Housing Markets

• Housing fulfills many functions in our society

– Use values (which are valued differently by different households)

• Providing shelter and privacy

• Satisfaction and status (having to do with house’s size, design, and location)

• Creating environmental quality (both the physical environment in terms of trees, gardens, etc AND the social environment, in terms of neighborliness)

• Providing accessibility to work, education, shopping, recreation, social networks

– Exchange value (its worth in the market place)

• Equity (which is the gap between the market price and what is owed on the mortgage)

– In the US, up to $250,000 of this (or $500,000 for a married couple) is tax free upon the sale of the home provided it is your main home and you have lived in it for two years

» Thus real estate is a major source of potential wealth for people in times of economic upturn

Housing Sub-markets

• All cities have submarkets

• Six constraints that help shape/price urban housing submarkets

– Supply restrictions: some types of housing (such as historical housing or low-cost downtown housing) cannot be reproduced

– Accessibility restrictions: some houses have a unique location, either positive (walking distance to shopping) or negative (superfund site)

– Neighborhood restrictions: Small areas become can become attractive (or super-unattractive), and result in premiums (or discounts) on rents

– Institutional restrictions: Including redlining (districts where mortgage brokers won’t originate loans) and zoning

– Racial, ethnic and class discrimination: This keeps certain people out of certain areas

– Information restrictions: Different households have different information on the housing market and opportunities within it.

The Rise of Homeownership

• In earlier eras, home ownership was relatively uncommon

– In the mercantile era, many employees lived in the home of their owners

• Most of the rest rented accommodation from merchants or rural landowners who had built housing for such a purpose

– In turn, most of these renters would take on a border to make sure they had some steady income

– In the industrial era, factory owners began by providing housing to attract people from the countryside (a mixed blessing for the tenants, in that they actually had a place to live, but they were completely dependent on their bosses for everything)

• But over time, their were too many immigrants and a lot of job switching, so a generalized housing market unconnected from work emerged

– The turning point for owner-occupiers was the street car suburbs, built specifically for those types of individuals

• It has been rapidly uphill in the US since then until the 70% number was reached, which is about the ceiling

Rise of Homeownership (cont.)

• Reasons why increasing home ownership

– Increasing affluence of a wider section of society (following WWII) combined with economies of scale achieved by housing developers to keep costs down

– Increasing “benefits” including

• The social status that comes with home ownership and being part of the American Dream (which is centered on having your own piece of property)

• Achieving residential segregation

• Building equity to move up the financial ladder

• Performing a family lifestyle

Rise of Homeownership (cont.)

• Increasing economic and political benefit of homeownership

– Banks like it because the down payment provides capital to reinvest, the interest provides a revenue stream, and it leads to all sorts of other purchase like furniture and home improvements

– Under Keynesianism, stimulating home construction could help grow the economy

• To this end, the government insures mortgages to help get more written and allows people to deduct mortgage interest from their income pre-tax

– People with mortgages are interested in social and political stability, so their investment does not decrease

• Decline in rental profitability

– More codes got rid of the shoddiest units

– Renter’s low income means it is hard to raise rents

– Rent control legislation

– The deteriorating quality of rental stock

– Decrease in demand (because of rising home ownership)

– Taxation policies which make improving rentals unattractive

Housing Affordability

• Finding decent housing at a decent price has been a major issue for city dwellers since the industrial revolution

– This is because, unlike in rural areas, land is a more finite commodity

• In recent decades, the early 1980’s and the mid 2000’s had the biggest crises of affordability

– This, again, was a combination of rising commodity prices, more households, high interest rates and slow economic growth

• During this era, homeowners were spending 36% of income on home ownership delaying other types of consumption (including having children) in order to be house poor

– The idea was that prices would continue to rise and big sums of money could be made soon

– By the end of the 1980’s, the end of inflation (plus a wave of foreclosures) saw prices dip

• With low interest rates and lower prices, home ownership was only taking 20% of income in the 1990’s

Housing Affordability (cont.)

