New York Times, March 4, 2006
By VIKAS BAJAJ and DAVID LEONHARDT
Along much of the East and West Coasts, home buyers and home sellers are engaged in a stare-down.
Many buyers, having heard that the real estate market is a bubble in danger of popping, are refusing to offer the asking price on a house, convinced that it will soon drop. But many sellers are not blinking either, thinking that offers will improve when the weather does and biding their time until then.
As a result, the housing market is now in a deeply confusing state, with average prices still rising even though homes are taking much longer to sell and the number on the market has soared. Sometime soon — probably in the spring, the peak sales season — one side or the other will have to capitulate, many economists and industry executives predict.
"In my opinion, the jury on housing is still out," said Antonio B. Mon, the chief executive of Technical Olympic USA, a home builder. "The period from now until May will tell the tale."
Many real estate agents argue that the current slowdown is merely a pause, pointing out that interest rates remain low and that Americans still seem convinced that houses are a great investment. Buyers, on the other hand, are hoping that the rising number of unsold homes is a signal that a slump is coming. It was an early sign of the last housing slump, in the early 1990's.
Nationwide, the number of existing homes for sale jumped 36 percent between January 2005 and January of this year, the National Association of Realtors reported Tuesday.
In Manhattan, 42 percent more co-ops and condominiums were available for sale at the end of last month than was the case a year ago, according to Miller Samuel, an appraisal company in New York. More Manhattan apartments were on the market in late February than at any point in at least five years.
For now, though, average selling prices have continued to rise, even in the markets that had already experienced the biggest leaps in prices and the increases continued even in the final months of last year. Prices rose 40 percent in the Phoenix area during 2005, according to the federal government. In Manhattan, the median price of an apartment was $760,000 at the end of last year, up from $605,000 at the end of 2004.
The latest statistics on house prices appear to be dominated by sellers who, for one reason or another, quickly received good offers. That has kept average prices rising. Builders of new homes have also offered bonuses to buyers, like enclosed sunrooms or top-of-the-line appliances. So the builders have been able to continue selling homes without cutting the list prices.
But many houses in the Northeast, Florida and California are, in fact, selling for less than they would have six months ago. In parts of the Northeast, the drop has been about 5 percent, estimated Robert I. Toll, chief executive of Toll Brothers, the biggest luxury home builder in the country. Other sellers have cut their price and still not found a buyer.
In Buxton, Me., a suburb of Portland, Geof and Cheri Toner put their three-bedroom Cape Cod-style house on the market for $379,900 late last year, shortly before moving to Raleigh, N.C., for Mr. Toner's job. They have received only one offer — for $350,000, which they rejected — and recently reduced the price to $374,900.
Mr. Toner said he assumed that more buyers would look at the property as the weather warmed up. In the spring, they would not have to wonder whether snow covered up flaws in the lawn or the roof. He expects that the eventual buyer will be a transplant from elsewhere in New England who is willing to pay significantly more than $350,000.
"We're not panicking over it," said Mr. Toner, 48, the regional sales manager of a video equipment maker. "It's just a matter of sitting it out and seeing what happens."
Many real estate agents argue that people like the Toners are doing the right thing and that the market will not slump as it did a decade ago. The job market is now improving. The interest rate on a 30-year fixed rate mortgage remains just 5.79 percent, according to Bankrate.com. And the number of homes on the market remains far lower than in the early 1990's, relative to sales volumes, despite the recent increases.
The current slowdown is simply a transition, the agents say, from a scorching hot housing market to a normal, healthy one. "All we are seeing is a pregnant pause," said Richard A. Smith, chief executive of Cendant's real estate division, which owns Coldwell Banker and Century 21, "a disconnect between sellers and buyers."
But many buyers say they have a sense that the long boom has finally come to an end.
In the San Jose, Calif., area, where the average house price increased 21 percent last year, Sathish Pottavathini, a programmer at eBay, said he was taking his time with the search for a new home and trying to find a good deal.
"I don't want to rush into things especially in this kind of situation," Mr. Pottavathini, who is 32, said, "where you hear about a slowing down everywhere."
He and his wife, Madhuri, spend $1,200 a month renting an 800-square-foot two-bedroom apartment, where they live with their 21/2-year-old daughter, Siri. They would like to find a three-bedroom town house with a two-car garage for less than $500,000.
Although he does not expect prices to fall significantly, he does not think they will rise either and hopes he can find a bargain — a goal that seemed all but impossible in Northern California in the last few years. Now, Mr. Pottavathini said, "If I wait, I might get a better place."
Buyers who showed similar patience in the early 1990's were rewarded. From the summer of 1989 to the summer of 1990, the number of homes for sale rose about 10 percent, according to the Realtors association.
At first, many sellers refused to accept lower offers, thinking that they would get their asking price or close to it. But they eventually had to unload their houses, and in the Northeast and California that often meant reducing the price. In the Los Angeles area, the median sale price of existing houses fell 22 percent from 1992 to 1996, before taking inflation into account.
If a similar slowdown were to happen again, Mr. Toner said he would consider changing his mind and his asking price. "At some point, if this were to become protracted, I would consider lowering the price to attract a buyer," he said.
Mr. Pottavathini, meanwhile, is giving his San Jose search four months. After that, he plans to take a break and wait until his daughter is a bit older and his wife returns to work. With more money coming in, they might be able to pay more.
If they still have not succeeded, they would then consider leaving Northern California — which he called "the best place in the world" — and returning to their native India.
"If the condos become $600,000, it doesn't make any sense to live here," he said. "Imagine owning a house and paying your whole life for that house. I would rather move back to India."
07 March 2006
Amsterdam House - This Very, Very Old House
New York Times Magazine, March 5, 2006
By RUSSELL SHORTO
In 1625, a carpenter named Pieter Fransz built a house on the outskirts of Amsterdam. He was young, ambitious and lucky enough to belong to one of history's greatest generations: his life spanned the course of his country's golden age, when tiny Holland became an empire and Amsterdam grew into Europe's wealthiest city. Fransz walked the streets with Rembrandt; he saw a forest of masts grow in the harbor, as ships returned from the East Indies laden with pepper and nutmeg, a sack of which could make a man wealthy for life. He and his family prospered along with the city; 17 years after building his house, he was rich enough to buy the one next door, into which his daughter and her husband moved. In 1683 he was still listed as the owner of both properties. Happiness isn't registered in municipal archives, but the image of this one not terribly consequential human life that remains on the palimpsest of time speaks of contentment: a man who has lived beyond the normal life span of his era, surrounded by family, financially successful.
Most of us leave no lasting traces that recall our stay on the planet, but through accident and fate, Fransz left something that has endured the centuries. His house — an elegant redbrick step-gable, its facade ornamented with sandstone bands and wooden cross-framed windows, a building that has more of the Renaissance than the Baroque about it — still stands. Napoleon and Hitler conquered Amsterdam in their separate centuries; later, postmodern architects and the sex and soft-drug industries made their marks. Pieter Fransz's house withstood all.
The Dutch have always been meticulous recordkeepers, so it is possible to follow this house, and others nearby it on Amsterdam's famous Herengracht, or Gentlemen's Canal, as they make their way through the centuries: to watch the succession of doctors, diamond cutters, confectioners, merchants and politicians move in and out, to glimpse the births and deaths, to watch careers and families unfold. More to the point, it's possible to follow the successive property transactions in this area of Amsterdam from the time it was developed to the present.
In itself, this isn't exceptional: other European cities have land registers that date to the Middle Ages. What makes Pieter Fransz's neighborhood unique — and uniquely interesting to some economists who are studying today's global real-estate boom and wondering whether the bubble that has been expanding for the past decade and more is in the process of bursting — is what real-estate experts call a constant quality index. Cities change over time; neighborhoods fall out of favor, and new ones come into vogue. Comparing property values in Greenwich Village a century ago with those of today might be interesting as part of a study of a changing neighborhood — the transformation of a low-rent, working-class community into a tony and sophisticated enclave — but not as a way of understanding how real-estate value changes over time.
From the time the Herengracht was developed in the early 17th century, however, it has been Amsterdam's prime real estate, the place where power brokers — 17th-century merchants dealing in spices and slaves or 21st-century bankers and international consultants — have chosen to base themselves. Looking at real-estate transactions over four centuries on this canal on which Pieter Fransz built his home gives a quality constant of unparalleled duration.
This is what attracted Piet Eichholtz, a professor of real-estate finance at Maastricht University in the Netherlands, to study the Herengracht in the 1990's. Eichholtz's work — the so-called Herengracht index — has become a touchstone in recent discussions about real-estate prices. He began with a sense of frustration. "If you look at most research on real-estate markets," he said, "papers will typically say they are taking 'a long-run look,' and then they go back 20 years. I wasn't impressed with that. I thought you had to go back further to get a really good picture of what a housing market performs like."
Eichholtz's study of the Herengracht came to international attention when the Yale economist Robert J. Shiller relied on it in the second edition of his best-selling book "Irrational Exuberance," which was published in 2005. After the first edition came out in 2000, Shiller became famous for predicting, correctly, that the stock market's explosive rise was about to end. The book's title — a phrase made famous by the former Federal Reserve Board chairman Alan Greenspan — referred to Shiller's argument that the market's rise of the 1990's was based more on herd mentality than on common sense.
In the new edition, Shiller applies the same thinking to global real-estate prices and argues that the phenomenal increases of recent years — especially in places like New York, San Francisco, Sydney, London and Paris, but also more broadly — amount to another instance of irrational exuberance. Taking the long-range view, he says, led him to conclude that real-estate prices are destined to fall. "The data just are not there to support the idea that housing prices will continue to soar out of sight," he said.
Not everyone agrees with Shiller's irrational-exuberance thesis. "I just don't see it that way," said Richard Peach, a vice president at the Federal Reserve Bank of New York and an author of a study in 2005 that concluded that the sharp rise in home prices is in line with economic conditions — that it indicates not a skewed vision of reality but a strong economy. In fact, Peach says, in the past 20 years family buying power has grown faster than housing prices. "We sometimes wonder why home prices haven't increased much more, given the tremendous increase in the size of mortgage the average family can finance," he said.
Like-minded experts include Christopher Mayer of Columbia University and Joseph Gyourko and Todd Sinai of the Wharton School, who focus on what they call "superstar cities," places so desirable that they not only are not headed for a correction but they also can sustain "ever-increasing" prices compared with less-sought-after cities.
What such optimists are missing, Shiller says, is a long historical perspective. "The fundamentals that they cite in support of their reassuring assessments are surprisingly weak at explaining historical prices," he writes in a recent paper. Reading the data as an economist leads Shiller to conclude that the market will go south. In addition, he says that studying the erratic but rhythmic rising and falling of prices over time — in other words, acting more like a historian than an economist — reinforces this conclusion. "Looking at the Herengracht data is very instructive," he said to me, "because you can see 50-year intervals of growth, then it turns around. That's more realistic than the superstar-cities argument."
Piet Eichholtz says he doesn't think the long-term data alone necessarily suggest that a collapse is coming. But at the same time, like Shiller, he is skeptical of those who claim that property values can continue to increase ad infinitum. "Some people say economies in the past were very volatile and didn't have safeguards that we have now, so we aren't likely to experience any major crises that will causes prices to crash," he said. "I'm doubtful." Looking through the history of the Herengracht, he says, you can see similarly rosy assessments made over and over, which are then quashed by circumstances.
Eichholtz's Herengracht index turns on one of the basic questions of the discipline of history: how applicable is the past to the present? What can a study of one small part of the world centuries ago say about actions in a 21st-century global economy? Or, put another way, just how special are we today?
The Herengracht index begins with one of history's great building booms. In the 1620's, the Dutch Republic was in the first stage of its rise to global power. The Dutch had become the middlemen of commerce between European nations and had a monopoly on trade with Japan and the East Indies. The world's first major stock exchange came into being around this time in Amsterdam, and the Dutch developed or perfected the commodities and futures markets. With money pouring in and the population doubling in 20 years, the city leaders finally broke an old taboo against building outside the medieval city walls and authorized one of the earliest and most far-reaching urban-planning schemes in history. They mapped out three concentric canals that would arc around the city and divided the land along them into housing lots. It was a massive undertaking that would more than double the size of the city and involved diverting the river, digging miles of canals, driving tens of thousands of piles dozens of feet below the shifting soil and building scores of bridges, not to mention thousands of brick houses. It took 50 years to complete.
From the beginning, the master plan earmarked the Herengracht, the new canal closest to the city center, as the choicest; lots there were larger than others, and the practice of noisy, smelly or otherwise "intolerable and dangerous" trades was prohibited. Wealthy burghers and upwardly mobile tradesmen like Pieter Fransz snapped up the lots, built their little mansions, each with a garden in back, and settled in with their families. In the five-year period between 1628 and 1633, as the economy soared, the real, inflation-adjusted prices of houses on the Herengracht doubled. (By comparison, for the period 2000 to 2005, real home prices increased nationally in the U.S. by 38 percent, according to the Office of Federal Housing Enterprise Oversight. For a city-to-city comparison, between 1997 and 2005 real home prices in Boston rose 93 percent.)
Then two things happened almost simultaneously: tulip mania and the plague. As their country became the center of international finance, the Dutch had taken to speculating on everything from tobacco and spices to tulip bulbs, and it wasn't only professional traders who gambled on the prices of goods but ordinary citizens, with much of the trading taking place outside government regulations. After a one-month period of manic speculation in tulip bulbs, in which the price for one variety —Witte Croonen or White Crowns — shot from 64 guilders per half-pound in January 1637 to 1,668 guilders (the price of some houses in Amsterdam) in February, the bottom dropped out of the market; White Crowns later stabilized at about 38 guilders.
The collapse of the tulip market was not in itself the cause of a wider financial collapse, but more likely a component. The plague had begun to sweep through the country in 1635; in Amsterdam alone more than 17,000 people — 14 percent of the population — died of the plague in the year 1636. Peter M. Garber, an economist at Deutsche Bank, in his book "Famous First Bubbles," speculates that this "death threat" may have resulted in a "gambling binge" on tulip futures.
