Land Use Prof Blog

Zingales on the Menace of Strategic Default

Luigi Zingales (U. Chicago--Business) has an interesting article in the latest City Journal called The Menace of Strategic Default: Homeowners who walk away from their mortgages undermine our financial system.  The idea of "strategic default" is that it might be economically rational for owners of underwater mortgages--where the debt owed is greater than the market value of the home--to walk away, even if they can in fact afford to keep making payments.  Zingales looks at the numbers and surmises that while still low, the number of such "strategic defaults" is on the uptick.  He posits that the only thing preventing a mass movement of strategic defaults is the lingering American normative disapproval of failing to pay debts:

What does prevent people from strategic default, it seems, is their sense of what’s right. More than 80 percent of Americans think that it’s immoral to default on a mortgage if you can afford to pay it, according to a recent paper by Luigi Guiso, Paola Sapienza, and myself, and these people are 77 percent less likely to declare their intention to default strategically than people who don’t find the act immoral.

Zingales is concerned that a breakdown of this social norm could put the entire system at risk.

How much risk? If the underwater homeowners who currently refuse to default changed their minds and decided to abandon their mortgage commitments, the results could be catastrophic. The more people walk away, the more houses get auctioned off, further depressing real-estate prices. This additional decline would push more homeowners into negative territory, leading to still more defaults.

To prevent the catastrophe resulting from such a normative breakdown, Zingales and Eric Posner offer a proposal:

Eric Posner and I have proposed a simple solution to the problem of underwater mortgages. We envision a reform of the bankruptcy code that, in areas where house prices have dropped precipitously, would require lenders to give homeowners the option of resetting their mortgages to the current value of their houses. In exchange, the lenders would get 50 percent of the houses’ future appreciation.

Interesting analysis; read the whole thing.

Matt Festa

Local Growth Politics and The Real Estate Meltdown

In my previous posts, here and here, I discussed the nature of local growth politics in southern California and elsewhere.  The central dynamic of local growth politics nationwide is the conflict between developers and homeowners about whether, where, and what form new development should take.  This dynamic presupposes that growth is something perpetual and that the critical issue is how to "manage" growth in the same way we would use dams and levees to manage a raging river.  The history of Los Angeles and other sunbelt cities certainly gives us much reason to believe that growth is indeed inexorable unless some force of nature (such as extremely arid or mountainous terrain), some accident of history (such as the huge landholdings of the Irvine company), or some political movement (such as the environmental and slow-growth movements of the 1970s and 80s), applies the brakes.  And according to the "growth machine" school, even these latter forces can only re-direct or temporarily slow growth.

The events of the last few years, however, have cast doubt on whether growth is in fact perpetual and inexorable, as we are now seeing ghost-town residential subdivisions appearing on the fringes of many once booming cities and established neighborhoods becoming gap-tooted with boarded up, foreclosed homes.  It was no force of nature, political movement, or accident of history that caused this downturn, however, but rather the very idea that growth was going to continue perpetually.  As property values were increasing up to 30% a year, interest rates were low and mortgages were easy to get even for the worst credit risks, real estate began to be seen as a fool-proof and inflation-proof investment, with no thought that there would eventually be a market correction.  Unbounded optimism about growth drove real estate values higher until the now-infamous "bubble" burst.  Today we look back on this bygone era as some sort of extended Ponzi scheme, and those who peddled the benefits of growth as glorified scam-artists.  Many are calling for more stringent regulation of the mortgage-backed securities market, prosecution of predatory lenders, or the deconstruction of the long-cherished ideal of homeownership.

As part of the postmortem on the real estate crisis, we should question what the future of growth politics holds.  Will NIMBY homeowners become more favorably disposed to development as growth-driven revenue slows to a trickle?  With property values collapsing, will homeowners begin to challenge the suite of public policies (highway subsidies, mortgage interest deductions, Euclidean zoning, etc.) that have long reified the idea of homeownership?  Will developers see the need to build high-density transit-oriented development rather than undertaking speculative homebuilding in the exurbs?  Will they work with community groups to avoid costly delays as their profit margins get thinner?

