Clarity on PDX’s Housing Affordability Crisis

The essential paradox with affordable housing is that everyone is in favor of it in theory–but no one wants the value of any property they have invested in to decline.

Last fall, OregonPEN and others helped sponsor an Oregon tour for Chuck Marohn, founder of the national membership nonprofit “Strong Towns,” a tiny outfit that has brought more clear thinking and profound insight into national conversation about urban planning and development in a few years than any convention center full of developers, financiers, contractors, lenders, and government officials have since 1945.

Marohn spent a few days in Portland before going to spend a day in Salem and visit towns like Newberg and Independence as well. He penned a powerful series of essays over the next few weeks, reflecting on causes and possible treatments (he would reject the idea of “cures”) for the affordability crisis that the Legislature is trying to grapple with.

This series is Strong Towns at its best, iconoclastic, penetrating, deceptively simple prose, and discomfiting to sacred cows and conventional wisdom on the right, left, and center. The entire series is reprinted in this issue of OregonPEN, in hopes that some among the Legislature will read and consider a better approach to housing affordability than the current ones, which are mostly variations on a theme of trying to control a powerful automobile by stomping on the brakes and the accelerator as hard as possible while at the same time looking only at the rear-view mirror.

What’s the matter with Portland?

Last week was my first experience with Portland, Oregon. We’ve been trying to schedule a Strong Towns event there for some time so a trip has been long overdue, but still. When I was in graduate school pursuing a degree in urban and regional planning, it seemed like one out of four lectures contained Portland as a case study and that at least half of my class intended to move there upon graduation. It has a certain lore in my mind.

From an urban design standpoint, downtown Portland didn’t disappoint. It’s a planner’s Disneyland. Block after block of the consistently best urban form I’ve experienced in North America. I spent a lot of time just walking around and taking it all in. Very impressive.

And perhaps it was the unquestionable greatness of the downtown that made most everything outside of it seem really bad in comparison (although there were some bright pockets there too). Or perhaps it actually was really bad. I had three forays into the outskirts, two by automobile and one by rail, and I was struck, not only by how ordinary by North American standards most of it was, but also by how run down it felt.

PictureJust outside the Cleveland Ave MAX stop in Gresham. (Photo from GoogleMaps)

We took the MAX — Portland’s light rail system — out to neighboring city of Gresham.

Again, the urban design of each rail stop was amazing; there are clearly some brilliant people working on transportation there.

Outside of the right-of-way, however, things got really bleak. For miles along the route, within walking distance of many of these nice rail stops, the housing looked run down and neglected.

It was hard to reconcile what I was seeing with what I was hearing. I was repeatedly told that affordable housing was a huge problem. I met some neighborhood activists in Gresham, one in particular who told me that he used to live near the downtown and kept getting forced further and further out because he couldn’t afford the housing. In my tour, I was shown building after building — all very low value and some quite derelict — with some enormous price tags attached, millions of dollars for structures a stiff wind away from being condemned.

If housing values are so high, and demand is so high, why isn’t the housing stock nicer? Why were many people not maintaining their yards, keeping the paint up and doing the little things you’d expect to see in a place where modest homes were selling for prices well into six figures?

I think one possible answer to these questions gives a clue to the unaffordable housing problem facing Portland and a number of other cities. Before we get into that, however, I’d like to take some time to review — and question — the standard reasons given for why housing in Portland is so expensive.

1. So many people want to live here and they’ll pay anything because Portland is so nice.

I’m always reflexively skeptical of this kind of thinking. I want to live here and am willing to pay high prices to do so and thus others must be making a similar decision. This reasoning can give us blinders that keeps us from realizing that different people do different things for different reasons, especially those not in our own economic strata.

“This reasoning can give us blinders that keeps us from realizing that different people do different things for different reasons, especially those not in our own economic strata.”

Case in point, there was nothing really nice about Gresham. In fact, it was not really nice at all. Why are all these people willing to pay inflated prices to live in Gresham? I don’t think it is because they love living 35 minutes by train from Portland. It’s not like the people I saw there were living in small, overpriced apartments because they valued the opportunity to ride the MAX into downtown, sip a local latte and eat at a food truck. 

Put another way, Portland may be nice and the culture may be great for some, but there are a large number of people who are paying really high prices for sub-par housing and an experience they could get far more affordably somewhere else. While it is a happy notion for people in Portland to believe that they’re so wonderful — and I don’t ridicule because, as a Minnesotan, I know everyone living here is well above average – it doesn’t make any sense as the influence of a broad economic trend.