– Until the current recession, the exchange value of real estate began to surpass all of its other uses, driving home prices up to the point where only the richest 20% of the population could afford the median home in some markets (like Miami and almost all of California)

• Here in Miami, some households were spending 50% of their income on homeownership

– Since the 1990’s, there has been tremendous growth in sub prime lending (lending to people with weak or bad credit histories) and exotic mortgages (usually with teaser rates or interest only options)

• It did broaden home ownership, but came with higher rates and fees that left many upside down when home prices dipped below the value of their mortgages

– Turns out a large chunk of the subprime mortgages were purposefully given to people who could have got better rates, because sales people received higher commissions for them

• For the poorest, the rental market takes a big chunk of their income while providing sub-standard housing (especially since there is comparatively little public housing in the US)

Public Housing

• Most other wealthy countries have 10-20% of units in public housing

– US has only 1.5%, most of which involve Section 8 vouchers issued by HUD

• Essentially, Section 8 is where the government pays the difference between 30% of a household’s income and the fair market rent

– Two methods of administration: project based (a whole private building or development where section 8 designated households can move in, either renovated or newly constructed) or voucher based (where the tenant is given a voucher, and finds a private landlord who accepts them)

» Section 8 housing is annually inspected for quality; if a tenant damages the property, they get booted from the Section 8 rolls

– During the depression, there was a push to build public housing (and by some estimates, nearly 1/3 of central city families still need help), but the following factors have prevented it here:

• An especially strong free enterprise ethic

• Racial bias, since the perception is that minorities would benefit most (even though white, non-Hispanics make up the majority of Section 8 recipients)

• Well-funded opposition from builders, banks and the US Chamber of Commerce

• The extremely severe cost limits put on public housing, which guaranteed it would be crappy (for example, units did not come with toilet seats to save money)

– It was also strictly means tested, so that if you started doing better economically, you were booted out

» This meant no one cared about the long term maintenance and only the poorest of the poor were put there

» This meant that it was always going to fail

• That being said, in most places public housing is far from lovely, and often suffers from obsolescence

European Housing Market

• European urban dwellers (except in Ireland, England and Wales where the row house predominates in all but densest neighborhoods) live in apartments

– Makes sense given density, emphasis on public transport

• Historically, apartments were socially mixed affairs

– B4 elevators, wealthy on lower floors, poor up top

• Also, wealthy at front of building, poor at the back or in the basement

• Public Housing

– Europe, facing huge shortages following the destruction of WWII, went in heavily to publicly owned housing

• Initially, at least in West Europe, the build qualities were good and the size of the flats were large (and had indoor private bathrooms)

– Also, because the poorest could not afford it initially, there was little social stigma

European Housing (cont.)

• Public Housing (cont.)

– Overtime, went for more pre-fab apartments (of lower quality), especially in East Europe; and more tower blocks/housing estates/ grands ensembles out in the suburbs

• These declined in attractiveness quickly; even more so once maintenance problems became apparent

– Starting in the 1970’s, new supply began to dry up; in 1980’s, much of it sold to long term residents (as in UK) or given to community groups

• There is more neighborhood stability in Europe, as people move far less (and the rich never left the central cities in great numbers)

– In fact, high urban taxes kept most of the poor towards the periphery in many cities

• The largest cities annexed many smaller towns near them during the course of the 19^th century, which have formed the core of shopping districts/distinct neighborhoods

– London is the perfect example of this, with its patchwork of neighborhood High Streets (shopping streets)

Residential Mobility

• In any given year, one out of every 12 households in US metropolitan areas move

– Renters more likely to move than owners; central city more likely to move than suburbs;

• Some people (middle age and young-old, working to middle class, suburbanites) tend to be stayers; the young and both the very rich and very poor tend to be movers.

