Plainfield: Historic?

Another downtown bites the dust – or should we say drinks the Kool-Aid? The latter phrase has been overly misused the last decade or two but it is quite appropriate. Historic downtown Plainfield – a lovely Will County town west of Lockport, has voted down historic landmark status, despite a 21-20 majority of downtown property owners being in favor of it. This was reported in the Chicago Tribune today.

Despite the slim majority of owners in favor, Village trustees voted 4-2 against the district, essentially caving to a minority. Negative motivations – like fear – tend to trump the positive motivations, like the economic security provided by knowing what kind of downtown you are going to have in the future. Another negative motivation: fear of the frightening property regulators, who have somehow not interfered with two renovations of this historic property owned by Pat Andreasen, listed on the state, national and local registers.

Actually, the economic motivations of historic districts are complex, because they are on both sides of the issue. Historic districts have ALWAYS been motivated by a desire for economic stability – to reinforce the investments people have made in their property and to insure the value of their property’s surroundings. This is natural, because real estate is an asset whose value is almost entirely external – it is based on location, location and location. Historic districts create a palpable, physical security about location.

Yet the opponents also have an economic motivation. But it is not a rational, steady economic motivation but more of a “dropped-from-heaven” fantasy motivation that works wonderfully in the abstract and JUST often enough in reality to keep hope alive. Because while historic districts insure and protect and enhance value, they also limit WINDFALLS, those magical moments when the property you owned your entire life suddenly becomes the object of desire of a heaven-sent hotel-condo-highrise developer and you are able to finally realize the POTENTIAL value the zoning board so generously gave you six decades ago.

It is sort of like the lottery – it happens, just not to you or me. But there is enough hope there to keep some people dreaming, and their dreams fuel a sometimes rabid opposition to historic preservation – even the kind that DOESN’T prevent demolition – which is the kind proposed in Plainfield. Repeat after me: this historic designation DOES NOT prevent demolition. But it might force you to talk to your neighbors.

So, here is the pull quote, from local property owner John Bates: “I’m not opposed to historic preservation. I’m opposed to something that limits the options for me to maximize my investment.”

Dude dreamt the dream and drank the Kool-Aid. Sorry, Mr. Bates, but you ARE opposed to historic preservation. You can’t have it both ways.

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Owning in an historic district

I own a house in a historic district and last year I blogged about how thankful I was for that fact. Real estate is an asset whose value is largely external – it comes from its location, which is to say, its surrounding buildings and environment. Because my house is in a historic district, its value is assured. Economic studies for over 40 years have confirmed this fact in communities across the United States.

If you look at the history of historic districts – which I did in my dissertation – you find that the first modern historic districts emerged in the 1950s in communities that were concerned about drastic changes to their environment and thus the value of their homes. Urban renewal was one threat, which proposed outright demolition. The other threat was posed by postwar zoning ordinances, which dramatically increased density and thus owners of brownstones or single-family homes faced the prospect of massive highrises next door.

So homeowners in places like Beacon Hill in Boston and Brooklyn Heights in New York did what their forefathers did a generation earlier with zoning: they crafted legislation to protect their environment and thus their home value. Often they also secured downzoning – this happened in Greenwich Village in 1961, and in Chicago’s trio of lakefront landmarks in the 1970s – Astor Street, Old Town, and Mid-North.

Now, some people, motivated by greed or some sort of Ayn Rand ideology, argue that they don’t want historic districts because it will limit their value. How can this be true? Well, we have the examples of teardowns, where people are able to cash in on windfall profits because they can tear down a house and build a bigger one.

The libertarian ideology goes right out the window as soon as you realize that what allows the teardown is zoning: it’s just another government handout. In fact, the zoning that makes teardowns possible and profitable ALSO protects the value of some of those teardowns by insuring that I can’t build an abbatoir next door. Indeed, that it why a Supreme Court Justice (Sutherlan – who was as conservative then as Scalia is today) upheld zoning in 1926. So people who bought houses wouldn’t have knackering houses next door.

