Saturday, June 21, 2008

The Slow Death of Suburbs?

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I've proposed in the past that if we do indeed move to a higher energy cost cycle, the living habits of Americans are going to change quite drastically. In short, we are going to look a lot like Europe - concentrated urban centers, and closer to the city (or job centers in satellite smaller towns) will be much more attractive. Smaller homes, smaller cars, etc. I wrote in [Apr 22: Euro hits $1.60 as ECB Hints at Rate Hikes] when gas was "only" mid $3s...

When do we start hearing stories of people quitting work because its too expensive to get to their low paying "service job" that politicians say are "great for America" as we gut the production capability over the past 2 decades.

And for you eager real estate investors? Here is a trend I'm giving you first... smaller homes... in inner ring suburbs. With heating costs and A/C costs killing people on top of gasoline prices - those outer suburb McMansions are going to be ghost towns left for the truly well off. The middle class will be moving closer to work, in homes they can afford to pay the utilities. Start scouting those type of homes - thats where the next real estate boom will be (2011). Or buy a farm.

Now 3 months later - the mainstream press has caught on....

Now, I do believe this is our path: the cure for higher prices is higher prices. Unfortunately we are in a global competition for resources so to truly bring down prices for a sustained period of time, we need something akin to a global slowdown. Judging by the rampant inflation in emerging markets, along with slow growth in Western countries - we seem on our way. And what will happen? Lower energy prices. For a time; looking further out - I see an era of higher prices, combated by technological innovation and mass adaptation of alternative energies; but that is a very long term trend. The global economy, after retrenching will pick up again, and even if/when we see a pullback in energy prices - we will be in the same boat we are in now, in the future (if its 6 months, 18 months or 30 months I do not know, but we will be back here).

What I do wonder is how quickly Americans will fall back into bad habits if/when energy retreats - i.e. if oil gets back to $100 will people go back to their SUV ways? *IF* wage increases were keeping up with true inflation I'd say yes - but since large swaths of the middle and lower class (and parts of lower upper class) have fallen so far behind true cost of living changes, and I don't see food inflation abating anytime soon, I think perhaps they will not go back to the "old ways". But we'll see - Americans are famous for short memories. But once we hit pain levels, we also are very good at adapting - let's pick up on some stories showing how life is quickly changing - the Europization of America if you will. As you read these also keep in mind how this is going to affect the housing "rebound" everyone is touting - we have some major headwinds coming our way now - higher inflation means long term interest rates go up (which is what mortgages are based on), higher fuel costs makes that lazy Sunday afternoon drive perusing open houses a non-starter for many in the lower and middle class, and homes too far from working centers or mass transit (95% of America has no means to mass transit) are just not going to be on anyone's list (except the very well off - and they really will not be wanting to live in those tiny 2800 sq foot homes we overbuilt on a mass scale the past half decade). These are all stories one might quickly glance over as curious sidebars, but by analyzing these macro trends we can help make specific investing decisions. (or if you are a real estate investor, you can see today where to invest for greatest gains in the long run)