As I’ve said before, I absolutely can’t get enough lobster at $1 per pound. At $25 per pound, I’m more discriminating. At $50 per pound, I’ll stick with hamburger. Love of something can drive a market, but only so far.

2. We are not building enough housing to meet demand.

This is the more intellectually rational argument and I heard it a lot. Essentially, there is a supply and demand curve problem. Too much demand and not enough supply thus higher prices. The answer then is to build a lot more housing and eventually….what? Reverse the Portland housing bubble and bring housing more in line with wages? Slow the increases so that people scraping by can continue to scrape by?

I don’t buy this argument either. Yes, supply and demand curves are real and the demand for housing certainly drives up price, but I don’t find this to be the cause of sustained massive price increases. Supply and demand curves suggest that, when prices increase, demand will decrease when supply stays constant. You can’t sustain increasing demand while also sustaining increasing prices and increasing supply. You can do it for a while, but not over many, many years.  


Picture

This logic would have us believe that, if Portland housing prices fell by 25%, instead of 10,000 people per year planning to move to Portland (supposedly — more on this in a follow up post), 20,000 people or more would show up year after year until housing prices went back up to what people were willing to pay to live in such an amazing place. Maybe someone can put together a model that pretends to demonstrate this; I don’t find the argument credible.

3. It’s cheaper than San Francisco.

I heard this one a couple of times: people from San Francisco look at Portland as a huge bargain and are bidding up the prices. It felt like an old wives’ tale, something that someone heard or perhaps even experienced once or twice that has now become legend throughout the community in complete disproportion to its actual influence.

Let’s say a large percentage of the (supposedly) 10,000 people per year I was repeatedly told are moving to Portland come from San Francisco and other areas with over-inflated housing markets. The theory then is that they are influencing peak prices which is having an economic trickle down effect to all these other marginal places? Again, I think that is a comfortable theory and if I was in real estate or development I would certainly want people to believe it, but it doesn’t explain high prices at the margins. Luxury condos: sure. Dilapidated hotels renting for $2,500 per month for a two bedroom: not credible. Something else is keeping the market from finding a lower equilibrium.

4. The Urban Growth Boundary creates artificial scarcity and drives up price.

This is the Randall O’Toole argument and I’ve thrown it in just so it’s not brought up later. It’s a ridiculous argument to anyone who has gotten out of the ivory tower, freed themselves of dogma and actually walked around the areas outside of Portland’s downtown. There’s so much space, so much underutilized property, that it’s a ludicrous notion that land scarcity is part of the problem.

“The highest valued real estate in Portland is in the core downtown. That’s what the market is demanding.”

But Chuck…without greenfield development we can’t build the auto-oriented, single-family homes that the market is demanding. It’s such a joke.  That’s what it is valuing most. If it was just a matter of meeting a massive demand, you would never build single-family homes on cul-de-sacs.

The only reason that is even a lament is because a certain kind of developer with a certain kind of financing knows how to make nearly-guaranteed profits delivering it. It’s a financial train wreck and, if Portland can avoid it, they will be much better off.

If there is a lack of anything — and I am really not confident that there truly is — it certainly is not land for development.

So what is going on? In my next article, [Distorting Housing Prices, below] I’ll put forth an argument that the way Portland has done its rail investments along with the planning theories they’ve adopted on transit oriented development have combined with a social stickiness in housing to artificially inflate Portland’s housing market in a way that is really dangerous. Those dogmatically committed to a certain set of beliefs and/or outcomes in this debate may want to skip my next few posts. If you’re a planner, this could be a little depressing. The theories I outlined above are far too comforting and convenient. You’ve been warned.

If you have your own theory, I’d love to hear it.


Distorting Housing Prices

Two weeks ago I wrote about all the ways people explain the very high housing prices in a place like Portland, Oregon, and why I found those explanations lacking.

While Portland is nice, it’s not so extraordinarily nice as to defy natural market mechanisms. Portland could build more housing, but there’s no evidence that housing is not keeping up with demand at current prices. Yes, Portland is cheaper than San Francisco, but so are a lot of places that are not experiencing such huge distortions. And there is decades — perhaps centuries — worth of developable property within the current urban growth boundary; the UGB is not creating an artificial scarcity.

So what is going on?

There are two parts to this conversation. One is psychological and one is financial. I’ve chosen to deal with the financial today and will tie in the essential psychological element in a follow up.

To explain the financial, I’m going to present a hypothetical situation that I’ve seen in Portland as well as other bizarre housing markets like Austin, Texas (where I’ll be this week) and Northern California.

