Creative Class

This has not been the best week for economic news. The housing market lapsed back into a double-dip. The May jobs report showed the slowest private sector employment growth this year, with the average length of unemployment hitting its highest level on record.

But on all these indicators and more, Greater Washington DC flies in the face of the national trend. I’m not exaggerating:

• Metro DC clocked the highest level of housing appreciation on the Case-Shiller Home Price Index, 4 plus percent, while every other metro is tanking.
• Greater Washington posted the second lowest rate of unemployment according to the latest BLS figures, 5.4 percent, as many metros remain above 10 percent.
• And DC households boast the nation’s second highest real household income, $61,449, when cost of living is taken into account, considerably more than Greater New York’s $34,931, which is the nation’s second lowest. Only McAllen-Edinburg-Mission, Texas fares worse.

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The U.S. housing market is on track to lose another $1.7 trillion in value this year, according to estimates by the real estate site Zillow.com — 63 percent more than the $1 trillion lost in 2009. All told, the U.S. housing market has lost a staggering $9 trillion in value since its peak in 2006, according to Congressional Research Service estimates.

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The June unemployment numbers do not look very pretty for the United States. After four months of improvements in the number of jobs lost, the numbers again increased to 467,000 up from 322,000 in May. The unemployment rate, now at 9.5 percent, is the highest in 26 years. The recession is entering its 20th month and will soon reach two years with little end in sight.

While the great recession of the 21st century grinds on, explanations for it continue to elude us. Some think that it is a depression and they may be right. I suggest that we have at least four issues on our plate that have emerged as a perfect story. The solutions to all are institutional. First, let’s start with the financial crisis. This financial crisis resulted from market failure. The lack of rules or what some like to call regulatory arbitrage, that is, working the rules led to the financial meltdown. We are still not out of the woods on this one because the rules have not been fixed. Without rules markets cannot work.

Second, we now have a global recession with falling demand and rising unemployment. A classic case of underused resources. The recession was in part caused by the financial crisis, but only in part. It is clear now that at least two interpretations are in order. First, it was a classic case of over-investment in housing. We have about two to three million too many houses. It will take about six years to work this off through population growth and attrition. This “inventory recession,” to use an old phrase, is nothing new, only the sector is – housing. The other interpretation is that it was caused by imbalances in the global economy between rich and poor countries. In either case, as Richard Florida pointed out with housing, or Business Week with global imbalances, new rules are needed.

Third, we have finally realized that we do indeed have a sustainability issue in the environment. It is both about the carbon footprint and about the type and amount of energy used. This is not a cause of our current financial and economic problems but it impacts it directly since it is about investment, and with a huge amount of uncertainty where to invest it is also putting a drag on the economy. Rules would help.

Finally, we are just realizing that globalization that started a few decades ago might be a dead end. It is a dead end not because the world does not want to globalize (most do) but because markets cannot work without rules. And in a global economy we need global rules. Here is the rub. All of the above problems in some way suffer from having a global economy without a set of global rules. When the last era of globalization ended at the dawn of the first world war, the rules that governed up to then also evaporated and it took decades to put them back in place after the second world war.

We are now into the second decade of the second globalization of the world economy. Until we are able to put the “rules of the game” in place markets, I am afraid the economy, and the financial sector, cannot be expected to lead to growth. The environmental rules are even more onerous. We just might need to start working on the rules of the game sooner rather than later. This seems like a task for the creative class. What is needed is talent and honesty in order to put a global structure in place where all can prosper. This is no small task.

In the New York Times, Alex Kotlowitz visits my home town of Cleveland, Ohio to find that it is all boarded up. I grew up in Cleveland right in the middle of it just a few miles from the famous Cuyahoga River. Cleveland was a modest town with lots of blue collar workers in scores of industries. The city had a very large and very substantial housing stock. Over the years, as industry declines, the creative class fled, and as technology evolved the city declines. When a city like Cleveland declines it leaves behind something, and that something is an abandoned housing stock. Cleveland now has between 10,000 and 15,000 abandoned and boarded up houses. Of course this is not new. When I was growing up in Cleveland, the whole east side of the city was abandoned, houses were torn down, and the Cleveland Clinic expanded in much of the space, the rest was left abandoned like my old neighborhood.

This is in part a legacy of industrial restructuring, the sub prime mortgage problem, and the long term subsidy to housing dating back to the great depression. Whatever the cause it seems to be well picked up by Richard in his article in the Atlantic. Cities come and go. In an article by Phil McCann and I we show that this has been the case for over 1,000 years and is nothing new. Baghdad 1,000 years ago was the most important city in the world.