• 2/3 of moves are intra-metropolitan (within the same metro area); 1/3 are inter-metropolitan, rural to urban in migrants, and direct immigration

– Rural to urban used to be more prominent in US and Europe

• Low income in-migrants and immigrants go to central cities, as well as 1^st or 2^nd ring suburbs

• Middle and upper income people who come in tend to: come with a new job, and little time to search for a house; try to pick homes with decent resale value in case they move again; and tend to locate in newly built areas on the fringe for the first few years (where everyone else in the neighborhood is new), until they get a sense of the city

Residential Mobility (cont.)

• Intraurban moves

– A decent number is the first move of a recent migrant and caused by family status change, but also:

• Most moves are short distance (about 1/6 of city diameter) to stay close to social networks, especially the schools and friends of children

• Most moves involve going to a very similar neighborhood with very similar housing

• Most moves within same sector or quadrant, because they know it well and have places they like to shop/socialize

• They pick up rapidly during better economic times

Residential Mobility (cont.)

• Reasons to move

– Between 15-25% of intraurban mobility are forced moves due to eminent domain, demolition, eviction, home loss

– A further 15% are induced, meaning moving made sense because of lifecycle event (especially marriage and divorce), job change, retirement

– The rest then are voluntary moves, driven push and pull factors

• Feeling the household lacks sufficient space is the number one cited push factor

– Other push factors include anticipated high maintenance costs, obsolescence, and neighborhood change

• Number one pull factor is change in employment

– Accessibility to shopping/amenities/friends, good schools and moving from renting to owning are all pull factors

Residential Mobility (cont.)

• According to Brown and Moore’s model of housing search, “stressors” reduce the utility of a dwelling to a family, prompting them to do something

– Many households do in fact renovate or try to change their neighborhood for the better in stead of move (or, as many of the old do, just adjust their expectations to meet new realities)

• Interestingly, it is the rich and poor who are most likely to use their voices to change neighborhoods; upper middle class are much more likely to just exit and lower middle class/working class are more likely just to stay loyal and adjust to the new circumstances

• If they do decide to move, while some households will conduct extensive searches of all sub-markets using the internet and newspaper ads (this tendency goes up with education) combined with neighborhood visits; most people target only one submarket for reasons that include reducing stress and costs

– Thus people search within their awareness space, which is a combination of action space (where they move around) and information space (what they learn about)

• The poor tend to have a much narrower awareness space, partly because of lower information consumption, partially by lack of private transport

• When it comes time to move, even if they have clear aspirations for what they are looking for, most settle for what they consider a “good deal” (since they can only buy houses that are on the market)

– In terms of what wins out, neighborhood quality (especially school quality) wins out over house quality; interior space and appearance wins out over exterior design and appearance

Housing Market Gatekeepers

• Exchange professionals determine the direction of neighborhoods after the city builders have brought them into existence

– Include realtors, mortgage brokers, insurance agents, appraisers, and landlords

• They have the power to direct both people and capital

– In the past, they practiced active segregation; now they continue the process of segregation, but likely without the same level of intentionality

• Realtors, for example, work on commission, so want neighborhoods with high prices and high turnover

– By working for buyers and sellers within the same market (illegal in some countries), they also have a command view

– Thus, they are reluctant to do anything that would jeopardize a neighborhood’s home prices

Housing Market Gatekeepers (cont.)

• In the past (and still in some pockets today), steering take place, where realtors won’t show properties in neighborhoods with high value to poor/minority buyers

– Now, thanks to “paired testing” done by HUD (where one minority and one white with identical income, occupations, etc.. inquiry about housing), we know that whites are 1) more likely to be shown homes in white-dominated neighborhoods 2) they are shown the insides of more homes 3) are treated with more enthusiasm and 4) are given more help with obtaining financing

• There have been slight declines over time for discrimination faced by African Americans (especially among potential home owners), but it has not declined for Hispanics (who started with less discrimination than African Americans)

– A related horrible practice is “block busting” where real estates actually try to drive down prices so they can buy themselves to sell high later (either to an incoming group or as a unit to a developer seeking a large lot)

• Have included tactics like encouraging minority families to move into white blocks, buying houses only to leave them derelict, putting up false “For Sale” signs, and paying someone to vandalize nearby properties

Gatekeepers (cont.)