In the wake of these twin calamities, house prices dropped 36 percent. Piet Eichholtz says that this sort of episode — in which unpredictable disasters combine unpredictably — has relevance for today. "It's true that economic and social conditions were different back then," he said. "But major crises do happen, and we can't necessarily predict them. Will bird flu be a major disaster? Will there be more hurricanes? I don't know. Nobody knows."
To this, Richard Peach of the Federal Reserve Bank of New York counters, quite reasonably, "I'm not in the business of forecasting the next international calamity or outbreak of the plague." Economists look at economic data and create economic models. And not all calamities are followed by a drop in real-estate prices, at least not in the short term; home prices have soared in New York City since Sept. 11, 2001, for instance. But if there is one clear lesson that emerges from history, it's that life can be messy.
Another lesson is that the word "bubble" may be a misnomer. If the housing market in Amsterdam plummeted in the late 1630's, it quickly stabilized: by the early 1640's prices had surpassed their previous heights. "The bursting of a bubble is the wrong metaphor for what housing prices do over time," Eichholtz says. "What you see is rising and falling, sometimes dramatically, depending on whether the city had a stable economy or became hostage to outside forces. That's not a bubble bursting — it's volatility."
"Volatility" is indeed the watchword as the buying and selling of homes on the canal unfurls against the backdrop of modern history. In the 1650's and 1660's, the Dutch Republic reached the height of its golden age, and prices rose sharply. With money came changes in architectural fashion: new gable types and, on the Herengracht, larger houses built along classical Italian lines. The Fransz family still lived at the oldest end of the canal, but now the mansions farther along, with their clean facades, made the blocky, busy Renaissance style of their home look dated. Where houses sold in the 4,000-guilder range in earlier decades, they were now fetching 9,000 to 15,000.
Then, once again, the bottom falls out. In 1672, France and England declared war on the Dutch Republic. The English strangled Dutch shipping; Louis XIV invaded by land. From 1670 to 1677, houses on the Herengracht lost 56 percent of their value.
Then the cycle begins all over again: from that low point, prices head back up.
But what does "up" mean? The most surprising thing about Eichholtz's study is that it contradicts a maxim of the real-estate profession. "There is a myth which says that real-estate values go up significantly over time, and that this is especially true for central city locations," Eichholtz said. "When I began to study the Herengracht, I didn't know what I would find, but the data ended up challenging that myth."
That is to say, where everyone from your wise old uncle to the broker who sold you your house holds it as gospel that real estate is one of the best long-term investments, this longest of long-term indices suggests that, on the contrary, it sort of stinks. Between 1628 and 1973 (the period of Eichholtz's original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, "Real home prices did roughly double, but took nearly 350 years to do so."
The house that Pieter Fransz built is a case in point. In 1855, an estate agent named Robertus van Zoelen bought the house for 6,850 guilders. In 1881, his children sold it to a carpenter, Johann Diederich Brinkmann, for 12,100 guilders — an increase of 93 percent in real terms. But when Brinkmann sold it in 1888, it was for 10,000 guilders: a net loss. The next sale, in 1899, at 9,600 guilders, was also at a loss. Fifteen years later, with World War I looming, a real-estate agent named Georges Jean Josef Salen bought it for 10,000 guilders: again, a loss in real terms. And when, in 1955, a woman named Grietje Uitentuis bought the house, the 15,000 guilders she paid was, after adjusting for inflation, less than what the house sold for in 1855. Over the course of a century, Pieter Fransz's house actually lost 30 percent of its value.
This sort of thing isn't surprising to Shiller, who says he believes that the notion that real estate is a terrific investment comes in part from the long-term nature of most purchases. You know that your grandmother paid $15,000 for her house in 1951, and it's now worth $250,000. That sounds grand, but most of the increase is simply matching inflation. An analysis Shiller made of home prices in the U.S. going back to 1890 showed an average annual increase of a meager 0.4 percent. By way of contrast, Jeremy J. Siegel of the Wharton School of Business has calculated that over a 200-year period, the stock market had an average annual real rate of return of 6.8 percent. It's only in recent years, Shiller says, that huge increases in real-estate prices have become the norm and that people have come to expect them.
It's worth noting, however, that rocketing prices aren't everything. The word "value" has many meanings. Buying a home gets you tax deductions that you wouldn't get from renting. And no economic analysis can diminish the other kind of value that comes with homeownership: the fuzzy kind, the sense of place and rootedness.
Beyond that, probably few homeowners in 2006 are worrying about how much the value of their homes will have increased by 2206 or 2406. It's 2 or 5 or 10 years down the road that matters, and neither Shiller nor Eichholtz is willing to go out on the limb of making definitive short-term predictions. The value of studying a really long term housing market would seem to be less in revealing the how and when of downturns as in underscoring their inevitability. Really bad stuff happens, and when it does, there is often a collapse in real estate.
On the face of it, Amsterdam doesn't seem the most apt model to apply to other cities, particularly American cities. For one thing, the Dutch have a turbulent history. The Low Countries were invaded or occupied many times by foreign powers, with subsequent collapses in the housing market. Also, notes Shiller, "Amsterdam — with tulip mania and the birth of the stock market — is the home of speculation. If you look at, say, Milwaukee, you don't see the same degree of volatility. In a place like that, price is driven by land availability and construction costs, which is the tradition."
But then, volatility is more prevalent in world history than stability, which, as far as Eichholtz is concerned, makes the Herengracht data more, rather than less, widely applicable. "The financial literature has been dominated by America," he said. "And most models are created using post-1950 U.S. data, which give a biased picture of reality. There has been no other country like America, and there has been no other period like that in terms of stability. So I would say that in global terms, Milwaukee is the exception, not Amsterdam."
Besides which, speculation has now gone global — and with speculation comes instability. "Today we see bubblelike activity even in places where there is no land constraint, such as Phoenix," Shiller said. "They have miles of available land, so there's no justifiable reason for the kinds of increases you see there." So while it may have been true in the past that the ups and downs of the Herengracht index would make it a less-than-perfect model for American cities, that's not necessarily the case anymore. As Shiller says, "It's plausible that the sort of volatility we see now will make the rest of the world look more like the Herengracht index."
Amsterdam also turns out to be a pretty good model of recent history. After it had its 17th-century heyday, it settled into a poky, second-tier status among European cities. It was slow to hitch onto the Industrial Revolution, and of course the world wars hit hard. Real-estate prices lagged far behind those in larger and jazzier cities — until recently. The last time that Pieter Fransz's house changed hands was in 1983, when a Hungarian financial adviser and his wife, an English actress, sold it to a pair of doctors for 440,000 guilders. Today, prices on the Herengracht run from one million euros for family houses to three million or more for mansions (the Dutch currency was converted in 2002 at a rate of 2.2 guilders per euro). Even assuming that the house would sell at the low end, and accounting for inflation, this means that after taking three and a half centuries to double its real value, the house has tripled in value in the last 22 years.
The reason, of course, is that Amsterdam is part of the global housing boom. To get an idea of recent history, I asked Babs Persoons, owner of Babs Persoons BV, one of the premier real-estate agencies in Amsterdam's center city, to reminisce for me. "It started in 1998 — prices just went up amazingly," she said as she sat in her office on the Prinsengracht, another of Amsterdam's three grand canals. "For a while, every agent had a queue in front of their houses, and many were selling for more than the asking price. We didn't know that phenomenon in Holland before."
But if this description of the past few years typifies the brave new world we live in, putting it into the perspective of time — rise, fall, rise, fall — leads us back to what may be the oldest history lesson of all: it tends to repeat.
By RUSSELL SHORTO
In 1625, a carpenter named Pieter Fransz built a house on the outskirts of Amsterdam. He was young, ambitious and lucky enough to belong to one of history's greatest generations: his life spanned the course of his country's golden age, when tiny Holland became an empire and Amsterdam grew into Europe's wealthiest city. Fransz walked the streets with Rembrandt; he saw a forest of masts grow in the harbor, as ships returned from the East Indies laden with pepper and nutmeg, a sack of which could make a man wealthy for life. He and his family prospered along with the city; 17 years after building his house, he was rich enough to buy the one next door, into which his daughter and her husband moved. In 1683 he was still listed as the owner of both properties. Happiness isn't registered in municipal archives, but the image of this one not terribly consequential human life that remains on the palimpsest of time speaks of contentment: a man who has lived beyond the normal life span of his era, surrounded by family, financially successful.
Most of us leave no lasting traces that recall our stay on the planet, but through accident and fate, Fransz left something that has endured the centuries. His house — an elegant redbrick step-gable, its facade ornamented with sandstone bands and wooden cross-framed windows, a building that has more of the Renaissance than the Baroque about it — still stands. Napoleon and Hitler conquered Amsterdam in their separate centuries; later, postmodern architects and the sex and soft-drug industries made their marks. Pieter Fransz's house withstood all.
The Dutch have always been meticulous recordkeepers, so it is possible to follow this house, and others nearby it on Amsterdam's famous Herengracht, or Gentlemen's Canal, as they make their way through the centuries: to watch the succession of doctors, diamond cutters, confectioners, merchants and politicians move in and out, to glimpse the births and deaths, to watch careers and families unfold. More to the point, it's possible to follow the successive property transactions in this area of Amsterdam from the time it was developed to the present.
In itself, this isn't exceptional: other European cities have land registers that date to the Middle Ages. What makes Pieter Fransz's neighborhood unique — and uniquely interesting to some economists who are studying today's global real-estate boom and wondering whether the bubble that has been expanding for the past decade and more is in the process of bursting — is what real-estate experts call a constant quality index. Cities change over time; neighborhoods fall out of favor, and new ones come into vogue. Comparing property values in Greenwich Village a century ago with those of today might be interesting as part of a study of a changing neighborhood — the transformation of a low-rent, working-class community into a tony and sophisticated enclave — but not as a way of understanding how real-estate value changes over time.
From the time the Herengracht was developed in the early 17th century, however, it has been Amsterdam's prime real estate, the place where power brokers — 17th-century merchants dealing in spices and slaves or 21st-century bankers and international consultants — have chosen to base themselves. Looking at real-estate transactions over four centuries on this canal on which Pieter Fransz built his home gives a quality constant of unparalleled duration.
This is what attracted Piet Eichholtz, a professor of real-estate finance at Maastricht University in the Netherlands, to study the Herengracht in the 1990's. Eichholtz's work — the so-called Herengracht index — has become a touchstone in recent discussions about real-estate prices. He began with a sense of frustration. "If you look at most research on real-estate markets," he said, "papers will typically say they are taking 'a long-run look,' and then they go back 20 years. I wasn't impressed with that. I thought you had to go back further to get a really good picture of what a housing market performs like."
Eichholtz's study of the Herengracht came to international attention when the Yale economist Robert J. Shiller relied on it in the second edition of his best-selling book "Irrational Exuberance," which was published in 2005. After the first edition came out in 2000, Shiller became famous for predicting, correctly, that the stock market's explosive rise was about to end. The book's title — a phrase made famous by the former Federal Reserve Board chairman Alan Greenspan — referred to Shiller's argument that the market's rise of the 1990's was based more on herd mentality than on common sense.
In the new edition, Shiller applies the same thinking to global real-estate prices and argues that the phenomenal increases of recent years — especially in places like New York, San Francisco, Sydney, London and Paris, but also more broadly — amount to another instance of irrational exuberance. Taking the long-range view, he says, led him to conclude that real-estate prices are destined to fall. "The data just are not there to support the idea that housing prices will continue to soar out of sight," he said.
Not everyone agrees with Shiller's irrational-exuberance thesis. "I just don't see it that way," said Richard Peach, a vice president at the Federal Reserve Bank of New York and an author of a study in 2005 that concluded that the sharp rise in home prices is in line with economic conditions — that it indicates not a skewed vision of reality but a strong economy. In fact, Peach says, in the past 20 years family buying power has grown faster than housing prices. "We sometimes wonder why home prices haven't increased much more, given the tremendous increase in the size of mortgage the average family can finance," he said.
Like-minded experts include Christopher Mayer of Columbia University and Joseph Gyourko and Todd Sinai of the Wharton School, who focus on what they call "superstar cities," places so desirable that they not only are not headed for a correction but they also can sustain "ever-increasing" prices compared with less-sought-after cities.
What such optimists are missing, Shiller says, is a long historical perspective. "The fundamentals that they cite in support of their reassuring assessments are surprisingly weak at explaining historical prices," he writes in a recent paper. Reading the data as an economist leads Shiller to conclude that the market will go south. In addition, he says that studying the erratic but rhythmic rising and falling of prices over time — in other words, acting more like a historian than an economist — reinforces this conclusion. "Looking at the Herengracht data is very instructive," he said to me, "because you can see 50-year intervals of growth, then it turns around. That's more realistic than the superstar-cities argument."
Piet Eichholtz says he doesn't think the long-term data alone necessarily suggest that a collapse is coming. But at the same time, like Shiller, he is skeptical of those who claim that property values can continue to increase ad infinitum. "Some people say economies in the past were very volatile and didn't have safeguards that we have now, so we aren't likely to experience any major crises that will causes prices to crash," he said. "I'm doubtful." Looking through the history of the Herengracht, he says, you can see similarly rosy assessments made over and over, which are then quashed by circumstances.
Eichholtz's Herengracht index turns on one of the basic questions of the discipline of history: how applicable is the past to the present? What can a study of one small part of the world centuries ago say about actions in a 21st-century global economy? Or, put another way, just how special are we today?
The Herengracht index begins with one of history's great building booms. In the 1620's, the Dutch Republic was in the first stage of its rise to global power. The Dutch had become the middlemen of commerce between European nations and had a monopoly on trade with Japan and the East Indies. The world's first major stock exchange came into being around this time in Amsterdam, and the Dutch developed or perfected the commodities and futures markets. With money pouring in and the population doubling in 20 years, the city leaders finally broke an old taboo against building outside the medieval city walls and authorized one of the earliest and most far-reaching urban-planning schemes in history. They mapped out three concentric canals that would arc around the city and divided the land along them into housing lots. It was a massive undertaking that would more than double the size of the city and involved diverting the river, digging miles of canals, driving tens of thousands of piles dozens of feet below the shifting soil and building scores of bridges, not to mention thousands of brick houses. It took 50 years to complete.
