More on gas prices and home prices.

I've tried to evaluate the impact of gas prices on home prices before.  Richard Green, a GWU real estate/finance/economics professor, comes to a completely different conclusion:

Let's say the average household makes five one-way trips per day--for work, shopping, entertainment, etc. Let's also say that the average car gets 20 mpg in city driving. Each mile of distance to work, shopping, etc. is therefore now 50 cents per day per household more expensive than before. A household living immediately adjascent to work and shopping should then be willing to pay $5 per day more in rent than a household 10 miles away compared with six years ago, all else being equal. This becomes $150 per month, or $1800 per year. Assuming a five percent cap rate for owner occupied housing, this translates to $36,000 in relative change in value. Given that the median house price in the US is about $220k, this is kind of a big deal.

The assumptions here are pretty crude (particulalry the ceteris paribus assumption), but if gas remains at its current real price, we will see the shape of US cities change.

Green is using the standard monocentric model.  Under that model, all employment and city amenities are assumed to be concentrated in the CBD.  With that assumption (Ok, and a few others), the model predicts that land rents are completely determined by commuting  costs.  That is, property values (which depend directly on rents) will decline to offset any increase in gasoline costs.

I am skeptical that home prices will completely offset the rise in gas prices (and, to be fair, Green acknowledges he is making a bunch of assumptions for the sake of simplicity).

First, homeowners can cut their gas bills by switching to more efficient vehicles, combining errands, taking public transit, etc.  This means they won't necessarily respond to higher gas prices by bidding up rents dollar for dollar.

Second, cities aren't really monocentric.  They are polycentric.  Think of Houston, which has its downtown, the Galleria, the Med Center, Greenway Plaza, the Energy Corridor, etc.  A home nine miles from downtown Houston may become less attractive to downtown commuters, but if it is only three miles from the Galleria, it may become relatively more attractive to Galleria commuters.  The push and pull of the different employment centers will snarl the simple rent gradient predicted by the monocentric model.

Ultimately it's an empirical question.  It will be interesting to see what really happens to home prices.  Will (have) home prices in Houston react(ed) differently than home prices in a relatively more monocentric city such as Boston?

I think Green definitely overstates things, though,  when he says "we will see the shape of U.S. cities change."  Even if one assumes that home prices will completely absorb the rise in gas prices, our urban form won't change much, at least not quickly.  Rising gas prices theoretically could drop the value of suburban land below its value as farmland, but it still won't be worth anyone's while to plow under all those houses.  The markets simply will clear at very low prices.  The low land prices may discourage the construction of new suburban housing, but this assumes that central city zoning will allow the density necessary to accommodate the suburban refugees (which it certainly should).  Even then, adding a robust 1-2% per year to existing central city housing stock won't have a dramatic effect on the city's urban form.  For example, if a city starts with 70% of its housing as detached single-family homes, it will take a very long time before most of its housing is made up of condos and apartments. 

In other words, Atlanta won't turn into Berlin during our lifetimes, regardless of what gas prices do.

Comments

[M1EK]

I think you underplayed the zoning constraint. If today, we can elect Laura Morrison to City Council with gas at $4, there is zero chance for infill to absorb more than a trickle of demand. With a completely supportive public policy environment, we could absorb all new growth with density and maybe make a small dent in reshaping existing sprawl, but if we're going the wrong direction at $4/gallon, I wonder what it will take.

(Amazingly, on the hancock list, there's already people insisting that since Concordia's getting rebuilt but Southpark Meadows did too, that density doesn't slow sprawl).

This is going to be nearly impossible to fix - in darker moments, I see the competitive advantage we have over Western Europe tilting the other way around more every day, and wonder at what point they'll want to allow easier immigration from Americans.

Looking back, it's amazing Watson accomplished what he did - but it wasn't enough in enough time. (25,000 downtown voters would have been a great counterbalance to the ANC).

[Kedron Touvell]

Not sure what you're giving Watson credit for...he was very energetic and started a lot of initiatives but high-tailed it out of town before he could make any of them a success. Many of the specifics he launched turned out to be disastrous (Intel, CSC, actually most of his business giveaways failed due to (variously) bad timing, no accountability standards, and incompleteness). I'd give Mayor Wynn credit for most of the heavy lifting in furthering the Downtown renaissance.

