How Conservative Ideas Could Make for Better Cities

Austin, Texas (Erik A. Ellison — CC BY SA 3.0)

By Daniel Van Oudenaren

In Austin, Texas, the two principle urban challenges are housing affordability and mobility. As thousands move to the city each year, home and rent prices rise and gridlock on already crowded roads gets worse.

Neither party in the city, the Democrats or the Republicans, is offering solutions. Austin City Council, comprised entirely of Democrats, has failed for years to agree on zoning changes that would allow for denser development, which would increase the availability of housing and allow for a more efficient deployment of transit resources.

Council members and the progressive voters behind them are locked in a stalemate between two internal camps — what loosely might be called preservationists and urbanists. The preservationists want to ensure that existing single-family neighborhoods are not destroyed, while the urbanists want to see denser development of multi-family apartment buildings, regardless of whether that means building over some existing neighborhoods.

Republicans are just as ambivalent as Democrats about density and have little to say about transit. Austin Republicans’ only major effort last election was a failed ballot measure to force the city to do a third-party efficiency audit. This kind of tactical maneuvering is what we might expect of a party that has consigned itself to the permanent opposition — not one that has a vision for a return to power. Rather than address pressing urban problems directly, the Republican Party has entrenched itself in a few holdouts on the city’s periphery, where residents can afford to ignore the problems at the city’s core.

Conservatives need a positive vision for addressing the challenges of housing affordability, mobility, and other urban problems. One way to do this would be to engage constructively with contemporary architectural and city planning ideas, including the movement known as “New Urbanism,” which proposes ways to make cities more livable, affordable, and environmentally friendly.

A conservative vision for urban reform should address the need for changes in at least four key policy areas: zoning, property taxes, mortgage finance, and transit. As outlined below, reforms in these areas would go a long way toward making the city more affordable and livable.

Eliminate zoning that serves little or no public purpose

Austin, like other cities, has a land development code that restricts how land can be used in different parts of the city. Adopted over 30 years ago, the current code strongly favors the preservation of neighborhoods consisting of single-family lots.

While Austin liberals have led the charge on reforming this code, including the failed recode effort known as CodeNext, conservatives have their own reasons for supporting a reform. The conservative case for reform is premised on respect for private property rights. Zoning restrictions like those in the Austin land code in principle are a form of limiting private property rights. They should be imposed only when there is a compelling public need for them.

In Austin, it is doubtful whether many requirements of the land code reflect a true public purpose or rather only a narrow interest. Height restrictions, for example, limit buildings to two to three stories in most parts of the city. Outside of the downtown, even “high density” multi-family zones have a maximum height of 60 feet.

The code also requires commercial properties and apartment buildings to make available a certain number of parking spaces. This prevents businesses from making their own decisions about how much parking they need, if any. While some businesses cater to customers visiting by car, others have only a small clientele or rely more on customers who walk, bike, use rideshares, or take public transit. By regulating businesses and apartment developers in this way, the city inhibits denser development, suppressing the supply of housing and retail space.

Of course, some limitations on landholders are clearly necessary for the protection of other landholders. Ordinances that are truly necessary for the public good should be preserved, while those that do not reflect a true public purpose should be eliminated.

Cut property taxes

Texas cities are booming, which means property values are rising, resulting in higher tax bills for landowners. It doesn’t help that city councils, school boards, and other taxing entities have been hiking rates year after year. While modest property taxes should be retained, the current rates are simply too high and are not fair to long-time residents whose home values have increased while their incomes have not.

City Council’s response to the affordability problem thus far has been to allocate bond revenue toward building a limited number of affordable housing units. This is simply not an adequate or appropriate response when Austin is seeing an influx of thousands of workers per year, pushing home values and rents to boom-time levels.

Affordable housing bonds will help only a very limited number of low-income people obtain housing, and only years into the future once the affordable housing projects are completed, whereas property tax cuts would have an immediate impact for all income brackets.

End federal subsidization of sprawl

A major driver of suburban sprawl is government subsidization of the single-family housing market through Fannie Mae and Freddie Mac, federally owned lenders in what is called the secondary mortgage market. Fannie and Freddie don’t lend to homebuyers directly but instead purchase or guarantee mortgages made by other lenders, such as Wells Fargo bank, Fannie’s biggest customer.

Here’s how it works. When a bank like Wells Fargo gives a mortgage to a homebuyer, it creates a stream of future revenue for itself in the form of principal repayments and interest. But it also runs the risk that the homeowner will never repay. A few defaults here or there aren’t a big deal for a bank, but in an economic downturn thousands of people could lose their jobs and default on their mortgages all at once.

