Thu, June 26, 2008
Will Gas Prices Drive Home Buyers Out of the Suburbs?
Over the last fifty years, suburban neighborhoods outside of cities grew for a variety of reasons: families wanted more space than city homes provided, urban crime rates were higher than now (peaking in the 1960's and 70's), and the idealized vision of suburban life grew in popular imagination to become a mark of prestige. Less consciously, perhaps, suburban living was enabled by cheap gas and good roads; the "driveable suburb" within striking distance of city jobs became the ideal place in which to build a home. In the 1948 film, "Mr. Blandings Builds His Dream House," Cary Grant played an advertising executive whose family flees its cramped New York apartment for a country home in Connecticut. For Jim Blandings, trains enabled the commute; that wasn't the case for most workers who decamped from the cities. The ability to drive to and from work relatively cheaply made the suburban "dream house" possible.
Now that gas prices are over $4.00 a gallon, the attractiveness of commuter life is waning for some. The June 17th Wall Street Journal ran an article suggesting that the uptick in gas prices is one of several forces crimping the popularity of suburban living. Only yesterday, a New York Times piece also pondered the question of whether gas prices will put a permanent damper on suburban/exurban life. The WSJ article claims that two powerful demographic trends are pushing in the same direction. The US population of 20- and 50-somethings is peaking; together there are about 80 million people in these two categories. Millenials (people born from 1977 to 1995, a.k.a. Generation Y) are increasingly looking to live in cities, perhaps as a way of rebelling against the suburban sprawl of their youth. Boomers in their 50s, it’s thought, are tiring of maintaining big suburban homes as their children leave the nest; they too are believed to be moving toward the cities again. I suspect that this latter trend has been overstated, though it is happening in some areas and may be accelerating.
A couple of years ago, the Center for Housing Policy issued a report examining the effect of housing and transportation costs on household budgets. At the time, the average price of gas was about $2.86. The report estimated that a typical household spent 27% of its income on housing and 20% on transportation. Higher-income households spend a lower proportion of income on housing but tended to spend a higher proportion on transportation. Near many major metropolitan areas, although housing costs decline as the distance from employment centers increases, there is a point at which lower housing costs are outweighed by the increase in transportation costs. At the time, the distance where this effect took hold was estimated to be 12-15 miles. With gas prices 50% higher and housing prices lower in most areas, this distance must be shrinking. The Times article points to data indicating that in many metropolitan areas, suburban home prices have already been falling faster than urban ones.
This trend - if it is a trend - will have to take effect gradually, Moving from one house to another takes time, and the housing slump will tend to retard household mobility for a while. There is wide debate over whether oil prices will remain at current lofty levels indefinitely or will subside in response to eventual increases in production. My impression is that gas prices have been going up steadily in the last decade. An increase in the number of US refineries might help, but these take years to build and may not come online at a rate that keeps up with the demand for gasoline. If so, gas prices would be unlikely to decline. Moreover, oil prices are driven by world (not U.S.) demand, so increased growth in China and India may keep prices rising even if U.S. demand declines.
The latest increase in gas prices has already caused increased mass transit use across the country. It will also take years for municipalities to increase their mass transit capacity. Many systems are already strained to the limit by the present demand. Commuting into cities from a distance, even in places where commuter rail is available, will continue to have to be done largely by car. Carpooling is one alternative solution that could grow in popularity, but it may not take up all the slack.
My hunch is that people who chose to buy homes in suburbs over the last couple of generations felt no need to factor in the cost of commuting. Now, suddenly people are thinking differently as gas prices storm past psychologically significant levels. This, with the rise of eco-consciousness, will make transportation loom larger in considerations of where people choose to live. Access to employment, shopping, restaurants, and other amenities will become increasingly attractive if it can be gained without the need to drive a car.
It’s difficult to say whether this trend will persist. Prices in the suburbs could restabilize at a level so low relative to urban areas that the cost of gas is cancelled out. More important than the demographic trends, I think, will be the trend in (for lack of a better term) mass psychology. If enough people start to worry enough about gas prices, it could become significantly more popular for households of all income levels to live nearer to city centers. Plenty of workers are presently doing one- and 2-hour commutes to work in many US metro areas, but it’s likely that many will be looking for a way to throw in the towel as soon as they can. All I know for sure is this: I won’t be going back to my old 65-mile-a-day commute unless somebody forces me to!
ADDENDUM: For maps showing housing and transortation cost distributions in 28 metropolitan areas, take a look at the Center for Housing Policy report here.