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The Cause of the Housing Bubble, the Burst and the Recession Finally Revealed: It’s Growth Management

November 9, 2009
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Posted By: Dwight Merriam, Partner, Robinson & Cole, LLP

Those of us whose professional lives are inextricably linked to the real estate development economy in one way or another have had plenty of time in the last year to twiddle our thumbs and attempt to figure out what the heck happened.  This much we know — there was a housing bubble some places, it burst, and the economy collapsed. Have you ever slipped and fell – one those unexpected spectacular aerial feats where your feet fly out from underneath you, you look down your legs and see your toes at eye level pointing to the sky, and you say to yourself “this is really going to hurt when I land”?  That’s what this year has been like for many, some of whom are still waiting to hit hard because they had projects in the pipeline and they are grinding their way through “inventory” of unfinished work.  Plus, we started from a high plateau.  Wall Street types call the unexpected but apparent life in the market during the first part of a recession “dead cat bounce” which Forbes defines as “a temporary recovery from a prolonged decline or bear market, after which the market continues to fall.”  Even a dead cat dropped from a very high place will bounce a little when it hits the ground…

I have been reading all I can on what happened (to see me so engaged makes my law partners think I have work), though it’s uncomfortable at times as it feels a little like getting to know someone really well by reading their obituary.  The experts tell us that the housing bubble was caused by several factors.

1.  Too much home ownership.  Think of your local affordable housing programs.  Most produce housing for ownership. Homeownership has increased from 64% in 1994 to 69.2% in 2004, an all time high. It’s a chicken-and-egg thing.  Maybe the high level of ownership is driven by the easy credit, but it could be the other way around.  Compare our ownership with other countries.  In Switzerland 34.6% own, Germany 43%, France 55%, Austria 56%.  For the first time in a half century, home ownership in Great Britain declined in 2007.  Too many people with too little money own too many homes.  It’s cheaper to rent and some people who own homes should not have been enticed to buy them.

2. Buying for speculation rather than shelter.  A study by the National Association of Realtors a few years ago found that 23% of homebuyers specifically identified their purchases as investments.  Another 13% said they bought vacation properties, real estate which inherently has a speculative component. Think of all the house flippers you have had to listen to at parties, bending your ear about how they bought with a low interest adjustable rate mortgage so their carrying costs would be low, tidied up the place, and sold it for some big profit?  California (of course, it’s always California) has a licensed real estate agent for every 52 people.  Compare that with say, veterinarians.  California has the 8th highest per capita ratio of veterinarians, yet they have just one for every 5617 people – in short you’re more than a hundred times more likely to encounter a real estate broker than veterinarian in California.

3.  Low interest rates.  The plain fact is that money has been and is cheap.  Cheap money was brought to us in the first instance by the dot.com crash in 2000 and the Federal Reserve cutting its short-term rates to the lowest ever, down to 1% from 6.5%, to overcome the 2000-2001 recession.

4.  Residential real estate as a safe harbor.  So, after NASDAQ dropped some 70% when the dot.com bubble burst, people took what money they had left and put it in residential real estate, figuring that had to be safe.  That drove up the price of housing, as did the easy credit, over-emphasis on ownership, and herding instinct encouraged by the media touting investment in residential real estate.

5.  Bad lending practices.  This we have all heard enough about that to accept it as a principal cause for the bubble and its bursting. Now, however, many foreclosures are of good loans, ones with relatively low loan-to-value ratios,  and fully-amortizing at fixed rates.  The problem has become that the bursting bubble has wiped out jobs which has eliminated income which has led to defaults – all in a cascading effect.

So, that’s my take on what happened, but along comes Randal O’Toole, a Senior Fellow of the Cato Institute, which might be fairly described (not by themselves) as a libertarian think tank in Washington, DC.  O’Toole is a burr under the saddle of planning.  In 1996 he wrote The Vanishing Automobile and Other Urban Myths which lambasted New Urbanism and Smart Growth. In 2007 he published The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future which the advertising says “reveals how government attempts to do long-range, comprehensive planning inevitably do more harm than good by choking American cities with congestion, making housing markets more unaffordable, and sending the cost of government infrastructure skyrocketing.”

