In 2004 and 2005, American homebuilders created over two million new housing units per year, including mobile homes. Then housing construction plummeted to under 600,000 new units per year, a record fall of 70 percent, and home prices fell drastically too.

Housing will not help lead the U.S. economy out of this recession, as it has done many times in past recessions. A major reason is that America’s housing industry suffers from nine deficiencies that limit its ability to meet our housing needs. Some of these deficiencies are not widely recognized or are even considered advantages by the housing industry. Until its problems are better and more widely understood, that industry will continue underserving U.S. housing needs. This article summarizes those nine deficiencies and then analyzes them in more detail.

The Nine Deficiencies

1. The biggest deficiency is the lack of households willing and able to buy homes
    
2. A combination of falling home prices, losses of jobs by millions of Americans, and low-quality home mortgages sold to home buyers led many home owning households to default on their mortgage payments.
    
3. The federal government has tried several times to enable foreclosed home owners to remain in their homes, but its efforts have been limited because both banks and other mortgage lenders have fought taking any “haircuts” in their loan amounts to make that possible.
    
4. The deduction of mortgage interest payments from the taxable incomes of home owners is a large government subsidy that provides most of its benefits to the wealthy owners of costly homes.
    
5. Control over what types of homes are permitted within each community is completely exercised by that community’s local government, but many suburban governments are pressured by homeowners to exclude housing affordable to lower-income households.
    
6. In each year, homebuilders construct as many new units as they can sell during that year. But doing so in prosperous periods requires selling into housing demands oriented towards the future.
    
7. Many thousands of individuals and low-income households are essentially homeless.
    
8. The measures of home prices used by the housing industry and major media distort what really happens to home prices.
    
9. Bankers and other parties who normally provide loans to potential homebuyers have adopted stringent requirements for persons trying to qualify for home loans.

       

During the past two decades, most large American cities have lost population, yet some have continued to grow. Does this trend foreshadow the “death” of our largest cities? Or is urban decline a temporary phenomenon likely to be reversed by high energy costs? This ambitious book tackles these questions by analyzing the nature and extent of urban decline and growth of large U.S. cities. It includes and integrates five substudies. The first examines urban decline and some of its long-run causes, and whether cities that are losing population are performing their economic and social functions less effectively. The second substudy is a multivariate analysis of factors associated with the growth and decline of 121 large U.S. cities and their metropolitan areas. Although its causes vary, urban decline appears closely related to processes that have both upgraded individual households and generated serious problems for city governments and poor neighborhoods. A third substudy shows that neighborhood decline is part of a systematic process related to the influx of poor households into metropolitan areas. Another substudy simulates five antidecline strategies in a single metropolitan area, that of Cleveland, Ohio, and finds that severe decline (occurring in about one-fourth of large U.S. cities) could be slowed, though not stopped by vigorous policies. From the last substudy it emerges that, even if gasoline prices rose to over $2 a gallon, resulting adjustments by commuters and firms would produce little net centralization of future urban development—though many older neighborhoods would probably be rehabilitated. The book concludes that further losses of population and jobs in most severely declining cities are unavoidable in the near future. Even Southern and Western cities, now growing fast, will find their rate of growth slowing as further annexation of surrounding territory is limited. The book ends with two chapters discussing policies designed both to help declining population and job losses and to minimize such loses in other cities.

       

Rental housing is increasingly recognized as a vital housing option in the United States. Government policies and programs continue to grapple with problematic issues, however, including affordability, distressed urban neighborhoods, concentrated poverty, substandard housing stock, and the unmet needs of the disabled, the elderly, and the homeless. In R evisiting Rental Housing, leading housing researchers build upon decades of experience, research, and evaluation to inform our understanding of the nation’s rental housing challenges and what can be done about them. It thoughtfully addresses not only present issues affecting rental housing, but also viable solutions. The first section reviews the contributing factors and primary problems generated by the operation of rental markets. In the second section, contributors dissect how policies and programs have—or have not—dealt with the primary challenges; what improvements—if any—have been gained; and the lessons learned in the process. The final section looks to potential new directions in housing policy, including integrating best practices from past lessons into existing programs, and new innovations for large-scale, long-term market and policy solutions that get to the root of rental housing challenges. Contributors include William C. Apgar (Harvard University), Anthony Downs (Brookings), Rachel Drew (Harvard University), Ingrid Gould Ellen (New York University), George C. Galster (Wayne State University), Bruce Katz (Brookings), Jill Khadduri (Abt Associates), Shekar Narasimhan (Beekman Advisors), Rolf Pendall (Cornell University), John M. Quigley (University of California–Berkeley), James A. Riccio (MDRC), Stuart S. Rosenthal (Syracuse University), Margery Austin Turner (Urban Institute), and Charles Wilkins (Compass Group).

