Houses in car-dependent U.S. neighbourhoods are currently priced below the cost of the material that went into their construction. A look at the economy by M.A. Siraj

When real estate crashes, the economy goes bust. Why? Because the infrastructure that real estate supports represents 35 per cent of the total infrastructure, i.e., transportation, sewerage, power and water. The crash in demand for realty in the U.S. caused widespread havoc and triggered the much needed-introspection that an insouciant economy had not allowed to occur earlier. The larger question that is being asked now is: How long can America continue to afford exurban fringe, low-density, and car-dependent neighbourhoods as has been its wont in the post-World War II phase?

Knives are out against status-quoists and a bevy of brash new advocates propose homes for people in central areas of cities and closer-in suburbs where one can walk to stores and mass transit railheads. It is being pointed out that such walkable urban real estate has experienced less than half the average decline in prices from the housing peak.

Experts point out that houses in car-dependent neighbourhoods are currently priced below the cost of the material that went into their construction. Things have come to such a pass that their owners have no financial incentives to invest in their upkeep. Consequently, decay has set in and much of these neighbourhoods are turning into slums.

After the mortgage crisis

Demand is yet to rise from the nadir it touched following the mortgage crisis in 2008, though optimists in the realty sector clothe the all-pervasive gloom with myriad clichés such as ‘there had never been any better time to buy'. Chief Economist of the National Association of Realtors (NAR), Lawrence Yun, in an online interview claims: “The hard data in the housing affordability index, which takes into account median income, median home price, and mortgage rates, has been bouncing around in the 180 to 200 range since the beginning of this year – the highest reading since the index was first used in 1971.”

Contrast this with what Gail Lyons, NAR's Regional Coordinator for Asia and Pacific, has to say: “I will tell you this…don't believe everything you read in the media. There are certainly areas that have been very badly hit by the recession, primarily Florida, Arizona, Nevada and California. However, there are also other areas that have either simply not appreciated or have actually begun to accelerate. Where I live in Boulder, Colorado, we've had 2-3 per cent appreciation for the last several years but the main problem is very few buyers given the relatively high unemployment rate, meaning that there are fewer than normal sales.” (Gail was 2002-2005 NAR President's Liaison to India Institute of Real Estate too.)

And the deadweight…

Suburbanisation became a phenomenon after World War II. People moved out to suburbs in droves. Downtowns came to be associated with business activity and could afford residential facilities only for the top few rich and their maintenance staff. Builders turned into town planners and that is how most of those small neighbourhoods suffixed with ‘dales', ‘woods', ‘brooks', ‘ hills', and ‘ridge' emerged around the metros. Suburbanisation pushed the economy with construction boom, appliances, development work, cars etc. Now those are acting as deadweight on current recovery.

Transportation

It is estimated that on an average, residents in suburban neighbourhoods spend 24 per cent of their income on transportation. Those in walkable neighbourhoods spend half of that, thus more people are expected to jettison cars and transfer from two-car households to one-car households. This will leave a household one lakh dollars to service house loans.

Lawrence Yun concurs that the tide is now turning in favour of walkable neighbourhoods from drivable ones.

Says he (online interview): “Americans favour walkable, mixed-use neighbourhoods, with 56 per cent of respondents preferring smart growth neighbourhoods over neighbourhoods that require more driving between home, work and recreation.”

Quoting NAR's Community Preference Survey, Yun says: “When considering a home purchase, 77 per cent of respondents said they would look for neighbourhoods with abundant sidewalks and other pedestrian-friendly features, and 50 per cent would like to see improvements to existing public transportation rather than initiatives to build new roads and developments.”

Habitation pattern and real estate growth has always been determined by transportation facilities. Neighbourhoods came to be accepted initially when realtors who planned them ran buses (called streetcars in the U.S.) in collaboration with power supply companies.

They were in themselves not meant to generate profits. They merely boosted the real estate value of the neighbourhoods. Every neighbourhood with a 5,000 population had them.

New proposals

The votaries for pushing the development of core areas of cities have come up with new proposals. They want zoning codes to allow denser localities. They also want the low income households to be provided homes along the rapid transit systems. Yet another proposal is to link home loans to an electronic map to take into account how much homeowners will have to pay for transportation.

Researches by Scott Bernstein, founder of the Surface Transportation Policy Partnership, suggest that location-efficient mortgages will have lower default rates.

Population growth

Demographers predict the U.S. population to grow from 310 million in 2011 to 440 million in 2050. This will result in epic amount of money pouring into real estate.

Another projection is that 85 per cent of the new households formed between now and 2025 will have less children and will have more income to put into housing.

Keywords: real estate