Here he is pitcured on one of the sites with his biography.  You can get information here also.

randalotoole

Planning magazine, published by the American Planning Association, is quoted on the Cato website as saying “O’Toole today looks a lot like Jane Jacobs did in 1961. They’re both outsiders with a detailed grass-roots view of how planners—with the best of intentions—are following a fashion into disaster.”

You got the picture.  I don’t agree with him for the most part, but he’s a good writer, a good speaker, and he is thought provoking.  Planning needs to be challenged if nothing more than to ferret out the mistakes, the weaknesses, the false assumptions, and thus make it better.  His latest burr, an especially prickly one, is an October 1, 2009 report for Cato entitled “How Urban Planners Caused the Housing Bubble.”

He asks why California and Florida are ground zero for burst bubbles and Georgia and Texas escape largely undamaged.  The answer, he says, is simple – the former two states have growth management, the latter two don’t, and growth management constrains supply, driving up prices.  When the bubble gets big, it bursts.

The solution?  He says “…states and urban areas with growth management laws and plans should repeal those laws and dismantle the programs that made housing expensive in the first place.”  No bubble, no burst, no recession.

Ask yourself what metropolitan area has the absolutely toughest growth management system?  You will likely answer: Portland, Oregon.  I went to the latest Case Shiller index for year-over-year prices and see that Portland with a highly constrained market is down 14.4%.   Atlanta, essentially a free-fire zone when it comes to development, is down 15.3%.  And Detroit, it’s a complete tragedy, is down 23.6%, barely beaten by Miami at 29.5%. Google “Detroit growth management” and the first hit is the Detroit Economic Growth Management Corporation. Its job is to promote growth.

We must remember that the big bubble, big loss markets are for the most part ones that had enormous increases in value, so the bursting brings them back to the ground (no Balloon Boy hoax here).  Detroit is quite different as it never enjoyed the up swing and its devastation is almost entirely to be attributed to the loss of jobs.  It really is about employment now.  Augusta, Maine, with steady employment from the state capital, has had no bubble and no burst.

Growth management may be part of the problem in some markets, but the true cause of the housing bubble is far more complex than that.


The Eleventh Commandment: “Thou Shalt Not Violate the Establishment Clause”

August 19, 2009
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Posted By: Dwight Merriam, Partner, Robinson & Cole, LLP

So sayeth the Tenth Circuit in Green v. Haskell County Board of Commissioners on June 8, 2009, followed on July 30th by the court en banc voting 6 to 6 to deny a rehearing.  Close only counts in horseshoes and hand grenades. 

In reading the dissent to the en banc decision, you will see the frustration and angst among both local officials and the jurists as to where to draw the line.

The board of commissioners of Haskell County, Oklahoma, authorized a Ten Commandments monument, eight feet tall, in front of the county’s courthouse in Stigler.  Here it is up close:

And here it is in context:

Here is the layout of the front lawn (Appendix C, page 51 of the decision):

clip_image003

As you may recall, the U.S. Supreme Court decided two Decalogue cases in 2005, allowing the monument in one, Van Orden v. Perry, and finding an Establishment Clause violation in the other, McCreary County v. ACLU of Kentucky. The difference appears to be that the former had been up for many years and did not have any apparent history of being placed in support of religion.

The Haskell County monument, emplaced on November 5, 2004, was up just a year before it was challenged and the there was ample evidence that many supporters wanted it there for religious purposes.  It was sponsored by Michael Bush, a construction worker and part-time minister who helped raise the money for it from local churches. Two of the three county commissioners, and several ministers, attended the unveiling of the monument (along with 200 people and representatives of 17 churches) and participated in a rally afterwards. 

In speaking of the monument sometime in November 2004, one county commissioner reportedly said:

“That’s what we’re trying to live by, that right there…The good Lord died for me. I can stand for him, and I’m going to…I’m a Christian and believe in this.  I think it’s a benefit to the community.”

