When, in the summer of 2009, the sociopath Bernie Madoff was sentenced to 150 years in prison, the news accounts proclaimed that Madoff had perpetrated the largest, longest Ponzi scheme in the history of the United States. How quickly we forget. Or – more to the point – how happy we are to let a good story take the place of hard truths. Just a season before Madoff’s unmasking, the global economy had been driven to the brink of disaster by a much bigger swindle. It was a plot hiding in plain sight, at once more complex and more obvious, with many more perpetrators and far more victims. The scam was elegantly simple, leveraging the inexhaustible hopefulness of the American Dream against the warnings of our better judgment. Tens of millions of people were eager to buy into the idea that we could keep building homes far from any services or jobs, and that these properties would keep appreciating in value – forever. I like to call this particular Ponzi scheme “the US suburban housing market.”
The contours of the housing bubble’s rise and fall have become clearer from the vantage of the wreckage. For decades, city councils and county supervisors, ever eager for more property tax revenues, floated bonds to pay for the streets and sewers to accommodate home building – and then had to keep borrowing to fund even newer housing developments that would supply the tax base to pay off the previous loans. Homebuilders were more than happy to play the game. They constructed millions of homes on spec, even when the homes – their large size and far-out locations – were completely mismatched with the needs of US families, which were shrinking. With an excess supply of houses, someone had to gin up demand for all those lots. Enter an army of shifty mortgage companies and predatory lenders who helped sell homes to people who had no way to pay for them. In Washington, Alan Greenspan kept the party going by maintaining interest rates at all-time lows, igniting a debt binge. On Wall Street, financiers created all kinds of esoteric “investment vehicles” that shoveled even more credit into the maw of the real estate market. Loads of people got rich.
Then the music stopped. Since the end of 2006, nearly 6.5 million homes have been lost to foreclosure and more than 4 million homeowners are “seriously delinquent” on their mortgage payments. Roughly a quarter of homes in the United States are underwater; the value of the property is less than what’s owed on the mortgage. The single family home, once a family’s most important asset, has become a financial liability for tens of millions of people.
photo Inman News
By now a shelf’s worth of books have been written about how this came to pass. The insider accounts offer a perverse tale of how the “false economy” – the Wall Street whirlwind of credit default swaps and mortgage derivatives and wanton speculation – kneecapped the real economy – the place where people make goods and services that have actual uses. The investigative exposés are essential reading for anyone who wants to understand how late-stage capitalism works.
And yet they fail to tell the whole story. I have read a number of those books, and I looked in vain through their pages for a phrase that I suspected would be there: “rising gas prices.” This seems to me a stunning oversight. The mainstream narratives of the real estate collapse neglect a crucial fact. They don’t note that everyone involved – from the Goldman Sachs vampires, to the boiler room loan sharks, to local homebuilders and federal officials – shared the assumption that gasoline would stay cheap enough to subsidize houses in the middle of nowhere.
Perhaps it’s because Marx is unfashionable among the reporters who cover the financial markets, but the exposés all miss an essential fact: Our economy remains grounded in material resources. It has become common to compare the 2007-2008 meltdown with the Crash of 1929 or the Great Panic of 1873. The comparison is useful, to a point. There’s an important difference, though. During the earlier contagions of panic a mentality of scarcity overshadowed a genuine abundance of natural wealth. Think of the Depression-era farmers pouring out good milk because there were no buyers for it. But the age of abundance is over. Today we are in the midst of actual scarcity, at least when it comes to the essential material of our civilization – oil.
If American suburbia was raised on easy credit, it was suckled on cheap gasoline. To borrow from the language of accountants, our oil addiction is what you could call an “off- balance-sheet risk.” Now that risk is being reckoned. The US economy slammed into a brick wall because, in part, the housing market had reached the limits of growth. There was no more cheap fuel to keep it expanding.
The $100 weekly gas bill has dealt a fatal blow to the suspension of disbelief on which the real estate Ponzi scheme always relied.
The far-flung reaches of suburbia also have reached the limits of believability. It turns out that a 3,000-square-foot home a one-hour drive from work isn’t really such a bargain – not when gas is $4/gallon, not when transportation is the second biggest cost for the average American household. Real utility has corrected imagined value: There’s no use in spending your life savings on an oversized shelter if you can’t afford to even get there. The $100 weekly gas bill has dealt a fatal blow to the suspension of disbelief on which the real estate Ponzi scheme always relied.
Elementary geology: the fossil fuels on which we have built our entire civilization won’t last forever. The Peak Oil-ers who are determined to remind us of this law of nature have been waiting with undisguised glee for the day when the price of oil would catch up to the suburbs. James Howard Kunstler, the most acerbic of the Peak Oil contingent, calls suburbia “the greatest misallocation of resources in world history” and “a living arrangement that had no future.” It appears that we’ve arrived at that dead-end.