From the beginning, the master plan earmarked the Herengracht, the new canal closest to the city center, as the choicest; lots there were larger than others, and the practice of noisy, smelly or otherwise "intolerable and dangerous" trades was prohibited. Wealthy burghers and upwardly mobile tradesmen like Pieter Fransz snapped up the lots, built their little mansions, each with a garden in back, and settled in with their families. In the five-year period between 1628 and 1633, as the economy soared, the real, inflation-adjusted prices of houses on the Herengracht doubled. (By comparison, for the period 2000 to 2005, real home prices increased nationally in the U.S. by 38 percent, according to the Office of Federal Housing Enterprise Oversight. For a city-to-city comparison, between 1997 and 2005 real home prices in Boston rose 93 percent.)
Then two things happened almost simultaneously: tulip mania and the plague. As their country became the center of international finance, the Dutch had taken to speculating on everything from tobacco and spices to tulip bulbs, and it wasn't only professional traders who gambled on the prices of goods but ordinary citizens, with much of the trading taking place outside government regulations. After a one-month period of manic speculation in tulip bulbs, in which the price for one variety —Witte Croonen or White Crowns — shot from 64 guilders per half-pound in January 1637 to 1,668 guilders (the price of some houses in Amsterdam) in February, the bottom dropped out of the market; White Crowns later stabilized at about 38 guilders.
The collapse of the tulip market was not in itself the cause of a wider financial collapse, but more likely a component. The plague had begun to sweep through the country in 1635; in Amsterdam alone more than 17,000 people — 14 percent of the population — died of the plague in the year 1636. Peter M. Garber, an economist at Deutsche Bank, in his book "Famous First Bubbles," speculates that this "death threat" may have resulted in a "gambling binge" on tulip futures.
In the wake of these twin calamities, house prices dropped 36 percent. Piet Eichholtz says that this sort of episode — in which unpredictable disasters combine unpredictably — has relevance for today. "It's true that economic and social conditions were different back then," he said. "But major crises do happen, and we can't necessarily predict them. Will bird flu be a major disaster? Will there be more hurricanes? I don't know. Nobody knows."
To this, Richard Peach of the Federal Reserve Bank of New York counters, quite reasonably, "I'm not in the business of forecasting the next international calamity or outbreak of the plague." Economists look at economic data and create economic models. And not all calamities are followed by a drop in real-estate prices, at least not in the short term; home prices have soared in New York City since Sept. 11, 2001, for instance. But if there is one clear lesson that emerges from history, it's that life can be messy.
Another lesson is that the word "bubble" may be a misnomer. If the housing market in Amsterdam plummeted in the late 1630's, it quickly stabilized: by the early 1640's prices had surpassed their previous heights. "The bursting of a bubble is the wrong metaphor for what housing prices do over time," Eichholtz says. "What you see is rising and falling, sometimes dramatically, depending on whether the city had a stable economy or became hostage to outside forces. That's not a bubble bursting — it's volatility."
"Volatility" is indeed the watchword as the buying and selling of homes on the canal unfurls against the backdrop of modern history. In the 1650's and 1660's, the Dutch Republic reached the height of its golden age, and prices rose sharply. With money came changes in architectural fashion: new gable types and, on the Herengracht, larger houses built along classical Italian lines. The Fransz family still lived at the oldest end of the canal, but now the mansions farther along, with their clean facades, made the blocky, busy Renaissance style of their home look dated. Where houses sold in the 4,000-guilder range in earlier decades, they were now fetching 9,000 to 15,000.
Then, once again, the bottom falls out. In 1672, France and England declared war on the Dutch Republic. The English strangled Dutch shipping; Louis XIV invaded by land. From 1670 to 1677, houses on the Herengracht lost 56 percent of their value.
Then the cycle begins all over again: from that low point, prices head back up.
But what does "up" mean? The most surprising thing about Eichholtz's study is that it contradicts a maxim of the real-estate profession. "There is a myth which says that real-estate values go up significantly over time, and that this is especially true for central city locations," Eichholtz said. "When I began to study the Herengracht, I didn't know what I would find, but the data ended up challenging that myth."
That is to say, where everyone from your wise old uncle to the broker who sold you your house holds it as gospel that real estate is one of the best long-term investments, this longest of long-term indices suggests that, on the contrary, it sort of stinks. Between 1628 and 1973 (the period of Eichholtz's original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, "Real home prices did roughly double, but took nearly 350 years to do so."
The house that Pieter Fransz built is a case in point. In 1855, an estate agent named Robertus van Zoelen bought the house for 6,850 guilders. In 1881, his children sold it to a carpenter, Johann Diederich Brinkmann, for 12,100 guilders — an increase of 93 percent in real terms. But when Brinkmann sold it in 1888, it was for 10,000 guilders: a net loss. The next sale, in 1899, at 9,600 guilders, was also at a loss. Fifteen years later, with World War I looming, a real-estate agent named Georges Jean Josef Salen bought it for 10,000 guilders: again, a loss in real terms. And when, in 1955, a woman named Grietje Uitentuis bought the house, the 15,000 guilders she paid was, after adjusting for inflation, less than what the house sold for in 1855. Over the course of a century, Pieter Fransz's house actually lost 30 percent of its value.
This sort of thing isn't surprising to Shiller, who says he believes that the notion that real estate is a terrific investment comes in part from the long-term nature of most purchases. You know that your grandmother paid $15,000 for her house in 1951, and it's now worth $250,000. That sounds grand, but most of the increase is simply matching inflation. An analysis Shiller made of home prices in the U.S. going back to 1890 showed an average annual increase of a meager 0.4 percent. By way of contrast, Jeremy J. Siegel of the Wharton School of Business has calculated that over a 200-year period, the stock market had an average annual real rate of return of 6.8 percent. It's only in recent years, Shiller says, that huge increases in real-estate prices have become the norm and that people have come to expect them.
It's worth noting, however, that rocketing prices aren't everything. The word "value" has many meanings. Buying a home gets you tax deductions that you wouldn't get from renting. And no economic analysis can diminish the other kind of value that comes with homeownership: the fuzzy kind, the sense of place and rootedness.
Beyond that, probably few homeowners in 2006 are worrying about how much the value of their homes will have increased by 2206 or 2406. It's 2 or 5 or 10 years down the road that matters, and neither Shiller nor Eichholtz is willing to go out on the limb of making definitive short-term predictions. The value of studying a really long term housing market would seem to be less in revealing the how and when of downturns as in underscoring their inevitability. Really bad stuff happens, and when it does, there is often a collapse in real estate.
On the face of it, Amsterdam doesn't seem the most apt model to apply to other cities, particularly American cities. For one thing, the Dutch have a turbulent history. The Low Countries were invaded or occupied many times by foreign powers, with subsequent collapses in the housing market. Also, notes Shiller, "Amsterdam — with tulip mania and the birth of the stock market — is the home of speculation. If you look at, say, Milwaukee, you don't see the same degree of volatility. In a place like that, price is driven by land availability and construction costs, which is the tradition."
But then, volatility is more prevalent in world history than stability, which, as far as Eichholtz is concerned, makes the Herengracht data more, rather than less, widely applicable. "The financial literature has been dominated by America," he said. "And most models are created using post-1950 U.S. data, which give a biased picture of reality. There has been no other country like America, and there has been no other period like that in terms of stability. So I would say that in global terms, Milwaukee is the exception, not Amsterdam."
Besides which, speculation has now gone global — and with speculation comes instability. "Today we see bubblelike activity even in places where there is no land constraint, such as Phoenix," Shiller said. "They have miles of available land, so there's no justifiable reason for the kinds of increases you see there." So while it may have been true in the past that the ups and downs of the Herengracht index would make it a less-than-perfect model for American cities, that's not necessarily the case anymore. As Shiller says, "It's plausible that the sort of volatility we see now will make the rest of the world look more like the Herengracht index."
Amsterdam also turns out to be a pretty good model of recent history. After it had its 17th-century heyday, it settled into a poky, second-tier status among European cities. It was slow to hitch onto the Industrial Revolution, and of course the world wars hit hard. Real-estate prices lagged far behind those in larger and jazzier cities — until recently. The last time that Pieter Fransz's house changed hands was in 1983, when a Hungarian financial adviser and his wife, an English actress, sold it to a pair of doctors for 440,000 guilders. Today, prices on the Herengracht run from one million euros for family houses to three million or more for mansions (the Dutch currency was converted in 2002 at a rate of 2.2 guilders per euro). Even assuming that the house would sell at the low end, and accounting for inflation, this means that after taking three and a half centuries to double its real value, the house has tripled in value in the last 22 years.
The reason, of course, is that Amsterdam is part of the global housing boom. To get an idea of recent history, I asked Babs Persoons, owner of Babs Persoons BV, one of the premier real-estate agencies in Amsterdam's center city, to reminisce for me. "It started in 1998 — prices just went up amazingly," she said as she sat in her office on the Prinsengracht, another of Amsterdam's three grand canals. "For a while, every agent had a queue in front of their houses, and many were selling for more than the asking price. We didn't know that phenomenon in Holland before."
But if this description of the past few years typifies the brave new world we live in, putting it into the perspective of time — rise, fall, rise, fall — leads us back to what may be the oldest history lesson of all: it tends to repeat.
There Goes the Neighborhood
New York Times Magazine, March 5, 2006
By MICHAEL SOKOLOVE
As I write this, I have a dead-on view of what feels like a crime being committed, a tableau perfectly framed through the window of my home office. Across my quiet suburban street, a man in an orange helmet has roped himself to a healthy old sycamore, 100 feet tall. He is systematically chain-sawing it to the ground. Two beefy accomplices, sweatshirt hoods pulled up tight on this blustery day, wait below to dispose of the fallen carcass. They gather up the heavy branches, then wrestle them into a brightly painted yellow mulch machine that does its work with an awful grinding sound.
The sycamore stands beside a modest brick colonial in Bethesda, Md. The tree predates the house, which was built in the 1940's. And it will predecease it, in a sense. The house was just sold. It is soon to be gutted, then refashioned into something more in keeping with the new style of the neighborhood — taller, wider, deeper, a structure with twice the square footage of the original that will nearly cover its small plot and leave little room for greenery, let alone a majestic tree.
I am not what you would call a tree-hugger or even an ardent or active environmentalist — life goes on, right? — and I'm as ecstatic as the next homeowner over soaring property values. But there is something unsettling about living in a neighborhood that is undergoing the brutal process of mansionization. The landscape changes so suddenly, and with little warning. In order to build, you must first destroy.
On the walks my wife and I take, we'll come upon a big hole in the ground, a few blocks from home, where a house stood just a day before. These are the total teardowns — homes that have been bulldozed without one bone of the old structure left standing. "Which one was that?" I'll ask. "The cute little stucco house with the front porch?" We'll stand in front of it and think for a while. No, maybe it wasn't the stucco house — could it have been the rancher where the old guy was always washing and buffing his Cadillac? No, there's the Cadillac up the street. Was it that house where they inflate that huge plastic Santa at Christmas? Sometimes we can't figure it out.
I decided there should be a law: Before you knock down a house, you should have to post its picture on a nearby tree (one that will not get hacked down), because part of what's so disturbing to me is the instant obliteration of history and memory. Here was a house where families lived, tomatoes grew, children played catch. . .and now it is gone and unrecognizable. The whole damn thing has gone into a Dumpster and then off to the landfill, like a bag of trash set out on the curb.
My family, arguably, has more room than it needs — in automobile terms, our four-bedroom house is akin to a comfortable family sedan. We could squeeze into something smaller. Our three kids could share bedrooms, as I did growing up. But all around us, people are building the residential equivalents of Hummers — homes whose essential feature is their bigness, their ability to command the road. Most of these would look fine on an acre or two, but our lots are one-third of an acre, or smaller. The peaks of these new homes rise ominously above us, blocking sunlight, stopping summer breezes.
When neighbors return, after having moved out temporarily to have one of these steroid palaces built for them, I'm at a loss for what to say. "Nice house" seems insincere. "Where the hell did you get the money?" would be aggressive and intrusive. But it seems as if you should say something, right? I want to say, "Why?" or, "You expecting quintuplets?" I settle for "Looks like it's really coming along."
The tree across the street is first stripped of its branches, then sawed down. Watching the process makes me almost literally sick. The big trunk is on its side in the front yard, in pieces. Where the cuts have been made I can see the wood, which is tinged with a crimson color. I half expect it to bleed.
I walk across the street and have a word with the man in the orange helmet, the chain-saw master who brought the sycamore down. He isn't happy. "Unbelievable, isn't it?" he says with a shrug. "It was healthy. I'm in the business, and it depresses me."
He tells me that he is an arborist dedicated to saving trees, but all the money is in killing them. He'll take some of the wood back to his shop, dry it and make furniture out of it. He'll sell the rest to other amateur woodworkers. "They'll do something with it, so at least I don't have to feel like this was a complete waste." Then he walks around to the back of the house and ropes himself up another tree, a silver maple. This one, too, is coming down.
By MICHAEL SOKOLOVE
As I write this, I have a dead-on view of what feels like a crime being committed, a tableau perfectly framed through the window of my home office. Across my quiet suburban street, a man in an orange helmet has roped himself to a healthy old sycamore, 100 feet tall. He is systematically chain-sawing it to the ground. Two beefy accomplices, sweatshirt hoods pulled up tight on this blustery day, wait below to dispose of the fallen carcass. They gather up the heavy branches, then wrestle them into a brightly painted yellow mulch machine that does its work with an awful grinding sound.
The sycamore stands beside a modest brick colonial in Bethesda, Md. The tree predates the house, which was built in the 1940's. And it will predecease it, in a sense. The house was just sold. It is soon to be gutted, then refashioned into something more in keeping with the new style of the neighborhood — taller, wider, deeper, a structure with twice the square footage of the original that will nearly cover its small plot and leave little room for greenery, let alone a majestic tree.
