After spending a month in the USA (the reason for the lack of recent blogs) I have really begun to grasp the scale of the housing market crisis there. The sub-prime US mortgage market triggered the global economic crisis in 2007-8. Now the weakness of the housing market is slowing the US recovery, and making front page news day by day. As housing became a commodity and an investment opportunity, rather than a place to live, so speculation led to over-production and predictable bust. Foreclosures have soared, homebuilding has stopped and many homes now lie empty.
Across the US as a whole, house prices are at 2002 levels. Prices in the first quarter of this year fell by 4.2%, after dropping 3.6% in the last quarter of 2010. Yet this is an economy in which home purchase and consumer spending traditionally have been drivers of growth. The flexibility of US housing markets used to facilitate labour mobility and hence oil economic wheels. Today all this is changed. Homeowners, spooked by the falling value of their house, have cut back on their general consumer spending. They cannot move because they are trapped by negative equity. Some 23% of home owners are “underwater”, which means their house is worth less than they owe on their mortgage.
Such aggregate figures across this vast country conceal significant variations between different places. Any student of economic geography will be able to name some of the cities with the deepest problems. In Detroit, perhaps the archetypal “rust belt” city, prices are down by just about a third since 2000. In other words, almost everyone who has bought in the last decade now has negative equity. However, the dramatic and surprising story is not there. Instead it is in the classic “sun-belt” towns whose sprawling suburbs materialised the American Dream over the past 20 years.
The states that have suffered most in the housing crash are Florida, Arizona and Nevada. These are precisely the places where the consumer-led boom had fuelled the market. It seems that some places that were less buoyant, and less dependent on property for their economic health, have actually proved more resilient.
Atlanta ‘s house prices are now below their 2000 level and down 28% since their peak. Phoenix prices are just about at 2000 levels. Las Vegas spread as prices soared dramatically. They peaked in 2006-7, and then crashed. Today a house in Las Vegas on average is worth almost 60% less than it was then. It’s not just homeowners that are hurting in Vegas. The commercial property market has seen a similar boom and bust. Below is a photo that I took of a huge 67 acre “CityCenter” development. It consists of apartments, shops, hotels and art galleries (and the obligatory casinos), and fronts on the famous strip where Elvis Presleys stroll about in groups of three. The sheer scale of the CityCenter development means it must have significantly increased the supply of condominiums in downtown Las Vegas. Nearby there are stalled developments and gap sites, as my photo at the top of the blog shows.
There are some signs of a recovery in downtowns. In Miami renters are taking up tenancies in empty apartment blocks that were built for sale during the boom. According to the Miami Downtown Development Association, the occupancy rate in new condominium units is now 85%, compared with74% last year and 62% in 2009. The relatively high price of “gas” (aka “petrol”) may make city centres more attractive. Prices now are around $4 a gallon, the level at which Americans begin to squeal, but which Europeans can only dream of. This leaves places like suburban Flager County in Florida, with almost 14% unemployment, in deep trouble. In Las Vegas, the worst hit areas appear to be the northern suburbs. As the Las Vegas Review recently observed, “half-built subdivisions have little hope of ever being filled”.
While labour markets and housing markets are closely intertwined, the rundown of a neighbourhood takes on a dynamic of its own. When homeowners flee their debt, as many are now doing, empty houses become an easy target for vandals and overgrown lawns add to the picture of malaise. A downward spiral develops that makes it more difficult to stabilise prices and the community.
Build to escape bust?
A solution is now being advocated. Housing developers in the Las Vegas Valley say there is a demand for NEW homes. Their argument is that new houses are now cheap, and many buyers in the region don’t want a second-hand home. Hence the builders are calling for the release of much more land for development, in a landscape already splattered with vacant desert strips bearing signs advertising development that is “coming soon”. This solution is unlikely to do much for those struggling to escape from communities ravaged by foreclosures, vacancies and stalled developments. Would you buy a brand new house with all the latest white goods and extras, or a repossessed property on an estate where there are a lot of empty houses?
The form of development in the Las Vegas Valley, and in areas that are still growing such as the south-west of Utah (see my photo below), mocks European angst about sustainable urbanisation. In this desert, water sprinkles lawns and golf courses. Air conditioning is essential in the scorching summer heat. The car is a necessity to reach work or to get to the shopping malls.
The state of US housing markets and their environmental legacy make a strong case for planning. Left to themselves, weakly regulated property markets have always gone through cycles of boom and bust, and ignored negative externalities. The difference this time is the scale and duration of the slump is damaging the whole economy of the USA. Yes, planning has many problems, and is often bureaucratic and unresponsive, but in the long term it’s the best option, economically, environmentally and socially.