In fringe suburbs, has economics trumped the appeal of new?

The recession and the burst of the housing bubble have stopped development in many fringe suburbs. With many urban neighborhoods on the rise, some suggest that fringe suburbs are on the decline. Has simple economics surpassed the appeal of “new” in the hinterlands?

There’s been a lot of chatter around the blogosphere about Christopher Leinberger’s New York Times op-ed that I think really hits the nail on the head when it comes to the issue of what’s ahead for fringe suburbs.

Basically, the hypothesis presented is that fringe suburbs are headed downward, and I think this piece of evidence is really the most damning:

Many drivable-fringe house prices are now below replacement value, meaning the land under the house has no value and the sticks and bricks are worth less than they would cost to replace. This means there is no financial incentive to maintain the house; the next dollar invested will not be recouped upon resale. Many of these houses will be converted to rentals, which are rarely as well maintained as owner-occupied housing. Add the fact that the houses were built with cheap materials and methods to begin with, and you see why many fringe suburbs are turning into slums, with abandoned housing and rising crime.

Leinberger goes on and cites several examples of urban neighborhoods that have transformed from slum to hip in recent history: Capitol Hill in Seattle; Virginia Highland in Atlanta; German Village in Columbus, Ohio; and Logan Circle in Washington.

I don’t know much about Capitol Hill or Virginia Highland, but I do know something about Logan Circle and German Village. One very important (and I think non-trivial) quality that they share is that they both have a high quality, durable housing stock that has held up very well, given its age, all things considered.

When I think about what made cookie cutter houses in suburbs appealing to people, in addition to the square footage and the yards and the school systems, I really suspect that one of the things that people were drawn to was the absolute “newness” of everything. People love having new stuff — new appliances, new counter tops, new floors. When stuff is brand new, it’s almost guaranteed to be in style. When it’s brand new, it’s not in need of immediate repair. There’s a lot to like about brand new.

The problem though, as Leinberger notes, is that fringe suburbs were literally built on the cheap. They may have looked nice initially, but the drywall they used to throw up houses in Prince William County is not the same as the brick they used to build rowhouses in Dupont Circle. At the time, the appliances they put into new suburban homes might have been nicer than what was in old urban houses, but appliances can easily be replaced, structures can’t.

Around DC, a lot of old rowhouses have gone through the process of renovation — some have gone through many renovations since originally being built. The interiors have been gutted, redesigned and rebuilt, but the physical structure is generally the same. These houses were built to last, I can only imagine what a cookie-cutter house on the suburban fringe might look like in 100 years. The rowhouses in DC that have been re-built look beautiful, easily as nice as what got built in the suburbs during the boom.

At one point, the suburbs looked so much “nicer” because that’s where the building was — that’s where stuff was brand new. That’s not necessarily true anymore. Now, some of the newest, shiniest stuff is right in the heart of the city.

I was reminded of this when I saw this article in the Plain Dealer last month. The author makes the case that there’s more demand for housing in downtown Cleveland than the market can keep up with. A lot of folks will use this as evidence of a downtown renaissance, I think it says that people are no longer afraid to live downtown (something that was true in Cleveland for many years) but I also suspect it has something to do with the quality of downtown housing.

While it seems true that downtown Cleveland is doing well, many other urban Cleveland neighborhoods are not doing well at all. The apartments and condos popping up downtown are all brand new, beautifully renovated spaces. The houses in Cleveland’s urban neighborhoods, on the other hand, are much lower quality. Compared to Washington’s rowhouses, they’re downright terrible. I suspect that many of Cleveland’s houses are also below replacement value. The only hope is to knock them down, and that’s exactly what’s happening.

When I studied home prices in Cleveland a few years ago (pdf), I found that while downtown was in fact the neighborhood in the city with the highest prices, there was nevertheless a positive relationship between home price and the distance from the city center. In other words, the farther from downtown you went, the higher the price of homes. It was “drive til you qualify” in reverse.

I think the future of suburbs as Leinberger imagines them is going to look like some of Cleveland’s neighborhoods today - Hough, Mount Pleasant, Cudell — places with generally poor housing stock that isn’t worth fixing up. Places where crime is frustratingly high, where most of the housing that isn’t vacant is renter-occupied, and where few are willing to make any investment.

Is it true to say that millennials and baby boomers have a taste for urban living? I think there is good evidence to support that theory, but it’s clearly the case that they don’t want to live just anywhere in the city. Nobody wants to live in a slum, and the type of homes that people want has to meet at least a certain threshold of quality.

In high-cost cities, like DC, that’s not so hard to pull off. A $200,000 rowhouse rehab might be well worth the cost when you can turn around and sell the house for half a million or more. A similar job simply doesn’t make any financial sense in a city like Cleveland. In fact, the Plain Dealer article above specifically says that developers aren’t building in downtown Cleveland without government incentives because the rents are too low to support the kind of investment they need to make.

I think the more realistic assessment of suburbs and cities is that some suburbs will see a precipitous decline, some urban neighborhoods will experience a renaissance, and the degree to which each happens will be highly dependent on local market conditions. In other words, it will happen, but it won’t be as clear cut as the magazine articles might lead you to believe.

Crossposted on Extraordinary Observations.