The question is how do we deal with the housing abandonment in this country. For a large part of the problem is that we have an overstock of housing that no one will ever use. Should we start the write off of the trillions of dollars worth of old abandoned, or nearly abandoned housing, wipe the slate clean and just move on? Perhaps as Richard suggests we should just abandon the support for home ownership, eliminate the tax subsidy, and use the savings to clean up and abandoned housing mess.

Ed Glaeser:

The plan does too little to recognize that many homeowners are living in homes that they cannot afford. In one of the government examples, a family earning less than $44,000 a year has a $213,000 mortgage on a $190,000 house. By any reasonable standard, this family cannot afford that house. It would be far wiser for the government to facilitate the family’s move to rental housing than to provide a short-term subsidy aimed at keeping the family in the home. The plan should have been more forthright in acknowledging that America’s housing mess means new mortgage terms for some and new housing for others.

Tyler Cowen:

We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income.  (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income.  The government then steps in to lower payments to 31 percent of income.)

Willem Buiter::

The extreme fiscal largesse bestowed on residential housing, directly and indirectly through mortgage interest deductibility, has led to a massive misallocation of investment in the US.  There has been overinvestment in the private residential housing stock and underinvestment in just about every other form of fixed capital: infrastructure, public amenities of all kinds (sports facilities, public recreational facilities, parks etc.), commercial structures, plant and equipment.  It is time to correct the distorted incentives that are at the root of this misallocation.  The easiest way to do this, in the current tax system, is to end the deductibility of mortgage interest in the personal income tax, close down Fannie and Freddie and end the role of the US government in the provision of residential mortgages.

Matt Yglesias:

But this impossible dream of re-inflating the housing bubble and making all the wealth reappear is going to die hard. Clever, but stupid, politicians are going to try to convince people that they have plans to make this happen, and they’ll criticize the Obama administration for not getting the job done. It’s important to understand, however, that we’re not talking about real assets that vanished. The houses are still there, and they’re still as good or bad or useful or non-useful as they ever were. What’s vanished is a speculative mania, and public policy can’t—and shouldn’t—create a new one.

Ryan Avent points to this finding from a 2006 report from the Center for Housing Policy, which documents the share of income people devote to housing and transportation. It’s higher than you might think.

It’s been a busy week of conferences and symposiums and forums! This week in Toronto the Canadian Housing and Renewal Association had their Tri-Country Conference; in Ottawa yesterday the Governor General held an Arts Matters forum on Architecture at Carleton University; and today we had the Carleton Senate Symposium focusing on the role of architecture in relation to health and the environment, where I presented my research on youth cultures in young spaces.

At all three of these meetings-of-the-mind, the issue of housing was focal, and at two of the three the issue of youth engagement in housing came up. At the Tri-Country Symposium in Toronto, Julia Unwin gave a great speech which, among many things, addressed the lack of system thinking when it comes to addressing the matter of youth and housing. The next day at the Arts Matters Forum in Ottawa, Professor Boyle talked about housing existing in something of a void as it relates to young people, and the open discussion often returned to the issue of what the best way is to engage society with the art of architecture.

The discussions got me thinking about my own education. I spent four years doing a fairly high level liberal arts degree and, even then, I never learned much about architecture or housing. It took some continued education, a lot of digging in the course calendar, and a bit of luck for me to stumble upon a history of housing course that really developed a deeper appreciation for the built environment by showing me the process. Not only the physical changes that the houses went through, but the changes in human consciousness that followed and sometimes preceded those changes in our modes of living. The relationship between form and function, and how space is one of the sedimentary aspects of all life. Moreover, that the places we live, work, and play didn’t just show up as we did. They’re a product of a long deliberated process and negotiation with the things we value and our increasing ability to realize those things physically in the world.

To put it in even less lofty terms, I’ll paraphrase what Sarah Webb of the UK delegation said during our group discussion at the Tri-Country Symposium: If you do choose to buy a house, it will most likely be the most expensive, most complicated, most determining decision of your life. Why is it that most young people only start to learn about it as they’re about to do it?

If the places we live are such important financial and personal investments, should there not be some base level courses about architecture, or at least housing in our secondary or post-secondary curriculums? Is it reasonable to raise young people without giving them the understanding of their built environments as a part of a process? Without some context, how can young people develop opinions about how space should be used when they are voting citizens of a municipality? Where did you first learn about where/how you live?

And now, as always, some music.