I am not what you would call a tree-hugger or even an ardent or active environmentalist — life goes on, right? — and I'm as ecstatic as the next homeowner over soaring property values. But there is something unsettling about living in a neighborhood that is undergoing the brutal process of mansionization. The landscape changes so suddenly, and with little warning. In order to build, you must first destroy.
On the walks my wife and I take, we'll come upon a big hole in the ground, a few blocks from home, where a house stood just a day before. These are the total teardowns — homes that have been bulldozed without one bone of the old structure left standing. "Which one was that?" I'll ask. "The cute little stucco house with the front porch?" We'll stand in front of it and think for a while. No, maybe it wasn't the stucco house — could it have been the rancher where the old guy was always washing and buffing his Cadillac? No, there's the Cadillac up the street. Was it that house where they inflate that huge plastic Santa at Christmas? Sometimes we can't figure it out.
I decided there should be a law: Before you knock down a house, you should have to post its picture on a nearby tree (one that will not get hacked down), because part of what's so disturbing to me is the instant obliteration of history and memory. Here was a house where families lived, tomatoes grew, children played catch. . .and now it is gone and unrecognizable. The whole damn thing has gone into a Dumpster and then off to the landfill, like a bag of trash set out on the curb.
My family, arguably, has more room than it needs — in automobile terms, our four-bedroom house is akin to a comfortable family sedan. We could squeeze into something smaller. Our three kids could share bedrooms, as I did growing up. But all around us, people are building the residential equivalents of Hummers — homes whose essential feature is their bigness, their ability to command the road. Most of these would look fine on an acre or two, but our lots are one-third of an acre, or smaller. The peaks of these new homes rise ominously above us, blocking sunlight, stopping summer breezes.
When neighbors return, after having moved out temporarily to have one of these steroid palaces built for them, I'm at a loss for what to say. "Nice house" seems insincere. "Where the hell did you get the money?" would be aggressive and intrusive. But it seems as if you should say something, right? I want to say, "Why?" or, "You expecting quintuplets?" I settle for "Looks like it's really coming along."
The tree across the street is first stripped of its branches, then sawed down. Watching the process makes me almost literally sick. The big trunk is on its side in the front yard, in pieces. Where the cuts have been made I can see the wood, which is tinged with a crimson color. I half expect it to bleed.
I walk across the street and have a word with the man in the orange helmet, the chain-saw master who brought the sycamore down. He isn't happy. "Unbelievable, isn't it?" he says with a shrug. "It was healthy. I'm in the business, and it depresses me."
He tells me that he is an arborist dedicated to saving trees, but all the money is in killing them. He'll take some of the wood back to his shop, dry it and make furniture out of it. He'll sell the rest to other amateur woodworkers. "They'll do something with it, so at least I don't have to feel like this was a complete waste." Then he walks around to the back of the house and ropes himself up another tree, a silver maple. This one, too, is coming down.
Affordable Housing - The Suburban Solution
New York Times Magazine, March 5, 2006
By ANDREW RICE
Bernie Tetreault was driving along Good Hope Road, past the Baptist churches and check-cashing storefronts that populate Washington's poorest neighborhood, when a dented green street sign caught his eye. It marked the way to the Frederick Douglass Dwellings, a place that no longer existed. "Yeah, those are gone," he said. "That's Henson Ridge." Tetreault, 67, an adviser to the District of Columbia Housing Authority, has the clipped demeanor of a city manager, which he once was; in those few words, he had summed up the death and revival of an entire community. Where the Frederick Douglass public-housing project once stood — violent, run-down, rat-infested — the city government was erecting Henson Ridge: several hundred new homes, painted in shades of cream and taupe.
Tetreault was driving there, in his late-model black convertible, to show me his vision of the future of public housing. An accomplished creator of homes for the poor — he spent most of his career in leafy Montgomery County, Md., where he helped devise and run some of the country's most admired housing programs — he left retirement a decade ago to come to D.C., where the task has been, quite literally, destruction. Since 1996, nearly $800 million has been spent to level some of D.C.'s most notorious housing projects and resurrect them as mixed-income communities, an effort Tetreault has spearheaded.
Henson Ridge was still a work in progress. As we drove into the development, backhoes were excavating a vast fenced-in field where apartment blocks once stood. "Fred Douglass was war housing that was built for the workers" during the 1940's, Tetreault told me. "Then they sold it to the housing authority. It was terrible. Oh, man, it was terrible." By the late 1990's, when the project was finally shut down, the median income was just $7,765, more than 80 percent of residents had no jobs and the biggest local employer was probably the "1-5 Mob," a notorious crack-dealing gang.
Such projects — the kind of dystopian superblocks that inspired crime dramas like "New Jack City" and "The Wire" — were never representative of America's low-income housing; they amounted to perhaps 100,000 of the federal government's stock of about five million units. But they were meaningful symbols, crumbling rebukes to the ideal, pronounced in the landmark Housing Act of 1949, that the federal government should provide "a decent home and suitable living environment for every American family." Their demise only underscores that the days of such aspirations are gone. The Frederick Douglass projects were demolished by bulldozers and front-end loaders; the federal government's commitment to shelter its poor has been dismantled slowly, quietly, brick by brick. Richard Nixon moved federal policy toward issuing vouchers instead of building new housing. Ronald Reagan gutted HUD's construction budget and narrowed its mission. Since then, the cuts have kept coming. From 1976 to 2000, subsidized housing's share of new federal spending fell 80 percent, according to Michael A. Stegman, a former HUD official, now at the University of North Carolina. "This year, there is virtually no new housing production," he says. Meanwhile, as housing-subsidy agreements expire, about 1,000 apartments a month leave the federal housing rolls.
The need for affordable housing, however, will always be with us. If anything, the problem is growing in many American cities and their older suburbs, as a perverse side effect of the last decade's urban economic resurgence. As big-city real-estate prices continue to inflate, and the affluent move into neighborhoods that once defined urban decline — like Harlem in New York, the Mission District in San Francisco or Logan Circle in Washington — the poor, and even the working class, are having a harder time finding places to live. Local governments are struggling to fill the federal void as best they can, with an uneven patchwork of initiatives. Reagan ran for president in 1980 on the notion that the common good would be best served if the federal government scaled back its sweeping ambitions and left the thinking to the locals. Though advocates for the poor would be loath to admit it, that's exactly what has happened. They are living in the world Reaganism created, making the best of it by devising market-oriented, grass-roots solutions. "Increasingly, the creativity, the ingenuity, the political will is stronger at the state and local level than at the federal," says Conrad Egan, president of the National Housing Conference, a group that advocates for more low-income assistance.
As decision-making authority is pushed closer to the ground, housing officials are thinking more like landowners. The new goal is to create mixed-income communities indistinguishable from those built by private real-estate developers. Taking the market ethic one step further, some programs shift the burden of providing housing for the poor from the government to private developers themselves, most often by giving zoning bonuses to builders — allowing them to build more profitably per acre — in return for setting aside affordably-priced units in their developments. The shift in outlook is reflected in changing language: "public" housing has become "affordable" or "work force" housing; "projects" are now "developments"; "tenants" have become "stakeholders" or "homeowners," because many of the new public houses are for sale.
Tetreault turned left up a street within Henson Ridge. Before us stood a row of new town houses. Outside one, a man was washing his S.U.V. A child was playing with a remote-controlled car along the sidewalk. On the way over, Tetreault had told me, "What you want to do is set the mix so that the 'feel"'— he took his hands off the steering wheel to make little quotes in the air — "is market rate." By that, he meant middle class: about a third of the 320 houses for sale at Henson Ridge will be reserved for former public-housing tenants. The rest will be sold at market rates, though the city will help people with lower incomes get mortgage subsidies. There will also be 280 rental units, offered at prices for a range of incomes. The idea is to reproduce the daily interplay among social classes that is said, perhaps apocryphally, to have once thrived in cities.
Tetreault, like many urban theorists, says that the old policy of concentrating the poor in housing projects failed because it undermined the social structures — family, workplace, neighborhood — that created something called a community. The price of building a mixed-income development at Henson Ridge, sacrificing a few hundred units from the city's depleted stock of public housing, is one Tetreault says he felt the city had to pay, even if it meant that a large fraction of those people whom Frederick Douglass once served, however poorly, ended up getting lost. "It won't feel market rate if you've got too many very low income families," he said. "You try to stretch that as far as you can, but don't push it too far."
If the "feel" of Henson Ridge, from its sylvan name to its muted colors to its gently curving streets, evokes nothing so much as the suburbs, that is no accident. A decade that has witnessed the miraculous resurrection of many cities has also seen a remarkable reversal in housing policy. Not long ago, America's suburbs were widely considered a wasteland for progressive policies. These days, ideas are migrating backward, as urban-housing advocates look for inspiration in places like Longmont, Colo., and Chula Vista, Calif. The solutions suburbs have developed are widely divergent, as you would expect, but they tend to have at least one thing in common: instead of relying on expensive and unpopular public subsidies, they seek to harness the power of the rising real-estate market.
In this regard, Bernie Tetreault's career is emblematic. He ran the housing authority in Montgomery County for almost a quarter-century. At the time he took the job, in the early 70's, the county faced a challenge similar to the one many cities are encountering today. Development was booming as white-collar workers flooded in. Housing prices were rising spectacularly. Teachers, police officers and other working-class people were finding it difficult to stay. During Tetreault's tenure, the county began devising its own approaches, eventually becoming to affordable-housing policy what Palo Alto is to the technology industry: an incubator of new ideas.
Tetreault, a compact man with close-shorn gray hair, dresses like a lobbyist and speaks like a banker. Where other housing advocates tend to wax utopian, he grounds his conversations in hard numbers and terse sentences. In his spare time, he now promotes Montgomery County-style programs through the Innovative Housing Institute, which he founded.
Montgomery County was, in many ways, a perfect place to experiment. It possessed in abundance the two things that housing advocates crave: money and political will. The county, which is populated by many government workers, has a long tradition of promoting liberal social programs, and its most famous innovation wasn't even Tetreault's idea: it was a product of popular demand. In the early 70's, a group of Democrats took control of the county council after a campaign in which they promised to tackle the local housing crisis. They argued that if the federal government wouldn't help, the county could force developers to. They changed the local zoning ordinance so that anyone building a large new development had to set aside 15 percent of the units for buyers or renters with low and moderate incomes. In return, they promised that the builders could construct more homes on the same amount of property. The county could also buy one-third of the units produced under the set-aside program to rent to the truly indigent. Despite the inducements, most builders opposed the program, saying that it would retard development and invite a bad element to the county. Epithets like "radical" and "European" were thrown around. The council had to override the county executive's veto.
The "inclusionary zoning" program, as it is known, became the centerpiece of a package of widely imitated initiatives, like a "housing trust fund" financed by property taxes and programs that offered mortgage financing and closing-cost assistance to home buyers. With periodic tinkering, the ordinance succeeded in creating roughly 11,000 affordably priced houses and apartments over its first 20 years without noticeably dampening development. Dozens of mixed-income communities came into being at relatively little cost to the county. And there was hardly any of the nasty class warfare that so often accompanies attempts to build low-income housing, even in progressive Montgomery County.
Joyce Siegel, who used to run the local housing authority's public-affairs office, told me that before the ordinance passed, "every time there was a proposal to build public housing, a 50-unit development or something, my husband would say I was going to a lynching. People went crazy. They were so opposed to it because of their property values." But afterward, "there was never a peep," she says. "Never a public peep. No more public hearings, no more screaming, no more lynchings. It was the law, and everybody knew it was fair across the board."
Over time, Montgomery County's radical idea has become an accepted, even trendy, practice throughout the country. David Rusk, a former mayor of Albuquerque and a tireless promoter of inclusionary zoning, has counted 134 cities, towns and counties around the country that now have such ordinances. Several states, including California, Massachusetts and New Jersey, also have laws on the books, though they are enforced spottily. When Tetreault's policy institute and several other organizations sponsored a three-day conference on the subject last fall, it drew more than 200 attendees, representing at least 30 local and state governments as well as many private organizations. They piled into a bus for a daylong tour of model communities around the region, like Carrington in Fairfax County, Va., where a developer has built a pair of four-unit apartment complexes disguised as beige-trimmed McMansions.
Such programs may face a hidden threat. In almost every jurisdiction where such ordinances have been proposed, building-industry groups have opposed them, often complaining that they amount to an unjust "taking" of private property. This argument has yet to be seriously tested in court, but in a study of the set-aside programs, Douglas R. Porter, an expert on urban growth, ominously concludes that "the 'right' to decent and/or affordable housing is a moral assertion more than a legal issue."
Montgomery County's law faced one of its most serious tests in the late 80's, when a local developer, Anthony Natelli, bought a thousand acres of rolling farmland in Potomac and announced plans to build Avenel, a 900-home community set around a golf course. Natelli asked to construct a low-cost apartment building in downtown Bethesda instead of in Avenel. The county recommended against his request, and Natelli relented, building an enclave of 60 small houses that sold for about $90,000 each. Twenty of the homes, in keeping with the county's longstanding policy, were rented to people living below the poverty line; the rest were sold, by lottery, to families with incomes up to $35,000 a year. "I felt strongly that Avenel should have a portion of the units," Tetreault says. "So now you have Mr. Marriott living in Avenel, and you have some moderate-income people living in Avenel, and you have some public-housing residents."
The road to Avenel winds through the hills and old-growth woods of Potomac, past deer-crossing signs and stately stone manors. On a January morning when I drove through, a landscaping crew was tending the lawn outside a Doric-columned home just across the way from Pleasant Gate Lane, the cul-de-sac where the poorer folks live. The street is set in a natural depression and is shielded from the road by tall evergreens. The houses, Cape Cods with brass porch lamps and shutters of varying colors, are modest and set close together. There were covered gas grills in most of the tiny backyards. Mario Wawrzusin still had a Christmas wreath hanging on his door.