• Mortgage Brokers used to be accountable to investors, and tended to be risk averse (seriously)

– It was easier for middle class families with salaries to get mortgages than wage-earners, self-employed or female headed households

• Recently, the middle class family was more likely to get a good fixed rate mortgage; the others more likely pushed into adjustable rate, option ARM or subprime (high rate) loans

– But even controlling other factors, whites got more loans on better terms (and sometimes, poor whites would even get better terms than upper middle class African Americans)

– Also used to be “high risk neighborhoods” that would not have loans written in them, called “redlining”

• Now some neighborhoods more likely to receive crappy loans than others, instead of outright denial

Gatekeepers (cont.)

– Redlining can have a series of cascading consequences

• Starts with making cheap housing less affordable (due to high rates); then worst dwellings are left vacant beginning blight; then even home improvement loans get hard to get; more blight and harder to get property insurance; that causes businesses to leave followed by people leaving the poorest and eldest

– The city also loses big as it loses sales and property tax revenues

– Government tried through Civil Rights Act, Home Mortgage Disclosure Act, Equal Opportunity Credit Act)

• But even the FHA rejects a higher number of non-white applications.

• Insurance Agents

– They, for a while, were using “racial composition” as a category to decide coverage and rates (they cannot do that now, supposedly)

– You have to have the insurance to get a mortgage, thus the gate keeping function

Gentrification

• It is when

– 1. Middle income or high income people move into a working class or “twilight” neighborhood

– 2. Physically renovate deteriorating housing stock to meet the new owner’s requirements

– 3. Raising property values (and thus taxes)

– 4. Forcing the old inhabitants out

• It was once just in the top tier of world cities, then regional nodal centers, and now has gone completely global, both to small cities and cities in the developing world (to the extent they have old cores to renovate), even tourist areas where old hotels turned into “boutiques”

– In the US, it displaces about 900,000 households a year

• It often finds some left and right support: left like that it rehabilitates historic structures, and often brings about alternative retail spaces; right likes it because it is urban renewal with little cost to government

• For gentrification to take place, need

– A pool of potential gentrifiers, which means well paid people in administrative, managerial, medical and producer services in the CBD

– A supply of potentially gentrifiable urban housing (which cities like Dallas and Phoenix lack – although there can still be a movement towards downtown in these cities, just in new construction)

– A critical mass of people and businesses who see gentrification as a desirable lifestyle choice

Gentrification (cont.)

• It is one of the most looked at urban processes by geographers, and several different approaches have developed

– David Ley developed the humanistic approach, which emphasized social, cultural, and occupational shifts in bringing about gentrification

• Essentially, more professionals, working downtown, with post-modern sensibilities want something human scale and diverse near their work (so high rises and suburbia won’t do)

– They choose historic stock, use their large incomes to secure it, and then begin to work on city politics from a position of strength

– Neil Smith emphasized the role of economics in a structural approach

• He emphasized the rent gap that had developed in the area between the CBD and the suburbs, that was undervalued

– As the drivers of the process he put developers, owner-developers, and landlord developers

• He framed it as part of neo-liberal governance, where the poor are left to the mercy of the market (sometimes with a push from government)

– Called it the revanchist era (where the powerful got revenge for the gains of the 1960’s)

Gentrification (cont.)

• Liz Bondi and Alan Warde have emphasized that gender is a major component of gentrification

– That many gentrifying couples are dual income, both working downtown and can afford private schooling

• Larry Knopp and Mickey Lauria emphasize the role of GLBT (especially gay men, who have higher wages) in gentrification

– Without children (generally) did not have to worry about schools

– Over-represented in high skill, high wage professions located in cities

– The heteronormativity of suburbs made it suck to GLBT, but in cities could get a concentration and community

• Sharon Zukin and Rosalyn Deutsche emphasized changing taste under post-modernism, and the increasing acceptance of avant garde as quasi-mainstream

• Thus, gentrification is both economic and cultural – but it is important to understand to what degree it is which, since only by understanding it can policy be effective