[AC]

M1EK, ANC has been test-marketing the "density is futile" argument for a few months now. It's not doing any good, so why bother? ANC's got to have an argument to counter the environmentalist pressure, and this is the best it's been able to muster so far.

[DSK]

M1EK, I don't really think you can extrapolate Austin's experience into any sort of indicator of the direction of American cities in general. As I've said before, among medium-large American cities, Austin is unusually anachronistic in its governance and development patterns. How many cities of its size still run on a "non-partisan" group of at-large council members, a weak mayor, and a city manager? How many are so dedicated to 1950s era housing patterns in the *heart* of the city? Few if any of the other MSAs clustered around Austin in the population rankings.
I don't think we are in any danger of losing population to Western Europe, and in fact many American cities are evolving denser urban cores at a much faster rate than Austin.
And those larger cities which are purportedly poster-children for sprawl, such as Atlanta and Houston, are actually far more supportive of infill these days.

[M1EK]

DSK, I know some areas do a little better than the ANC would let us do, but we're actually infilling quicker than almost anybody else (due to market demand) -- and many other metro areas have similar problems with zoning and neighborhood reactionaries (think Seattle; heck, even Portland, the poster child, often has trouble).

And it's going to take a massive increase in the rate of infill to stay competitive - not just staying the course; but a 5-10x increase in infill. I don't see any US city willing to do that right now.

Kedron, Watson set the rules and environment in place which allowed projects to go through without having to run the Jeff Jack Gauntlet so that when the economy came back, we were able to start building right away. (And what corporate giveaways do you think he did, anyways? Intel didn't get anything from us; the only cost was embarassment; CSC got a little bit but the space is still being used).

Like the automatic "bike/ped required on street reconstruction" rule Tommy (with some minor help from me) got passed by city council, the effects come years later.

[Kedron Touvell]

???

http://www.austinchronicle.com/gyrobase/Issue/story?oid=oid:83667

To attract Intel downtown, the city of Austin offered the company $15.1 million in waived fees, deferred costs, and infrastructure subsidies. Intel has already gotten half of that amount in fee waivers. Meanwhile, Intel pays $500,000 a year in property taxes on its Austin sites (including $218,000 on AN-2), valued at $20 million. On a total value of $69 million for a completed AN-2 ($160 per sq. ft.), the annual property tax would be around $1.7 million.

money quote:

"We're not immune from this kind of thing, but it's a lesson that cities need to be careful, and make sure there are plenty of checks and balances in place to keep this from happening."

[Kedron Touvell]

sadly, I think the "smart-growth isn't working" argument is getting more traction from areas of the city other than the ANC. I've seen more and more environmentalists starting to move in that direction, which is why I thought Cid's TDR plan was so important. Hopefully, the PC and the rest of the Council will take up the SCI in Cid's absence.

[M1EK]

So what are you doing about it (TDR)? A post on BOR about TDR would be a nice way to educate the so-called progressives.

I also lost a post I wrote at home; short version: Intel didn't get to keep any money, if I remember correctly; it was all contingent on finishing the project.

[Kedron Touvell]

I don't think a post on BOR would mean much, as they're much more interested in politics than policy (although I did write plenty of comments praising TDRs and Galindo's policies over the last few months). I have been doing some behind-the-scenes work trying to find situations where we could pull off a TDR or two. Green is the obvious "right-now" opportunity, and from speaking with some folks affiliated with one of the teams (guess which one), it could be a definite possibility. Unfortunately, that team wasn't selected by the staff. We'll see who the Council goes with in about an hour or two. Beyond Green or any other major development projects that fall into our lap, it's going to take some major leadership at the Council level.

[AC]

TDRs? I remember Cid talking vaguely about using TDRs to incentivize development away from the hill country and into town centers east of town. Is that what you guys are talking about? Or is there a more specific proposal on the table?

[Kedron Touvell]

yeah, Cid made TDRs the center of his environmental platform. There is no specific proposal on the table, and now that Green has gone to Trammel Crow, I don't know of any opportunities in the near future (unless someone in Oak Hill actually uses the SOS redevelopment ordinance -- we'll see).