Gas prices shift housing demand toward cities

Table 1 title: Housing price change for selected Zip Code areas Table 2 title: Change in housing prices New Urban News has reported for some time, based on observations and published stories, that urban neighborhoods have performed better than suburban ones in the recent housing market downturn. Now that claim is backed up by empirical evidence (see tables on this page). Neighborhoods close to central business districts are doing significantly better than those farther away, according to a May report by economist Joe Cortright, a Brookings Institution senior fellow who is with Impresa Consultants in Portland, Oregon. His study, “Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs,” was commissioned by CEOs for Cities, a national network of mayors and private-sector leaders. Higher gasoline prices are shifting consumer preference toward more urban housing, and this shift that will continue far into the future, according to Cortright. “The process of foreclosures, though painful now, will run its course,” he says. “In contrast, the rise in gas prices has fundamentally altered the landscape of urban housing markets in a way that will not quickly be undone, barring an unforeseen collapse in oil prices.” The study looked at five cities in different regions — Pittsburgh, Portland (Oregon), Los Angeles, Tampa, and Chicago. “In each case, housing prices fared worse in the more distant neighborhood,” the report says. “In Pittsburgh and Portland, prices in close-in neighborhoods continued to increase, while prices in distant neighborhoods declined. In Los Angeles and Tampa, declines were significantly less in close-in neighborhoods than more distant neighborhoods. In Chicago, prices in close-in neighborhoods were steady, even though prices in more distant neighborhoods declined.” Even when gas prices were low — they were $1.50 a gallon as recently as 2003 — total transportation costs have always been much higher in the suburbs. “A case study of the Twin Cities estimates that households living in distant suburbs spend 30 percent of their household income on transportation, compared to about 20 percent for the typical household in the region.,” Cortright reports. That reality was often lost on consumers, partly because it was spread out among myriad payments for car loans, maintenance, gas, insurance, fees, and the like. Today, however, high gasoline prices are sending a more immediate and dramatic signal. Many analysts have failed to notice how much variation there is in vehicle miles traveled (VMT) across the spectrum of US households and what this means in gasoline costs. During the last five years, average household gasoline expenditures have risen from approximately $1,750 to $4,350 per year. Even now, many urban or retired households will be spending less than $2,000 a year. Many two-income suburban households, however, will spend $6,000 to $8,000 a year, or even more. That’s the equivalent of $10,000 in pre-tax income — and it doesn’t include the other costs of owning and driving automobiles. Two-income households have been an important segment of the suburban housing market; Cortright believes that these and other households will increasingly seek to reside closer to work. “While this is a far from instantaneous answer to high gas prices, over a period of years it can markedly reduce total vehicle miles traveled and the gas consumption of the average household,” he says. Policy implications Cortright makes a series of policy recommendations and observations: • The relative decline in prices in sprawling suburbs is likely to persist because of the continued high price of gas, and governments should plan accordingly. • The market for higher density and redevelopment in close-in neighborhoods is likely to grow stronger, and local land use plans should accommodate this shift. • Government can help families save money by making it easy and convenient to live in mixed-use, close-in neighborhoods served by transit. • Reducing vehicle miles traveled not only saves families money; households that drive less will have more to spend on other things, stimulating the local economy. Additionally, reducing oil consumption not only cuts greenhouse gas emissions but lowers the trade deficit. • Many distant exurban developments may no longer be economical; propping up building and homeownership in these areas would encourage unsustainable settlement that makes families even more vulnerable to future gas price increases. He adds that “In crafting responses to the current foreclosure crisis, the federal government should pay attention to the new market realities, rather than simply bailing out the homebuilders and homebuyers who built and bought the economically unsustainable housing on the urban fringe. Lower housing prices at the suburban fringe represent a real market shift in the private and social value of very low density development.” Though he addresses the price of gasoline, Cortright doesn’t mention other forces, such as changes in demographics, which already indicate that higher-density housing is undersupplied and that there’s an excessive inventory of large-lot suburban housing (see “Market Trends Favor NU,” April/May 2007 New Urban News). “As both short- and long-term factors, gas prices specifically and energy prices in general certainly exert a powerful impact on settlement patterns,” says market researcher Todd Zimmerman. “However, demographic changes will have greater impact.” Moreover, Zimmerman believes that Driven to the Brink overstates one specific cause — gas prices — for the downturn. There were many. Barriers to changes As to future shifts in settlement patterns, significant barriers stand in the way of meeting the demand for higher-density housing. Despite the best efforts of new urbanists and other planners, zoning laws mostly restrict development of higher-density, mixed-use neighborhoods. Another barrier is the not-in-my-backyard (NIMBY) attitudes of existing homeowners in the suburbs, many of whom believe their interest lies in preserving the status quo. Owners of suburban houses declining in value may be trapped in a house they cannot sell. These barriers may explain why gas prices have not had as big an impact on VMT as experts had anticipated. Economists estimate that a 10 percent increase in gas prices, over the long term, is likely to result in a 1 to 3 percent reduction in VMT, Cortright reports. With gas prices up 150 percent in the last five years, such a change seemingly would have cut VMT significantly. VMT peaked in 2005 at 27.5 miles per person per day, and declined to 27.2 in 2007. Recent figures show that the decline may be accelerating — VMT in March declined 4.3 percent compared to a year earlier, the US Department of Transportation reports.