Wawrzusin, 46, is a county social worker who paid his way through Catholic University. He is proud of his home and values the fact that his two sons attend one of the state's best public high schools. Most of his neighbors on Pleasant Gate Lane are similarly striving types, many of them immigrants. In the beginning, there was some tension between Pleasant Gate Lane and the larger community Wawrzusin refers to as "across the street." Even before the houses were finished, some anonymous neighbors were complaining to The Washington Post. "There are just concerns about the element of people moving in," one told the paper. Wawrzusin joined the homeowners' board as a representative of the Pleasant Gate Lane residents, and he said that their presence came to be accepted. "I had one of the homeowner advisory board guys go up to my neighborhood," Wawrzusin recalled. "He said to me: 'You know, Mario, you're the one who lives in a normal house. Our house is really odd.' That kind of was a nice thing."
Thomas Natelli is the 45-year-old son of Anthony Natelli, who died in 2004. Thomas is now the C.E.O. of the family's development firm and is himself an Avenel resident. "Time is always the test of these things," he says. Despite the initial fears of Avenel homeowners, the presence of less-affluent people along Pleasant Gate Lane does not seem to have adversely affected resale prices, which squares with the findings of studies conducted by housing advocates. The average asking price for a house at Avenel is now $2 million, and one was recently on the market for three times that amount. Developers, happily or not, have come to accept the set-aside program as part of doing business. "It is part of the fabric of the development process in the county," Natelli says.
There are housing advocates who are skeptical of programs like Montgomery County's. They say that because developers don't sell to anyone poorer than they have to, the main beneficiaries are families that just make the qualifying threshold of 65 percent of the region's median income, or about $55,000 for a family of four. The truly needy are much poorer than that, and critics say that private-sector solutions don't help them much. And the poor are increasingly plentiful in the suburbs: when Montgomery County recently opened its waiting list for the federal housing-voucher program, 10,000 families signed up in five days. "It's one program that has a lot of very good aspects, but it doesn't solve everything," says Elizabeth Davison, director of the county's Department of Housing and Community Affairs.
Advocates of the set-aside program, however, say that it fills a vital need, because by assisting people like Wawrzusin — in need of some help but not desperately poor — it frees up scant public-housing resources for those who need them most. But, as so often in public-policy debates, a program that works splendidly for a few also raises basic questions about fairness for all. The lucky families who won the Avenel lottery are no longer poor. They have grown older, established themselves, earned promotions. More to the point, they own valuable assets: their homes. Until recently, Montgomery County's law was written so that price controls on the affordable units expired after 10 years, at which point residents were free to sell their homes at market rates and split the proceeds with the county. At Avenel, asking prices for the houses on Pleasant Gate Lane now run well over $500,000.
Wawrzusin and his wife have watched several of their neighbors sell their houses for big profits, and somewhat abashedly, he admits that they sometimes talk about cashing in themselves. He has thought about retiring to upstate New York. "My kids are in a good school, so I'm not going anywhere," Wawrzusin said. "Once they're out of school, I'll most certainly think about going somewhere. We'll see."
"You'd be amazed at what they did on Eighth Street here," Tetreault said as we drove past the grounds of the Washington Navy Yard in the city's Southeast section. He showed me a vacant lot that was once a housing project (slated to come back as a mixed-income residential and office development), pointed out the probable location of the new Washington Nationals baseball stadium and hung a left. We drove up a street of refurbished brick storefronts, passing a bike shop, a Blockbuster and the home of the Shakespeare Theater Company. A few elderly black men sat on one street corner, shooting the breeze, but most of the faces on the street were white.
Tetreault came to D.C. in 1995, at a time when the city was mired in bankruptcy. He was looking for a new challenge to burnish his legacy. His tenure in Montgomery County had ended badly. Clashes with new political appointees to the housing authority's board culminated in his firing. Tetreault's detractors had complained that he was imperious and wouldn't take orders; when, several years after his departure, HUD placed the county's federal housing-voucher program on probation for various administrative lapses, some blamed him for neglecting details. (Tetreault says the problems arose after he left.) D.C.'s housing officials, however, desperately needed ideas. They hired Tetreault as a kind of thinker in residence. The job required a reversal: instead of finding a place for the poor in one of the country's richest counties, Tetreault would be coaxing the middle class into onetime ghettos. Either way, he figured, it was integration.
Then something unexpected happened: Washington's housing market turned around. Between 2000 and 2005, housing prices rose 119 percent, and names that once struck fear into middle-class hearts — U Street, Columbia Heights, Eastern Market — have become the stuff of cocktail-party chatter. While that made it easier to revive blighted neighborhoods, there are now fewer places for the poor to live. All of which has caused elected officials to start thinking seriously about how to create affordable housing.
It was long thought that urban real-estate markets couldn't grow fast enough to produce an appreciable number of affordable units through set-aside programs, but a decade of rising towers and skyrocketing prices has made many city governments think again. Boston and San Francisco, which have had set-aside programs for more than a decade, have recently beefed them up. San Diego and Denver enacted new ordinances in the last few years, and last summer New York passed a limited zoning change along the Brooklyn waterfront, where developers are eager to erect residential buildings on derelict industrial sites. Other cities, including Chicago, Los Angeles and Atlanta, are currently debating similar plans.
"It's almost a desperation response," says Bruce Katz, a former Clinton-administration official and the director of the Metropolitan Policy Program at the Brookings Institution. "The affordability issue in housing is worsening in the United States in many otherwise prosperous metros, because we're seeing widening gaps between wages and prices." On average, nationwide, it takes a $15-an-hour job to rent a decent two-bedroom apartment; the Center for Housing Policy estimates that about five million working families are in serious need, a 67 percent increase since 1997. Rising prices have forced poor and working-class people to crowd into already distressed neighborhoods or to migrate to decaying inner-ring suburbs.
This is particularly true in Washington, where it now takes a household income of more than $85,000 to buy the average house. For the poor, most federal housing assistance comes in the form of HUD vouchers, but the program's budget keeps getting squeezed, and the district now has a waiting list that's 47,500 names long. Half of those who do receive vouchers still can't find housing; some landlords, eager to capitalize on gentrification, are now refusing to accept them.
In response, about three years ago, a group of housing advocates began pushing the idea of a Montgomery County-style set-aside program in the district. After many delays, the local zoning board issued a draft ordinance last month. A vote is scheduled for later this spring. Developers, real-estate agents and leaders of the construction industry have fought the proposal. They argue that an idea that works in the suburbs won't necessarily translate to the city because the economics of building high-rises make adding an extra floor or two prohibitively expensive. And because Washington has an inviolable restriction on height — nothing can be more than 20 feet taller than the width of the street it faces — density bonuses may not provide much incentive.
There may be a more serious problem, though, when it comes to the set-aside programs. In 2003, an independent report found that the district's affordable-housing shortage stood at 24,000 units, six times as large as it was in 1990. In the advocates' best estimates, changing the zoning ordinance will create fewer than 1,000 apartments a year. These projections, mind you, are based on the number of buildings that were in development between 2000 and 2003, in the midst of a once-in-a-generation growth spurt. So what goes up when the market declines?
Not much. "You have to have a booming real-estate market to make it work," Douglas Porter, the housing expert, says. When the economy slows, and people are presumably more in need, the set-aside programs stop working. In fact, one place now facing the problem of slowing growth is Montgomery County. Its developable land is dwindling, even as it is losing many of the houses built under its zoning ordinance because the 10-year waiting periods for reselling them are expiring. Of the 11,000 units of affordable housing created under the set-aside program, only about 3,000 remained under price controls in 2003. Local officials say the number of new units created has slowed to a trickle.
When presented with such numbers, advocates of these programs tend to adopt a fallback position: they justify them not on the grounds of how much housing they'll provide but rather on the kind of society they may conjure. Forcing developers to include a few affordable apartments in their buildings may not solve the present crisis, but it makes a symbolic statement that there's still a place for the poor — or at least the working class — in America's changing cities. The truth is, though the new-generation housing policies are creations of necessity, the logic of them is as much moral as economic. The mixed-income communities that are coming into being, whether created by a zoning ordinance or built the old-fashioned way, are not just places to live. They're political statements in bricks and mortar, speaking out in favor of hard work, family stability and homeownership. Ronald Reagan would be proud.
Yet such cherished values go only so far. In the end, poor people still need a place to sleep. Nearly every expert agrees that hitching housing policy to the private market is an unpredictable and imperfect solution. At some point, government has to spend. As we drove through the streets of Southeast Washington, I asked Tetreault if he thought ambitious low-income developments like Henson Ridge — which was, after all, partly financed by HUD — could ever be produced without the help of the federal government. He told me that the city's own housing trust fund, established in 2002 and financed by real-estate-transfer taxes, had lately swelled to $40 million. "But it's really only because of the really hot real-estate market we have in the city," he said. "You can't count on that. "
We passed a construction site along Pennsylvania Avenue, where massive cranes were at work on Thornton Row, a new luxury-condominium complex. Tetreault said its developer had expressed interest in buying a nearby public-housing project and knocking it down. "That's why I have stayed and continue to work in the District of Columbia, because I see a lot of gentrification taking place," he said. "It's going to come to Southeast, and what I want to do is make sure those families are housed before the gentrification gets down here. That sounds a little bit idealistic, but anyway.. . ." His voice trailed off.
Then he snapped back to the concrete world. "Look at this," he said as we drove along a row of classic brick town houses with peaked roofs, bay windows and dormers. "This is where 45 units of public housing used to be. If I didn't stop you, you wouldn't know." A few years before, he said, the city tore down a housing project, "a concrete bunker," that stood on this block. "So what did we get?" Tetreault continued. "We got 38 units where 45 were, so we lost 7 units. But, I mean, those 38 fit into that neighborhood." And he was right: it looked like a lovely block to live on, at least for the lucky fraction of public-housing residents who were able to get in. For those left out, Tetreault said, there are housing vouchers. But there are no more guarantees.
By ANDREW RICE
Bernie Tetreault was driving along Good Hope Road, past the Baptist churches and check-cashing storefronts that populate Washington's poorest neighborhood, when a dented green street sign caught his eye. It marked the way to the Frederick Douglass Dwellings, a place that no longer existed. "Yeah, those are gone," he said. "That's Henson Ridge." Tetreault, 67, an adviser to the District of Columbia Housing Authority, has the clipped demeanor of a city manager, which he once was; in those few words, he had summed up the death and revival of an entire community. Where the Frederick Douglass public-housing project once stood — violent, run-down, rat-infested — the city government was erecting Henson Ridge: several hundred new homes, painted in shades of cream and taupe.
Tetreault was driving there, in his late-model black convertible, to show me his vision of the future of public housing. An accomplished creator of homes for the poor — he spent most of his career in leafy Montgomery County, Md., where he helped devise and run some of the country's most admired housing programs — he left retirement a decade ago to come to D.C., where the task has been, quite literally, destruction. Since 1996, nearly $800 million has been spent to level some of D.C.'s most notorious housing projects and resurrect them as mixed-income communities, an effort Tetreault has spearheaded.
Henson Ridge was still a work in progress. As we drove into the development, backhoes were excavating a vast fenced-in field where apartment blocks once stood. "Fred Douglass was war housing that was built for the workers" during the 1940's, Tetreault told me. "Then they sold it to the housing authority. It was terrible. Oh, man, it was terrible." By the late 1990's, when the project was finally shut down, the median income was just $7,765, more than 80 percent of residents had no jobs and the biggest local employer was probably the "1-5 Mob," a notorious crack-dealing gang.
Such projects — the kind of dystopian superblocks that inspired crime dramas like "New Jack City" and "The Wire" — were never representative of America's low-income housing; they amounted to perhaps 100,000 of the federal government's stock of about five million units. But they were meaningful symbols, crumbling rebukes to the ideal, pronounced in the landmark Housing Act of 1949, that the federal government should provide "a decent home and suitable living environment for every American family." Their demise only underscores that the days of such aspirations are gone. The Frederick Douglass projects were demolished by bulldozers and front-end loaders; the federal government's commitment to shelter its poor has been dismantled slowly, quietly, brick by brick. Richard Nixon moved federal policy toward issuing vouchers instead of building new housing. Ronald Reagan gutted HUD's construction budget and narrowed its mission. Since then, the cuts have kept coming. From 1976 to 2000, subsidized housing's share of new federal spending fell 80 percent, according to Michael A. Stegman, a former HUD official, now at the University of North Carolina. "This year, there is virtually no new housing production," he says. Meanwhile, as housing-subsidy agreements expire, about 1,000 apartments a month leave the federal housing rolls.
The need for affordable housing, however, will always be with us. If anything, the problem is growing in many American cities and their older suburbs, as a perverse side effect of the last decade's urban economic resurgence. As big-city real-estate prices continue to inflate, and the affluent move into neighborhoods that once defined urban decline — like Harlem in New York, the Mission District in San Francisco or Logan Circle in Washington — the poor, and even the working class, are having a harder time finding places to live. Local governments are struggling to fill the federal void as best they can, with an uneven patchwork of initiatives. Reagan ran for president in 1980 on the notion that the common good would be best served if the federal government scaled back its sweeping ambitions and left the thinking to the locals. Though advocates for the poor would be loath to admit it, that's exactly what has happened. They are living in the world Reaganism created, making the best of it by devising market-oriented, grass-roots solutions. "Increasingly, the creativity, the ingenuity, the political will is stronger at the state and local level than at the federal," says Conrad Egan, president of the National Housing Conference, a group that advocates for more low-income assistance.
As decision-making authority is pushed closer to the ground, housing officials are thinking more like landowners. The new goal is to create mixed-income communities indistinguishable from those built by private real-estate developers. Taking the market ethic one step further, some programs shift the burden of providing housing for the poor from the government to private developers themselves, most often by giving zoning bonuses to builders — allowing them to build more profitably per acre — in return for setting aside affordably-priced units in their developments. The shift in outlook is reflected in changing language: "public" housing has become "affordable" or "work force" housing; "projects" are now "developments"; "tenants" have become "stakeholders" or "homeowners," because many of the new public houses are for sale.