 Another county commissioner said:

  “God died for me and you, and I’m going to stand up for him.”

At a rally two weeks later attended by 300-400 people, one commissioner said:

“I’ll stand up in front of that monument and if you bring a bulldozer up here you’ll have to push me down with it.”

At least one photograph in the press showed all three commissioners standing next to the monument.

The commissioners failed to distinguish their personal religious beliefs from that of the Board and consequently “left the impression that a principal or primary reason for the erection and maintenance of the display was religious.”

The Alliance Defense Fund plans to petition for certiorari in the U.S. Supreme Court.

“Americans shouldn’t be forced to abandon their religious heritage simply to appease someone’s political agenda,” said ADF Senior Counsel Kevin Theriot.  “As some of the dissenting judges pointed out, the three-judge panel’s decision is in conflict with both the U.S. Supreme Court and other federal appellate courts.  There is no difference between this Ten Commandments display and the one at the Texas state capitol that was upheld by the U.S. Supreme Court nearly five years ago.”

Here is a checklist I have prepared, based on my review of the several cases, for local government lawyers to use in managing the placement of religious monuments on public property:

1. Put up several monuments at once, including totally secular ones, like the Star Wars Pledge of Allegiance:

 

Star Wars Pledge of Allegiance


By Miba Reywes

I pledge allegiance to George Lucas,
the master of all that is Star Wars,
and to the movies he has created,
one galaxy, in war,
OT and PT, with Jedi
and blasters for all.

http://www.starwarsdotcom.com/fans/fanfiction/miba003.html.

In Haskell County, the minister who sponsored the display added the Mayflower Compact on the back apparently to somehow neutralize the religious content of the display.  Really, he did that.  The Board didn’t know about it.

2. Have the commissioners who vote to approve the monument say things like:  “So what are the Ten Commandments – I never heard of ‘em.”  And “Ten?  I thought there were two – drink beer and party.”

3.  After the vote to authorize the monument, have a couple of commissioners say something showing that they didn’t really know what they were voting on, like:  “Decalogue?  I thought we were building a ‘deck of logs’ in the park.”  In that way you totally insulate the commissioners from any religious intent.

4.  Have Larry Flynt sponsor the monument.  He’s got a kind of religion, yes, but not usually associated with this type of display.

5.  Have all the ministers and other religious types stay away from the unveiling.

6.  On further thought, don’t have an unveiling – have it erected on some moonless night behind the densest bush you have and a few weeks later approve a new landscape plan that eliminates the bush.

7.  Glue moss to the side in the shadows and prominently engrave on the bottom of any display: “Erected anonymously and without public support on November 14, 1957”.


RLUIPA Ripeness Rule Reinforced

July 27, 2009
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The concept of ripeness in several realms is elusive.  I have never figured out how to properly thump a melon at a grocery store, although I have made a thorough study of it.  You might want to click here, or here, or here  for some guidance, none of which seems to work when it’s just me in a stare down with a cold, stone faced and silent honeydew.

Just yesterday one of my younger children from what we call the “second litter” asked me at dinner how I could tell if a coconut was ripe.  I paused, realized that I had no answer, and did what every good parent should do and asked instead why they weren’t eating their salad.  Yes, attack and divert.

You think melons and coconuts are tough — try ripeness in land use litigation.  It has been a battleground in regulatory takings.  No one seems to like the current rules.   Here’s an article which you might find useful for background.  Even Professor Daniel R. Mandelker of Washington University in St. Louis, who is a self-styled “police power hawk” (meaning he is almost always on the side of planning, regulation and government), doesn’t like the current ripeness rules and testified in the U. S. Congress about what it should do to fix the situation.  Professor Mandelker co-hosts IMLA’s teleconference series “Mondays with Mandelker and Merriam.”  Click here for information.

