Bacon's Rebellion

Democracy Thrives in Sunlight

Boxed In

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by

James A. Bacon
in ,

Two weeks ago, I blogged how the real estate crash is threatening Prince William County’s bond rating and prompting county officials to hold off its road-building program. I thought the story was so important that I asked Peter Galuszka to take a more in-depth look.

In fleshing out Prince William’s dilemma in “Boxed In,” Peter shows how the Board of Supervisors is between the proverbial rock and a hard place. Writes Peter:

The total units of housing sold from 2006 to 2007 in Prince William County declined 24.65 percent and the total dollar volume declined 33.26 percent. Assessed value of homes overall is down 35 percent, says [Board Chair Corey] Stewart. Meanwhile, revenue from deed recording fees has taken a nose dive as well.

One thing Prince William isn’t willing to sacrifice is its hard-won AAA bond rating. To keep it intact, bond payments can constitute no more than 10 percent of the county budget. As revenues plunge, supervisors have little choice but to stretch out the schedule of bond issues that voters had approved a few years ago.

Nobody’s expecting the Comprehensive Transportation Funding and Reform act of 2007 to be much help. The Northern Virginia Transportation Authority is expected to bring in roughly $300 million a year, but only $17 million a year will trickle down to Prince William in the form of discretionary spending.

Needless to say, raising property taxes is never an attractive option in Republican-dominated Prince William. With thousands of homeowners already facing rising payments as their adjustable rate mortgages reset, a tax hike would be political suicide.

There’s talk of raising the impact fee on new houses from $30,000 a unit to more than $50,000. But home builders, already wounded by the housing crunch, are talking about rolling back proffers and impact fees. Talk about a battle royale.

I would concur with the observation of Stewart Schwartz, executive director of the Coalition for Smarter Growth. Supervisors should use the opportunity presented by the growth slowdown to think through the county’s growth strategy. Even when real estate markets return to normal, it’s unlikely that Prince William can return to its heroic go-it-alone strategy for building and financing new roads. Ideally, the supervisors will strive to plan more transportation-efficient development. But even won’t help in the short run: Prince William has a backlog of more than 30,000 houses in the development pipeline.

Prince William is boxed in. There is no easy way out. It’s going to get ugly.

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25 responses to “Boxed In”

  1. Anonymous Avatar
    Anonymous

    What perplexes me about Stewart Schwartz and his colleagues are twofold:

    1) Since the demise of the “Company Town,” where are some real life examples, with appropriate data, of smart growth communities that produce substantial results — i.e., where a significant number of residents also work. I’m not arguing that this cannot and has not occurred. I just want to see some measurable results.

    2) Even smart growth needs public facilities. Where will they come from and how will they be financed? If they are not provided in sufficient quantity and quality, don’t existing residents suffer?

    For example, Tysons Corner Land Use Task Force chair Clark Tyler has recently written public and private infrastructure providers to give information about how infrastructure needs can be provided at Tysons Corner. He urged them to look at the issue from an urban, and not a suburban perspective. Thus, we might see a different standard for school sites and parks and open spaces, for example. Fewer units of infrastructure for urban residents than for suburban ones.

    But how realistic is this? Will that changed standard meet the community’s needs? Even urban elementary schools need some type of playground for students. Also, a small park square may be attractive for Tysons Corner, but the residents of Tysons will still likely need soccer fields, trails, and picnic grounds. If those aren’t provided at Tysons, doesn’t this mean that there will be additional usage of Fairfax County’s already overburden parks, etc.?

    Part of me feels that Stewart simply wants to push the problems of growth into our backyard. If so, shouldn’t he expect that we will push back? Isn’t that where we are today?

    TMT

  2. Anonymous Avatar
    Anonymous

    Coalition for Smarter Growth is a red-herring false front for conservation groups. Stewart doesn’t care what happens to anyone as long as it doesn’t happen to open space.

  3. MOM Avatar
    MOM

    Boxed in??? That would presume that the limiting factors were largely external and beyond the County’s control. Painted in is probably a more accurate depiction as the problem is largely self-inflicted.

    Don’t get me wrong, there are plenty of fingers that can be pointed at the development industry but by and large the jam the county find itself in was created by staff and elected county officials.

    There are so many things wrong with the planning and approval processes of recent years that it is truly difficult to even begin pointing out the problems. In order to simplify matters, one could start by breaking them down into three categories: Planning Staff, School System and County Board.

