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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.


Don’t Bogart that Joint My Friend

October 26, 2009
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Posted By: Dwight Merriam, Partner, Robinson & Cole, LLP

Lyrics: Lawrence Wagner
Music: Elliot Ingber

(on the soundtrack of “Easy Rider”)

Chorus
Don’t bogart that joint my friend
Pass it over to me
Don’t bogart that joint my friend
Pass it over to me

Roll another one
Just like the other one
You’ve been holding on to it
And I sure will like a hit

[chorus]

Roll another one
Just like the other one
That one’s burned to the end
Come on and be a real friend

[chorus]

Marijuana is prescribed for certain medical conditions, such as pain relief, control of nausea and vomiting, and appetite stimulation. Since 1996, at least 13 states have legalized the sale of medical marijuana.

Now, check your zoning regulations and see what districts allow this land use:  “Retail Sales – Medical Marijuana.”  Couldn’t find it, right?

I first saw mention of this issue in Longmont, Colorado. It’s legal there and buyers now don’t have to drive into Boulder to get their meds.  Here’s a local proprietor with product to be prepared for sale.  One of his newest patients has had 14 knee surgeries and needs the pain relief.

Larry Hill — owner of the The Apothecary, 1314 Coffman St. — displays a medical marijuana plant Thursday that he has grown and harvested. Hill said he opened his medical marijuana dispensary in February and has “over 50 patients.” Lewis Geyer/Times-Call

Larry Hill — owner of the The Apothecary, 1314 Coffman St. — displays a medical marijuana plant Thursday that he has grown and harvested. Hill said he opened his medical marijuana dispensary in February and has “over 50 patients.” Lewis Geyer/Times-Call

When I started searching for other communities facing the issue of local zoning for medical marijuana sales, it was obvious there is a widespread debate.  Interestingly, Colorado and California, two of the 13 states allowing the sale, have most of the news stories.  Do you suppose their residents in those two states have special needs for pain relief, control of nausea and vomiting, and appetite stimulation?

Aspen, Colorado allows sale anywhere an office is permitted, says the city’s planning director.    

It’s being debated in Brush, Colorado, where there has been discussion (click here and here) about distancing requirements which would put the dispensaries on the same footing as liquor stores and sexually oriented business, hardly the medical treatment model. 

San Diego, California, has created a task force on the subject, but police are reportedly raiding dispensaries, guns drawn, bursting in using battering rams.

Charles Ziegenfelder, owner of PB 420 Cheech & Chong Headquarters, poses for a portrait just minutes before being informed that raids are being conducted at dispensaries in the area. Photo: Sam Hodgson. Courtesy www.voiceofsandiego.org

Charles Ziegenfelder, owner of PB 420 Cheech & Chong Headquarters, poses for a portrait just minutes before being informed that raids are being conducted at dispensaries in the area. Photo: Sam Hodgson. Courtesy http://www.voiceofsandiego.org

And, yes, there is even case law on the subject, from California, of course, where the Court of Appeal, Second Appellate District held that Claremont did not have to zone for the use and that the city could declare the dispensing to be a nuisance, at least where it appears the use is not permitted.  Go here for the actual decision.

For a good model zoning ordinance on “Medical Marijuana Dispensaries”, where else better to go than Berkeley, California?


Removal of Appointed Members of Planning and Zoning Boards

August 12, 2009
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Posted By: Professor Patricia E. Salkin

I often field phone calls asking whether planning and zoning members can be removed from office by the local legislative body.  Usually, the context involves board members who are allegedly “out of touch” with community desires and goals, or who “blatantly ignore” the urging of the appointing official or board.  Most of the time, however, state statutes and local laws provide that board members can only be removed “for cause,” yet the laws rarely define this phrase.  I typically try to engage in a conversation over what might be examples of “for cause.”  For instance, whether the board member missed a lot of meetings; whether the board member attended a number of meeting visibly (and perhaps verbally) unprepared; whether the board member failed to follow the by-laws or rules of procedure; and whether the board member consistently demonstrates a refusal to follow the applicable law.  Oftentimes, the answer to these questions is no, but the desire for removal seems more closely aligned with political motivations.  In these cases, I typically advise that the public relations nightmare and accompanying lawsuit that will follow, may not be worth the removal action. 

A recent federal district court case from Connecticut is instructive as to the legal analysis regarding the question of whether a federally protected property interest attaches to the position of planning and zoning board member.

