by Eric Miller, April 2012
Robert Shiller, a professor of economics at Yale University and co-creator of the Standard & Poor's/Case-Shiller Index quoted Richard Florida in an interview with Yahoo Finance recently. Shiller said in the interview that suburban housing prices may not recover in our lifetime.
"Richard Florida calls it the great reset, that's a book he has that says that maybe this disruption was changing our values and that maybe the young first-time homebuyers who are living with their parents now are wondering, am I really going to plunge in, is this really the new thing or maybe I'll just rent," Shiller says.
"If you're young and don't really need to buy, just look at what kind of nice new highrise apartment building with all the exciting things built in you might get in the city," Shiller asked.
So what's going on? After years of suburban growth, there's continued firming of this new interest in the city. Here's why.
- Gas prices
It's more of a gradual effect, but as the cost of travel (and heating fuel rises), so does the cost of living in the suburbs. As costs rise, demand falls.
I suspect people will give up their cars before they give up their connectivity, and as we see in headline after headline, connectivity and driving don't go well together. The effect is already showing itself in growth of intercity bus lines. People want to be connected and the more they are connected, the greater the desire to leave the car behind or forego it altogether.
It was a well-known theory when I was in graduate school in the late 1990s that once the suburbs became far enough out, the center would be the next "ring" of suburb. If you look at travel distance in the early 20th Century compared to 2000, the distance traveled to work is much greater, but the time spent traveling isn't much different. There's an ideal amount of time we like to spend traveling to work, school or shopping, and when that gets out of whack we begin to make changes.
- Falling Property Values
From the 1950s until 2008 or so, housing values were generally on the rise. Housing was looked at as a nest egg. With housing values on the decline for half a decade, the idea that they will always rise is being shattered. With that, would-be homeowners are looking at alternatives.
- Household Size
Smaller household sizes mean we don't need as much space, or as much space around us. In fact, all that space can be all too quiet.
- Environmental Awareness
Being green and sustainable is more important to more people. Walking and using public transportation are only part of the equation. No matter how energy-efficient big homes are, they are still big and use a lot of energy to heat and cool.
- Living Virtually
The more time we spend online, the more virtual our lives become and the less we are aware of our surroundings. I don't personally think this is desirable, but I do think it's real. We are replacing physical things in our lives with virtual things that don't need space.
This is the big one. At the same time baby boomers are reaching retirement age and looking to scale down or even move in town to be near family, friends and activities, members of Generation Y are looking to move into their first homes, which are for the most part apartments. The result is lessened demand for big houses, particularly those in outer-ring suburbs. Downtown apartments are expensive, and so suburban demand will be centered around "new-urban" style complexes, transit-oriented development and suburban homes with access to transit.
We're also short on time and running low on water in many parts of the country, so taking care of homes and lawns may be becoming less desirable. I expect these trends to continue for at least a decade, until enough members of Generation Y start having children and possibly look to the suburbs for more space. A generation that grows up renting may find the transition to a condominium or co-op more palatable, however.
If you read the business stories about real estate and housing, you know the demand is in the multi-family arena. Here in Dallas there are multi-family complexes rising in most every direction you look. Rising rents are making owning look more attractive, but some of the other factors mentioned above may have changed the equation. All the building may result in over-supply, but I don't expect multi-family supply will outstrip demand for some time.
I suspect Shiller and Florida are right. There is a "reset," and even with population and employment gains, it may be quite some time before we see a suburban rebound--if ever.