Tetreault turned left up a street within Henson Ridge. Before us stood a row of new town houses. Outside one, a man was washing his S.U.V. A child was playing with a remote-controlled car along the sidewalk. On the way over, Tetreault had told me, "What you want to do is set the mix so that the 'feel"'— he took his hands off the steering wheel to make little quotes in the air — "is market rate." By that, he meant middle class: about a third of the 320 houses for sale at Henson Ridge will be reserved for former public-housing tenants. The rest will be sold at market rates, though the city will help people with lower incomes get mortgage subsidies. There will also be 280 rental units, offered at prices for a range of incomes. The idea is to reproduce the daily interplay among social classes that is said, perhaps apocryphally, to have once thrived in cities.
Tetreault, like many urban theorists, says that the old policy of concentrating the poor in housing projects failed because it undermined the social structures — family, workplace, neighborhood — that created something called a community. The price of building a mixed-income development at Henson Ridge, sacrificing a few hundred units from the city's depleted stock of public housing, is one Tetreault says he felt the city had to pay, even if it meant that a large fraction of those people whom Frederick Douglass once served, however poorly, ended up getting lost. "It won't feel market rate if you've got too many very low income families," he said. "You try to stretch that as far as you can, but don't push it too far."
If the "feel" of Henson Ridge, from its sylvan name to its muted colors to its gently curving streets, evokes nothing so much as the suburbs, that is no accident. A decade that has witnessed the miraculous resurrection of many cities has also seen a remarkable reversal in housing policy. Not long ago, America's suburbs were widely considered a wasteland for progressive policies. These days, ideas are migrating backward, as urban-housing advocates look for inspiration in places like Longmont, Colo., and Chula Vista, Calif. The solutions suburbs have developed are widely divergent, as you would expect, but they tend to have at least one thing in common: instead of relying on expensive and unpopular public subsidies, they seek to harness the power of the rising real-estate market.
In this regard, Bernie Tetreault's career is emblematic. He ran the housing authority in Montgomery County for almost a quarter-century. At the time he took the job, in the early 70's, the county faced a challenge similar to the one many cities are encountering today. Development was booming as white-collar workers flooded in. Housing prices were rising spectacularly. Teachers, police officers and other working-class people were finding it difficult to stay. During Tetreault's tenure, the county began devising its own approaches, eventually becoming to affordable-housing policy what Palo Alto is to the technology industry: an incubator of new ideas.
Tetreault, a compact man with close-shorn gray hair, dresses like a lobbyist and speaks like a banker. Where other housing advocates tend to wax utopian, he grounds his conversations in hard numbers and terse sentences. In his spare time, he now promotes Montgomery County-style programs through the Innovative Housing Institute, which he founded.
Montgomery County was, in many ways, a perfect place to experiment. It possessed in abundance the two things that housing advocates crave: money and political will. The county, which is populated by many government workers, has a long tradition of promoting liberal social programs, and its most famous innovation wasn't even Tetreault's idea: it was a product of popular demand. In the early 70's, a group of Democrats took control of the county council after a campaign in which they promised to tackle the local housing crisis. They argued that if the federal government wouldn't help, the county could force developers to. They changed the local zoning ordinance so that anyone building a large new development had to set aside 15 percent of the units for buyers or renters with low and moderate incomes. In return, they promised that the builders could construct more homes on the same amount of property. The county could also buy one-third of the units produced under the set-aside program to rent to the truly indigent. Despite the inducements, most builders opposed the program, saying that it would retard development and invite a bad element to the county. Epithets like "radical" and "European" were thrown around. The council had to override the county executive's veto.
The "inclusionary zoning" program, as it is known, became the centerpiece of a package of widely imitated initiatives, like a "housing trust fund" financed by property taxes and programs that offered mortgage financing and closing-cost assistance to home buyers. With periodic tinkering, the ordinance succeeded in creating roughly 11,000 affordably priced houses and apartments over its first 20 years without noticeably dampening development. Dozens of mixed-income communities came into being at relatively little cost to the county. And there was hardly any of the nasty class warfare that so often accompanies attempts to build low-income housing, even in progressive Montgomery County.
Joyce Siegel, who used to run the local housing authority's public-affairs office, told me that before the ordinance passed, "every time there was a proposal to build public housing, a 50-unit development or something, my husband would say I was going to a lynching. People went crazy. They were so opposed to it because of their property values." But afterward, "there was never a peep," she says. "Never a public peep. No more public hearings, no more screaming, no more lynchings. It was the law, and everybody knew it was fair across the board."
Over time, Montgomery County's radical idea has become an accepted, even trendy, practice throughout the country. David Rusk, a former mayor of Albuquerque and a tireless promoter of inclusionary zoning, has counted 134 cities, towns and counties around the country that now have such ordinances. Several states, including California, Massachusetts and New Jersey, also have laws on the books, though they are enforced spottily. When Tetreault's policy institute and several other organizations sponsored a three-day conference on the subject last fall, it drew more than 200 attendees, representing at least 30 local and state governments as well as many private organizations. They piled into a bus for a daylong tour of model communities around the region, like Carrington in Fairfax County, Va., where a developer has built a pair of four-unit apartment complexes disguised as beige-trimmed McMansions.
Such programs may face a hidden threat. In almost every jurisdiction where such ordinances have been proposed, building-industry groups have opposed them, often complaining that they amount to an unjust "taking" of private property. This argument has yet to be seriously tested in court, but in a study of the set-aside programs, Douglas R. Porter, an expert on urban growth, ominously concludes that "the 'right' to decent and/or affordable housing is a moral assertion more than a legal issue."
Montgomery County's law faced one of its most serious tests in the late 80's, when a local developer, Anthony Natelli, bought a thousand acres of rolling farmland in Potomac and announced plans to build Avenel, a 900-home community set around a golf course. Natelli asked to construct a low-cost apartment building in downtown Bethesda instead of in Avenel. The county recommended against his request, and Natelli relented, building an enclave of 60 small houses that sold for about $90,000 each. Twenty of the homes, in keeping with the county's longstanding policy, were rented to people living below the poverty line; the rest were sold, by lottery, to families with incomes up to $35,000 a year. "I felt strongly that Avenel should have a portion of the units," Tetreault says. "So now you have Mr. Marriott living in Avenel, and you have some moderate-income people living in Avenel, and you have some public-housing residents."
The road to Avenel winds through the hills and old-growth woods of Potomac, past deer-crossing signs and stately stone manors. On a January morning when I drove through, a landscaping crew was tending the lawn outside a Doric-columned home just across the way from Pleasant Gate Lane, the cul-de-sac where the poorer folks live. The street is set in a natural depression and is shielded from the road by tall evergreens. The houses, Cape Cods with brass porch lamps and shutters of varying colors, are modest and set close together. There were covered gas grills in most of the tiny backyards. Mario Wawrzusin still had a Christmas wreath hanging on his door.
Wawrzusin, 46, is a county social worker who paid his way through Catholic University. He is proud of his home and values the fact that his two sons attend one of the state's best public high schools. Most of his neighbors on Pleasant Gate Lane are similarly striving types, many of them immigrants. In the beginning, there was some tension between Pleasant Gate Lane and the larger community Wawrzusin refers to as "across the street." Even before the houses were finished, some anonymous neighbors were complaining to The Washington Post. "There are just concerns about the element of people moving in," one told the paper. Wawrzusin joined the homeowners' board as a representative of the Pleasant Gate Lane residents, and he said that their presence came to be accepted. "I had one of the homeowner advisory board guys go up to my neighborhood," Wawrzusin recalled. "He said to me: 'You know, Mario, you're the one who lives in a normal house. Our house is really odd.' That kind of was a nice thing."
Thomas Natelli is the 45-year-old son of Anthony Natelli, who died in 2004. Thomas is now the C.E.O. of the family's development firm and is himself an Avenel resident. "Time is always the test of these things," he says. Despite the initial fears of Avenel homeowners, the presence of less-affluent people along Pleasant Gate Lane does not seem to have adversely affected resale prices, which squares with the findings of studies conducted by housing advocates. The average asking price for a house at Avenel is now $2 million, and one was recently on the market for three times that amount. Developers, happily or not, have come to accept the set-aside program as part of doing business. "It is part of the fabric of the development process in the county," Natelli says.
There are housing advocates who are skeptical of programs like Montgomery County's. They say that because developers don't sell to anyone poorer than they have to, the main beneficiaries are families that just make the qualifying threshold of 65 percent of the region's median income, or about $55,000 for a family of four. The truly needy are much poorer than that, and critics say that private-sector solutions don't help them much. And the poor are increasingly plentiful in the suburbs: when Montgomery County recently opened its waiting list for the federal housing-voucher program, 10,000 families signed up in five days. "It's one program that has a lot of very good aspects, but it doesn't solve everything," says Elizabeth Davison, director of the county's Department of Housing and Community Affairs.
Advocates of the set-aside program, however, say that it fills a vital need, because by assisting people like Wawrzusin — in need of some help but not desperately poor — it frees up scant public-housing resources for those who need them most. But, as so often in public-policy debates, a program that works splendidly for a few also raises basic questions about fairness for all. The lucky families who won the Avenel lottery are no longer poor. They have grown older, established themselves, earned promotions. More to the point, they own valuable assets: their homes. Until recently, Montgomery County's law was written so that price controls on the affordable units expired after 10 years, at which point residents were free to sell their homes at market rates and split the proceeds with the county. At Avenel, asking prices for the houses on Pleasant Gate Lane now run well over $500,000.
Wawrzusin and his wife have watched several of their neighbors sell their houses for big profits, and somewhat abashedly, he admits that they sometimes talk about cashing in themselves. He has thought about retiring to upstate New York. "My kids are in a good school, so I'm not going anywhere," Wawrzusin said. "Once they're out of school, I'll most certainly think about going somewhere. We'll see."
"You'd be amazed at what they did on Eighth Street here," Tetreault said as we drove past the grounds of the Washington Navy Yard in the city's Southeast section. He showed me a vacant lot that was once a housing project (slated to come back as a mixed-income residential and office development), pointed out the probable location of the new Washington Nationals baseball stadium and hung a left. We drove up a street of refurbished brick storefronts, passing a bike shop, a Blockbuster and the home of the Shakespeare Theater Company. A few elderly black men sat on one street corner, shooting the breeze, but most of the faces on the street were white.
Tetreault came to D.C. in 1995, at a time when the city was mired in bankruptcy. He was looking for a new challenge to burnish his legacy. His tenure in Montgomery County had ended badly. Clashes with new political appointees to the housing authority's board culminated in his firing. Tetreault's detractors had complained that he was imperious and wouldn't take orders; when, several years after his departure, HUD placed the county's federal housing-voucher program on probation for various administrative lapses, some blamed him for neglecting details. (Tetreault says the problems arose after he left.) D.C.'s housing officials, however, desperately needed ideas. They hired Tetreault as a kind of thinker in residence. The job required a reversal: instead of finding a place for the poor in one of the country's richest counties, Tetreault would be coaxing the middle class into onetime ghettos. Either way, he figured, it was integration.
Then something unexpected happened: Washington's housing market turned around. Between 2000 and 2005, housing prices rose 119 percent, and names that once struck fear into middle-class hearts — U Street, Columbia Heights, Eastern Market — have become the stuff of cocktail-party chatter. While that made it easier to revive blighted neighborhoods, there are now fewer places for the poor to live. All of which has caused elected officials to start thinking seriously about how to create affordable housing.
It was long thought that urban real-estate markets couldn't grow fast enough to produce an appreciable number of affordable units through set-aside programs, but a decade of rising towers and skyrocketing prices has made many city governments think again. Boston and San Francisco, which have had set-aside programs for more than a decade, have recently beefed them up. San Diego and Denver enacted new ordinances in the last few years, and last summer New York passed a limited zoning change along the Brooklyn waterfront, where developers are eager to erect residential buildings on derelict industrial sites. Other cities, including Chicago, Los Angeles and Atlanta, are currently debating similar plans.
"It's almost a desperation response," says Bruce Katz, a former Clinton-administration official and the director of the Metropolitan Policy Program at the Brookings Institution. "The affordability issue in housing is worsening in the United States in many otherwise prosperous metros, because we're seeing widening gaps between wages and prices." On average, nationwide, it takes a $15-an-hour job to rent a decent two-bedroom apartment; the Center for Housing Policy estimates that about five million working families are in serious need, a 67 percent increase since 1997. Rising prices have forced poor and working-class people to crowd into already distressed neighborhoods or to migrate to decaying inner-ring suburbs.
This is particularly true in Washington, where it now takes a household income of more than $85,000 to buy the average house. For the poor, most federal housing assistance comes in the form of HUD vouchers, but the program's budget keeps getting squeezed, and the district now has a waiting list that's 47,500 names long. Half of those who do receive vouchers still can't find housing; some landlords, eager to capitalize on gentrification, are now refusing to accept them.
In response, about three years ago, a group of housing advocates began pushing the idea of a Montgomery County-style set-aside program in the district. After many delays, the local zoning board issued a draft ordinance last month. A vote is scheduled for later this spring. Developers, real-estate agents and leaders of the construction industry have fought the proposal. They argue that an idea that works in the suburbs won't necessarily translate to the city because the economics of building high-rises make adding an extra floor or two prohibitively expensive. And because Washington has an inviolable restriction on height — nothing can be more than 20 feet taller than the width of the street it faces — density bonuses may not provide much incentive.
There may be a more serious problem, though, when it comes to the set-aside programs. In 2003, an independent report found that the district's affordable-housing shortage stood at 24,000 units, six times as large as it was in 1990. In the advocates' best estimates, changing the zoning ordinance will create fewer than 1,000 apartments a year. These projections, mind you, are based on the number of buildings that were in development between 2000 and 2003, in the midst of a once-in-a-generation growth spurt. So what goes up when the market declines?