    Planning Staff: The impact of current management is evident at virtually every Board or Planning Commission meeting. Over the past few years most of the experienced staff have left, reportedly as a result of upper management. In their place are very young staff members who are incapable of answering the simplest question or effectively enforcing requirements. Couple that inexperience with a management staff incapable of adequate analysis and seemingly bent on ignoring policy and procedure, failing to require due diligence and ignoring public comment, and you have the first ingredient for this recipe for disaster.

    School System: Although one can expect the usual turf wars between the School and County Boards to have some detrimental impact, in the case of this system the problem is grossly exacerbated by a School System Planning Office that makes the county version appear the model of excellence. These clowns have proven to be utterly incapable of arriving at the same state much less the ballpark when it comes to estimated student population growth. Combine that inability with a reliance on proffered school sites (regardless the geographic location) and a refusal to use monies set aside for site acquisition and you have the second ingredient for this disaster scenario.

    County Board: The final ingredient and arguably the craftsmen that have so neatly painted the county into its current predicament. Unscrupulous, incompetent and in some cases quite low on the intellectual wattage scale, these clowns are the principal architects of disaster and shouldn’t be entrusted with the church bake sale money. One need look no further than their first meeting of the month for evidence of graft, corruption and collusion as they moved forward a month and held a public hearing on controversial applications, denied the most controversial and then made the denial a sham as they passed a substitute motion crafted by staff and laid out at the last moment. Their coordinated actions made a mockery of the public process and are an insult to the intelligence of their constituents.

    What is most troubling is that at this weeks meetings the proverbial chickens have started coming home to roost. For example, Kettler, apparently have financial difficulties of its own, has found itself in a position wherein it can not afford to build the communter lot they proffered at the time of a rezoning approval they obtained. The county transportation staff in its infinite wisdom deemed it necessary to undertake the project themselves and promised to charge Kettler the costs at such time as they could afford to repay them. Costly the county taxpayer, yes, but the look on the purportedly unknowing Board of Supervisors faces when they were told of what had transpired, PRICELESS. Unfortunately is likely only the first of many expenses county residents will have to bear in the near future.

  4. E M Risse Avatar
    E M Risse

    MOM:

    Very well put.

    It has been the same for three decades.

    Perhaps it is worse now than ever but recall that the staff recommended Cellar Door, now Nissian Pavilion…

    Need we say more?

    EMR

  5. Larry Gross Avatar
    Larry Gross

    I’m on the same wavelength as TMT with respect to … I’m not gonna call it Smart Growth…

    but instead.. the claim is that “places” can be designed and built where folks can live AND work.

    We hear this quite often with compact/multi-use development.

    But .. to date.. I’ve not seen any of these… actually configured with performance standards.

    It’s one thing to claim that auto trips are reduced or that since a development has housing and retail/commercial that .. “logically” those that work the retail/commercial can, in theory, live in the same development.

    But it’s quite another to show that the average salary for the retail/commercial can actually buy the “affordable” housing in the same development.

    I’m not gonna say it’s smoke and mirrors because I do think that some developers actually are trying to move in the right direction but what I am saying is that the process for approving he development is not contingent on achieving specified performance standards.. so really .. it’s more of a marketing speal with the acquiescence of planners.. supposedly representing the interests of the taxpayers that pay their salaries.

    I used to be involved in a more activist role in some of this but then I realized that there is a difference between idealism and realities and that if one is truly interested in change.. then basically you have to get beyond the .. stereotypical mantra and get into the real issues.

    So .. to date.. in my view, mixed used compact developments do not achieve the very thing that supposedly motivates them.

    Certainly a compact mixed-use, “village” in Stafford county where the vast majority of the folks who live there.. are,in fact, daily commuters to NoVa jobs… they are not living and working in that development… so they are.. in some respects… an illusion.. and at best a ‘fell good” illusion that profits the developer, makes those who think about things in a cursory fashion “feel good”… and confirms to the skeptics that this is merely the next evolved version of ..

    you can have growth.. without paying for the infrastructure…

    in the smart growth/compact development/mixed-use version… because they will use “less” infrastructure.. without ever actually saying how much less and without ever proving that they do…

    there is not way to have population growth and development to serve it without adequate infrastructure.

    Yes.. if you build “smarter” you might need less.. infrastructure but less does not mean none..

    .. and on this.. TMT is dead-on in my view…

    p.s.

    it’s easy to beat up on Schwartz but give him credit… if nothing else.. he HAS pointed out that we CAN improve on the way we do growth even if we might not have 100% agreement on how…

  6. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Awww, this little problem is just getting started. Do you actually think that a bunch of low income losers are tearing up the world’s economy? It’s much worse than that.

