I just caught up with Joel Kotkin’s column of 8/27, which has bad news for cities that have spent, rather than hoarded, the spike in real estate tax receipts. The softening of the real estate market is disproportionately hitting what he calls “high-priced, overhyped urban areas.”
Many of these markets are heavily influenced by speculators, who own as much as one-third of the condos for sale in downtown San Diego and more than four-fifths in Miami. These “flippers” are most likely to unload properties once they see the prospect of declining prices.
Many other big city condo buyers are nonresidents for whom their city apartment constitutes, if not pure speculation, a second or third residence. One New York real estate developer places the percentage of second homes in his buildings as high as 80 percent. Since the 1990s, the number of Manhattan residences serving as second homes has grown as much as threefold. Unlike year-round residents, many with families, this group seems unlikely to stick around to see a sharp reversal of fortunes.
There is simply less substance to the current urban “boom” than meets the eye. Over the past five years, job growth in many cities with the greatest home price inflation — New York, Chicago, Los Angeles, Boston and San Francisco — has remained well below the national average. True, there has been a substantial growth in income among the highest end professionals and those who benefit from rising asset prices, but earnings for everyone else have been flat at best. Instead of the real estate tide lifting most boats, it is helping elevate only a few yachts.
The weakening of condominium prices — prices could fall 9 percent this year, Kotkin says — will also leave a lot of developers who committed to “smart growth” downtown projects out of luck. Were those projects a trend, as it seemed for awhile, or just a fad? The developers I knew about were more than happy to talk about transit-oriented development, bringing employees closer to their work and reviving urban street life–so long as they could expect $1 million bids for the luxury condos they were building.
Ironically, Kotkin says,
a significant correction in real estate prices — albeit painful for some, including speculators, developers and promoters — could contribute to a reorientation of urban priorities. Lower rents — partly supplied by developers who give up on selling — would provide incentives for middle- and working-class families to remain in the city. It could also allow artists, young professionals and others now being priced out of San Francisco a chance to re-enter the market.
But is it really true that cities with underfunded pension obligations didn’t shore them up when the getting was good? Who do they think is going to bail them out?
So what happens to cities once the property boom ends? One immediate effect will be to undermine the fiscal health of these cities, which are so dependent on real estate taxes.
Many cities may rue the day that they failed to address pressing city wage and pension issues when they had the chance. Unfortunately, mayors like San Francisco’s Gavin Newsom and New York’s Bloomberg — temporarily flush with unexpected property taxes — saw fit to grant hefty raises to city workers and refused to address the looming crisis posed by their enormous pension fund liabilities. In New York City, these amount to more than $50 billion.
Think about the California political impact if Kotkin’s prophecies bear out — long-term. Newsom and LA Mayor Antonio Villaraigosa are presumed to be the two top contenders for the Democratic gubernatorial nomination in 2010 (since no one thinks there will be an incumbent named Angelides readying for re-election that year). Both are mayors of cities that have benefited fiscally from the housing bubble. By 2010, which mayor will have the bigger fiscal mess on his hands, and who is most likely to come out of it looking good? It’ll be interesting to see who is more willing to accept some short-term grumbling by labor unions and clients for city services in order to better position themselves, and their cities, for the longer-term.
The whole column’s worth reading, particularly for Kotkin’s scathing descriptions of the kinds of cities real estate wealth creates.