Picture

Consider three adjacent parcels of identical size, shape and all other defining characteristics. One contains a single family home that was built prior to the construction of Portland’s light rail line. The second is a vacant lot. The third parcel contains a condominium unit that was built along the rail corridor consistent with the theory of Transit Oriented Development (TOD), the idea of promoting increased density in areas where significant transportation investments have been made (i.e. “build it and they will come”). 

Let’s consider a situation where the vacant lot in the middle is put up for sale. What should the asking price be? The most logical way to make that determination is to look at the adjacent properties and determine how the parcel could be developed. What is its highest and best use? We see that the single family home is valued at $200,000 while the condo building is valued at $10 million.


PictureIf you owned the vacant lot, how much would you ask for it?

You could look to the left and see a single family home and deduce that, if the purchaser of the parcel was going to build a single family home consistent with the local market, they could pay up to $30,000 for your parcel and still make the math work. However, if you look to the right, you’ll realize that someone buying the parcel with the intention of building a condo unit could pay 50x that much, about $1.5 million.

PictureWould you rather have $30,000 or $1.5 million?

Of course, the sale price of the parcel is going to reflect the highest reasonable possible use.

With the TOD regulations in place encouraging the maximum use of that rail investment, that means the vacant parcel is going to sell for $1.5 million, a nice haul for the lucky individual who wound up with land near the rail line (I’m assuming there was no assessment when the rail line was built) and sold before the real estate bubble burst (more on that later).

Let’s turn our attention now to that single family home. It now sits next to a vacant lot worth $1.5 million and a condo unit worth $10 million. How much is that single family home worth?


Picture

Whatever the answer is, we can clearly see that it’s not worth $200,000 anymore.

With the vacant lot going for $1.5 million, all of the value of the single family home is now in the land. The home itself is essentially worthless, a scrape off building that actually lowers the value of the property due to the demolition costs.

The single family home in this situation is worth nearly the same as the vacant lot, $1.5 million.

In my next article, [Suspicious Economics in Portland, below] I’m going to explain how these elevated values get transmitted outside of the TOD areas, but before I finish today, I want to point out how this financial mechanism explains two unique features in cities where this is happening.

I mentioned last week that I was shocked by how nice the nice parts of Portland were and how bad the bad parts of Portland were. There wasn’t a lot in between, at least not that I saw. I believe that is because the development approach I’ve explained today represents an all-or-nothing, binary kind of endeavor. If you owned that single family home, would you install granite counter tops? Would you put in a Jacuzzi tub? Would you do an addition to create a theater room? Of course not. You own a home that’s worth over a million dollars, yet it has none of the things a million dollar home would have and the reason is simple: you would never get that money back. The house is going to get torn down whether it has granite counter tops or not. Adding them may marginally improve your life, but it doesn’t change the value and thus is a bad investment.

“The land values are so high, and the building values comparatively so low, that it actually makes financial sense for the very affluent to buy the parcel, tear down the building and build their own multi-million dollar home.”

As is mowing the yard or picking up the trash, I’ll note.

You see this artificial distortion creating all kinds of unnatural side effects, such as the McMansion scrape off. The land values are so high, and the building values comparatively so low, that it actually makes financial sense for the very affluent to buy the parcel, tear down the building and build their own multi-million dollar home. That kind of thing may seem normal to those that have grown accustomed to it, but historically it’s an aberration.

One last thing to note: If every parcel in Portland (or Austin or Northern California) that had unnaturally elevated land values were to be redeveloped to its highest and best use—the use that would justify those property values—then Portland would need millions more people. Perhaps tens of millions. That will not happen in any kind of reasonable timeframe so what is going to happen — what must happen — is that, at some point, supply will exceed demand and prices will fall dramatically. Everyone who sold before the inflection will be huge winners (condo-inflated prices). Everyone who sells after will get normal single-family home prices.

It’s just like a stock market bubble with all the animal spirits and irrational exuberance, except for the fact that housing prices, like wages (but unlike stocks) are sticky. More on that in a later article.

And by the way, if you’re new to Strong Towns, don’t start thinking that I’m anti-transit. I’m very much not. What I’m against is the build-it-and-they-will-come gambling and the market-distorting theories that go along with it. I also find immoral a system of local government finance that benefits — by creating financial bubbles – today’s office holders and bureaucrats at the expense of tomorrow’s America.