    This all started with the affordable housing issue back in the 80s/90s. Subprime was just one method authorized by Congress to fix the right of poor people to have equal access to loans. HUD was instructed to not worry about things like not paying bills, or persistent unemployment.

    What morphed out of those concerns were the deregulation of loan making operations, resulting in interest free and other non-traditional loans including easy access to equity. Subprimes are just the bottom of a margined food chain.

    That equity fueled our nation’s prosperity as people pulled out dollars and replaced them with an IOU. But now things aren’t looking too good. Subprimes are foreclosing like crazy, soon to be followed by many with 700 credit ratings who used up their equity and now can’t refinance.

    And next year there will be millions more if Congress fails to exempt them from Alternative Minimum Tax.

    Credit squeeze? Man, you haven’t begun to see a credit squeeze. Some sap losing their home is the least of a problem the politicians haven’t even shown a glint of recognition. They are still taxing and spending as if nothing has changed.

  7. Larry Gross Avatar
    Larry Gross

    so .. I have a simple question.

    Would any of this have happened if loans were not subsidized by the government?

  8. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    It isn’t a question of subsidized loans. Those loans (FHA, VA) are basically insured against loss by the government and have a set of financial requirements that must be met by the persons applying.

    Such is not the case for the current situation. An entity such as Freddie Mac was created for the valid economic purpose of maintaining liquidity in the housing market. They would purchase loans, package them into investment bonds or other instruments and sell them on the open market to generate cash flow for future mortgages. When you hear about CDOs and SIVs, their roots originated with these government entities.

    The problem started when politicians began using an economic machine for political purposes. As the standards were lowered to meet affordable housing and other goals, more and more unguaranteed, shaky mortgages were bundled with conventional loans. Then the whole mess was sold off to unsuspecting investors. They were buying one of those brown paper bags with a ??? on it. That’s why the financial sectors can’t figure out their exposure to these loans.

    I have no real gripe against subsidized mortgages or any other program that fullfills a valid public purpose. Where would the nation be without student loans and such? But governmental intervention efforts must be compartmentalized from the free market. What we are seeing now is not just low income people failing, but even the more affluent among us. Which is why the Fed and financiers are sh**ing their pants.

  9. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Here’s a link from 2002 that explains how we eventually ended up in this mess. Make sure you read the sub-links as well.

    http://www.nhi.org/online/issues/125/goingsubprime.html

  10. Anonymous Avatar
    Anonymous

    Subprimes are about 4% of the market. Almost 40% own their homes outright. Another 40% have fixed rate loans.

    People have to live somewhere, and that means borrowed money.

    This will blow over. Some people will get hurt. It isn’t the end of the world. Housing starts were up last month.

  11. Larry Gross Avatar
    Larry Gross

    I’ll rephrase my question.

    How much demand would there be for mortgage loans for housing if the interest from those loans could not be recouped at tax time?

    In other words, would the percentage of “owned” homes be the same with or without a mortgage subsidy?

    I wonder .. for folks that know they are going to be job-mobile, if it would be ‘worth it” to buy a home if they knew that the likelihood of getting their money back out of that house in say 5 years or less was .. very low.

    Wouldn’t a lot of folks in such circumstances just look for rental or leased housing and NOT look to buy?

    I think the ONLY reason some folks buy a home is on the premise that even though they are not going to be in that house for more than a few years that they can justify it as long as that house .. even if it does not appreciate… does not depreciate –

    BECAUSE .. it’s cheaper than rent because you get a “rebate” of your payments at tax time.

    Take away that annual rebate and that house … in terms of an ‘investment” vehicle .. and the appeal of owning a house vice renting.. changes.. for those that are more transient…

    it would also change the type/kind of house that others would buy and become more like trying to decide between typical car verses one that is “loaded” because.. later on the resale value of the two starts to become the same.. so you “pay in full” for all those “extras”.

    I DID read the links which basically were discussing “affordable housing” .. from primarily a demographic perspective of folks who are typically on the lower economic levels… who.. without “help” could not meet/qualify for the minimum threshold for the initial purchase.

    If you read more.. you’ll find out that even some rental housing is involved because some folks bought housing (to rent to others) as INVESTMENTs .. that whose ROI is competitive with other investments ONLY because the mortgage interests is “deductible”.

    If you take away that deduction, then as an “investment”, they require higher levels of capitalization… i.e. companies whose business IS rental housing.

