A Quick Theory on the Housing Bubble

1/13/2013 12:42:00 PM
This is mostly just pointing out something that hasn't been part of the discussion of why the housing bubble happened.

What is notable about the recent housing boom that ended in 2007 is that these housing developments were of a very specific type--for the most part, we weren't building houses on orderly city blocks, like we used to, nor were we building the farm houses you see dotting the sides of old country roads. Instead, almost all of the housing boom took the form of what country folk like me refer to as "subdivisions," by which we mean the high-density neighborhoods with little winding roads and cul-de-sac's. Here is a very typical example of the type of housing development that fueled the housing boom:

This type of construction has its origin with the end of the second World War, when architects aborted the Modernist principles for harmonious development (that is, the "city-in-a-park" design) in favor of cheap, fast, dense housing subdivisions to allow the mass relocation of the troops and their family. This is certainly understandable--in 1945 almost 10% of the US population was in Europe and the south pacific, and in the course of a few years we had to expand the housing supply to adapt to their return. For those who live in Cincinnati, Marimont is the quintessential example of the type of housing developments we would have had if it hadn't been for the war.

But I digress. The point is, the war made the modern subdivision concept not only acceptable but desirable, and has dominated all housing construction ever since. Subdivisions have a flaw, however. Although they are an exceptionally cheap way to build, they are relatively high upkeep. People don't want to live in a subdivision that doesn't have freshly paved roads, well kept yards, and carefully trimmed trees. Thus, the housing developers--such as Fisher Homes, for example--will carefully manage all these details until they've completed the development and sold all their houses.

My point is this: very often, once the original housing developer completes a subdivision and sells the houses, they abandon the neighborhood completely. And in short order, the values of those houses plummet. The thing that no one seems to have noted in the whole debate on the housing bubble is that people only want to live in neighborhoods that are expanding, because these are the ones being managed by the housing developers. The economic implication of this is that house prices depend not just on the supply and demand of houses, but also on the rate of expansion of the local subdivisions. Hence, as housing supply expanded, we saw a massive bubble in house prices. And once we reached the point where everyone who could buy a house had a house, the housing supply stopped expanding, developers abandoned their developments, and house prices plummeted.

I don't know if the recession has fundamentally changed this dynamic. Maybe people have decided that living in a developer-managed neighborhood isn't worth the money or the risk. Maybe changes in homeowner expectations will force developers to focus more energy on creating neighborhoods whose values won't collapse after they leave. Or maybe we will only see a repeat of the housing bubble in a few years, once the housing stock starts to expand again.

At any rate, I think that this problem is manageable. As a country-dweller, I'm all for abolishing subdivisions and going back to the quaint days of city blocks and places like Marimont. But even if we don't, I think that we can solve this problem by doing more to bring subdivisions into the city governance. In the past developers have worked hard to make subdivisions semi-autonomous from the city governments by, for example, administering the street maintenance, snow removal, community centers, and even going so far as essentially enacting their own city ordinances and zoning laws by way of homeowners' agreements that regulate everything from the type of fence you can build to the number of dandelions you can have in your lawn. As long as the developer is in charge of enforcement, these things run smoothly. But when the developer leaves, they fall apart and lead to community decay. An easy solution, in my view, is to avoid these quasi-legal regulatory codes and semi-autonomous home owners associations, and instead have city or township governments administer the neighborhoods directly, the same way we do for city blocks and old country roads, which, by the way, never experienced the housing bubble.