Closson was appointed to the planning and zoning commission in 1997 and in 2005 he was elected by members of the commission to serve as chairman.  He was reelected as chairman in 2006 and 2007, and in 2007 he was reappointed by the Board of Selectmen to the commission. In 2008, the Board sent Closson a letter informing him that the Board intended to remove Closson for cause citing various alleged failures to amend the plan of conservation and development. About 10 days later, the Board held a hearing on the removal, and Closson presented evidence in his defense and argued that his performance was satisfactory. Two weeks later, the Board voted to remove Closson, and a week later Closson filed a lawsuit in state court alleging a violation of his due process.  The suit was removed to federal court.

On a motion to dismiss, the Town argued that Closson has no property interest in an voluntary, unpaid position as a commission member, and that he did receive due process regarding his removal. The District Court concluded that Closson did have a property interest in the appointed position, citing Connecticut state case law holding that an appointed fire marshall who received $70 per month and could only be removed for cause, had a continuing property interest in the appointment, the Court noted that under the Town Charter, Closson could only be removed for cause. The Court said, “it seems unlikely that Closson’s position as an unpaid, rather than minimally paid, appointee would change the Connecticut Supreme Court’s determination that such positions are property under Connecticut law.”  The Court then considered whether Closson’s property interest rises to the level of a federally protected interest.  While the Second Circuit has held that municipal board members do not enjoy federal constitutional protections of their positions, Closson argued that his position was appointed and not elected and therefore should be held to a different standard.  The District Court held, however, concluded that there is no federal due process protection for an unpaid, volunteer position on a municipal board, whether elected or appointed.

Closson v. Board of Selectmen, Town of Winchester, 2009 WL 1538138 (D. Conn. 6/1/2009).


Ficus Fight Fails Over Faulty Filing

April 27, 2009
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Posted By: Dwight Merriam, Partner, Robinson & Cole, LLP

Timing is everything.  Some advocates in Santa Monica last week learned that lesson – the hard way.  Treesavers v. City of Santa Monica Court of Appeal of California, Second Appellate District, Division Eight, 2009 Cal. App. Unpub. Lexis 3130, (April 22, 2009).

Notice that this is one of those unpublished decisions – the kind you can’t cite etc., sort of like what happens to you if you tear off that tag on the mattress.  When I see a decision that says not to be published, cited, quoted, read, whatever – it’s the first one I want to read.  Ever get one of those e-mail messages that says: “Bobby Bozo wishes to recall his email…?”  When I see one of those I figure it has to be something really good, right?  Go ahead, admit it, you look for that recalled e-mail…

Well, so too with these unpublished decisions.  Why do the judges decide something and then tell folks they shouldn’t read it?  Yes, I know, it is usually a narrow decision, based on the law and facts particular to that case, and whatever.

The basic facts are these.  The City of Santa Monica didn’t like the Ficus trees that were along certain roads.  Their roots are shallow and buckle the sidewalks.  Out go the Ficus, in come the Jacarandas and Gingkos, apparently much better behaved tress.

As the city reported:

“Ficus roots grow close to the surface, are destructive to the surrounding paved areas and generate a high level of sidewalk maintenance expenditures. Replacing the Ficus with the Ginkgo will reduce sidewalk maintenance expenditures and liability exposure in this pedestrian oriented district.”

Here’s a Ficus tree:

Here’s a Jacaranda:

And here is a Gingko:

“The plan calls for the creation of a cohesive district in the heart of downtown through a coordinated planting plan with variegated color and texture. Along the north-south streets, an alternating pattern of London Plane trees is proposed on Second, Fourth and Sixth Streets, with Jacaranda trees on Fifth and Seventh Streets to complement the existing Jacarandas on the Third Street Promenade. The existing Ficus trees on these streets will be ‘reforested’ over time with the new trees; the replacement of every other Ficus is proposed as a first phase improvement. In five to seven years, after the trees are well established, a second phase of replanting will replace the remaining Ficus.”

Treesavers, an unincorporated association of individuals who reside in the County of Los Angeles, opposed the plan, participated in the hearing and ultimately sued.  But they were too late in bringing the action – and that’s the lesson here for both sides:

“The bottom line problem with Treesavers’ current CEQA case is that the City Council approved the pedestrian and streetscape improvement project at a public meeting in October 2005, a meeting at which Jerry Rubin spoke about the removal of the ficus trees, and Treesavers did not file its petition for writ of mandate in the trial court until October 2007. The petition was too late.”

The time for the action started with the first decision:

“The 180-day limitations period starts running on the date the project is approved by the public agency, and is not re-triggered on each subsequent date on which the public agency takes some action toward implementation of the project.”

Always keep your eye on the statute of limitations.


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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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