We can only speculate as to the answer to these questions, but my research leads to the preliminary conclusion that no, the dynamics of growth politics have not substantially changed.  To the contrary, anecdotal evidence suggests that the real estate slowdown may deepen the existing animosity between developers and homeowners.  On one hand, the real estate downturn has resulted in increased cynicism about the traditionally pro-growth policies of local governments.  In Florida, a grassroots movement called “Hometown Democracy” is pushing a ballot measure for November 2010 that would require voter referenda on all amendments to a general plan.  In its campaign literature, Hometown Democracy argues that land use control needs to be taken out of the hands of local officials, whose habit of “rubberstamping speculative plan changes” caused Florida’s “destructive boom-bust cycle.”  On the other hand, influential students of urban development like the New Urbanist scholar Andres Duany have pinned the blame for  the real estate crisis squarely on NIMBY homeowners, who supposedly perpetuated sprawl to safeguard their own lifestyle.  In short, the anecdotal evidence indicates that the polarized discourse of growth politics is unlikely to subside any time soon.

I invite you to share your own thoughts about how, if at all, the real estate crisis may alter the dynamics of local growth politics or other aspects of land use law or policy. 

Ken Stahl

Red Clay Conference

Last Friday was UGA's annual Red Clay Conference.  This student-organized conference is always a blast, and I often have the honor of moderating a panel.  The conference gets its name from the red Georgia clay, and the theme is always environmental.  This year's theme was "Three States, One River: Exploring the Tri-State Water Dispute."  The three states are Alabama, Florida and Georgia, and the river is actually a river system, the Apalachicola, Chattahoochee, Flint. 

I wasn't able to stay for the whole day, but in the morning I sat in on a fascinating presentation by participants in a stakeholder negotiation process that is happening alongside the (inevitable, it seems, for these types of water resource disputes) litigation.

Then I moderated a panel called "Is Atlanta Really the 800 Pound Gorilla?"  As you might imagine, this is a loaded question.  There is much controversy in the region about how to allocate water resources to provide drinking water for Atlanta, water for power generation for Alabama, and sufficient water supply to protect the ecosystem (and fishing industry) in Florida.  Our distinguished panelists included the lawyers who represent Atlanta and the State of Georgia in current litigation over Lake Lanier (which until a recent court decision was a primary water source for several counties and municipalities in North Georgia.)  Needless to say, it was a lively discussion.  My friend and colleague Gil Rogers from Southern Environmental Law Center was an audience favorite, and not just because he does comedy improv in his off hours. SELC has done some great work on the tri-state dispute over the years.  At any rate, all the panelists were incredibly articulate, passionate, and interesting.

The keynote speaker was Joseph Dellapenna of Villanova University School of Law who spoke about potential ways forward in the dispute.  The most interesting, and least practical, option he discussion was that the US Supreme Court could settle the dispute if it was asked to exercise original jurisdiction over a dispute between states. (Blast to Civil Procedure past, anyone?)  However, since they've been litigating that case since the 1920s, that's probably not the most expedient solution.

Jamie Baker Roskie

"Boomburbs" and Local Growth Politics

In my previous post, I briefly sketched the thesis of my recent paper on local growth politics.  Here, I want to provide some important background for the project.  Those of us who study land use and local government tend to believe that local politics are dominated by homeowners, who disproportionately participate in local politics, either by vote or otherwise (such as appearing at a hearing to oppose a rezoning request), and whose participation is motivated solely by their own self-interest as homeowners.  That is, homeowners will advocate whatever local policies will boost property values, lower property taxation, ensure quality schools for their children, and protect neighborhood quality of life.  Usually, this means that homeowners support growth controls, exclusionary zoning policies that enable communities to screen for wealth, and opposition to almost any new development.  The thesis that "homevoters" control local government was most recently articulated in William Fischel's influential book, The Homevoter Hypothesis, but it is also amply supported by other important scholarship and caselaw. 

As Fischel points out in his book, the homevoter hypothesis really only works in relatively small suburban communities where homeowners can be assured of dominance.  It works less well in large, more diverse cities.  But Fischel assures us that this fact does not diminish the importance of his thesis because, after all, only 25% of the nation's population live in cities larger than 100,000 residents.  We are, in other words, a suburban nation full of homevoters.  Again, land use caselaw seems to support Fischel here, as so many of the important land use cases deal with small suburban communities attempting to use their zoning powers to maintain their suburban character.  Scholarship on land use and local government, likewise, frequently bemoans the exclusionary practices of small suburbs and the increasing fragmentation of metropolitan regions brought on by the proliferation of such small suburbs.