Not much. "You have to have a booming real-estate market to make it work," Douglas Porter, the housing expert, says. When the economy slows, and people are presumably more in need, the set-aside programs stop working. In fact, one place now facing the problem of slowing growth is Montgomery County. Its developable land is dwindling, even as it is losing many of the houses built under its zoning ordinance because the 10-year waiting periods for reselling them are expiring. Of the 11,000 units of affordable housing created under the set-aside program, only about 3,000 remained under price controls in 2003. Local officials say the number of new units created has slowed to a trickle.
When presented with such numbers, advocates of these programs tend to adopt a fallback position: they justify them not on the grounds of how much housing they'll provide but rather on the kind of society they may conjure. Forcing developers to include a few affordable apartments in their buildings may not solve the present crisis, but it makes a symbolic statement that there's still a place for the poor — or at least the working class — in America's changing cities. The truth is, though the new-generation housing policies are creations of necessity, the logic of them is as much moral as economic. The mixed-income communities that are coming into being, whether created by a zoning ordinance or built the old-fashioned way, are not just places to live. They're political statements in bricks and mortar, speaking out in favor of hard work, family stability and homeownership. Ronald Reagan would be proud.
Yet such cherished values go only so far. In the end, poor people still need a place to sleep. Nearly every expert agrees that hitching housing policy to the private market is an unpredictable and imperfect solution. At some point, government has to spend. As we drove through the streets of Southeast Washington, I asked Tetreault if he thought ambitious low-income developments like Henson Ridge — which was, after all, partly financed by HUD — could ever be produced without the help of the federal government. He told me that the city's own housing trust fund, established in 2002 and financed by real-estate-transfer taxes, had lately swelled to $40 million. "But it's really only because of the really hot real-estate market we have in the city," he said. "You can't count on that. "
We passed a construction site along Pennsylvania Avenue, where massive cranes were at work on Thornton Row, a new luxury-condominium complex. Tetreault said its developer had expressed interest in buying a nearby public-housing project and knocking it down. "That's why I have stayed and continue to work in the District of Columbia, because I see a lot of gentrification taking place," he said. "It's going to come to Southeast, and what I want to do is make sure those families are housed before the gentrification gets down here. That sounds a little bit idealistic, but anyway.. . ." His voice trailed off.
Then he snapped back to the concrete world. "Look at this," he said as we drove along a row of classic brick town houses with peaked roofs, bay windows and dormers. "This is where 45 units of public housing used to be. If I didn't stop you, you wouldn't know." A few years before, he said, the city tore down a housing project, "a concrete bunker," that stood on this block. "So what did we get?" Tetreault continued. "We got 38 units where 45 were, so we lost 7 units. But, I mean, those 38 fit into that neighborhood." And he was right: it looked like a lovely block to live on, at least for the lucky fraction of public-housing residents who were able to get in. For those left out, Tetreault said, there are housing vouchers. But there are no more guarantees.
Northern Virginians Greet Assessments With Disbelief
Washington Post, March 6, 2006
By Amy Gardner
When Linda T. Nevitte opened her 2006 property assessment notice a few days ago, she knew enough about the Northern Virginia real estate market to expect a higher assessment on her 22-year-old colonial in Sterling.
But nothing could have prepared her for what she saw -- that her 2,800-square-foot home, valued at $431,300 in January 2005, was worth $603,200. That's a 40 percent increase from one year to the next, and it is likely to lead to a whopping new tax bill for Nevitte this spring.
"The whole neighborhood got a 40 percent increase," Nevitte said. "We have a neighborhood e-mail system, and it's on fire. I'm expecting them to storm the courthouse with pitchforks and knives."
Thousands of property owners across the region know how Nevitte feels. It's sticker shock season -- the time of year when property assessments jolt homeowners with the good news (more equity) and bad (higher tax bills) of rising property values.
This year, the shock is particularly deep in the outlying counties of Northern Virginia, where property owners thought they were insulated from the skyrocketing appreciation the inner suburbs have experienced most of this decade.
With an average home value increase of 28 percent, Loudoun County led the region this year. Prince William County, at 25.5 percent, was not far behind. And Loudoun appears on track to handle a record number of complaints and requests for review. It is too soon to say the same for Prince William, where notices have not hit the streets, officials there said.
"We've had a couple thousand calls," said Loudoun County Assessor Todd Kaufman. Most callers don't dispute that their new assessment represents market value, as required by Virginia law, he said. They're just shocked that the value has gone up so much.
"For the most part, people aren't upset about their assessments once we explain it to them, show them comparable sales and so on," he said.
There are exceptions. Laurie F. Neff, 34, owns a home in the Sumner Lake neighborhood of Manassas. Her 3,500 square-foot home's value rose from $535,500 to $749,600 -- a 40 percent increase. Neff said she believes that the assessment is wrong because her house has been on the market for two months -- for $689,000. All Neff said she could think when she read her notice was: "Are they on crack?"
Assessments rose briskly in the inner suburbs, too -- 20.6 percent in Fairfax County, 19.5 percent in Alexandria, to name two. But in those closer-in communities, the rate of growth has slowed a bit from last year. In Fairfax, average home values actually ticked down in the fourth quarter of 2005, although they are still about 20 percent higher than in the previous year.
What no one can say is whether that trend will continue and whether property owners can expect a more profound stabilization next year.
"As long as people moving into Arlington have the income to support mortgages of several thousand dollars a month, and as long as interest rates remain relatively low, then we'll probably continue to see appreciation in the value of real estate," said Thomas L. Rice, director of the county's Department of Real Estate Assessments.
"But if you take a historical perspective and look at how increases in values have occurred, this is without question the most protracted increase in real estate values that anyone can document."
In the outer communities, one possible explanation for the higher rates of increase is the fact that historically, such locations have remained affordable, officials there said. As prices have soared closer to the District, home buyers with limited money have flocked to Loudoun and Prince William in search of cheaper homes.
Unfortunately, that very sales activity is driving prices up in those enclaves, said Allison Lindner, Prince William's real estate assessments division chief.
"I don't know for sure," Lindner said. "It seems to be the areas where there is some affordable housing in comparison to D.C."
Rising assessments don't automatically translate into higher tax bills. It is ultimately up to county boards of supervisors and city councils to set property tax rates.
Still, most residents will see their property tax bills rise this year. Although local governments are considering reductions in the tax rate -- seven cents in Loudoun and Fairfax counties, for example -- those reductions do not counter assessment increases in those communities.
Officials say they cannot afford to keep tax bills even because of the cost of services that their growing populations demand.
And that points to the quandary that governments will face next year, if home values do level off more dramatically. They will no longer be able to absorb spending increases with rising assessments. Unless they slow spending growth, they will have to increase tax rates
"Every year at the budget hearings, there are people arguing about the cost of taxes," said Kevin C. Greenlief, director of the Fairfax County Department of Tax Administration. "But there is also a large contingent arguing for services."
By Amy Gardner
When Linda T. Nevitte opened her 2006 property assessment notice a few days ago, she knew enough about the Northern Virginia real estate market to expect a higher assessment on her 22-year-old colonial in Sterling.
But nothing could have prepared her for what she saw -- that her 2,800-square-foot home, valued at $431,300 in January 2005, was worth $603,200. That's a 40 percent increase from one year to the next, and it is likely to lead to a whopping new tax bill for Nevitte this spring.
"The whole neighborhood got a 40 percent increase," Nevitte said. "We have a neighborhood e-mail system, and it's on fire. I'm expecting them to storm the courthouse with pitchforks and knives."
Thousands of property owners across the region know how Nevitte feels. It's sticker shock season -- the time of year when property assessments jolt homeowners with the good news (more equity) and bad (higher tax bills) of rising property values.
This year, the shock is particularly deep in the outlying counties of Northern Virginia, where property owners thought they were insulated from the skyrocketing appreciation the inner suburbs have experienced most of this decade.
With an average home value increase of 28 percent, Loudoun County led the region this year. Prince William County, at 25.5 percent, was not far behind. And Loudoun appears on track to handle a record number of complaints and requests for review. It is too soon to say the same for Prince William, where notices have not hit the streets, officials there said.
"We've had a couple thousand calls," said Loudoun County Assessor Todd Kaufman. Most callers don't dispute that their new assessment represents market value, as required by Virginia law, he said. They're just shocked that the value has gone up so much.
"For the most part, people aren't upset about their assessments once we explain it to them, show them comparable sales and so on," he said.
There are exceptions. Laurie F. Neff, 34, owns a home in the Sumner Lake neighborhood of Manassas. Her 3,500 square-foot home's value rose from $535,500 to $749,600 -- a 40 percent increase. Neff said she believes that the assessment is wrong because her house has been on the market for two months -- for $689,000. All Neff said she could think when she read her notice was: "Are they on crack?"
Assessments rose briskly in the inner suburbs, too -- 20.6 percent in Fairfax County, 19.5 percent in Alexandria, to name two. But in those closer-in communities, the rate of growth has slowed a bit from last year. In Fairfax, average home values actually ticked down in the fourth quarter of 2005, although they are still about 20 percent higher than in the previous year.
What no one can say is whether that trend will continue and whether property owners can expect a more profound stabilization next year.
"As long as people moving into Arlington have the income to support mortgages of several thousand dollars a month, and as long as interest rates remain relatively low, then we'll probably continue to see appreciation in the value of real estate," said Thomas L. Rice, director of the county's Department of Real Estate Assessments.
"But if you take a historical perspective and look at how increases in values have occurred, this is without question the most protracted increase in real estate values that anyone can document."
In the outer communities, one possible explanation for the higher rates of increase is the fact that historically, such locations have remained affordable, officials there said. As prices have soared closer to the District, home buyers with limited money have flocked to Loudoun and Prince William in search of cheaper homes.
Unfortunately, that very sales activity is driving prices up in those enclaves, said Allison Lindner, Prince William's real estate assessments division chief.
"I don't know for sure," Lindner said. "It seems to be the areas where there is some affordable housing in comparison to D.C."
Rising assessments don't automatically translate into higher tax bills. It is ultimately up to county boards of supervisors and city councils to set property tax rates.
Still, most residents will see their property tax bills rise this year. Although local governments are considering reductions in the tax rate -- seven cents in Loudoun and Fairfax counties, for example -- those reductions do not counter assessment increases in those communities.
Officials say they cannot afford to keep tax bills even because of the cost of services that their growing populations demand.
And that points to the quandary that governments will face next year, if home values do level off more dramatically. They will no longer be able to absorb spending increases with rising assessments. Unless they slow spending growth, they will have to increase tax rates
"Every year at the budget hearings, there are people arguing about the cost of taxes," said Kevin C. Greenlief, director of the Fairfax County Department of Tax Administration. "But there is also a large contingent arguing for services."
02 March 2006
Growth in Families' Wealth Stalls
House Values Jump, but Borrowing Holds Down Net Worth
Washington Post, February 24, 2006; D02
By Nell Henderson
Americans may feel much richer because of soaring home prices, but they're not.
U.S. families' wealth stagnated during the economy's recession and recovery from 2001 through 2004, as lackluster wage growth, sagging stock prices and rising debt levels offset the gains from higher home values, the Federal Reserve reported yesterday in its latest Survey of Consumer Finances.
Home prices did jump nearly 27 percent during the survey period, and the share of households owning homes rose to 69.1 percent in 2004, the report said. That made Americans feel good. And it did help boost the total value of families' assets, such as homes, autos, stocks, bonds and other investments.
But wealth, or net worth, measures the value of a household's assets minus its debts, such as mortgages, car loans, student loans and credit card balances. And debt climbed steadily during the survey period, as the Fed slashed interest rates to stimulate borrowing and spending in rocky economic times.
After totaling up both sides of the ledger, the median net worth of American households rose just 1.5 percent over the three years measured, to $93,100, according to the Fed's report, which is compiled every three years to provide a portrait of family finances.
By comparison, median family wealth rose 10.3 percent in the previous survey period, from 1998 through 2001, and shot up 17.4 percent from 1995 to 1998, during an economic boom that pushed up stock prices and wages.
The only weaker gain in wealth recorded by the Fed was in its first such survey, for 1989 to 1992, when median household net worth dropped 5.2 percent during a period that included the recession of 1990-91.
And the wealth gap grew in the latest survey. Median household net worth rose 4 percent for the richest tenth of Americans and fell 11 percent for the poorest two-tenths of Americans, the survey showed.
"Home appreciation was offset by lousy wage growth and debt accumulation," said Jared Bernstein, senior economist at the Economic Policy Institute, a think tank focused on labor issues. Median family incomes rose just 1.6 percent from 2001 through 2004, to $43,200, the report said. That marked the weakest results since a 6.9 percent drop in the 1989 to 1992 period.
Income growth was held back in from 2001 to 2004, largely because of a 6.2 percent fall in median wages, the largest source of family income, the report said. Investment income also declined, as interests rates, stock prices and dividends fell through much of the survey period.
The survey's findings reflect how households coped financially with the economic turmoil of that period, which coincided with President Bush's first term, a recession, terrorist attacks, accounting scandals, and wars in Iraq and Afghanistan. Businesses slashed millions of jobs and cut back sharply on investment in plants, software and equipment from 2001 through early 2003 while Bush and Congress cut taxes and the Fed lowered interest rates to keep the economy going.
Consumers responded enthusiastically, borrowing cheaply to pay for houses, cars and other goods and services. They succeeded in pumping up economic growth to a strong 4.1 percent in 2003 and 3.8 percent in 2004.
One welcomed result was the hot housing market. The median value of a principal residence rose to $160,000 in 2004, up 22 percent from 2001. But consumers revived the economy at a cost -- by accepting a bigger debt burden and by devoting more of their income to pay interest on the debt.
The overall median value of household debt rose 33.9 percent from 2001 through 2004, to $55,300, the Fed reported. Families spent 14.4 percent of their incomes on debt service in 2004, up from 12.9 percent in 2001.
And the borrowing has only accelerated since 2004. Total household debt grew to a record $11.4 trillion in last year's third quarter, which ended Sept. 30, shooting up at the fastest rate since 1985, according to a separate Fed report.