Ripeness is a good defense for government lawyers and ripeness rules do make sense where they prevent a case from being tried prematurely, because it is almost always better for all concerned if property owners and government have an opportunity to resolve their differences.  Ripeness, at least as it applies to inverse condemnation, has two prongs.  First, the government must reach a final position so that everyone knows what can be approved and what won’t be.  The second prong is that a property owner must seek compensation in the state courts before proceeding to the federal courts for relief.

That first finality prong of ripeness made its way into litigation under the Religious Land Use and Institutionalized Persons Act (RLUIPA) in the case of Murphy v. New Milford in the Second Circuit.

On Wednesday, the United States Court of Appeals for the Third Circuit handed down a decision in Congregation Anshei Roosevelt v. Planning and Zoning Board of the Borough of Roosevelt in which it adopted the ripeness rule applied in the Murphy case.   The lawyer for the Borough of Roosevelt was Professor Marci Hamilton, who will be the guest of Professor Mandelker and me on our IMLA teleconference next Monday, August 3rd.  She also represented New Milford in the Second Circuit in the Murphy case.

In Murphy, the complainants were conducting prayer meetings at their home.  Those meetings became more frequent and attracted larger numbers of people.  The zoning enforcement officer issued a cease and desist order on the ground that the use of the property for a religious institution was not permitted.  The Murphys went to federal court and won on their RLUIPA claim.  However, the Second Circuit said that the case was not ripe for adjudication because the Murphys had not appealed the cease and desist order or applied for any local zoning relief such as a variance.

In Roosevelt, the Congregation Anshei Roosevelt brought an action in federal district court in New Jersey against the Borough of Roosevelt, its mayor and council, and its planning and zoning board under RLUIPA and state law.  The defendants moved to dismiss claiming that the matter was not ripe for judicial review.  The federal district court granted the motion to dismiss and on appeal to the United States Court of Appeals for the Third Circuit, that court affirmed the district court’s dismissal. 

The Congregation established a small New Deal resettlement in the Borough long before zoning was enacted.  Under current zoning regulations, the pre-existing, non-conforming synagogue has been allowed to continue.

In 2005, the Congregation entered into an agreement with the Yeshiva under which the Yeshiva would provide the Congregation with rabbinical services and the Congregation in turn would allow the Yeshiva to conduct study and worship activities at the synagogue.  The Yeshiva began its operations, a neighbor complained, the zoning officer consulted with the Borough attorney, and it was ultimately decided that the activity could continue as part of the non-conforming use. 

Enter the concerned citizens group, the Roosevelt Preservation Association.  The Association appealed the zoning officer’s decision to the Planning and Zoning Board.  Hearings were held.  A rabbi testified as to why a Yeshiva is necessarily is part of a synagogue, the neighbors testified that there were 34 students enrolled and that those students congregated on the property and the street and that there many cars coming to and from the Yeshiva. 

The Board ultimately overturned the decision of the zoning officer and said that the Yeshiva would need a variance to operate there.  In the Board’s view requiring an application for a variance would not be a substantial burden on the congregation and the Yeshiva.

In the Court of Appeals, the Congregation and the Yeshiva argued that the case was ripe because the Board had reached a final determination on whether the Yeshiva was a house of worship use and therefore permitted as a pre-existing, non-conforming use and that the Board had also decided that the current zoning regulations were applicable to the property.

In handing down its decision, the Court of Appeals noted that ripeness is a jurisdictional inquiry under Article III of the U. S. Constitution.  The Court went on to cite the leading inverse condemnation case in this area, Williamson County Regional County Planning Commission v. Hamilton Bank of Johnson, U. S. Supreme Court (1985) and quoted from it noting that the takings claim as decided in that case was “not ripe until the government entity charged with implementing the regulations has reached a final decision regarding the application of the regulations to the property at issue.”

The Court of Appeals also cited Murphy and the four reasons for requiring ripeness:  it helps develop the full record, it provides the Court with knowledge as to how the regulation will be applied to a particular property, it may avoid litigation all together if the local government gives the relief sought, and it shows “the judiciary’s appreciation that land use disputes are uniquely matters of local concern more aptly suited for local resolution.”