Historic districts were born at the same time as zoning and for the same reasons and they are in fact simply a more precise and surgical tool compared to zoning, which can sometimes be a blunt instrument. They also secure value, and I will not be surprised when some teardown neighborhoods hit the skids when McMansions start falling apart in 2020 during the height of the baby bust. After all, I have seen how they were built.

There is a vital economic principle at work in historic districts: uncertainty. The reason people get all NIMBY about things and fear change is simple: they fear uncertainty. This has economic agency because uncertainty discourages investment and consumer confidence and other things that are seen as positive for a growing economy. This is another stick in the eye of free market ideologies, because in reality, markets only operate well under conditions of security and certainty. Bandits and plagues and earthquakes are generally BAD for markets. Historic districts, like other zoning devices, create a sense of certainty that insures value over the long term, even if it might discourage short-term windfall profits.

Historic districts create another alchemy which led me to question one of the basic assumptions I have been talking about here. Ownership. We want the certainty of a stable environment to preserve our home value, an argument Dartmouth economist William Fischel has made excellently. But I also studied historic districts in Manhattan, and found a strange condition. People wanted historic districts and the certainty of an attractive, healthy and wealthy environment, but they didn’t own. A majority of the residents of places like Greenwich Village and Hamilton Heights were renters, not owners when they sought historic status. Moreover, I found that renters were investing tons of sweat equity in Greenwich Village rentals from the 1910s onward. This counters the ownership and equity theory.

Why? I think it comes back to the certainty principle. You might have equity, but that is an abstract concept. And in the 2009 world of upside-down mortgages, it has proved often illusory. But where you sleep and eat and the buildings and streets you travel to work and shop and recreate – those are real. They are certain, and you derive value from your environment whether or not you accumulate value in it. You can’t take it with you. But you can have it with you all the time you are here.

As long as I live in a historic district, I will have this value and this certainty.

how does economics work?

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.

“Right” Zoning

wells and eugenie

Originally uploaded by vincusses.

Jonathan Fine of Preservation Chicago spoke to my Preservation Planning class today and introduced them to an excellent phrase: “Right” zoning. This is more accurate than “downzoning” which is a phrase commonly used to describe what happens when a local alderman or city decides to reduce the allowable density in a district.

The recent book on the history of Chicago zoning describes the “downzoning” of the lakefront communities of Gold Coast and Lincoln Park in the 1970s and 1980s, which often followed landmarking of the area. Real estate expert Jared Shlaes opposed the downzoning in a 1980 report, and the book now judges that Shlaes was probably on the wrong side of history.

Terminology is always loaded, and while “downzoning” accurately notes that the rezoning reduces the allowable density, the MORE ACCURATE term “right” zoning reflects the fact that the so-called downzoning actually reflects the REAL DENSITY found in the district.

People forget that almost every city was “UP-zoned” in the late 1950s and 1960s. Chicago doubled its density in 1957, in an effort to impel development in an age of suburban highway development. It didn’t work exactly, but there are lots of whingers who still dream of selling their rowhouse for a skyscraper nonetheless, and that 1957 zoning is still sitting there (despite a 2004 rewrite) encouraging them.

Jonathan also pointed out that historic districts are LESS onerous than downzoning because people can still add space (and value) to the rear of the their property, whereas with downzoning they might not be able to add on at all. I hadn’t thought of that. But he is right, and he has also proposed a new “renovation zoning” category that would downzone an area but allow existing owners to upzone ONLY if they rehab their own house. What fun – a law that protects community owners while sealing out the carpetbagging developers!

I have been looking at the creation of historic districts – usually precipitated by threat of new development and often by really bad new architecture – and I have to agree with Fine when he says “There would be no preservation movement if we were building great buildings.” The dreck – often really expensive dreck – populating parts of Lincoln Park is responsible for getting people agitated about preserving what they have. Because what they have – even if it was common a century ago – is priceless and irreproducible now. Historic districts are a manifestation of people’s disgust new buildings and their desire to control their own environment – it’s appearance yes, but mostly its value – social, economic and architectural.