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The Urban Bubble

For many in public-policy organizations, academia and the media, the current mortgage and credit crisis suggests the impending collapse of the American

Jul 31, 2020
Image has not been found. URL: /wp-content/uploads/2008/09/elite1.jpgPresident Franklin D. Roosevelt, President John F. Kennedy and Sen. Barack Obama (D-Ill.)
For many in public-policy organizations, academia and the media, the current mortgage and credit crisis suggests the impending collapse of the American suburban dream. The prevailing image is of a wave of foreclosures inundating the winding culs-de-sac of split-level ranch houses and neo-colonials, built and bought with cheap money and low interest rates.
One prominent New Urbanist, Chris B. Leinberger, writing in The Atlantic, is advancing the theory the mortgage crisis reflects a growing trend toward dense urban living that will leave much of the periphery — both the older, established suburbs and the newer, edge cities — as what he calls “the next slum.”He heralds a “structural change under way in the way Americans work and live,” with people moving back to the central core of cities.
It turns out, however, that urban centers — particularly those promoting dense condominium developments — are increasingly buckling under the same credit problems now affecting many housing developments on the suburban fringe. In some markets, condo sales, a strong indicator of urban fortunes, are dropping in price more quickly than single-family homes.
Even where prices are dropping less quickly or rising, as in Manhattan, higher prices often reflect the narrowing of the market. As middle class home-buyers have been priced out of elite urban centers, the extreme upper end of the market is increasingly dominating new sales. In New York, this means more and more “pied a terres” owned by foreigners or wealthy Americans with multiple residences. The New York Times recently ran a story about the new multimillion-dollar apartments in The Plaza — many of which are regularly empty, because buyers have their principle residences elsewhere.
But, even in New York, the volume of sales has been dropping, more than 34 percent in the last quarter compared to a year earlier — the steepest drop in 18 years. As the other great bubble, the one on Wall Street, deflates, many major projects, including the $4-billion Atlantic Yards project in downtown Brooklyn, designed by Frank O. Gehry, have been substantially scaled back or delayed. Altogether, more than $20 billion in new projects have been put on hold and into mothballs.
In other urban centers — none of which offer the amenities and attractions of New York — sales are falling off, sometimes dramatically. Many condo projects are suffering weak sales, softening prices or have been turned into rentals in once “hot” core cities, including San Francisco, Seattle, Boston, Philadelphia, Portland, Atlanta, Chicago and Washington.
Nor is a turnaround likely in the near future. One corrosive factor may be that, despite the downturn, many markets can expect to see thousands of new condo and multi-family units come on line in the next few years. This is the delayed impact of the easy financing available at the height of the property bubble.
In 2007, the nation had a supply of completed condominiums that would normally absorb 10 months’ demand, and this year more than 20,000 new units are scheduled to be completed in Atlanta, south Florida and San Diego alone. In these and many other once-promising downtown markets, like Los Angeles, prices in the much-ballyhooed central core are falling twice as fast as the surrounding region.
With the continued addition of new product amid falling prices, many, if not most inner city markets, are facing a tough road over the next few years.
If these realities conflict with what you have been reading in the mainstream press, do not be surprised. City revivals, sometimes amounting to a move of a few thousand people to a downtown area, have been promoted relentlessly by civic leaders and echoed with breathless enthusiasm by local developers and realtors.
Rarely reported, however, is the fact that more than 90 percent of all metropolitan growth in this “back to the city” decade has taken place in the periphery. One reason: 80 percent of Americans, according to numerous surveys, want to live in suburbs, small towns or the country. In addition, contrary to the notions of city planners and media cognitive elites, the vast majority of Americans prefer a single-family home to an apartment or condo. For most people, the American dream still means a house with a yard — not a high-rise apartment
Yet such facts seem to mean little to many who write about the future of cities and suburbs. One misleading account ran in the supposedly authoritative Financial Times on Apr. 4. Titled “As Cities revive, America’s poor are forced to the periphery,” the article cited studies which show that older, inner-ring suburbs now are home to more of the working poor than urban cores.
The FT’s basic premise was that while it’s still good times in the urban core, it’s a disaster further out. “It used to be that the poor people lived in cities and the rich lived in suburbs,” Carol Coletta, who runs CEO for Cities, a pro-urban think-tank, was cited in the piece, “Now it’s the reverse.”
