For decades, the nation’s affordable housing developers focused their efforts mostly on inner city neighborhoods. From South Central Los Angeles to the South Side of Chicago, developers fought depopulation and falling property values by rebuilding abandoned homes, redeveloping distressed apartments, and reusing vacant industrial sites.
Today, developers face a new challenge. The real estate boom and the bust that followed created a new kind of depopulated neighborhood, where empty subdivisions and unsold McMansions drag down property values.
The U.S. already has 25 million more single-family homes on large lots than the housing market will demand by 2025, according to Arthur Nelson, professor of city and metropolitan planning at the University of Utah. Of those redundant homes, five to ten million are located on the edges of metropolitan areas in places with little infrastructure.
Affordable housing developers and local officials may struggle for years to find a use for these homes, he says.
Bank Foreclosures Strike Sprawlville
In housing markets across the country, home loan foreclosures are concentrated in sprawl towns like Gilberts, Ill, 46 miles from Chicago’s Loop.
Gilberts is a collection of new subdivisions like Timber Trails, Timber Glen, and Woodland Meadows surrounded by cornfields. One out of every 31 homes in Gilberts was in foreclosure as of September 2010, according to the foreclosure watchers at RealtyTrac.com. Exurban towns like Gilberts have higher foreclosure rates than any other type of community in the Chicago metropolitan area.
Foreclosure rates don’t even come close in the ring of neighborhoods surrounding downtown that grew rapidly in Chicago’s condominium boom, where falling prices for Chicago condominiums have still not turned into large-scale foreclosures. As of September, only one out of every 217 housing units was in foreclosure in the zip code just south of the Loop, only slightly worse than average for the metro area.
Poor, urban neighborhoods have more serious foreclosure problems, but nothing compared to towns like Gilberts. One out of every 132 homes was in foreclosure as of September on the edge of the West Englewood neighborhood on Chicago’s South Side, where nearly all the residents are African-American and nearly one-third live in poverty. That relatively low foreclosure rate is the highest within Chicago city limits.
Until recently, urban places like the South Side of Chicago or the South Bronx in New York City had the most troubled real estate in the country. Predatory lending practices that targeted minorities wounded these neighborhoods again in the recent housing boom and bust. For example, in the long-blighted town of East Orange, N.J., the foreclosure rate in 2009 was 1 in 345 homes.
That’s low compared to the foreclosure rates in sprawling cities like Phoenix. One out of every four homes was in foreclosure in a single zip code on the northeast fringe of Phoenix, where hundreds of empty, new homes line freshly laid streets with names like Tombstone Trail and Desperado Way.
Even in the healthier neighborhoods of downtown Phoenix, roughly 1 in every 200 homes was in foreclosure as of September 2010. The same pattern in repeated in other sprawling cities. One in every 18 homes was foreclosed as of September in Winchester, Calif., a sprawl town 75 miles from San Diego’s downtown. At the same time, in downtown San Diego, once one of the hottest zip codes in the city for condominium sales and conversions, 1 in 133 homes were in foreclosure.
Real estate’s familiar hierarchy of values has been reversed. Once depressed urban cores are now strong compared to their suburban fringes. The once depressed real estate of Northeastern inner-city neighborhoods is now healthy compared to the foreclosure-ridden Sun Belt.
Weak Demand for Spawl
The future looks bleak for sprawl communities plagued by foreclosures. The quantifiable market demand for these places is weakening as economists adjust their projections of population growth downward. The latest data show average customers pay more to live in densely developed, walkable places than they would pay to live in sprawling communities like Winchester.
For example, Joe Cortright, founder of Portland-based Impresa, Inc., gathered the price information for 90,000 recently sold existing housing units in 15 metro areas across the country. Cortright then rated each property using the 100-point system created by WalkScore.com, which scores properties based on the number of amenities like schools, parks, or grocery stores that are within walking distance.
He found that in 13 of 15 metro areas, a property’s Walk Score adds $500 to $3,000 to the selling price compared a similar house in a less pedestrian-friendly place.
The relatively strong demand for densely developed, urban-style neighborhoods is also shown by the market value of condominiums, which by definition fit more housing onto an acre than a subdivision of single-family homes. Condos are holding their value significantly better in the crash than the broader housing markets in all five metropolitan areas where data has been collected, according to Standard & Poor’s Case-Shiller Home Price Indices, one of the most-quoted data sources on the housing boom and the bust that followed.
In the New York City metro area, the condo index stood at 199 in July 2010—25 points above the rest of the market. In the Los Angeles area, the condo index was more than a dozen points above the area's broader housing index. Case-Shiller starts at 100 in January 2000 for both condos and the general housing market. The condo markets in the remaining three cities in the condo index, San Francisco, Boston, and the condo boom and bust town of Chicago, .were all roughly five percent ahead of the broader housing market.
The high cost of transportation may be fueling this change in buyer preferences, as home buyers find the cost of driving to homes on the suburban fringe eats up much of the savings of buying in the exurbs. For example, on the northeastern edge of the San Francisco Bay Area, average Solano County residents pay $14,914 a year on transportation, compared to $9,501 in San Francisco County, according to “Bay Area Burden,” a report from the Urban Land Institute.
“Solano County has both the lowest housing costs and the highest transportation costs in the Bay Area,” says the report.
In the era of urban decline, riot-scarred cities like New York, Chicago, and Philadelphia fought for decades against the loss of their population and industry. They developed a broad array of tools to rebuild their housing and capture demand from new residents.
However, cities had other resources to help in the fight, including corporate headquarters, universities, mass transit, museums, and in many cases a sturdy housing stock of brick and stone.
Sprawl towns may prove much more vulnerable to falling demand for their homes. As much as 90% of a suburban municipal budget can come from the property taxes paid by homeowners. As home values decline, the ability of a suburban town to maintain its infrastructure and provide basic police and fire services declines too. Many exurban places are already difficult to police because their subdivisions of homes are so far apart from each other. When a town is forced to fire officers in a budget crisis, this difficult task becomes even harder.
“Bedroom communities are very fragile places,” says Christopher Leinberger, a visiting fellow with the Brookings Institution. “It’s a monoculture.”
Sprawl towns may eventually be redeveloped into communities that mix employment centers, mass transit, and housing at a variety of price points around new downtowns, says Leinberger. Affordable housing developers can play a productive role in this process, just as they played a role in rebuilding housing markets in many blighted urban neighborhoods.
“Empty houses on the ex-urban fringe might become the next generation of affordable housing for multiple households,” says the University of Utah’s Nelson. However, in the short-term, Nelson worries empty houses may be reused in ways that local officials are not prepared to support or adapt to. Speculators may have already begun to divide some large homes into improvised single-room occupancy apartment buildings, according to Nelson.
Bendix Anderson regularly writes for the Partnership for Sustainable Communities.