  12. Groveton Avatar
    Groveton

    A sinkhole starts at the bottom then works its way to the top. It seems to me that people think of real estate as being in “clumps”. There is the lower income “clump”, the middle income “clump” and the top income “clump”. I don’t see it that way. I believe that real estate is a continuum of properties at different values. Therefore, I question the believe that the subprime mess will stay contained at the lower income “clump”. Once deplation hits the bottom of a market the next higher stratus starts to deflate, etc. etc. The only brake may be the need to use jumbo and super-jumbo loans on the more expensive properties. Once you have 20% or 30% down on a home it’
    s harder to go “upside down” on that loan.

    The problem with this real estate crisis is that it coincides with a “perfoect storm” of demographic change. Even people who own their himes outright are aging and getting ready to retire. The baby boomers need to sell those homes to generate the cash needed for a smaller home in retirement. And, let’s be honest, most people won’t retire to NoVA, Tidewater or Richmond. Therefofe, the deflation of Virginia real estate in these areas will continue.

    So, what should the government do?

    Bail the mess out.

    Why? Isn’t this private risk?

    It sure is. But, the implications of failing to restore liquidity into the real estate market is catastrophic. In Japan in 1990 there was a real estate bubble and then the bubble burst. At one time the real estate in Tokyo where the Imperial Palace sits (very impressive place) was values higher than the real estate in the entire state of California. Kind of ridiculous – don’t you think? When the bubble burst the Japanese would not call the loans. They would not let banks go bankrupt. They simply stopped lending. Since real estate came to a standstill (sales wise) there was no way for the banks to know the real value of the property they held in collateral. So, they stopped lending. So, no sales were made. So, they couldn’t assess their portfolios. So, they stopped lending. Fourteen years later the Japenese economy came out of the tank.

    Look at the American answer to the Savings & Loan crisis. Establish the Resolution Trust Corporation (RTC), dissolve the broken S&Ls, sell the assets at fire-sale prices at auction. Was their “breakage”? Oh yes! Did the American economy go into the tank for 14 years? Hardly!

    Sometimes direct effective government intervention works. This may be one of those times.

  13. Larry Gross Avatar
    Larry Gross

    “intervention” is opportunity for reform.

    the boil will have to be lanced… at some point.

    We used to allow the same write-off of auto loan interest and it was phased out without catastrophe.

    At some point – without reform – the “choice” will come down to Medicare/Social Security or Mortgage subsidies.

    no?

  14. Larry Gross Avatar
    Larry Gross

    re: RTC

    lemme see if I “get” this…

    families and certainly the plain old shiftless need to be weaned/discouraged/dissuaded from viewing life as a government safety net…

    and entrepreneurialism … is how this country really “works” but if an entrepreneurial enterprise tries for a “bridge too far” and bad stuff and fallout is too widespread.. then it’s fine for the Feds to come to the rescue .. since taxpayers are going to pay… no matter what anyhow…

    oh… did I mention… Chrysler or the airlines ?, super-fund sites, 3-mile island, etc?

    or perhaps I’ve got my vocabularily mucked up..

    it’s “welfare” when people are receiving assistance…

    it’s a “subsidy” when transit receives such assistance…

    but it’s an “intervention” when businesses get assistance..

    very clever 🙂

    I just knew.. there was a good reason why we like to have less government and more private enterprise.

  15. Groveton Avatar
    Groveton

    Larry:

    My Dad always said, “When you owe the bank $100,000 they have you over a barrel. But when you owe the bank $100M you have the bank over the barrel.”.

    Resolution Trust Corp put a lot of S&L’s into bankruptcy. It then packaged the assets and sold them in a fire sale. A lot of the people who over-reached got burned. The worst of the worst went to jail.

    You can’t let a real estate bubble pop without trying to get things back on track. A recession that lasts for over a decade doesn’t help the poor. In fact, the poor gets hurt worse by a recession than anybody.

    I agree that it’s lousy for the government to spend taxpayer money to bail out “fat cats”. The problem is that it’s worse to allow the real estate crash to freeze the banking system which then freezes the economy.

    The government was sleep walking through this problem. Everybody saw a real estate bubble building. Australia went through the same thing although the Australian housing bubble bottomed out in 2004. And the government sat idly by and did nothing.

    Free markets don’t always work.

    This is a case in point.

  16. Groveton Avatar
    Groveton

    Chrysler?

    Should have been allowed to go bankrupt.

    The airlines?

    Should be allowed to be bought by foreign flag carriers. Many have gone bankrupt – Eastern, TWA.

    Super fund sites?

    Should have been paid for by the polluters even if it meant liquidation of some big companies.

    Three mile island?

    Don’t know the details.

    The US banking system?

    Must be preserved.