Not quite true. Overall, according to the Census, the poverty rate in the suburbs is only half that of the core cities. Moreover, the suburbs have grown at nine times the rate of central cities since 2000, and now have 2.7 times as much population. Given these fact, notes demographer Wendell Cox, it is not surprising they have a larger number of people in poverty.
Yet, the greatest concentrations of poverty in America remain in the country’s inner cities. All 10 of the nation’s poorest places of more than 250,000 people are traditional urban centers, most with nearly one in four persons living in poverty — including Coletta’s hometown of Memphis. In contrast, the 15 counties of more than 250,000 population that have the highest median income are all, well, in the suburbs.
It is also hard to make a case that urban centers are now attracting hordes of the upwardly mobile and well-off aging boomers, as is often suggested. Studies by the Brookings Institution demographer, William H. Frey, and real estate industry experts have found that relatively few well-heeled empty-nesters are deserting their suburban nests for the core. In fact, most are staying close to home, while about as many head further out than move in.
Similarly, middle class residents continue to leave urban centers, particularly as they enter their thirties and start having families. Most major urban school districts face declining enrollments; in Chicago, public school enrollment has declined by 41,000 in the last seven years alone. Despite reports of many more families with strollers in Manhattan, the numbers of urban children traditionally falls dramatically once kids reach school age. If you look at 10-year olds, notes an analysis by Praxis Strategy group, Manhattan’s youth population dwindles to almost half the national average.
Therefore, despite the hype about families or empty-nesters, cities still attract mostly young singles, students and new immigrants. Many of these, once they are settled or reach middle age, often move out to the suburbs or to less expensive regions. Even core urban groups, like gays, may now be heading to the suburbs for more affordable housing and quieter neighborhoods, notes a recent study by UCLA researcher Gary J. Gates.
Costs and comfort may be only part of the reason. Suburbs themselves have become more diverse and welcoming to households that do not fit the traditional “Leave it to Beaver” mold. Some have growing cultural institutions, thriving town centers and excellent ethnic restaurants. Perhaps more compelling, the bulk of economic growth and jobs — including high-end professions— continues to shift away from the core urban areas.This is true even in urban success stories like Portland and Philadelphia.
This may explain why the boosters’ over-hyping of the market for “luxury” condo development in many cities has become so overwrought and economically unsustainable. There is clearly a market for dense urban housing that should expand over time. But given the demographic and economic trends, it does not exist yet — at least not in the volume or at the prices offered by many developers today.
Equally important, the celebratory rhetoric surrounding the condo “boom” has deluded many urban policy makers into mistaking speculative development for real progress. They would have been much better off focusing on fundamentals like boosting middle class jobs, reining in inflated public employee costs, improving educational systems and improving basic infrastructure.
Yet, ironically, the current condo glut could still present a great long-term opportunity for urban centers. Lower condominium and rental prices might lure key urban demographic groups, like young educated workers, to the central cities that were becoming too pricey for them. City boosters would do well to use this current crisis to nurture a sustainable urban middle class instead of wasting time bashing the majority who, stubbornly, still prefer suburbs.
Joel Kotkin is a presidential fellow at Chapman University and the author of “The City: A Global History” and “Tribes: How Race, Religion and Identity Determine Success in the New Global Economy.” He is writing a book about the American future.
Camilo Wood

Camilo Wood

Camilo Wood has over two decades of experience as a writer and journalist, specializing in finance and economics. With a degree in Economics and a background in financial research and analysis, Camilo brings a wealth of knowledge and expertise to his writing. Throughout his career, Camilo has contributed to numerous publications, covering a wide range of topics such as global economic trends, investment strategies, and market analysis. His articles are recognized for their insightful analysis and clear explanations, making complex financial concepts accessible to readers. Camilo's experience includes working in roles related to financial reporting, analysis, and commentary, allowing him to provide readers with accurate and trustworthy information. His dedication to journalistic integrity and commitment to delivering high-quality content make him a trusted voice in the fields of finance and journalism.
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