To mitigate this risk, the bank looks to offload some of its loans to a secondary mortgage lender. In what’s called swap transaction, Fannie or Freddie takes a pool of mortgages off the hands of a bank, repackages it into what’s called a mortgage-backed security, or MBS, and gives this to the bank. The MBS is basically a paper that says the holder is entitled to payments from a batch of underlying mortgages, but it comes with a guaranty: even if the underlying mortgages go sour, the issuer (Fannie or Freddie) guarantees continuing payment. In return for the guaranty, Fannie and Freddie receive guaranty fees from the holders of MBS certificates.

While risk-shifting of this kind is not unusual in private capital markets, in this case the federal government plays an outsized role. Under the terms of its shareholding agreements in Fannie and Freddie, the federal government has committed to provide the companies with funds to maintain a positive net worth under specified conditions. Even if bad loans threaten to sink the two companies, the federal government will not allow them to collapse.

Markets consequently perceive securities issued by Fannie and Freddie to be implicitly guaranteed by the U.S. taxpayer and therefore very safe investments. This pushes outsized investment flows into the home market, suppressing interest rates.

‘Government subsidies distort demand toward one part of the housing market while suppressing it in another’

By facilitating lending at below-market rates, Fannie and Freddie artificially lower financing costs for single-family homes in the suburbs. Superficially, government subsidies would seem to promote housing affordability, but in reality they distort demand toward one part of the housing market while suppressing it in another. Fannie and Freddie boost housing supply in middle- to upper-end market segments that are unappealing to young people, singles, and low-wage earners whose demand is driving the affordability crisis in cities like Austin.

Fannie alone holds $3.1 trillion in single-family assets, which makes it the owner of 27% of total outstanding single-family mortgage debt in the country, according to Federal Reserve data. By contrast, it owns only $0.3 trillion in multifamily assets — just a tenth of what it invests in the single-family market. This is the result not of market forces but of decisions made by federal bureaucrats who set the company’s lending targets.

Beyond Fannie and Freddie, the federal government also subsidizes suburban sprawl through favorable tax treatment of homeowners, low central bank interest rates, and expansion of the money supply, which incentivize spending and indebtedness rather than saving.

Conservatives should be able to make a compelling case to end or adjust macro-economic policies that unfairly assist already privileged suburban areas. These subsidies are relics of the Baby Boomer era, are inconsistent with market-driven approaches, and do little to promote housing affordability where it actually is needed. Worse still, market subsidies enable banks to undertake lending practices that generate long-term systemic risks to the the U.S. economy.

Build smart transit

Each year Texas dedicates $2.5 billion in sales tax revenue and about $1.4 billion in oil and gas tax revenue to the State Highway Fund, and it gets more than $5 billion in federal transportation funds, derived from a federal tax on gasoline and diesel. This means that Texas has ample resources to fund transit of all types. Yet the state spends big on only one mode of transit — roadways designed to serve personal automobiles — without investing anything substantial in improving bus routes, light rail, or other modes of transit that would alleviate urban congestion.

This is explained as much by cultural, lifestyle factors as by political ones. In previous generations, personal freedom and the personal automobile were virtually synonymous. This was true for Democrats and Republicans alike, but especially for Libertarian-leaning conservatives for whom reliance on public transit appeared a threat to their autonomy. Today, new generations of urban Texans are more likely to see personal freedom as synonymous with not having to own a car to get around.

As increasing numbers of Texans lose their cultural biases for automobiles and suburban living, the state and its cities should have new opportunities to move away from Big Government transit solutions and toward limited, efficient mass transit solutions that will keep smaller, smarter networks of vital roadways clear of gridlock.

Gridlock on Texas roads is bad for economic efficiency, the environment, families, and communities. Every hour that a working father or mother spends in a traffic jam is another hour that he or she does not have to be in the workplace, the home, or the community. Values typically championed by conservatives — family, work, and vibrant local communities — are more easily lived out when people live in proximity to one another, able to visit one another’s homes, walk their children to school, or come home from work on a lunch break.

The American Dream of an idyllic suburbia where families grow and thrive in neat, picket-fence, single-family homes has turned into a nightmare in which our walls and technologies separate us from one another. The time has come for a new vision for American cities.

Originally published at https://www.honestaustin.com on June 19, 2019.

Original reporting on local Austin news, Texas politics, and the economy. honestaustin.com

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