       

U.S. stock markets are gyrating on news of an apparent credit crunch generated by defaults among subprime home mortgage loans. Such frenzy has spurred Wall Street to cry capital crisis. However, there is no shortage of capital – only a shortage of confidence in some of the instruments Wall Street has invented. Much financial capital is still out there looking for a home.

As this brief describes, the facts hardly indicate a credit crisis. As of mid-2007, data show that prices of existing homes are not collapsing. Despite large declines in new home production and existing home sales, home prices are only slightly falling overall but are still rising in many markets. Default rates are rising on subprime mortgages, but these mortgages—which offer loans to borrowers with poor credit at higher interest rates—form a relatively small part of all mortgage originations. About 87 percent of residential mortgages are not subprime loans, according to the Mortgage Bankers Association’s delinquency studies.

Subprime delinquency rates will most likely rise more in 2008 as mortgages are reset to higher levels as interest-only periods end or adjustable rates are driven upward. Unless the U.S. economy dips dramatically, however, the vast majority of subprime mortgages will be paid. And, because there is no basic shortage of money, investors still have a tremendous amount of financial capital they must put to work somewhere.

On the immediate problem of mortgage defaults, some aid to the subprime borrowers might be justified, but bailing out the lenders even more than we have up to now would create a moral hazard by merely encouraging them to do it again.

Policy Brief #164

The Great Capital Inflow into Real Estate

Throughout the 1990s, the investment community had largely considered real estate undesirable because of its falling rents, occupancy rates, and prices; so investors shifted most of their attention and funds to stocks and bonds. This helped launch a record price rise in world stock markets. Soaring stock prices drew money away from real estate into stocks until the Internet stock bubble burst early in the new century.

Overnight, real estate morphed from a pariah among investors to the major viable and easily accessible way to invest funds, since stock markets were plummeting in value. The NASDAQ composite index fell over 70 percent in value from its 2000 peak in two years, and the other major indices also declined sharply. But real estate investment trust (REIT) stock prices started a steady climb as money flowed into both residential and commercial property markets.

This money came mainly from a global over-supply of savings from rapidly developing nations like China and India, from newly independent Eastern European nations just returning to market economies after almost a half-century of Soviet domination, from soaring profits in oil-producing states like Russia, Saudi Arabia, Venezuela, and Iran, from zooming corporate profits in the U.S. economy, from investors borrowing money at almost zero interest in Japan and investing it elsewhere at higher rates and from a variety of other sources. A fundamental paradigm shift took place in the attitude of world financial institutions and investors toward the relative desirability of real estate – especially commercial properties – as compared to other asset classes.

The Impacts of Securitizing Real Estate Finance

The expansion of a financial technique known as securitization helped to encourage the change in attitude toward real estate. Formerly, mortgage lenders often held onto the entire mortgage until it was repaid. But under securitization, lenders put many such mortgages into a single pool, dividing the interests into several different “tranches.” With differing yields and access to mortgage repayment flows, tranches offered differing degrees of risk. Mortgage repackagers could sell off tranche pieces to other investors, spreading the risks of any one mortgage among many lenders. This technique reduced the risks and allowed for the expansion of world capital available to real estate. The globalization of capital markets also aided the flow.

Securitization also generated more private mortgage lenders and packagers who were not covered by extensive federal regulations. Residential mortgage-backed securities issues by private labels rather than federally regulated agencies accounted for $135 billion, or 21 percent, of all such securities issued in the first quarter of 2003, but rose to about $320 billion, or 56 percent of the total issued, in the fourth quarter of 2005. Private label issuers were more likely to engage in reckless subprime lending with extremely easy credit terms for subprime borrowers. So their expanded responsibility for residential mortgage lending increased the risks of such lending through 2005.

