Miami and Vegas Sucker Punch Smart Growth

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Smart growth has simple concepts at its core.  The primary principle is that it is more efficient and environmentally friendly to have development patterns that are 1) mixed-use, 2) compact and 3) connected.  With those elements, transit functions efficiently, people can walk places, and development has a lighter impact on the natural environment.

The smart growth movement got a huge boost from the development boom, but the real estate bust has been especially hard on smart growth.  Even though people liked smart growth developments, our society has started to revert back to supporting suburban sprawl over smart growth because of the financial instruments that are available, or rather that are no longer available, to finance smart growth.

What happened?

Huge speculative condominium projects in places like Miami and Vegas went down in flames when the real estate bust hit.  Bankers and investors lost their shirts on these condo projects.  Large numbers of these condos went into default.  As a result, secondary underwriters, mainly Fannie Mae and Freddie Mac, changed their underwriting rules so that no buyer, no matter how qualified, could get a loan to buy a condo if the condo project did not have at least 70% sold to owner occupants (this rule is still in place).   Because most condo projects have more than 30% renters, it is now very difficult for someone to get a loan to buy a condo.

This over-tightening of credit to potential buyers of condos drastically reduced the pool of potential condo buyers, and simple supply and demand economics kicked in – demand was cut and prices went down.  And since condo prices dropped faster than the market on average, people have been further disincentivized from buying condos and prices have become even more depressed.  This negative feedback cycle has made developers and investors more reluctant to build mixed-use buildings and condo buildings in the future.

Without the ability to build condos, it will be nearly impossible to build dense, mixed-use projects.  This is a huge impediment to making meaningful progress in creating smart growth developments and tackling climate change.

Posted on February 12th 2010 in news

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