Total global production of “conventional” petroleum reached its all time high in 2005 and since then has remained steady – evidence that the laws of supply and demand will force some version of a petroleum plateau rather than a sharp peak. There’s still plenty of oil left on the planet. That is, as long as we’re prepared to grub for the deposits of hard-to-get, “unconventional” fuels under the boreal forests of Canada, locked in the savannahs of Venezuela, or hidden in the deep waters off Brazil. Even if we do – and fry the globe in the process – the era of cheap and easy oil is over. And since cheap and easy has always been the dominant ideology of suburbia, the suburbs (or at least their farthest fringes) are seeing the end of their best days.
Take a look at the numbers. In 2001, when the Federal Reserve opened the credit spigot that led to the mortgage mania, gas was at a national average of $1.50 a gallon. By the spring of 2007 – as many adjustable rate mortgages were resetting at higher rates – the price of gas had risen to $3 a gallon. It might be hard to imagine that a doubling of monthly fuel costs would cause a wave of defaults. But consider this: In 2005, two-thirds of borrowers at Countrywide, one of the nation’s biggest mortgage firms, put no down payment on their homes. That same year, 29 percent of all mortgages in the US were negative-amortization loans, taken out by people who had so little cash that they were willing to tack their interest payments onto the principal. And they were taking out those loans even as their incomes were stagnating or declining.
To break it all down: Millions of people went into debt buying homes they couldn’t afford and, since they were nearly broke already, they had no way to cover a spike in their gas bills. Something had to give. For families spending a quarter of their earnings on transportation, the choice came down to their house or their second home – the car.
The evidence of the collapse is all around us: The weedy lots in the California subdivisions; Florida’s empty McMansions that have been stripped for copper wiring; the newly built Las Vegas neighborhoods that are uninhabited. “Gated Ghettos” is how one dark-witted real estate agent described these places to the Los Angeles Times. According to the US Census Bureau, the suburban poverty rate is at its highest level since 1967, when the government began keeping such statistics. Christopher Leinberger, a fellow at the Brookings Institution, has written that the outer ring suburbs are poised to become America’s next slums, “characterized by poverty, crime, and decay.”
A few studies show how this is happening. A 2008 white paper from a group called CEOs for Cities notes that “as gas prices sustained [a] higher level and then increased in 2006 and 2007, first to $2.50 and then to $3, housing price inflation collapsed, and, indeed turned negative.” The suburbs on the farthest edge were hit hardest. “Our analysis … finds that prices have declined most in the most distant neighborhoods,” the paper says. Another study by the Center for Neighborhood Technology confirms this trend. The center mapped every foreclosure in the Chicago area from 1998 to 2009 and found that the farther houses were from downtown, the higher the rate of foreclosures. As gas prices kept climbing, the “drive-until-you-qualify” mentality hit a roadblock. The homes out in the exurbs were a “bargain” only as long gas stayed inexpensive.
Of course, coincidence doesn’t equal causality. Did a spike in gasoline prices provide the spark that engulfed an overleveraged debt system? Or were financial shenanigans the catalyst that collapsed a structure overdependent on fossil fuels? As Alex Steffens, an ecological urbanist, put it to me: “The answer is probably D: All of the Above.”
What matters now is that persistently high gas prices (holding steady between $3.50 and $4 a gallon through much of 2011) are serving as a drag on the economy. The recovery remains stalled, and many economists agree that the weakness in the housing market is a major cause, as depressed home prices dampen spenders’ confidence. CEOs for Cities reports: “The new calculus of higher gas prices may have permanently reshaped urban housing markets.” Arthur C. Nelson, a professor at the University of Utah and an expert on urban development, has done the math to prove the point. He figures that, nationally, there is a surplus of 25 million homes and large lots. Supply for many properties outstrips demand. People aren’t interested in living on the suburban fringe anymore.
The Brookings Institution’s Leinberger pointed out to me that, in 2000, big homes on large lots outside of Washington, DC were worth 25 percent more than townhouses in Dupont Circle, in the heart of the capital. By 2010, the urban townhouse was worth 70 percent more than the house in what Leinberger calls “horsey country.” “The lines crossed,” he says. “There has been, in essence, a structural shift.” Our cities are transitioning toward a European model, where the affluent live in the central core while the poor, ethnic minorities, and recent immigrants are shunted off to the hinterlands.
Leinberger told me he doesn’t believe that high gas prices are driving this trend, but rather accelerating it. For families who were the last to buy into the outer ring suburbs – the latecomers to the Ponzi scheme – it makes little difference. They are still seeing a decline in their assets, their world turned inside out. The suburbs, once imagined as a refuge, have become more like a trap. To be living in a home that’s underwater is just another way of saying that you’ve been shipwrecked and stranded.