Securitization of real estate debt also created great uncertainty about who would be responsible for absorbing losses or working out repayment problems if borrowers were unable to pay on time. The actual sources of capital for any one loan were so scattered among multiple lenders, each with a relatively small piece of each total loan, that no one was certain who would bear the costs for defaults or delinquencies. The massive amount of securitized debt outstanding had never been subjected to a large-scale repayment crisis; so past experience was not much of a guide.

Effects of the Massive Capital Flow into Real Estate Markets

As capital poured into real estate, especially after 2000, it generated a worldwide upward movement in real property prices. This was most evident in housing prices, not only in the United States, but throughout the developed world – except in Japan and Germany. According to Freddie Mac’s home price index for 381 U.S. metropolitan areas, based on repeat sales of the same properties, housing prices had risen 46.5 percent in all of the 1990s, but they then rose almost another 59.8 percent in just the first six years of the new century.

This worldwide inflow of financial capital into real estate was a crucial factor influencing U.S. housing prices and the general boom in housing production after 2000. As the value of housing soared, U.S. homeowners realized they had more equity in their homes; so many borrowed against that equity or refinanced their homes at falling interest rates and used some of the acquired funds to stimulate their general consumption. That helped keep the entire U.S. economy booming. It also led to bigger U.S. trade deficits with the rest of the world as we imported more than we exported, and paid for that deficit by issuing Treasury securities and other I.O.U.s to foreign investors and governments.

Much of that gigantic pool of capital from around the world is still out there looking for something in which to invest, and investors are still willing to consider real estate – including American real estate. The outcries of Wall Street that there is a capital crisis are exaggerated – there is only a shortage of confidence in some of the instruments that Wall Street has invented to capture some of that capital. Though the resulting uncertainty has spread to banks and other financial institutions, plenty of capital is still out there and looking for a home.

The Current Overall U.S. Housing Market Situation

In both 2004 and 2005, the U.S. housing industry built 2 million new housing units, including mobile or manufactured homes. Yet most demographers believe our economy actually needs only about 1.3 million new housing units to supply shelter to all new households formed each year, plus 200,000 to 400,000 new units to replace obsolete older ones. This means the homebuilding industry was reaching into future demand to support its high levels of new housing production in 2004 and 2005. Four previous high-level bursts of new housing production have been followed by two-to-five year production declines averaging 37.5 percent. Housing starts have already fallen below 2005 levels by 13 percent in 2006 and 29 percent so far in 2007. So the housing industry’s production decline is not over yet, and will continue through 2008.

Sales of existing homes have also decreased in number from a peak rate of 7.2 million per year in September 2005 to 5.5 million per year in August 2007, a drop of 23.6 percent. However, that does not mean housing prices as a whole will collapse, even though such prices have risen dramatically in the past decade. According to Freddie Mac’s home price index, housing prices in 381 U.S. metropolitan areas rose an average of 46.5 percent in 10 years from the first quarter of 1990 to the first quarter of 2000, then soared an average of 59.8 percent in the six years from the first quarter of 2000 to the first quarter of 2006. From early 2006 to the second quarter of 2007, home prices continued to rise in 314 of those metropolitan areas, or 82 percent, by an average increase of 7.3 percent. In the other 41 metropolitan areas, prices dropped by an average of 3.4 percent. The areas with continued price increases included 24 of the 29 largest metropolitan areas in terms of population.

As of September 2007, National Association of Realtor data show that the median price of existing homes sold was down only 4.2 percent nationally vs. one year earlier, though down 8.8 percent in the west. These data show that prices of existing homes are not collapsing, despite large decreases in both new home production and sales of existing homes.

Why is that happening? Most American home owners do not have to move. So when prices start to fall below what they think their homes are “really worth,” they will simply withdraw those homes from the market and wait for prices to improve. This puts a floor under the prices of most single-family homes. Where overbuilding has been spectacular and many buyers were speculating on flipping the units they bought rather than occupying those units, a price collapse could occur. That is most likely in condominium markets in big cities like Miami and Las Vegas, but probably will not spread to typical single-family homeowner units in most U.S. metropolitan areas.