Having been steeped in this literature, I could not have been more surprised when I started reading a book by Robert Lang and Jennifer LeFurgy entitled Boomburbs: The Rise of America's Accidental Cities (2007).  According to the authors, Fischel's depiction of small suburban communities dominated by homevoters completely ignores what was (at the time) the fastest-growing, highly populated, and most politically influential region of the country, the Sunbelt.   Most communities in this region are neither small suburbs nor conventional big cities but "boomburbs," large, incorporated cities of over 100,000 that are "suburban" in density and attitude but "urban" in size and diversity (ethnic, architectural, and otherwise).  The authors argue that these boomburbs are  far too large and diverse for homevoters to dominate; instead, boomburb politics are driven by the "growth machine," a matrix of interests that profits from development, including politicians, developers, construction companies, unions and the media.  It is not only size and diversity that weaken the influence of the homevoter; boomburbs virtually all use at-large voting systems that tend to dilute the influence of neighborhood homeowners' groups and maximize the influence of deep-pocketed developers.   

Lang and LeFurgy's book was a revelation, but something about their argument struck me as far too simplistic. A significant plurality of the boomburbs the author identify are right here in southern California. Indeed, southern California has often been considered an archetype of the "growth machine" thesis.  However, southern California has also been labeled the birthplace of the NIMBYs ("Not in My Backyard,") a somewhat more pejorative name for Fischel's homevoters, and writers like Mike Davis have chronicled the bitter growth wars southern California has endured over the past several decades as developers have done battle with affluent homeowners.  It occurred to me that Lang and LeFurgy were ignoring something crucial: In the sunbelt, and in southern California specifically, "homevoters" who are dissatisfied with the "growth machine" and the at-large system can use the initiative process to put the brakes on growth. In fact, homeowners in southern California have passed scores of slow-growth initiatives after the passage of the epochal (or apocalyptic) Proposition 13, which itself was partially the result of strong anti-growth sentiment.  So there seems to be an uneasy equilibrium between development interests and homevoters in places like southern California, brought about, at least in part, by the co-existence of at-large voting and the initiative process.  Making matters even more interesting, I discovered that both at-large voting and the initiative process were enacted as part of the Progressive movement's effort to reform local politics.  This signaled that despite the opposition between pro-growth and anti-growth interests built into the political structures of boomburbs, there might be some underlying continuity as well.  Indeed, that continuity became my thesis, as you can see from my previous post.   You can also download the paper here.

Ken Stahl

The Artifice of Local Growth Politics -- Part I

Many thanks to Matt and the rest of the editors at the Land Use Prof Blog for inviting me to "guest blog" here about my paper on local growth politics.  You can find the abstract and a link to the paper here or here.  Let me start out by saying that the folks here at the Land Use Prof Blog have been doing a great job.  The site is continuously updated with important and interesting developments in land use law.  For me, the site is a must-read every day (especially now that I'm posting!) 

In this post, I'll just say a few words about the paper's thesis, then outline where I hope to go in the next few posts.  Evidence abounds that local politics are riven by conflict between developers, who push municipalities to pursue growth, and homeowners' groups, aka NIMBYs, who resist growth in or near their neighborhoods.  There is substantial disagreement, however, about who "really" runs things in local politics, with developers arguing that they are unable to accomplish anything over the incessant objections of pampered homeowners, and neighborhood groups complaining that their concerns are totally ignored by developer-friendly bureaucrats.  The conflict between developers and homeowners -- and confusion about who has the upper hand between them -- is especially acute in regions like southern California, which serves as a case study in my paper.  I argue that politics in southern California have been structured in a way that heightens, rather than alleviates, the inherent tension between developers and homeowners.  On one hand, most southern California cities use at-large voting systems, which maximize the influence of developers and dilute the influence of neighborhood groups.  On the other hand, all California cities retain the right of local initiative, which slow-growth groups have used with increasing effectiveness in recent decades to counteract the pro-growth tendencies of the at-large system.

