-Atlantic region to New England. In these coastal metropolitan areas, median single-family housing prices are nearly five times larger than median prices in the least expensive metropolitan areas in other regions.
Analysis across all U.S. metropolitan areas shows a strong association between the level of housing market regulation and the level of prices—metropolitan areas with the most regulations on residential development have the highest housing prices. Moreover, areas with the highest prices also have low growth rates of housing stocks. Together these findings suggest that rapid growth in housing prices in coastal cities is due in large part to growing impediments on the supply side of the market. Supply constraints may not be only a U.S. phenomenon. A review of planning experience in the United Kingdom showed that urban development corporations, which have the power to overrule local regulations, have been more effective than most other approaches in fostering urban revitalization.
The ownership of second homes (for own use, not for rent to others) has been growing rapidly in the United States, and about 5.6 percent of all U.S. housing units were second homes in 2004. The main determinants of second-home ownership are income, wealth, and age of the household head. Second-home ownership is highest for those in their sixties, suggesting that the aging of the baby boom generation will increase second-home ownership. Additional research (and better data) is required to determine if this trend is related to the location or characteristics of a household’s primary residence.
The complete collection of papers and commentaries presented at the conference will be published as an edited volume in 2007.
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We suggest that a better approach is to link IH to the ongoing process of rezoning—either by the developer or by local government initiative—thus treating it explicitly as a vehicle for recapturing for public benefit some part of the gain in land value resulting from public action.
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From 2000 to the end of 2005, the value of U.S. residential land and dwellings increased from $14 trillion to $24 trillion. Until about 2002, housing price increases had followed the normal pattern from the mid-1980s, and housing prices grew along with household incomes. But starting in 2002 housing prices began to grow much faster than incomes in most metropolitan areas.
There were three main causes for this acceleration in housing prices. First, the interest rate for 30-year fixed rate mortgages declined from 7 percent in 2001 to 4.6 percent in 2003, buoying housing prices. Second, starting in the early 2000s mortgage originators began to reduce lending standards and to offer high-risk mortgage instruments such as no-document mortgages and other subprime mortgage instruments. Finally, the national policy to increase home ownership supported the latter trend because increased mortgage availability seemed to increase housing affordability.
These changes led to the rapid growth in mortgages with high loan-to-value ratios and to the approval of borrowers with modest financial reserves. This increasing risk of mortgages was assuaged by the belief that “housing prices could not decline,” which was based on national housing price indices dating back a few decades. Of course, in several metropolitan areas housing prices had declined from 1989 to the mid-1990s, but the national price index had only flattened out in this period.
Nationally, house prices softened in 2006 and fell 30 percent to the present time, while housing starts declined precipitously from 2.27 million in 2006 to 500,000 now, a level well below the typical low point of 1 million starts experienced in the past half dozen recessions. The reduction in housing starts eliminated millions of construction jobs and contributed significantly to the rapid increase in the unemployment rate.
The accompanying financial crisis reduced employment more broadly as part of a severe recession. Mortgage defaults and subsequent foreclosures spiked, caused by the severe housing price decline that left many homeowners “under water” with a mortgage greater than their house value, combined with the loss of household income from unemployment and the tightening of lending standards that made refinancing impossible for many households. From 2006 through 2009, 6 million homes were foreclosed, and 2010 has seen another 2.9 million foreclosure filings. Foreclosure rates are likely to have peaked, and filings in December 2010 were a quarter lower than those in December 2009. But foreclosure rates remain far above historic levels—in 2005 banks foreclosed on about 100,000 homes. The lack of recovery in housing and other construction has in turn been a factor in the slow reduction in unemployment.
House prices may now be stabilizing—national housing prices rose in the second quarter of 2010, but have declined modestly in the third and fourth quarters. This has led some analysts to forecast a possible second round of price declines. In any case, the likely slow decrease in unemployment will continue to restrain income growth and demand for home ownership. Clearly, housing will not lead the economy out of this recession. Needed now is regulatory reform to prevent the repetition of a housing bubble and an inevitable subsequent housing bust and its related financial meltdown.