The Subprime Mortgage Situation

The subprime mortgage market has recently generated the most concern that credit markets may completely seize up and paralyze the economy. In fact, subprime mortgages form a relatively small part of all mortgage originations. They are mortgages made to households with poor credit records at interest rates 3 to 4 percent above normal prime mortgages. Lenders liked them because they had higher interest rates than prime mortgage rates, which had fallen very low in the early 2000s. Borrowers with poor credit liked them because they enabled such households to buy homes when they otherwise could not do so.

But when prices stopped rising and began to decline, as they did in many markets after 2005, subprime default rates began to rise. Since many mortgage-backed-bonds had been based on subprime loans, the conduits floating those bonds had a hard time making their payments to the persons or institutions investing in such bonds. Surprisingly, those persons and institutions included many in Europe and even in Asia who had been attracted by high-interest rates and the prospects of continuing increases in housing prices. Moreover, the conduits creating such bonds were largely unregulated, private firms, unlike Freddie Mac and Fannie Mae, and took many risks by making loans with no down payments, monthly payments of interest only and even no checking of borrowers’ incomes.

Yet among all U.S. residential mortgage originations, subprime loans altogether comprised a cumulative total of under 13 percent from 1994 through 2005, though they rose to 19 percent in the year 2004 and 21 percent in 2005, according to the Mortgage Bankers’ Association (MBA). This means at least 87 percent of residential mortgages as of mid-2007 were not subprime loans, according to the MBA’s delinquency studies.

The serious delinquency rate among subprime mortgage loans remained below 8 percent from 1998 through the third quarter of 2000. Then it rose to between 10 and 13 percent through the second quarter of 2003, and has declined to below 8 percent since the fourth quarter of 2003. Thus, at least 87 percent of subprime home loans had not defaulted as of 2005. True, this is much higher than the serious delinquency rate among prime mortgages, which has remained below 2 percent from 1998 through 2005. Subprime delinquency rates may rise somewhat more in 2008 because monthly payments on many such mortgages will be re-set to higher levels when interest–only periods end or adjustable rates are driven upward. But even then, the vast majority of subprime mortgages are likely to remain fully paid up as long as unemployment remains as low as it is now in the U.S. economy.

The Broader Repercussions of Subprime Mortgage Problems

These facts hardly indicate a credit crisis throughout the economy or even in mortgage markets. But the subprime mortgage problems do glaringly reveal the inadequate mortgage and other credit underwriting standards in practice during several recent years of high-volume, low-interest lending. Subprime mortgage problems make many real estate lenders realize they should have been conducting more thorough underwriting, demanding higher-interest rates and putting more loan covenants into their deals.

Lenders have woken up to the fact that their actual risks were much greater than they had recognized. In response, many recently stopped making any loans until they could better assess the real risks involved. Other lenders raised rates and increased loan covenants. The resulting shock threatened to upset lending activity throughout global credit markets. This fear was encouraged because many complex securitized loan funds contained small portions of delinquent subprime mortgages. If this seizing-up of credit markets became worldwide, that would slow down economic growth everywhere – hardly a desirable outcome.

In response, the Federal Reserve Bank, the European Central Bank, and the Bank of England all cut their discount rates (the rates at which they lend money to banks) and pumped more liquidity into credit markets. Then the Federal Reserve Bank further cut the fed funds rate (at which banks can lend reserves to each other) and the discount rate by 50 basis points each – a dramatic change in past policy. This has seemed to reassure credit markets somewhat, although interest rates and credit terms are almost certain to remain higher than before the subprime mortgage mess – as they should. How long it will take credit markets to recover fully is not yet clear. But investors still have a tremendous amount of financial capital that they must put to work somewhere – there is no basic shortage of money.

The Booming World Economy

The world’s generally favorable economic conditions suggest continued prosperity rather than a collapse of market economies. Western Europe, Eastern Europe, Asia’s developing nations, and Japan are all prospering and growing economically faster than they have been in the past decade. The U.S. economy has slowed down somewhat, but our gross domestic product is still growing and our unemployment rate is very low compared to historic norms. There are large supplies of capital being generated around the world looking for places to invest. Although growth rates in developing nations are faster than the U.S. growth rate, our economy is still regarded as the safest and most politically secure place to invest in the world, despite the devaluing U.S. dollar. This is shown by the recent decline in U.S. Treasury interest rates as lenders fled into Treasuries seeking guaranteed security. These are not the conditions likely to generate a financial crisis.