WSJ: Suburbs a Mile too Far for Some
  • Pasadena, CA - Abandoning grueling freeway commutes and the ennui of San Fernando Valley suburbs, Mike Boseman recently found residential refuge in this Southern California city. His apartment building straddles a light-rail line, which the 25-year-old insurance broker rides to and from work in Los Angeles.
  • Richard Wells is more than a generation older but was similarly attracted to the Pasadena apartment building. The British-born scientist retains what he calls a European preference for public transportation despite his nearly 30 years in California.
  • Messrs. Boseman and Wells embody trends that are dovetailing to potentially reshape a half-century-long pattern of how and where Americans live: The driveable suburb -- that bedrock of post-World War II society -- is for many a mile too far.
  • Today, the subprime-mortgage crisis and $4-a-gallon gasoline are delivering further gut punches by blighting remote subdivisions nationwide and rendering long commutes untenable for middle-class Americans.
  • "All these things are piling up, and there are fundamental changes occurring in demand for housing in most parts of the country."
  • hristopher Leinberger, a visiting fellow at the Brookings Institution and a developer of walkable areas that combine housing and commercial space, describes the structural shift as the "beginning of the end of sprawl."
  • While baby boomers may be looking to downsize their homes and simplify their lives in urban condominiums, millennials often look to cities as a way of rebelling against the suburban cul-de-sac culture that pervaded their youth.
  • Even families who sought the suburbs or were priced out of cities now have an economic imperative to find their way back closer to town. Transportation is the second-biggest household expense, after housing, and suburban families face a relatively greater gas burden.
  • At the same time, distant suburbs, or exurbs, where housing growth was predicated on cheap gas, have experienced the biggest declines in home values in the past year.
  • The demand for housing near urban centers isn't going to snuff out suburbs overnight. Several satellite towns around cities continue to lure jobs and are reinventing themselves with their own city centers.
  • The challenges for cities are considerable, from investing in public-transportation systems to creating incentives for developers to accommodate the new urban housing demand.
Speaking of those challenges - high prices are a tax on all things (consumers/producers) - even police departments - let me introduce you to the traffic ticket fuel surcharge! Remember folks, our whole government (local/state) revenue system is based on home price taxes - that's the bedrock - as we have written in the past this housing slump is really going to hit home in 2009/2010. But it is already starting - we are just early on this story. [May 7: Vallejo California Votes for Bankruptcy] Schools, public services, the whole system is going to be affected. Someone needs to pay the bills, so do you think these governments are going to really cut costs? (hah) More revenue! New sources! American consumers will be beset with higher charges/taxes from their local governments JUST as they are suffering through inflation from global forces. Meanwhile Wall Street can cheer because unlike the 1970s workers cannot go to employers and ask for cost of living wage increases 10-12-14%. Nope, because government reports show 2.4% inflation. :) See it all ties together in one very ugly picture - Welcome to the jungle. The American consumer is going to be staggered for a long while.
  • Some cash-strapped US municipalities are resorting to slapping fuel surcharges onto tickets issued to speeding drivers in order to fill dwindling city coffers hit hard by skyrocketing gas prices.
  • "The hike in gas prices seriously hurts our ability to patrol," said Clarence Martin, the Atlanta city council member who proposed the measure.
But let's look at a broader picture - NYTimes: Fuel Costs, Pinch Cities - Mayors Push Mass Transit
  • Higher fuel prices are forcing cities across the country to cut public services, limit driving by employees and expand public transportation in what has become a sprawling movement to conserve energy.
  • A survey of 132 cities, released Friday here at a meeting of the United States Conference of Mayors, found that 90 percent were altering operations because of fuel costs.
  • They are pushing City Council members, whether they get along or not, to car-pool. They are telling housing inspectors to arrange site visits in clusters so they stop criss-crossing neighborhoods. And, even as many of them still use S.U.V.’s, the mayors are asking nearly everyone to do a little more walking.
  • Coinciding with a real estate meltdown, rising energy costs have wreaked havoc because many city budgets were passed months ago with the assumption that gasoline would cost $2 a gallon. Now mayors are finding themselves squeezed by rising costs, declining revenues and increased demands for public transportation.
  • Mr. Hannemann said the federal government needed to give cities more money to expand their offerings. “We’re starting a ferry system, and making more bike lanes, more opportunities for people to walk,” he said. “And the federal government can help us immeasurably.” (and where would this money come from? the federal government is broke? aha - from the grandchildren)
  • But he said the gains for most cities would be limited because the nation had relied heavily on cars for decades. “We have waited until we are at a crisis point to address transportation,” Mr. Smith said. (American the reactive, not proactive - this is a theme we talk about each and every week)
One more to finish the entry. AP: Home Buying Practices Adjust to Higher Gas Prices
  • Stroud was looking in Elk Grove., Calif. -- about 85 miles away from his job in the San Francisco Bay Area -- because homes there are more affordable. But with gas at $4.50 and a car that gets about 22 miles per gallon, Stroud would be pumping $560 a month into his tank. So instead he made an offer on a home near the train station in Davis, which will shave $160 off his commuting costs.
  • "I wouldn't even be able to consider doing it without that Amtrak possibility," said Stroud, 45, who also telecommutes one day a week to his job in software quality assurance.
  • Stroud's choice represents a fundamental shift in the way more Americans are approaching home buying in this era of ballooning gas prices. Real estate agents, transportation officials and industry surveys indicate that home buyers are placing more importance on cutting their gas bills and commute times than they have since the oil shocks of the 1970s.
  • And there are some early indications that homes near urban centers, and subway, train and bus stops are often selling faster and at better prices than those in the distant suburbs.
  • ...a survey of 900 Coldwell Banker agents showed a remarkable 96 percent said that rising gas prices were a concern to their clients, and 78 percent said higher fuel costs are increasing their desire for city living. (but the Federal Reserve insists that inflation risks are anchored, fancy wording to mean consumers do not believe there will be more inflation in the future - anything to excuse themselves from their misguided policy of banking out the banking system run amock and throwing the middle and lower to class under the Amtrak)
  • A grueling commute by car into the city is the main reason why Mark Bulkeley wants to move closer to his job in Tysons Corner, Va., near downtown Washington D.C. He is selling his home in Haymarket, Va., which is 30 miles from work, and has signed a contract on a home in Great Falls, Va., that's just 6 miles from the office. "When we decided that we were going to make a move we basically put a dot in the middle of the map where my office is and said, `We are not going to live farther than essentially a 20-minute circle around that,'" Bulkeley said.
  • In Atlanta, agent Mike Wright with Prudential Georgia Realty notes that real estate brokerages within the city perimeter have been selling better than those outside the city, reflecting an area trend of people moving "closer-in."
  • In Florida, real estate professor Bill Weaver sees this as possibly the beginnings a shift to a more European approach to finding homes.
  • "Transportation costs in Europe have been so high for so long that they already take transportation into account when they buy a home," Weaver said. "We've just been behind on that. In that regard, you might look at high gas prices as sort of a silver lining."
Once again can I stress that inflation is benign when you strip out the "tiny" part of consumption that is food and energy. I mean, this "tiny" part of consumption is not causing whole scale demographic changes, or anything like that so it is correct to eliminate it from the conversation. Yep.


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