Suspicious economics in Portland

I’m hearing the frustration of many of you regarding my two articles on housing affordability in Portland (What’s the matter with Portland and Distorting Housing Prices). In the history of Strong Towns, I’ve gotten this kind of feedback every time I’ve encountered a deeply held belief. And really, it’s the deeply held belief — the dogmatic adherence as if to a religious doctrine — that raises my alarm bells.

When I’m in Portland and everyone tells me how much Portland is growing, I find it interesting. When the issue of housing affordability comes up again and again, it is always tied to the agreed upon narrative that Portland is growing and will continue to grow, world without end. When I see neighborhoods where the homes are $500,000+ yet they look like they should be $50,000, the narrative is, of course, Portland is growing. When I run into people making minimum wage working retail and they are somehow living in Portland despite paying thousands a month in rent, well….Portland is growing.

The thing that really makes me skeptical is that the “Portland is growing” narrative is just really convenient for those who hold that belief. Who would not want their choice of places to reside confirmed by hordes of people being willing to pay ever more irrational prices for housing? Of course they want to live here, Portland is growing.

And don’t we kind of need to believe that? I mean, I’m going to be more willing to pay exorbitant prices for a home — and cash out equity to make ends meet – if I am convinced of the belief that even more irrational people will follow and take prices higher (in stock trading, we call this the greater fool theory).

“Portland is growing” is also really convenient for the local government and all of those who theorize, plan and design the systems of Portland’s growth. Inflated housing prices make it tons easier to balance the annual budget; you can get used to a tax base that grows by 10% or more each year. It’s fun to work with big budgets doing big projects to handle this big challenge of “Portland is growing”. If we can focus on accommodating the growth that we all agree is happening — world without end — then we don’t have to ponder very deeply the effects that our policies are having on housing affordability. High prices are obviously due to a lack of supply and so, if we want to deal with the impacts of high prices, we just continue to work harder and harder on accommodating all that growth. It’s just such a comforting narrative, which is why I’m highly skeptical of it.

That and I hear the same thing in places like Austin, where I’m at today. Austin is awesome and everyone wants to be here and so, despite the laws of supply and demand and the impact that price has on reducing demand, the laws of supply and demand tell us that it is a lack of supply that is increasing price. The only way that’s not an incoherent statement is if you believe that growth is a given. 

Austin is growing. Portland is growing. Of course.

So I’ve received a number of emails on this including one yesterday with the subject line Suspicious Economics in Portland Articles. Here’s what that email said:

To: marohn@strongtowns.org
Re: Suspicious Economics in Portland Articles

Chuck,
Reading your last couple of articles on Portland, I’m disappointed by the sloppy economic analysis. I say this with utmost respect for your work and Strong Towns – you’ve changed my mind about many things. Your analysis of supply restrictions seems to assume a fixed number of people living in Portland.

You can’t sustain increasing demand while also sustaining increasing prices and increasing supply. You can do it for a while, but not over many, many years.

Portland’s population has been increasing for decades now, and people and jobs are increasingly attracted to dense city centers. Both of these will move a demand curve rightward. Yes, this increases prices, and at some second-order level this might slow the growth of the demand curve, but demand has and will continue to increase. If supply is not increased commensurately, prices will continue to rise.

Then you resort to the standby that the housing market is in some sort of bubble.

Reverse the Portland housing bubble and bring housing more in line with wages? 

The logic seems to be that higher prices must mean there’s a bubble, but that seems silly when you look at high prices in dense cities with supply restrictions all over the world. Places with flexible supply like the sunbelt cities, Houston, or even Tokyo have (comparatively) low prices, despite huge population growth.

The answer then is to build a lot more housing and eventually….what?

Then the equilibrium point on the increasing demand curve and increasing supply curve will land at a lower (or at least slower-rising) price, and a rapidly increasing quantity. This is a much simpler argument, and it’s how almost every other market for goods works, so why are you dismissing it out of hand? 

See what I mean? This email is a series of very comforting assertions and beliefs. Growth is a given; it is unaffected by price. Demand is not subject to price equilibrium of the supply/demand curve, only supply is so impacted.

Chuck, it’s such a simple argument, why are you dismissing it? Because it’s not simple enough, it’s too affirming for those who want to believe it and it doesn’t adequately explain the world as I have experienced it.

In my last piece, I explained how large jumps in the development pattern — such as those planned for Portland’s many TOD sites — dramatically distort land prices upward while unnecessarily stagnating underutilized property, land that would otherwise be improved.