As noted above, the world’s major central banks have taken steps to pump more liquidity into financial markets to forestall any fears among investors of a credit crisis. The Fed has put billions of additional dollars into U.S. banks, and those banks must lend that money to someone to make it work for them. These actions are designed to offset the feelings of panic generated by the Wall Street purveyors of gloom and doom. Some aid to their borrowers might be justified, but bailing out the lenders even more than we have up to now would create a moral hazard of merely encouraging them to do it again when the next chance appeared.

Is Real Estate’s Boom Sustainable?

Nothing in this world lasts forever, and the recent unprecedented prosperity in housing and real estate markets is no exception. Activity in U.S. residential markets has already slowed down, and that slow-down will probably continue for the next year or so, though it may recover after that. But in commercial real property markets, though interest rates are appropriately rising somewhat, there is still considerable capital looking for someplace to go. Thanks to the paradigm shift among world investors about the basic desirability of real property as an investment asset class, much of the money that has moved into real property will stay there.

Yet the impacts of the tremendous inflow of capital into existing real estate have in some respects undermined its continued attractions as an investment. As competition among investors drove prices of existing properties up and their yields down, more investors have begun to consider building new properties rather than buying existing ones. They think they could get higher initial yields from new and “greener” or more high-tech properties than from older, more obsolete existing ones, since the older ones had become so expensive and have such low yields. This change in views could start another new development boom like those that have ended so many real estate cycles in the past. That is especially likely to happen if the oversupply of capital keeps borrowing very cheap and interest rates do not rise much. Eventually, such a new development boom would overbuild world property markets and make it less desirable to keep putting more money into them. But that would take several years of booming new development.

So real estate’s boom cannot last forever – nothing does – but it could last a lot longer than it has lasted up to now. There is still plenty of financial capital out there looking for somewhere to go, and there are still plenty of property markets around the world that present good development opportunities. In the absence of some catastrophic world crisis that would upset all forecasts, there is no reason to think we are in the midst of an inevitable credit crisis. Just look at the facts.

       

The Bush Administration recently launched a new “National Strategy to Reduce Congestion on America’s Transportation Network.” This new policy deals with both air and ground travel, but focuses mainly on highway traffic congestion. But does this strategy show an understanding of what really causes traffic congestion and what might be done effectively in response?

According to the U.S. Department of Transportation (USDOT), “congestion results from poor policy choices, and a failure to separate and embrace solutions that are effective from those that are not.” This is inaccurate. Traffic congestion is a worldwide problem with four primary causes:

First, congestion exists because societies organize economies so most people will work during the same hours each day. This makes interaction among firms and agencies possible, thereby increasing society’s productivity, and raising overall efficiency. But it also requires most workers and students to travel to and from their places of activity at the same times. This overloads ground transportation systems during the morning and evening peaks, and often longer. No large metropolitan areas have enough infrastructure to transport everyone who wants to move during peak hours simultaneously; nor do they have enough resources to build it. Hence some travelers must wait until others have moved. That waiting constitutes traffic congestion.

Second, rising incomes intensify congestion by permitting more households to purchase vehicles and buy homes—mainly in suburban areas. That encourages a shift to private vehicles from public transit, walking, or bicycles. This trend is occurring worldwide, including in Europe and Asia.

A third cause is population growth. When metropolitan growth is accompanied by rising prosperity, more households buy more cars, and roads become more congested. This is what is occurring in China today.

The final cause consists of incidents and accidents. They result from high volumes of traffic generated by the first three causes.

So, contrary to the USDOT’s assertions, traffic congestion is not caused by poor policy choices but rather, by economic success. That is why traffic in high-tech areas fell sharply when the “internet bubble” burst in 2000. Moreover, since the U.S. population will continue to increase, and we hope it will remain efficient and with rising incomes, congestion will remain a fact of life for most Americans.

Can anything be done to counteract traffic congestion? Sort of. Some policies might make it less intense than it would otherwise become.

The National Strategy suggests using high tolls during peak hours and tolled traffic zones (as in London), so as to force more drivers to pay the true costs of moving during peak hours. But the London system is unworkable in the U.S. outside of a few places like Manhattan. Plus, putting high enough tolls on enough major roads to reduce their usage is not politically acceptable to most Americans. It would force millions of lower-income drivers off roads during the most convenient times.