The Court of Appeals said that the Board had not determined that the Yeshiva was not a permitted use, but had only found that there was a “significant increase in the intensity of that use” and that the variance was necessary to “consider the effect on the neighborhood.”

As so the claim that the Board had made a final determination with regard to the application of the zoning rules at this property, the Court discussed the land use aspects of RLUIPA and ultimately determined that “[t]he factual record is not sufficiently developed to decide fully the RLUIPA claim here, and the Board has not issued a definitive position as to the extent the Yeshiva can operate on the synagogue property.”

The pièce de résistance is what every local government lawyer and planner likes to hear from a federal court:  “Finally, we have stressed ‘the importance of the finality requirement and our reluctance to allow the courts to become super land-use boards of appeals.  Land-use decisions concern a variety of interests and persons, and local authorities are in a better position than the courts to assess the burdens and benefits of those varying interests.’”

Time and time again federal courts have stated emphatically that they do not want to be “super land-use boards of appeals,” and consequently they have, in most cases, supported ripeness rules that require finality in the decision making process at the local level.

The Third Circuit has marked the decision as “not precedential.”  However, the Federal Rules of Appellate Procedure were recently amended to allow the decision to be cited.

Rule 32.1 Citing Judicial Dispositions

(a)    Citation Permitted. A court may not prohibit or restrict the citation of federal judicial opinions, orders, judgments, or other written dispositions that have been: (i) designated as unpublished, not for publication, nonprecedential, not precedent, or the like; and (ii) issued on or after January 1, 2007. (b) Copies Required. If a party cites a federal judicial opinion, order, judgment, or other written disposition that is not available in a publicly accessible electronic database, the party must file and serve a copy of that opinion, order, judgment, or disposition with the brief or other paper in which it is cited.

The debate continues on how these nonprecedential decisions can be used. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1280962.

Meanwhile, I will go on mindlessly thumping the honeydews…


What Happens When an Irresistible Force Meets an Immovable Object – A Moratorium to Promote Sustainable Development Runs into the Constitutional Right to the Exercise of Religion

July 21, 2009
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Posted By: Dwight Merriam, Partner, Robinson & Cole, LLP

The unstoppable force paradox is an exercise in logic that seems to come up in the law all too often. There is a Chinese variant. The Chinese word for “paradox” is literally translated as “spear-shield” coming from a story in a Third Century B.C. philosophy book, Han Fiez, about a man selling a sword he claimed could pierce any shield. He also was trying to sell a shield, which he said could resist any sword. He was asked the obvious question and could give no answer.

The Washington Supreme Court broke the paradox between a 12-month moratorium during which the City of Woodinville considered sustainable development regulations for its R-1 residential area, and the efforts by the Northshore United Church of Christ (Northshore Church) to host a movable encampment for homeless people on its R-1 property. City of Woodinville v. Northshore United Church of Christ (July 16, 2009).

Throw into the mix the Washington State Constitution and the federal Religious Land Use and Institutionalized Persons Act (RLUIPA) and you have enough irresistible forces and immovable objects to fill any Chinese philosopher’s book.

The encampment of 60-100 people in the Puget Sound area moves from place to place every 90 days. When it came time for it to move, and Northshore Church applied for a temporary use permit, the city refused to act on it based on the moratorium put in place just a few months before.

Here is the encampment from the city’s website:

int_TentCity

Here’s another photograph, courtesy of MyNorthwest.com which also has a story on the case and a KIRO radio report.

9488

Northshore Church sued. The city won at trial and got an injunction against the encampment. The trial court held that the city met its obligation to have a narrowly tailored moratorium that achieved a compelling governmental purpose – thus, there were no constitutional or RLUIPA violations. The appellate court upheld the trial court, even though it found that the trial court should not have applied strict scrutiny.

The Washington Supreme Court reversed, holding that the city could not refuse to process the application because the Washington Constitution guarantees “[a]bsolute freedom of conscience in all matters of religious sentiment, belief and worship…[and] shall not be so construed as to … justify practices inconsistent with the peace and safety of the state.” The refusal to process the application was a substantial burden, said the court, because “[i]t gave the Church no alternatives.”