The juxtaposition of at-large voting and the local initiative thus enhances conflict between developer and homeowners.  However, my research reveals that beneath this conflict there is a fundamental continuity between at-large voting and the local initiative (both of which, incidentally, were originally introduced into local politics during the Progressive age as complementary facets of the Progressive movement's efforts to reform local politics.)  The structuring of local politics in southern California fosters an artificial dichotomy between pro-growth and anti-growth positions that subverts the possibility of compromise, truncates the municipal political agenda to a narrow conflict between competing middle class elites about whether to privilege the use or exchange value of property, and suppresses a wide range of views about growth and other issues, thus effectively silencing large portions of the metropolitan population whose views are inadequately captured by the pro-growth/no-growth binary.  I further argue that the reason courts have rejected most challenges to this distorted political system is because they have placed far too much faith in the vigorous application of judicial review to compensate for the flaws in the political process.  I conclude that a superior approach would be for courts to focus on correcting these process defects so as to enable a more robust conversation about growth and other local political issues

In future posts, I plan to address the impetus of the project, its contribution to existing scholarship, the impact of the recent real estate crisis on my thesis, southern California's suitability as a case study of national trends in growth politics, and the strengths and weaknesses of my proposed reforms. 

Ken Stahl

Glaeser spotlights Atlanta in NYT

Harvard economist Edward L. Glaeser--whose interesting work on cities we have posted about before--has a great entry on the New York Times' Economix Blog called Betting on Altanta.  He asks:

Atlanta added 1.13 million people from 2000 to 2008, more than any other in the country except Dallas. But from 2005 to 2009, the number of annual building permits fell by 66,352, the biggest decline in any metropolitan area.

Will Atlanta continue to emerge as a mighty metropolitan economy, or will the housing downturn turn the area into a place that might have been?

After a succint review of Altanta's history as a city, Glaeser observes that growth policies and housing have been key to Atlanta's late-20th Century success:

Housing supply, not quality of life, has been the crucial helpmate of economic convergence. Atlanta has kept housing prices low, despite a vast increase in its size, because there are few natural or legislative limits to new construction.

The city was built in the middle of the state with neither mountains nor an ocean to block its growth. The dominant political players have long been pro-growth, and as a result, much of suburban Atlanta is a paradise for builders. The resulting low home prices have helped bring millions to the region.

Glaeser concludes that despite some of the economic problems that are currently plaguing sun-belt boom cities, Altanta's future may be bright, for three reasons: (1) its position as the dominant city in the region; (2) companies will continue to find its pro-business policies to be hospitable; and (3) it maintains a highly skilled population, with 43 percent of its adults holding college degrees (well above the national average and even higher than places like Boston (41%)).  The next decade or so might be revealing about the long-term sustainability of the prevailing models of growth and land use in post-WWII America.

Matt Festa

May the bells toll . . . in Phoenix?

There seems to be a big church-state land use battle brewing in Arizona.  From the Arizona Republic story Court hears arguments over church bell in Phoenix:

The arguing over the silencing of church bells grew louder in two Phoenix courtrooms on Monday. 
 
The legal conflict centers on a church in north Phoenix. In 2008, it started to ring its bells 13 times a day, seven days a week, to  the annoyance of its neighbors. 
 
In May 2009 Phoenix Municipal Court Judge Lori Metcalf told the church, Cathedral of Christ the King, to pipe down. 
 
The bells could ring, she said, but only once a week on Sunday morning.
 
She also found the church's leader, Bishop Rick Painter, guilty on two counts of  disturbing the peace. He received a 10-day suspended sentence and three years' probation. 
 
On Monday morning, a national Christian legal group, the Alliance Defense Fund, argued in U.S. District Court that the Phoenix noise ordinance is overly vague and unconstitutional. 

The legal conflict centers around a city noise ordinance.  The language of the Phoenix noise ordinance isn't at all uncommon, and is based on nuisance theory.  In the "Nuisance and Noise" section, the Phoenix City Code sec. 23-12 reads:

"Subject to the provisions of this article the creating of any unreasonably loud, disturbing and unnecessary noise within the limits of the City is hereby prohibited." 

Is the ordinance unconstitutionally vague?  Does targeting church bells infringe on First Amendment free exercise, or RLUIPA?  It's a generally-applicable rule, but the text certainly gives a wide berth of discretion to local government officials to make enforcement decisions under the "reasonableness" standard.  Too much discretion, or necessary flexibility?  That's the classic land use regulation debate, and the religious land use cases tend to bring this point out.

Either way, though, sentencing a bishop to (suspended) jail time in pursuit of nuisance code enforcement is pretty hard core.  The battle is joined and it looks to be an interesting federal case.

UPDATE: Erik Stanley, the ADF attorney for the churches cited in the article, has a post in the comments section.

Matt Festa