In my next post, [Spiking a Rising Tide, below] I’m going to put forth my notion of how that distortion — which is actually a simpler explanation than the entire voodoo belief system of ignoring the effect of price on demand — is transmitted across the greater Portland area. In a subsequent post,

I’ll then propose a simple set of policies that would prick Portland’s housing bubble, move prices closer to their supply/demand equilibrium price point and thus restore housing affordability, albeit by negatively impacting the government’s cash flow as well as the paper assets many Portlanders believe is theirs.

Spiking a Rising Tide

A wave laps up on the beach. The force of the surge pushes water up against the wet sand. The action is understandable, a rhythm that is quite predictable. Even little children find it easy to discern the areas where their feet will get wet from those places where the effort of building a sand castle won’t be wasted.

Up the shore is a seawall. The waves act differently there. When the water hits the wall, it explodes upward, the force of the wave ultimately dissipated by gravity instead of friction. Kids play near the edge of the wall, but not too close (unless they want to get splashed by the mist).

Some Strong Towns readers have been frustrated with me for not acknowledging what you see as the obvious wave of growth impacting housing prices in cities like Portland and Austin. While I’ve said that I’m not convinced that the housing emergency in Portland in due to these causes, there is clearly a wave of demand that is putting upward pressure on price. What I’ve reacted to is the seawall, the self-created impediment that is dramatically forcing that wave skyward. That seawall is the city’s fetish with high density development.

I’ve been on the road nearly all of the past two weeks and so I’ve not had a time to push this conversation forward at the pace many of you would like. As a makeup, today’s post is going to be rather dense. As you’ll see, however, the density of this post builds incrementally on what came before it; it’s the next step in years of conversation we’ve had here. To make the point even more, this conversation is not an intellectual leap into the unknown, one that carelessly and recklessly skips over necessary iterations of development just to get to the desired end.

Last week I explained how large leaps in the development pattern — from single family home to multi-story tower — distorts land values and, in doing so, artificially drives up prices on lands zoned for such a leap. At the same time that a number of you were responding negatively to what I think is an obvious and hardly-even-debatable phenomenon, I was experiencing yet another example of it in San Marcos, Texas.

PictureT-5 zoning in San Marcos, TX. Should be T-2 or, at most, T-3 since that is the next increment of intensity. T-5 simply distorts the underlying land values, jacks up housing prices and stagnates the entire neighborhood. Image from Google.

On a walking tour there, we strolled through blocks and blocks of gaps — empty and underutilized lots — just off of their core downtown. I pointed out a nice little home as an example of what the city should be striving for to fill in these gaps and then pointed to the adjacent vacant lot as the perfect place to start. That was when I was informed that the vacant lot was zoned T-5 Urban Center (2-5 story multi-family housing) and that the owner wanted $600,000 for it, making my proposed modest home financially impossible.

I asked why this land was zoned T-5 when there was so much underutilized property in the area, so much dead space. The answer was exactly what I heard in Portland and exactly what I heard in Austin: we’re growing.

Supposedly there is so much demand for housing in San Marcos that T-5 zoning is needed — all that high density development is necessary — to meet the demand. I walked around for hours and experienced an endless amount of underutilized property, just as I had outside the cores of Portland and Austin. It was more property than would ever be utilized as T-5 and it was sitting there, high priced and waiting for the right buyer to come by and make the owner rich. 

And the property owner had good reason to find this wait rational. It was reported to me that prices had been going up dramatically. There were a couple parts of town where high density development — in this case some five story apartments — was going on. With the land consistently going up in value and the cost to hold it minimal — it is being taxed as raw land — why not wait for a windfall? San Marcos is growing — everyone knows it — so sit back and let the growth make you rich.


PictureZoning in the downtown core of San Marcos, TX. Enough T-5 to bring population from 54,000 to a couple hundred thousand, at least.

This is the same thing I experienced here in my home town in a personal way over the past twenty years. My parents purchased the 80-acre Marohn homestead back when I was a little boy for something like $500 per acre. In the mid-1990’s, development was taking off in the Brainerd area and raw land started to skyrocket. The narrative was that all those rich people from the Minneapolis/St. Paul area were moving up and they could afford to pay outrageous prices. Heck, they thought land was so cheap they just threw money at it. 

We heard reports of land selling for $20,000 per acre. Then I, in my capacity as an engineer, worked with someone who paid the insane price of $30,000 per acre for land about a mile away from our farm. A little later, one of the old farms just up the road sold for $35,000 per acre. My parents were convinced that their much nicer property was certainly worth $40,000 per acre, at least. They still own it with the assessor having it worth six figures but with their own balance sheet valuing it in the millions. 