The Court did not reach the RLUIPA claim as it held the constitutional violation was dispositive.

The city’s website describes the appellate court decision, but does not report the Supreme Court’s reversal. Northshore Church’s website, however, celebrates the decision.

The key point is the utter lack of any alternatives. The city simply refused to process the application. Northshore Church said at oral argument that it could have hosted the encampment inside the church (sounds like new evidence to me – surprising how often this kind of thing sneaks in during appellate argument) and the Washington Supreme Court noted this as illustrative of how refusing to process the application precludes considering any alternatives. Almost as important was the moratorium of 12 months and the Washington Supreme Court’s precedential decision that a 14-month delay created an unconstitutional burden. The city had not shown the moratorium to be a narrow means of achieving a compelling goal. “Planning pause” moratoria, as we call them, are hard to justify beyond six months and most moratoria should allow some administrative relief for exceptional cases. This is one of those exceptional cases, where the permit was for a temporary use, a use not likely to defeat the purpose of this moratorium to study how to have more sustainable development in a residential zone.


Development Opposition Results in Civil Stalking Protection Order

July 13, 2009
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 Posted By: Dwight Merriam, Partner, Robinson & Cole, LLP

I get back from a nice nine days cruising in my sailboat to face over 1,000 emails and there in the midst of them is a slip opinion in a land-use civil stalking complaint.  It kind of makes me want get back onboard with Captain Morgan and sail away…

Thanks (I guess) to my friend, Stuart Meck, FAICP/PP, Associate Research Professor and Director, Planning Practice Program at the Edward J. Bloustein School of Planning and Public Policy at Rutgers, The State University of New Jersey, for this little gem. (Stuart — your title is longer than my resume, for heaven’s sake).  Stuart was from Ohio in another life and with Kenneth J. Pearlman publishes the annual treatise, Ohio Planning and Zoning Law (Thomson West).  Stuart’s a planner, not a lawyer, but he knows land use law.

The back story is this.  Three 20-something idealists decide to do an ambitious mixed use project in Oberlin, Ohio.  It even gets the attention of The New York Times in 2006.   Here are the young entrepreneurs courtesy of The New York Times.

untitled

Ben Ezinga, left, Naomi Sabel and Joshua Rosen, collectively known in Oberlin, Ohio, as “the kids,” put together the financial backing and city support for a $15 million development on a site vacant for years. David Maxwell for The New York Times

Their project was budgeted at $15 but became $17 million and includes 28,000 square feet of retail space, 52,000 square feet of residential space and about 15,000 square feet of parking. They closed on the financing and have the project under construction.

The string of messages spanning almost three years on this blog is a good read.  The threesome calls themselves Sustainable Community Associates and their website has detailed information on the project. You can see the construction underway on videos they have posted at the website.  Many recent photographs (July 8, 2009) are available on flickr.

Nice story; happy ending forthcoming, I assume, if the rotten real estate economy doesn’t take them down.

However, early on, one Mark Chesler became a vitriolic opponent.  Click on this and read some of his testimony and think back to those hearings when you sat through similar diatribes.   And if you want more, click here.

It got so bad that Rosen sought and was granted a civil stalking protection order against Chesler, who allegedly yelled things at Rosen on the street 7-10 times in two months before the order was issued.  The court issuing the order (actually adopting a magistrate’s decision) and the court on appeal found a “pattern of conduct” which is two or more actions or incidents closely related in time. One of them was in a restaurant where Chesler yelled at Rosen: “I got you now.”

A few days later Chesler confronted Rosen downtown.  There were other encounters reported in the decision by the Court of Appeals Ninth Judicial District on June 30, 2009, upholding the order.  Rosen feared bodily harm.

This land-use business can be tough.


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This blog is made possible by the International Municipal Lawyers Association (IMLA), but may include guest bloggers (who are attorneys with experience in local government matters) who might or might not work for IMLA. Their views (and those expressed on this site) do not necessarily express the views of IMLA.

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