However, if the tolls were confined to only some of the lanes on each road—so-called HOT lanes—and they were newly added lanes, it would permit most drivers to travel free during peak hours but also provide a choice of moving faster.

Other tactics mentioned in the National Strategy, such as roving teams to move accidents off highway lanes, providing more current road information to drivers, more lanes in key bottlenecks, and synchronization of traffic signals, would help. So would ramp metering on entrances to expressways and traffic management centers.

But the belief that these fixes will reduce existing congestion significantly is a delusion. As long as we operate our economy efficiently, continue raising our incomes, and add 30 million people—and 30 million vehicles—to our metropolitan regions each decade, we will have rising congestion.

And maybe that’s ok.

Congestion should be considered the price Americans and others around the world pay to achieve and sustain high-level economic efficiency and to provide millions of households with varied choices of where to live and work and the means to move between them.

That price has indeed been rising over time, causing greater personal inconvenience and higher business costs. But our prosperity and growth have also been increasing. We may not like paying this price for greater prosperity, growth, and choices of where to live and work. But until we are willing to reduce those benefits, we will continue to have rising congestion.

       

“‘Summertime, and the drivin’ is easy” ought to be the theme song for drivers in our nation’s capital region. Traffic is lighter here in the summer for three reasons: School buses are off the roads, Congress is often out of session and many Washingtonians are on vacation. Yet summer is also a time when road repair crews do much of their work, blocking traffic flow.

In spite of lighter traffic, congestion is still a pain for many drivers during morning and evening rush hours. That is because of the way Americans—and residents of all other major nations—organize their societies. We want most people to be at work during the same hours each day so they can interact efficiently, thereby improving economic productivity. And during the school year, we want our children learning during the same hours so they can be taught in classrooms with one or two teachers and 20 to 30 students. These requirements mean many people have to travel to and from work and school at the same times each day. No highway or public transit systems in the world can handle all those people who want to move simultaneously without overloading the systems’ capacity. So delays inevitably arise as all those people try to use the same roads and the same transit systems during the same periods. That is the fundamental cause of traffic congestion. And that cause is inescapable: There is no real remedy for congestion, once it appears.

Two other factors aggravate congestion. The first is traffic “incidents” that block one or more lanes. “Incidents” include accidents in which vehicles collide, flat tires, stalled engines, overturned trucks that spill their loads all over the road, people running out of gas, road repair crews and rescue vehicles blocking lanes, and plain bad weather. The rate of accidents per 100,000 miles driven has been falling over the years, but the number of incidents of all kinds is still great enough to cause many traffic slow-downs.

The second additional cause of intensifying congestion is the worldwide growth of populations and incomes. More people create more demand for vehicles, and higher incomes permit more people to own vehicles and drive them farther. In the United States, from 1980 to 2000, we added 1.2 more cars, trucks and buses to the vehicle population for every one person added to the human population. Moreover, in that same period, while our total human population was rising by 24 percent, the number of vehicle miles driven each year rose 80 percent. Yet the miles of additional roads and more lanes on existing roads we built did not expand by nearly as large a percentage. Nor could they have; no region in the world can build enough roads to permit rush-hour traffic to move without congestion delays.

The Washington area exemplifies this situation. The population of the Washington metropolitan area (not counting the Baltimore area) rose from 3.5 million in April 1980 to 5.1 million in July 2003—a gain of 1.6 million. If the area’s residents were adding only one vehicle for every added person (the actual national ratio in the 1990s alone), that implies we have added at least 1.6 million vehicles since 1980, or 45.7 percent. But the Washington area’s road capacity has by no means gone up by 45.7 percent since 1980. No wonder our roads seem a lot more crowded during rush hours, and those hours are longer than ever!

As populations and incomes rise, some tactics like “HOT lanes” and metered entry onto expressways can slow the rate at which traffic congestion gets worse, but no policies can completely halt that worsening. Therefore, I recommend that you relax and get used to congestion. If you can’t commute by transit, as most people can’t, get an air-conditioned vehicle with a stereo radio, books on tape, a hands-free telephone, a CD player and perhaps even a microwave oven, and commute with someone you really like. Then regard the time you spend stuck in traffic as part of your regular leisure time, and learn to enjoy it—especially since congestion here is less intense in the summer.