While some modest steps have been taken in this direction, much remains to be done and the announced reform of Fannie Mae and Freddie Mac have increased uncertainty about the course of future mortgage finance. The realization by households that housing price appreciation is not inevitable will likely slow the shift to ownership by younger households and encourage older empty-nesters to move their assets to investments less risky than housing. The resulting growth in rental demand will focus in denser parts of metropolitan areas and give some impetus to smart growth outcomes. Housing demand will be robust only in several years, driven by long-term growth in incomes, population, and household formation.
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The United States is emerging from a great recession whose major hallmark has been the collapse of national housing prices, which grew by 59 percent from 2000 to 2006 and then fell 41 percent by 2011, all in constant dollars. Nationally, real house prices in 2011 were 6 percent below levels in 2000. The housing price collapse had unanticipated contagion effects that helped produce the accompanying financial crisis and the most severe economic downturn since the Great Depression. The share of U.S. mortgages that were delinquent by 90 days or more rose from about 1 percent in 2006 to over 8 percent in 2010. The economic and social costs of this house price bubble and subsequent collapse have been immense.
The benefits of preventing future house price bubbles is obviously great, but realizing such benefits will require that policy makers learn to detect price bubbles as they are forming and then implement policies that will attenuate or mitigate them. A recent Lincoln Institute policy focus report, Preventing House Price Bubbles: Lessons from the 2006–2012 Bust, by James Follain and Seth Giertz, addresses the challenges of diagnosing and treating price bubbles in the real estate market. Their report builds on extensive statistical analysis available in several Lincoln Institute working papers.
While it is common to summarize the recent housing market bust using national indicators (as in the first paragraph above), these national indicators don’t account for great variations in both the levels and changes in housing prices across metropolitan areas. For example, from 1978 to 2011, constant dollar housing prices in Dallas, Texas and Omaha, Nebraska varied by less than 20 percent from their 1978 levels; those in Stockton, California nearly tripled from 1978 to 2006, but by 2011 fell back to their 1978 levels. Local housing markets are all influenced by national economic and financial policies and conditions, but these large differences across metropolitan markets indicate that local conditions play a very important role as well.
A key element of the statistical work by Follain and Giertz is to use metropolitan housing markets as the unit of observation for their analyses, which are based on annual data (for 1980 to 2010) and quarterly data (for 1990 to 2010) for up to 380 metropolitan areas. Their econometric work indicates that house price bubbles can be detected across metropolitan areas and that price changes and the accompanying credit risk vary greatly in size. Stress tests, such as those used to evaluate mortgage credit risk, can be useful indicators of potential price bubbles at the metropolitan level.
Because the levels and changes in housing prices vary greatly across metropolitan areas—with bubble-like price increases in some and essentially stable prices in others—Follain and Giertz conclude that policy measures to mitigate housing bubbles should be tailored to target metropolitan areas or regions rather than be applied uniformly across all metropolitan areas at the national level. Thus monetary policy would be an unattractive intervention to counter house price increases in a few metropolitan areas, because it would affect financing terms across both frothy and stable housing markets. Instead, Follain and Giertz favor policy interventions that would target those metropolitan areas with high price increases. The policy they advance would raise the capital reserve ratio that banks are required to hold against mortgages that they finance in those areas. Such countercyclical capital policies would both dampen house price increases and strengthen the reserves of the issuing banks, improving their ability to withstand any unexpected financial shocks.
Applying prudential housing market policies at the metro-politan level seems to be an obvious thing to do; so why has it not been done before? A major part of the answer is that housing market analysis is benefitting from a revolution in the availability of spatially disaggregated data at the metropolitan, county, and even zip code level. The data required to inform policy interventions targeted at the metropolitan level have only recently become widely available, and such data underpin the empirical work carried out by Follain and Giertz. For more information on their analysis, see http://www.lincolninst.edu/pubs/2245_Preventing-House-Price-Bubbles.