Here’s the absurd thing: there is so much land here that the price should be zero. Or, at most, the price of the land should be as if it were used for forestry, agriculture or hunting. Years ago, I did some simple math and showed some bankers that there is over 100 year’s worth of supply of developed lots in the area. That excluded the raw land, land that the owners still expect to be worth millions.

John Maynard Keynes observed that wages are sticky. That is, when market conditions falter and businesses start to see profits drop, they are more apt to lay people off than they are to cut wages. People are very resistant to wage decreases because humans are wired to to be very sensitive to loss, far more than we are to gain. Freeze wages for three years and people will gripe. Cut wages for three years and they will revolt.

Land prices are subject to this same human condition. Unless forced to sell — such as in an estate sale — many people mentally book gains and will not sell until those gains — or something near them — can be realized. This is why rumors of free-spending Chinese, wealthy San Franciscans and tech workers dripping with dollars are so widespread. They are part of a cultural belief system that explain — in an affirming way — what we see happening.

Portland grew by 1.5% last year. These are growth rates not seen since before 2008. Just ponder that number — 1.5% growth — and contrast that with housing prices and rents that are growing by double digits. Portland has spent billions — BILLIONS — preparing for growth. They have built rail lines all over the place, built highways throughout and run thousands of miles of pipe in anticipation of growth. Yet, they can’t handle 1.5% growth without blowing up housing prices?

Think of any other entity in any other realm that grows by 1.5% per year and contrast the reaction of that system with the hysteria of Portland. If this is only a 1.5% wave, it doesn’t make sense. That kind of wave should roll across the sand and dissipate. Something is magnifying it.

In Portland today, there are three types places where this wave is being accommodated. The first is the core downtown, what I’ve called an urban planning Disneyland, where truly high demand for a unique place combine with high building costs and relative scarcity to price this area out of reach for most. The second place is in the remaining greenfield areas, where single family homes are being built in the insolvent suburban style we see all over North America. Neighborhoods are built all at one to a finished state; there is no next increment of intensity anticipated.

The third — the spike — is in those corridors zoned for high density, where the highest and best use is priced into the land. In these areas, the government has already made the investment — the rail line — and put in place the regulatory environment that has created a windfall for property owners. All those property owners need to do now is wait around until it is their turn to sell to a developer, someone ready to pay the price to build high density. In the meantime, any scarcity — real or perceived — just drives up the price and increases the long term payoff.

Scarcity also helps the high density developer. Assembling the land, acquiring the permits and going through the development process for a condominium tower or apartment complex involves taking on great risk over an extended period. It’s best not to get too far out in front of a market — one only growing 1.5% per year — so that you don’t get exposed if (when) there is a correction. High land prices are a bummer, but you can find good deals now and then and the high price of the finished product gives some added margin for error.

So how do we free up more raw land for development? How do we get these stagnating properties off the sidelines and into the game? How do we get developers to proceed more quickly? There is a very simple answer, but it is counter-intuitive and directly clashes with the planning profession’s fetish with density.

The simple answer is downzoning.

What if along all these rail corridors and at all of these rail stops, instead of being able to build an eight-story condo unit, all a developer was allowed to build was the next increment of intensity? For most of that area, that would mean single family homes. In that case, what would happen to land prices? They would drop. They would crater, in fact. This would free up an incredible amount of land for cheap, affordable development while also taking a substantial amount of pressure off of the existing single-family neighborhoods.

But Chuck….Portland is growing (by 1.5% per year) and pretty soon all of that vacant and underutilized land is going to be built upon. Portland will be built out and we’ll be pressured to extend the Urban Growth Boundary for new greenfield development. How you can possibly support single-family homes?

“There is no such thing as “built out” in a Strong Town. There is no such thing as being done.”
I’m not advocating for single family homes. I’m advocating for incremental development. Portland (and Austin and San Marcos and…) are trying to skip increments. They are trying to have a toned body without proper diet and exercise. They are trying to sprint before they have learned to crawl. They are obsessing over their theories of density and, in the process, they are stagnating their cities and leaving wide swaths of their population behind. There is no such thing as “built out” in a Strong Town. There is no such thing as being done. Cities that grow incrementally are on a continuum of improvement and so, when a block is so-called fully developed, the next increment of intensity must always be available. By right. Everywhere.