  17. Larry Gross Avatar
    Larry Gross

    I note that Greenspan still prefers giving his own advice over his successors…

    He recommends that the government bail out the people with the loans also…

  18. Anonymous Avatar
    Anonymous

    “How much demand would there be for mortgage loans for housing if the interest from those loans could not be recouped at tax time?”

    You do not recoup the interest at tax time, you only get part of it back, and the amount depends on your tax rate.

    Almost no one pays cash for a home. People have to live somewhere, even if it is a rental. the money to create rentals is also borrwed. The demand for mortgage loans would probably be reduced by the amount of additional people living on the streets.

    RH

  19. Anonymous Avatar
    Anonymous

    “I question the believe that the subprime mess will stay contained at the lower income “clump”.”

    Aren’t a lot of the subprime loans also Jumbo loans?

  20. Anonymous Avatar
    Anonymous

    some folks bought housing (to rent “to others) as INVESTMENTs .. that whose ROI is competitive with other investments ONLY because the mortgage interests is “deductible”.

    If you take away that deduction, then as an “investment”, they require higher levels of capitalization… i.e. companies whose business IS rental housing.”

    And how will they get that capitalization? They will get it as mortgages, most likely, so that the loans can be secured. And if they are companies, they will be able to deduct their expenses as cost of doing business.

    Why should an individual be treated differently than a company, which is a “virtual person” in the eyes of the law?

  21. Anonymous Avatar
    Anonymous

    Subprimes are 4% of the market. Housing starts were up last month.

  22. Larry Gross Avatar
    Larry Gross

    …”The demand for mortgage loans would probably be reduced by the amount of additional people living on the streets.”

    “Why should an individual be treated differently than a company, which is a “virtual person” in the eyes of the law?”

    well, let’s see…

    if EVERYBODY got the subsidy it would be virtually equal – right?

    but guess what.. some folks get the subsidy and others can’t “qualify” for it – so what does that mean?

    …”and if they are companies, they will be able to deduct their expenses as cost of doing business.”

    ahhh… does that mean that we are equating a “business” with an “investment”?

    Is investing in a business the same as “investing” in property?

    If we subsidized businesses, no matter what their business was, the same way we subsidize mortgages what would happen?

    Well.. we already know.. when we subsidize sugar or ethanol or peanuts… what happens?

    why do we think doing that same thing with mortgages is different?

  23. Anonymous Avatar
    Anonymous

    “…”and if they are companies, they will be able to deduct their expenses as cost of doing business.”

    ahhh… does that mean that we are equating a “business” with an “investment”?

    Is investing in a business the same as “investing” in property?”

    If the nature of the business is to provide housing, then I would say (substantially) yes. Would you rather invest in a company with substantial physical assets, or in one whose value relied mostly on good will and market projections?

    I don’t see any reason why Wal-Mart Housing Rentals Inc. should be able to deduct the costs of their business any more than GranMa and granPa, just because the size of their business is different.

    ——————————–

    “that whose ROI is competitive with other investments ONLY because the mortgage interests is “deductible”.

    If you take away that deduction, then as an “investment”, they require higher levels of capitalization..”

    If GranMa can only rent at a profit because she is “subsidized” by the mortgage deduction, and if a corporation whose busine IS rental housing requires MORE capitalization, then their ROI would be LESS than GranMa’s. What corp. could sata in business that way?

    As a result there would be less housing and more people on the streets. Rents (and the underlying property values) would then climb so high that it would be more profitable to own than rent.

    RH

  24. Anonymous Avatar
    Anonymous

    “If we subsidized businesses, no matter what their business was, the same way we subsidize mortgages what would happen?”

    That is not the issue here. The issue is comparing two businesses in the same (rental) business, and whether they shouold play on an equal field.

    ——————————-

    “Well.. we already know.. when we subsidize sugar or ethanol or peanuts… what happens?”

    You get more sugar or ethanol at “lower prices”. Those lower prices are actually paid for of course, by someone.

    If it is a good subsidy, then those people who made up the difference will still be better off, because of other attributes the subsidy brings.

    If they are not better off, then it is a bad subsidy, unless those people paying the extra cost agree to see it as welfare for the entitiy receiving it.

    RH

  25. Larry Gross Avatar
    Larry Gross

    “Why should an individual be treated differently than a company, which is a “virtual person” in the eyes of the law?”

    oh you mean other than the fact that the law says so and the IRS will rip you a new one if you follow through on your disagreement?

    How about this:

    Businesses produce something. They contribute to the economy by providing jobs.

    If you do this as an individual, you get to claim this status and the law and the IRS will reward you for this beneficial activity.

    right?

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