Few places exemplify the suburban predicament as well as Stockton, California, a “city” of 300,000 people slung along the banks of the San Joaquin River. A hundred years ago, the place was an important inland port that transported Central Valley harvests down to the San Francisco Bay. Today, the town’s elegant Magnolia District is a remnant of that era of natural wealth. But most of Stockton – which doubled in population since 1980 – has outgrown its functionality. There are still jobs to be found in agriculture. For undocumented Mexicans, poorly paid work in the fields; for dudes with a high school diploma, maybe a forklift gig at the Big Ag warehouses. Aside from that, there’s little local industry. Many Stockton residents spend a lot of their time commuting: either crossing the Altamont Pass to get to work in Silicon Valley or driving 50 miles north to fill one of the dwindling number of government jobs in Sacramento. Everyone else peddles services to each other, or sells stuff made in China.
photo flickr user Morisius Cosmonaut
One out of five people in Stockton is unemployed. The city routinely ranks among the top ten communities for home foreclosures and as many as 75 percent of properties are underwater. Forbes magazine has dubbed it the “most miserable” place in America.
As the era of scarcity lengthens, Stockton’s vulnerability to costly gasoline has become obvious. “If you live over here, gas price is everything,” Randy Thomas, a real estate agent, told me. “It’s killing us. It’s crazy. Someone is spending $700 to $800 a month just for fuel for one car, if they have an SUV. And a lot of people are charging it. The gas on their credit card bills work into their debt-to-income ratio.”
Thomas tells me that “people are going to start making bigger sacrifices for energy.” In a place built on the commute, everyone gets hit in some way. The affluent decide they have to pull the kids out of private school. The middle classes are forced to give up the dinners out and the yearly vacation. The poor are shifted onto the rolls of the local charities. “People might think that this just hit the low income,” a Stockton developer named Carol Ornelas says. “Nu-uh. This happened across the board. This is the whole middle class that is collapsing.”
A gloom has settled over the place. For many people, success has been redefined to simply mean survival, Thomas says. Ornelas says, “This is the worst it’s ever been, and I’ve been here 26 years.” Food pantries are struggling to keep up with a spike in demand; charities are having to help people meet their healthcare and utility bills. “There’s no end in sight, things are going to get worse, and families are afraid,” a longtime Stockton social worker named Elvira Ramirez told me. “Families – I don’t want to say despair – but they don’t know where to turn to.”
Still, optimism is the signature American character trait, and the people of Stockton are trying to stay hopeful that eventually the situation will turn around. “We have to not be hopeless,” Ramirez says. “We have to do the best we can.” For the most remote neighborhoods of Stockton, “the best they can do” will involve a wholesale rethinking of what suburbia is supposed to look like. Whenever it comes, the recovery will not be a restoration of the cheap-oil status quo. It will be more of an evolution to a different way of life. Professor Nelson imagines that many houses in suburbia will be converted from single-family homes to multiple-family dwellings. Big houses will become apartment buildings; private yards will be turned into commons. To survive what could be $8 a gallon gas by 2020 (if current growth rates continue), people would have no option but to pile up. Think of it as the remodeling of the American Dream.
To be living in a home that’s underwater is just another way of saying that you’ve been shipwrecked and stranded.
And what of those places that might be unsuitable even for redesigning? They will be abandoned. If that sounds overstated, just take in this fact: After being the fastest-growing regions of the country for decades, the Sun Belt is beginning to experience an out-migration. In the last three years, Florida has experienced its first net migration loss since the 1940s. Same with Las Vegas. Arizona is just barely holding on. “If nobody can buy or sell their homes, there’s going to be a stagnancy,” a demographer at the Brookings Institution told The New York Times when the migration statistics were published.
Much of what we’ve built, it turns out, is worthless.
In classic tragic form, much of this pain could have been avoided if only wisdom had overcome hubris. For decades, a minority chorus of designers, urban planners, environmentalists, and a few enlightened leaders warned about the consequences of building homes for the sake of building homes – “the ideology of the cancer cell,” in the unforgettable words of Edward Abbey. As they’ve been saying, we know how to build better and, given what we’ve already built, how to retrofit. We can turn urban brownfields into high-density neighborhoods that combine housing, shopping, and services. We can pull out a lane of traffic and make rapid transit bus routes. The suburban garages can become in-law units. The freeway right-of-ways can get turned into light rail corridors. The golf courses might become community farms. “Forget about a dream house,” writes Nick Aster, editor of the website TriplePundit. “Think about a dream neighborhood.”
These ideas are off-the-shelf and shovel-ready. Which is not to say that implementing them will be easy. Not when thousands of homeowners associations around the US prohibit rooftop solar panels and backyard clotheslines. Not in places where neighborhoods don’t even have sidewalks. The work of rebuilding an outdated world will be grueling. The transition – what Peak Oil-er Kunstler has dubbed ‘The Long Emergency” – will demand a whole new valuation of things. In a world restored to limits, our priorities will change. Craftsmanship will once again be worth more than cleverness. Useful skills, the ability to build and grow things, will take precedence over the exchange of complex services. Place will become more important than size.
As we are learning the hard way, this process will be painful. Our best hope is that it will be cathartic, too. The meltdown of the housing market, as horrible as it has been, can serve as a long overdue wakeup call that, despite our dreams, we remain tethered to the natural resources of Earth. It’s a reminder that we can’t pull riches out of thin air. It’s proof that our society’s wealth always has, and always will, come from the body of the world.
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