And for those of you who have suggested the last couple weeks that I’m a country bumpkin who found himself in the big city and had a sudden flash of crazy, I wrote about a floating height limit two years ago. That article also made people who have a fetish with density quite cranky with me, people who look at build-it-and-they-will-come rail investments in their cities and think the problem is the market not reacting correctly to this awesome public investment, that a little more density could sweeten the pie and get developers off the sidelines. They don’t see how land speculators and developers were using the planner’s zeal for density to squeeze their communities for low risk, publicly subsidized profit. The problem isn’t the developer – it’s the premature rail investment. Portland is an extreme example and it was that contrast that made it even more visible to me.

I know there is a lot to unpack here and I’ll try — despite an insanely busy schedule this week — to be attentive to your comments and feedback, but let me address one final thing before signing off on this one. A comment by @Funktapus last week that received a really high number of upvotes included these rhetorical questions:

Suppose you’re right and Portland has invested in transit oriented development, which by some voodoo has jacked up housing costs everywhere, snowballing the demand for more transit oriented development. What’s the worst case scenario if growth abruptly halts? We are left with a bunch of high quality, sustainable, resilient neighborhoods with falling rent? That’s not exactly a bad thing.

To be clear: I don’t think the demand is for transit oriented development, per se. That’s just the only development our fetish with density will allow us to consider in these places. You start with that given and @Funktapus’s proposition becomes a self-reinforcing one. I don’t start there.

Still, the worst case is we spend a couple of decades needlessly squeezing the poorest of Portland’s residents further and further to the margins. We appease our guilt and anxiety over this problem by distorting the housing market further with rent controls and inclusionary zoning, things that, if they have worked at all (and I’m highly skeptical), have only worked on the margins. Planners get paid and have fun spouting Jane Jacobs while acting like Robert Moses. Developers and bankers get paid, of course. Corporations that can work at the scale demanded by Portland’s development approach also do well while the small, incremental developer is squeezed out (that’s okay – she can go be a barista as they are in high demand). 

And after decades of squeezing, economic distortions so great that even middle class and upper middle class people find it hard to make it, the growth stops and all that inflated land adjusts back to normal prices. Hundreds of billions of dollars of wealth are lost, many decent and hardworking people are thrust into extreme financial distress and — to make matters worse — at the time of greatest need, the city (which is dependent on the artificially high land values for a large part of its revenue) struggles just to make their debt payments, let alone do anything to make life better for people that are suffering, the people who must — if the place is to ever prosper again – continue to find themselves in love with Portland, even when it isn’t growing.

But yeah, at least you’ll have some high density buildings to enjoy.


 Difficult Choices

One of the reactions to my thoughts on Portland’s housing affordability emergency (their label) that I’ve found the most interesting is that my proposal is unworkable, Portland’s residents will never accept even small increases in density in their single-family neighborhoods. Chuck, you don’t understand the level of resistance. Better to get the most density where you can, when you can, and that is at the transit stops.

“Everywhere you turn you see Americans sacrifice their long-term interests for a short-term reward.”  — Michael Lewis in Boomerang

In the Curbside Chat, I talk about the modern definition of a solutions as, “What can someone else change about what they are doing so that I don’t have to change anything about what I am doing?” We’re nearing the end of an insane election cycle where we are once again bombarded with such non-solution solutions. Benjamin Franklin never warned of a democracy where the electorate can vote themselves money, although it makes a good meme. Michael Lewis did suggest, at the end of Boomerang: Travels in the New Third World, that is precisely what we now have.

One of the key insights of Strong Towns is that our development pattern functions like a Ponzi scheme. The Suburban Experiment – development built in large blocks to a finished state – provides the illusion of wealth when everything is new and costs are low. In time, things start to go bad and the tragic truth begins to be revealed: that the long term costs of servicing and maintaining these places cannot be met by the wealth they produce. New growth and debt – mistaking insolvency for a cash flow problem – bridge the gap for a while until the growing liabilities overwhelm everything. What happens next is an open question, although we can see in places like Detroit – which got started on this experiment a couple of decades before the rest of the continent – one possible outcome.

And let me point out to the residents of Portland who believe their financial situation bears no resemblance to Detroit’s, trust me when I say that the people of 1960’s Detroit would believe the same thing about today’s Detroit. The vast majority of the land area in Portland – like practically every other city in North America – is functionally insolvent. That insolvency will come to bear at some point, and to a degree already is, so let’s stop pretending that it won’t.

I’ve said many times that the greatest challenge of this generation will be to avoid repeating the mistakes of what has come to be known as “white flight”, the abandonment of large parts of our cities by everyone except the very poor. When we concentrated poverty in our inner cities after World War II, we left people behind in neighborhoods that were largely coherent.