The Fed's findings on wealth and income growth are particularly disappointing, Bernstein said, when compared with the economy's 11.6 percent growth in productivity, or output per hour of work, during the same period.
Productivity growth usually enables living standards to rise because employers can simultaneously reap higher profits and raise workers' wages without fanning inflation. Many economists, including some Fed policymakers, are puzzled by the relatively weak wage growth of recent years despite strong productivity growth.
"The last three years have been a period of impressive productivity growth and depressive changes in the living standards for most families," Bernstein said.
Washington Post, February 24, 2006; D02
By Nell Henderson
Americans may feel much richer because of soaring home prices, but they're not.
U.S. families' wealth stagnated during the economy's recession and recovery from 2001 through 2004, as lackluster wage growth, sagging stock prices and rising debt levels offset the gains from higher home values, the Federal Reserve reported yesterday in its latest Survey of Consumer Finances.
Home prices did jump nearly 27 percent during the survey period, and the share of households owning homes rose to 69.1 percent in 2004, the report said. That made Americans feel good. And it did help boost the total value of families' assets, such as homes, autos, stocks, bonds and other investments.
But wealth, or net worth, measures the value of a household's assets minus its debts, such as mortgages, car loans, student loans and credit card balances. And debt climbed steadily during the survey period, as the Fed slashed interest rates to stimulate borrowing and spending in rocky economic times.
After totaling up both sides of the ledger, the median net worth of American households rose just 1.5 percent over the three years measured, to $93,100, according to the Fed's report, which is compiled every three years to provide a portrait of family finances.
By comparison, median family wealth rose 10.3 percent in the previous survey period, from 1998 through 2001, and shot up 17.4 percent from 1995 to 1998, during an economic boom that pushed up stock prices and wages.
The only weaker gain in wealth recorded by the Fed was in its first such survey, for 1989 to 1992, when median household net worth dropped 5.2 percent during a period that included the recession of 1990-91.
And the wealth gap grew in the latest survey. Median household net worth rose 4 percent for the richest tenth of Americans and fell 11 percent for the poorest two-tenths of Americans, the survey showed.
"Home appreciation was offset by lousy wage growth and debt accumulation," said Jared Bernstein, senior economist at the Economic Policy Institute, a think tank focused on labor issues. Median family incomes rose just 1.6 percent from 2001 through 2004, to $43,200, the report said. That marked the weakest results since a 6.9 percent drop in the 1989 to 1992 period.
Income growth was held back in from 2001 to 2004, largely because of a 6.2 percent fall in median wages, the largest source of family income, the report said. Investment income also declined, as interests rates, stock prices and dividends fell through much of the survey period.
The survey's findings reflect how households coped financially with the economic turmoil of that period, which coincided with President Bush's first term, a recession, terrorist attacks, accounting scandals, and wars in Iraq and Afghanistan. Businesses slashed millions of jobs and cut back sharply on investment in plants, software and equipment from 2001 through early 2003 while Bush and Congress cut taxes and the Fed lowered interest rates to keep the economy going.
Consumers responded enthusiastically, borrowing cheaply to pay for houses, cars and other goods and services. They succeeded in pumping up economic growth to a strong 4.1 percent in 2003 and 3.8 percent in 2004.
One welcomed result was the hot housing market. The median value of a principal residence rose to $160,000 in 2004, up 22 percent from 2001. But consumers revived the economy at a cost -- by accepting a bigger debt burden and by devoting more of their income to pay interest on the debt.
The overall median value of household debt rose 33.9 percent from 2001 through 2004, to $55,300, the Fed reported. Families spent 14.4 percent of their incomes on debt service in 2004, up from 12.9 percent in 2001.
And the borrowing has only accelerated since 2004. Total household debt grew to a record $11.4 trillion in last year's third quarter, which ended Sept. 30, shooting up at the fastest rate since 1985, according to a separate Fed report.
The Fed's findings on wealth and income growth are particularly disappointing, Bernstein said, when compared with the economy's 11.6 percent growth in productivity, or output per hour of work, during the same period.
Productivity growth usually enables living standards to rise because employers can simultaneously reap higher profits and raise workers' wages without fanning inflation. Many economists, including some Fed policymakers, are puzzled by the relatively weak wage growth of recent years despite strong productivity growth.
"The last three years have been a period of impressive productivity growth and depressive changes in the living standards for most families," Bernstein said.
Zillow's Alluring Facade Is Built on Shaky Foundation
Washington Post, February 16, 2006
By Leslie Walker
When I saw a demo of the Zillow.com real estate service last month, it struck me as so obvious I wondered why no one had done it before.
Then when Zillow launched on the Web last week, I realized why.
Offering automated property valuations via the Internet turns out to be much harder than it seems -- especially if you expect them to be accurate. But after running extensive tests on this ambitious national real estate service, I found it to be so inaccurate that it's not useful.
It's hard to quibble with the company's goal -- "free, instant valuations and data for 60,000,000+ homes." You type in any address, and in most cases Zillow will spit out a free estimate of the property's market value.
But appraisers questioned whether consumers will have any idea how off-base Zillow's free valuations can be.
"What scares me is the consumer who goes out there and makes a decision based on that data," said Richard Powers, president of the Appraisal Institute, the nation's largest appraiser association with 21,000 members. "Consumers really have no way to judge the accuracy of the estimate -- that really is the problem."
Powers said his board members have had mixed results on tests they've been running since Zillow's public beta test went live. "In some areas, we found the results were fairly accurate to the value of the home. In others, we found results that were at least 40 percent wrong."
Zillow president and co-founder Lloyd Frink said the free, advertising-supported site doesn't aim to replace home appraisers or real estate agents. "It is meant as something to help buyers and sellers start a conversation."
How does Zillow work? It starts by buying massive amounts of real estate information from commercial data collectors -- home addresses, tax assessments, square footage, lot sizes, number of bedrooms, prior sales prices and the like. Then its computers identify similar homes that recently sold in the same neighborhoods and use mathematical models to compare their traits and create a "Zestimate," or "estimated market value."
Below its estimate, Zillow shows a mesmerizing array of other data, including features describing the house, a chart of estimated value over the past year and list of similar houses sold recently. You can call up scrollable neighborhood maps with images of the homes, with their values superimposed.
So far, Zillow has identified about 60 million homes and collected enough data to offer estimates on slightly more than 40 million, with more being added daily. Coverage is spotty to nonexistent for the District, Alexandria and Arlington, but plentiful for the Maryland suburbs and Fairfax, Loudoun and Prince William counties.
Trouble is, because Zillow is loaded with dirty data in some places and missing key factoids in others, its Zestimates often miss the mark -- sometimes so widely that I fear that anyone trying to buy or sell a home could get burned by relying on Zillow.
In my own random tests of dozens of local properties, I found about half of the estimates to be sharply off -- more than 10 percent off the actual recent sales price or what someone knowledgeable about the property deemed its market value to be. Many were off by 20 percent or more.
I asked a Virginia title company to randomly pick houses that went to settlement in the past week -- too soon for Zillow to have picked up those market prices -- and asked an agent to identify recently listed homes, along with comparable recent transactions, using the multiple listing system run by the Washington area's Metropolitan Regional Information System.
I found Zillow sharply undervalued one home in Fairfax Station that had sold twice in the past two years, first for $560,000 and then for $630,000. Zillow pegged its value at $499,206. Oddly, Zillow not only had the first sales price in its database but also showed it right below the flawed estimate. Zillow made the same error on a Lorton home, pegging its value at $784,793 while noting it had sold last summer for $900,000.
Those estimates were likely due to a glitch in Zillow's valuation formula, which has been overriding actual sales data too frequently, according to Stan Humphries, Zillow's director of advanced analytics. He said the formula is being adjusted to give greater weight to sale prices.
Other flawed Zestimates may have been caused by stale data on the size, age and other characteristics of houses, several of which had been remodeled. For instance, a new Lorton home on the market for $899,900 was valued by Zillow at only $394,240. I'm guessing it was because Zillow's description was missing one bathroom and two bedrooms.
Zillow offers a tweaking tool called My Zestimator that allows you to fine-tune estimates by adding data about a home, such as the size and cost of renovation work -- and then view, but not save, the modified value. I was able to boost the value of remodeled homes that way, though not enough to match the sale prices.
Zillow runs extensive analyses to calculate its own accuracy rate by comparing actual transactions as they occur with the automated estimates provided by its computerized valuation system. Nationwide, 62 percent of all Zestimates fall within 10 percent of the selling price, according to Zillow. That means 38 percent are more than 10 percent off the mark, which strikes me as significant.
Accuracy runs higher in urban areas where Zillow has more sales data and drops in rural areas where the data tends to be sparser. But the company's track record can be dismal in some metro areas, such as Baltimore, where the company's own accuracy chart shows more than half its Zestimates are 17.7 percent or more off the selling price.
Frink said he considers Zillow's national accuracy rate strong and isn't troubled by its misses. Zestimates, he said, shouldn't be considered replacements for appraisals, which are created by trained, certified professionals who go to a home to verify its traits and physically view comparable homes.
Frink predicted that Zillow, which received plenty of media hoopla when it debuted, will improve gradually as the company adds housing data and tweaks its algorithm for automated value calls.
But until Zillow gets a lot smarter, I don't recommend making it a trusted bookmark.
By Leslie Walker
When I saw a demo of the Zillow.com real estate service last month, it struck me as so obvious I wondered why no one had done it before.
Then when Zillow launched on the Web last week, I realized why.
Offering automated property valuations via the Internet turns out to be much harder than it seems -- especially if you expect them to be accurate. But after running extensive tests on this ambitious national real estate service, I found it to be so inaccurate that it's not useful.
It's hard to quibble with the company's goal -- "free, instant valuations and data for 60,000,000+ homes." You type in any address, and in most cases Zillow will spit out a free estimate of the property's market value.
But appraisers questioned whether consumers will have any idea how off-base Zillow's free valuations can be.
"What scares me is the consumer who goes out there and makes a decision based on that data," said Richard Powers, president of the Appraisal Institute, the nation's largest appraiser association with 21,000 members. "Consumers really have no way to judge the accuracy of the estimate -- that really is the problem."
Powers said his board members have had mixed results on tests they've been running since Zillow's public beta test went live. "In some areas, we found the results were fairly accurate to the value of the home. In others, we found results that were at least 40 percent wrong."
Zillow president and co-founder Lloyd Frink said the free, advertising-supported site doesn't aim to replace home appraisers or real estate agents. "It is meant as something to help buyers and sellers start a conversation."
How does Zillow work? It starts by buying massive amounts of real estate information from commercial data collectors -- home addresses, tax assessments, square footage, lot sizes, number of bedrooms, prior sales prices and the like. Then its computers identify similar homes that recently sold in the same neighborhoods and use mathematical models to compare their traits and create a "Zestimate," or "estimated market value."
Below its estimate, Zillow shows a mesmerizing array of other data, including features describing the house, a chart of estimated value over the past year and list of similar houses sold recently. You can call up scrollable neighborhood maps with images of the homes, with their values superimposed.
So far, Zillow has identified about 60 million homes and collected enough data to offer estimates on slightly more than 40 million, with more being added daily. Coverage is spotty to nonexistent for the District, Alexandria and Arlington, but plentiful for the Maryland suburbs and Fairfax, Loudoun and Prince William counties.
Trouble is, because Zillow is loaded with dirty data in some places and missing key factoids in others, its Zestimates often miss the mark -- sometimes so widely that I fear that anyone trying to buy or sell a home could get burned by relying on Zillow.
In my own random tests of dozens of local properties, I found about half of the estimates to be sharply off -- more than 10 percent off the actual recent sales price or what someone knowledgeable about the property deemed its market value to be. Many were off by 20 percent or more.
I asked a Virginia title company to randomly pick houses that went to settlement in the past week -- too soon for Zillow to have picked up those market prices -- and asked an agent to identify recently listed homes, along with comparable recent transactions, using the multiple listing system run by the Washington area's Metropolitan Regional Information System.
I found Zillow sharply undervalued one home in Fairfax Station that had sold twice in the past two years, first for $560,000 and then for $630,000. Zillow pegged its value at $499,206. Oddly, Zillow not only had the first sales price in its database but also showed it right below the flawed estimate. Zillow made the same error on a Lorton home, pegging its value at $784,793 while noting it had sold last summer for $900,000.
Those estimates were likely due to a glitch in Zillow's valuation formula, which has been overriding actual sales data too frequently, according to Stan Humphries, Zillow's director of advanced analytics. He said the formula is being adjusted to give greater weight to sale prices.
Other flawed Zestimates may have been caused by stale data on the size, age and other characteristics of houses, several of which had been remodeled. For instance, a new Lorton home on the market for $899,900 was valued by Zillow at only $394,240. I'm guessing it was because Zillow's description was missing one bathroom and two bedrooms.
Zillow offers a tweaking tool called My Zestimator that allows you to fine-tune estimates by adding data about a home, such as the size and cost of renovation work -- and then view, but not save, the modified value. I was able to boost the value of remodeled homes that way, though not enough to match the sale prices.
Zillow runs extensive analyses to calculate its own accuracy rate by comparing actual transactions as they occur with the automated estimates provided by its computerized valuation system. Nationwide, 62 percent of all Zestimates fall within 10 percent of the selling price, according to Zillow. That means 38 percent are more than 10 percent off the mark, which strikes me as significant.
Accuracy runs higher in urban areas where Zillow has more sales data and drops in rural areas where the data tends to be sparser. But the company's track record can be dismal in some metro areas, such as Baltimore, where the company's own accuracy chart shows more than half its Zestimates are 17.7 percent or more off the selling price.
Frink said he considers Zillow's national accuracy rate strong and isn't troubled by its misses. Zestimates, he said, shouldn't be considered replacements for appraisals, which are created by trained, certified professionals who go to a home to verify its traits and physically view comparable homes.
Frink predicted that Zillow, which received plenty of media hoopla when it debuted, will improve gradually as the company adds housing data and tweaks its algorithm for automated value calls.
But until Zillow gets a lot smarter, I don't recommend making it a trusted bookmark.
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