New Urbanism vs. Free Enterprise

A response that is often raised to new urbanism is what I call the Coercion Myth.  It can be expressed in several ways.  Sometimes we hear that new urbanism is an effort by liberals to force everyone to live in the style that the liberals prefer.  Other times, we hear that if there is a legitimate market desire for new urbanism, then the free market will meet that need.  An alternative on the last point is the argument that any rules that encourage new urbanism are inappropriate because “Government shouldn’t pick winners.”

Let me lay out my philosophy right here.  I love the free market.  There is no better force for creative problem solving than a free market that rewards success.  There always has been and always will be a need for government regulation to protect us from dangerous products or fraudulent practices, but the market should have as few controls as possible.  (Of course, there can be many arguments about the meaning of “as few controls as possible”.)

But the argument that the marketplace should decide between greenfield* development and new urbanist projects is moot.  The government already picked a winner.  Starting during the Depression and continuing until today, governmental policies have consistently favored greenfield development.  It wasn’t a top-down decision to favor greenfield projects.  It was a gradual accretion of policies.  But it had the same effect.  Let’s review some of the key elements:

·         Gasoline: That gasoline is subsidized by governmental policies, allowing folks to drive longer distances to greenfield homes, is the principal argument of many environmentalists against greenfield development.  We could spend days on this topic alone, but I’ll just note a few areas of subsidy: tax benefits for oil exploration, military costs incurred in protecting oil shipments, and the external environmental and health costs of gasoline usage.  Depending on how the various subsidies are computed, one source estimates the true cost of gasoline somewhere between $6 and $15 per gallon.

·         Streets: Initial construction of streets is now typically funded by the developers of new projects and the builders of new homes and other buildings (they’re not always the same).  However, the costs for maintenance and eventual reconstruction of streets are paid from property taxes.  Whether you drive all over town doing errands or have found a way to do many of your daily tasks on foot, the same proportion of the property taxes you pay are allocated to street maintenance, which is effectively a subsidy from urbanist projects to greenfield projects.

·         Mortgages: Although not all mortgages are eventually sold to Fannie Mae or Freddie Mac, their mortgage standards are key yardsticks in the marketplace.   And their rules have consistently favored single-family homes.  Doubt me?  Call your mortgage broker and ask whether it’ll be easier to get a mortgage for a $400,000 single-family home surrounded by a white picket fence or a $400,000 condominium above a restaurant.

·         Infrastructure: A tenet of contemporary land use is that developers must pay for upgrades or extensions of required infrastructure.  These are streets, water, wastewater, stormwater, electricity, etc.  Of course, this seems a reasonable condition and might even seem to favor new urbanist projects which are typically located nearer to existing infrastructure.  In practice however, existing downtown infrastructure is often undersized and/or nearing the end of its useful life.  Cities, which would otherwise be required to replace or upsize the infrastructure with shrinking tax dollars, are happy to require new urbanist developers to do the infrastructure work.   Furthermore, downtown infrastructure replacement must often be accomplished around existing improvements while maintaining existing traffic and utility services, which results in higher costs.

·         Construction liability: The nature of homeowners associations and construction law makes it far more likely that condominium builders will be sued for construction defects than single-family home builders.  The market bias is so severe that many contractors, who might regularly build multi-story buildings for other uses, are not allowed by their insurance carrier to build condominiums.  I previously worked at a consulting firm where the insurance carrier dictated that no more than ten percent of annual billings could be on condominium projects.  There was no parallel limitation on single-family projects.  Developers can avoid the condominium construction defect problem by building apartments instead, but that leads right to the next point.

·         Mortgage deduction: As an incentive to increase home ownership during the Depression, the federal government began allowing a deduction for mortgage interest.  By the time the economy was again healthy, the mortgage interest deduction (or loophole depending on one’s perspective) was deeply engrained and has never been seriously challenged.  Whether it’s good public policy, I’ll leave for others to discuss.  However, I’ll note that it incentivizes home ownership, while construction liability encourages urban developers to build apartments rather than condominiums, with the net effect that families with sufficient resources to buy homes are effectively directed toward greenfield developments.

·         Project size: I feel strongly that new urbanism projects shouldn’t be large.  When I hear of a 20-acre single-family project, I shrug.  It’s a fairly typical type size for a development type in which the potential economies of scale are significant.  But when I hear of a 20-acre new urbanist development, I shudder.   New urbanism should be an organic mix of different development philosophies that blend to become greater than the sum of the parts.  No single developer, no matter how bright or motivated, can achieve that organic feel.  And yet the entitlement process is structured on a project basis.  Many of the required studies, such as traffic, acoustic, or habitat, are required for each project.  A single 20-acre greenfield project could be expected to have far lower entitlement costs than five 4-acre urbanist projects, despite having the same developed area.

·         Impact fees: Most municipalities allow lower impact fees for multi-family projects than single-family, which is reasonable and a benefit to most urbanist projects.  However, many of the impact fees are the same for greenfield multi-family and urbanist multi-family, which neglects the reduced transportation impacts expected for urbanist projects.

·         Hazardous materials: Many sites that are best located for urbanist projects have been contaminated by past land uses.  Some sites are former rail yards.  Others were filled a century ago by debris covered in lead-based paints.  These hazardous materials must be cleaned up or otherwise mitigated before construction.  If the owner of the site when the pollution occurred is known, then he is responsible for the cleanup.  But for many urbanist sites, the hazardous materials were deposited in the faded and distant past, leaving the developer responsible for the cleanup, at a cost that is never incurred on a greenfield project.

The relative impact of these elements will vary depending on the municipality and the site.  Also, some incentives are becoming available, including grants and expedited entitlements, which attempt to redress the market biases.  However, as is typically the case with solutions such as these, they are only bandages.

I’m not a conspiracy theorist.  In fact, I’m pretty much the opposite of one.  I don’t believe that there was a vast, secret cabal of oil companies, automotive manufacturers, and single-family homebuilders who worked in smoke-filled rooms to ensure that single-family homes gained a market advantage over urbanist projects.  Instead, I believe that the favoritism toward single-family homes was an unintended consequence of years of well-intended legislation and rule-making.  Unfortunately, we can be slow to recognize when our accumulated policies have run off the track and to devise appropriate corrections.

Those of us who think that new urbanism should have a role in our communities have two tasks.  The first is to speak out against the biases that aggregated within the governmental processes.  It’ll be an often frustrating and unrewarding task because progress will be fitful, but it is necessary work.  The second is to advocate, even if it just means writing letters to city hall, for the urbanist projects that are making headway.

Lastly, I don’t think that everyone should live in an urbanist project.  I think folks should be able to live wherever they wish as long as the external costs of their decisions are internalized to the greatest extent possible.  But I don’t think that the government, however inadvertently, should tilt the playing field toward one project type.

As always, your questions or comments will be appreciated.  Please comment below or email me.  And thanks for reading. - Dave Alden (davealden53@comcast.net)

* Greenfield development is my general term for single family subdivisions on the developed fringe.   There are a range of housing types that can be gathered under the umbrella of “greenfield development”.  The same is true of new urbanist projects.  I’ll sometimes use a dichotomy of greenfield versus new urbanism, but will readily acknowledge that it’s simplistic.  Humor me.