That was a tragedy on many levels, but it will be dwarfed by the catastrophe of abandoning poor people on the outskirts of our cities, where even during the best of times, life is despotic for people who can’t afford the high financial burn rate of such a lifestyle. Wait until those big box stores go empty, the drainage ditches and berms are overgrown with weeds and the infrastructure is no longer maintained. Again, Charlie LeDuff’s Detroit: An American Autopsy gives a firsthand account of how this is playing out in one scenario.

PictureDetroit. (Photo by Johnny Sanphillippo)

So please excuse me if I’m not very sympathetic to the notion that change is hard, that people who are comfortable will resist it. Of course they will. Our job as Strong Towns advocates is to find a way through that resistance, to share our message with our friends, neighbors and others in our communities, to keep bringing the conversation back to the persistent fact that our current approach is not working financially. We’re broke and so we must start thinking differently.

So I’ve suggested that all neighborhoods – those areas around our transit stops as well as the broad swatch of single family homes – should be allowed, by right, the next level of intensity in their development pattern. But no more. The ability to move to the next increment is to allow neighborhoods to mature and renew, to become antifragile by adapting over time to stress. The limit on how far of a jump can be made is an attempt to mitigate the distorting effects of our existing public investments, the build-it-and-they-will-come, winner-take-all delusion we’ve come to view as normal. It’s all about feedback loops. As Tomas Sedlacek suggests, trading growth for stability.

I want to help you think this through, to peer into the future and envision what I think – what I hope – would happen in such a system.

In the triage that will be the next generation of cities in North America – my apologies to Ed Glaeser, Richard Florida and others – there will be neighborhoods where the pipe is fixed and others where it isn’t. Where the fire department is staffed and where it is not. How do we determine which is which? Well, of course, the pipe where the rich people live will be fixed while the pipe where the poor people live will not. Let’s pretend, however, that we truly want to avoid that outcome. Let’s pretend that in enlightened places like Portland people really do care about everyone in their community (and I believe they do, in more places than just Portland).

What we should see, with my proposal (and other Strong Towns approaches), is that some neighborhoods receive a lot of incremental investment and other do not. With the high bar to development lowered – in price and in regulation – we should get a lot of Jimmy’s Pizza-scaled development. Small chaotic-but-smart stuff that seeds and reinforces a local economic ecosystem. In time, we’ll get a second generation in these places and even a third, increasing intensity in a feedback loop that mimics traditional development patterns. With each successive generation, the allowable increment climbs and so the places that people find strategic and valuable are those that will experience self-reinforcing growth.

And because it’s incremental, it doesn’t displace the way our big leaps do today; a much broader share of people share in the wealth being created. And, as we like to point out with Jimmy’s Pizza, it works at a scale that is inclusive of anyone with a dream who is willing to work hard. You know, what we Americans like to believe we are (instead of what we really are today).

In short, the system triages itself. In time, these places would (hopefully) become financially solvent, the cost of providing services easily justifiable by the tax base produced (not just the political influence). When we are forced to decide which pipe to maintain, which place to provide quality transit, where to maintain the best public safety response times, these are it. And you’ll not only have the math to back you up, you’ll have the critical mass of public support there as well.

As for those other areas….. I do not think the core of Portland will go away, although it will have to deal with the financial drag of subsidizing the transition happening on its outskirts. The rest – the neighborhoods of single family homes that reject incremental growth or are too far away from those emerging neighborhood centers to ever experience it – will go one of two ways.

Either they will wall themselves off into an affluent, yet fragile, enclave and use their political clout to try and force everyone else to continue to subsidize their preferred living arrangement. Or, their homes will go into steep decline and will eventually be used for salvage material.

Either way, we need to start framing the conversation today in terms of financial productivity. We need to drop our fetish with density, our grand dreams of converting those storage sheds and 7-11’s at each ill-conceived transit stop into a mini urban utopia, and start talking about how we build – and sustain over multiple generations – enough wealth to actually afford the places we want to inhabit.

Chuck, you don’t understand the level of resistance. No, I actually do. We need to stop talking about density and start talking about financial productivity.

Reprinted with kind permission of the author and Strong Towns, a membership organization.
The mission of Strong Towns is to support a model of development that allows America’s cities, towns and neighborhoods to become financially strong and resilient. For the United States to be a prosperous country, it must have strong cities, towns and neighborhoods. Enduring prosperity for our communities cannot be artificially created from the outside but must be built from within, incrementally over time.