There was a great symposium Saturday at the Chicago Architecture Foundation, one of several in conjunction with their exhibit on the history of Chicago preservation: “Do We Dare Squander Chicago’s Great Architectural Heritage?” that runs through May 9 (See it now!). Prof. Bob Bruegmann opened it up with an excellent history of teardowns and the inquisitive, expectation-overturning perspective he brings to everything. Prof. Richard Dye, an economist, explained the economics of teardowns. Both men suggested that an upside of teardowns was that they shouldered a bigger portion of the tax base, a fact that neighbors of teardowns are perhaps loath to admit. Bob did note that increased values could mean higher taxes for the teardown-adjacent in their little historic houses as well, and he also sagely discussed the new penchant for small houses, which are of course greener and thus more chic and popular with the wealthy.
Which is part of the objection to teardowns – lots of people hate them not for what is lost but what replaces them – ersatz castles with turrets and lions and gargoyles and balustrades that scream “I just got a lot of money and I don’t know how to use it!” (That is of course an Obamaesque elitist opinion).
Anyway, back to the economist Dye, who talked about how markets work to maximize value in good locations, which lead to teardowns, and markets fail because houses are durable goods built for current fashion but last longer than those fashions. Cathedral ceilings, great rooms, bathrooms that would make a Saudi prince blush, and other trappings of 1999 are popular examples of the fashionista excesses of McMansions and Lollapalazzos.
So I was suddenly struck – as a historian – by the fact that the teardown phenomenon emerged at the same time as the TIF phenomenon, and mindful of the big fight in Oak Park over extension of the downtown TIF, I asked whether there was a connection between these things, since teardowns occur largely in inner-ring residential suburbs that rely on a residential tax base, and since (I presumed) TIF districts limit the amount these places can rely on commercial taxes, hence teardowns – by increasing the tax base – might be related.
This got Dye’s hackles up. His short answer was no but his long answer – which came first – was that I had an understanding of TIFs that was much clearer than his and he has studied them. Zing! TIFs are simply a financing mechanism he said. Fair enough, but I told him later it was an honest question – I noticed a cohort and asked if there was a correlation. In my neighborhood the school district negotiated carve-outs to the TIF district and blamed it for their reduced income. The first TIF happened at the same time as the first teardown. That doesn’t mean they are related but you can see where the question comes from.
And my hackles get up when people describe any development – commercial or residential – as shouldering more of the tax burden. The suggestion is that I would be paying more taxes if the development didn’t happen. I hope someone at the various land institutes is studying this, because it counters both intuition and experience. Consumers have a hard time with this argument basically because taxes are historically unidirectional, and the conceptual leap “But your taxes would have gone up 200% if we hadn’t spent $25 million of public money on that shopping center” is hard for the average guy to make.
If there is a new development, property values go up and so do my taxes. If I oppose a new development and granted some queer quirk of history, stop it, values presumably are depressed, and so are my taxes. This seems to me related to Bruegmann’s argument – shared by a whole lot of economists – that regulations add costs to real estate and thus reduce affordability.
But of course real estate economics is about location, not cathedral ceilings or giant master bathrooms or high end appliances or Frank Lloyd Wright, as Dye and so many others noted. Teardowns occur in choice locations near transportation, amenities and where zoning suggests it.
Oh – there it is. A stick in the eye of the free market. Zoning. Seems government controls that, and it seems to have an oversized influence on the teardown market. My town downzoned a bunch of areas – to their actual size – recently because of outrage over teardowns of small houses just outside the historic district. Interestingly, inside the historic district there are loads of cases where they simply add lots of units on the rear, thus capturing more of their land value. Land value that comes from zoning.
Now, I’m not an economist but I am an historian and I know that Justice Sutherland was a fierce advocate of property rights and I know that the reason he upheld zoning in 1926 (I mean gee whiz he could have gotten someone else to write the opinion – he wanted his fingerprints on this one) was that it upheld property rights in the abstract and property values in specific. Location makes the big differences in price, but zoning creates the demand for teardowns in all sorts of markets – which is where teardowns are occurring. Teardowns have ripped across this country in the last 15 years with unprecedented speed affecting all sorts of communities.
Correct that – there is a precedent and it is zoning. Between 1916 and 1926, 591 zoning ordinances were enacted regulating the properties of 30 million people. Talk about a fad – that is like the iPod. Don’t tell me it didn’t have to do with property values. But somehow this topic – government granting value through zoning – doesn’t have much place in the discussion, which is queer. The whole point of Chicago’s 1957 zoning ordinance – which doubled downtown density – was to get downtown development going. TIF is a form of financing yes, but it is also a government subsidy to stimulate development in the same way zoning is a government subsidy. They are both clever in the sense that they are subsidies where you don’t have to write a check.
Now before the numbers crunchers get their knickers in a twist, look at the history. We zoned in the 1920s and then we rezoned in the 1950s, so we should have zoned again in the 1980s, but we didn’t. We didn’t rezone until the aughty-aughts (2003) and then zoning had so many damn community activist inputs raising costs that it wasn’t much good at granting value.
Oh wait, I thought of another precedent for teardowns – blockbusting. The Austin neighborhood in Chicago – about three square miles – went from all white to all black in 5-6 years. Now blockbusting was a technique whereby a speculator offered one or two white homeowners on a block a lot double what their house was worth and then sold it to a black family at a slightly inflated price, because they were buying in a white neighborhood. The speculator could afford to lose money on the transaction, because once it was complete, thanks to racism, they would be able to buy all of the other houses on the block for half price and sell them for full price.
Teardowns are different of course. Speculators find a nice neighborhood location with good amenities, offer someone a good price for their house, knock it and build a newer bigger better house. The neighbors see that and often decide they would like to cash in as well, so they get the same good price for their house, right?
The trick here – as far as an amateur like me can understand – is that real estate is all about externalities. I was taught that real estate is a commodity and an asset whose value is not intrinsic but based entirely on its surroundings. I had a real experience of this in the early 1990s when I bought two Frank Lloyd Wright houses for a dollar. As we priced out the rehab, it became clear that these houses – despite their pedigree – had a negative value of at least $40,000 apiece. Why? Location. I should share this story with Dye and Dan McMillen, since it underscores their contention that location outweighs all other factors. Even regulations, I suppose, since those are generally advocated by residents who want to maintain their property values, just as they did in 1926. I agree with the economists who say that regulations increase prices (by increasing costs) but there is a massive “D-OH” here: that is the economic expression of what the people wanted.
But the real stick in the number-crunching eye is this: people aren’t rational consumers. The majority of our economy is a consumer economy and the biggest consumer item is the personal home. There are economists who study consumer rationality, and maybe they should look at the uber-tacky McMansions and dissect some of that consumer irrationality (I suspect it is simply the absence of a visual sense).
I have studied some economists who look at land value and regulation like Glaser and William Fischel, whose most brilliant insight (related in the Homevoter Hypothesis) came at a zoning meeting when a neighbor he knew and respected opposed a development that was obviously going to be good for the neighborhood. Fischel’s eureka moment came when he realized the property owner was motivated by a simple principle: uncertainty. You can tell me it is going to be good, you can tell me I will bear less of the tax burden, but all of that is in the future and I want to keep what I have now. I am not certain how that development will turn out and I am not certain what will happen to my taxes.
Zoning arose in response to what Fischel terms “the radical uncertainty created by the truck and the automobile” and all of the various regulations from historic districts and moratoriums in response to teardowns arise from the same motivation. Some people hate what is lost and some hate what replaces them. But everyone hates uncertainty.