       

Advocates of growth management and smart growth often propose policies that raise housing prices, thereby making housing less affordable to many households trying to buy or rent homes. Such policies include urban growth boundaries, zoning restrictions on multi-family housing, utility district lines, building permit caps, and even construction moratoria. Does this mean there is an inherent conflict between growth management and smart growth on the one hand, and creating more affordable housing on the other? Or can growth management and smart growth promote policies that help increase the supply of affordable housing? These issues are critical to the future of affordable housing because so many local communities are adopting various forms of growth management or smart growth in response to growth-related problems. Those problems include rising traffic congestion, the absorption of open space by new subdivisions, and higher taxes to pay for new infrastructures. This book explores the relationship between growth management and smart growth and affordable housing in depth. It draws from material presented at a symposium on these subjects held at the Brookings Institution in May 2003, sponsored by the U.S. Department of Housing and Urban Development, the National Association of Realtors, and the Fannie Mae Foundation. Contributors seek to inform the debate and provide some useful answers to help the nation accommodate the curtailment of growth in urban and suburban domains while still ensuring a supply of affordable housing. Contributors include Karen Destorel Brown (Brookings), Robert Burchell, (Rutgers University), Daniel Carlson (University of Washington), David L. Crawford (Econsult Corporation), Anthony Downs (Brookings), Ingrid Gould Ellen (New York University), William Fischel (Dartmouth College), George C. Galster (Wayne State University), Jill Khadduri (Abt Associates), Gerrit J. Knaap (University of Maryland), Robert Lang (Virginia Polytechnic Institute and State University), Shishir Mathur (University of Washington), Arthur C. Nelson (Virginia Polytechnic Institute and State University), Rolf Pendall (Cornell University), Douglas R. Porter, (Growth Management Institute), Michael Pyatok (University of Washington), Michael Schill (New York University School of Law), Samuel R. Staley (Reason Public Policy Institute), Richard P. Voith (Econsult Corporation).

       

Congested roads waste commuters’ time, cost them money, and degrade the environment. Most Americans agree that traffic congestion is the major problem in their communities—and it only seems to be getting worse. In this revised and expanded edition of his landmark work Stuck in Traffic, Anthony Downs examines the benefits and costs of various anticongestion strategies. Drawing on a significant body of research by transportation experts and land-use planners, he counters environmentalists and road lobbyists alike by explaining why seemingly simple solutions, such as expanding public transit or expanding roads, have unintended consequences that cancel out their apparent advantages. He argues that while there might be some measurable gains from increasing housing densities, most other land-use strategies have little effect. Indeed, the most powerful solutions, including higher gasoline taxes, increased public funding for transit, and highway tolls, are also the least palatable politically. St ill Stuck in Traffic contains new material on the causes of congestion, its dynamics, and its relative incidence in various parts of the country. In clear and realistic terms, Downs seeks to explore why traffic congestion has become part of modern American life and how it can be kept under control.

       

Traffic congestion is essentially a regional phenomenon requiring regional approaches to mitigate its impacts. This brief examines the governance options necessary to act regionally and the conditions required to implement such policies. Currently, the reauthorization of the federal transportation spending bill (TEA-21) presents a unique opportunity to build on previous reforms and increase the decision-making power of regional metropolitan planning organizations (MPOs).

       

Contents

• Introduction
• The Real Problem
• Coping With the Mobility Problem
• The Principle of Triple Convergence
• Triple Convergence and Other Proposals
• How Population Growth Can Swamp Transportation Capacity
• Low-Density Settlements
• Possible Improvements
• Conclusion

Rising traffic congestion is an inescapable condition in large and growing metropolitan areas across the world, from Los Angeles to Tokyo, from Cairo to Sao Paolo. Peak-hour traffic congestion is an inherent result of the way modern societies operate. It stems from the widespread desires of people to pursue certain goals that inevitably overload existing roads and transit systems every day. But everyone hates traffic congestion, and it keeps getting worse, in spite of attempted remedies.

Commuters are often frustrated by policymakers’ inability to do anything about the problem, which poses a significant public policy challenge. Although governments may never be able to eliminate road congestion, there are several ways cities and states can move to curb it.

POLICY BRIEF #128

The Real Problem

Traffic congestion is not primarily a problem, but rather the solution to our basic mobility problem, which is that too many people want to move at the same times each day. Why? Because efficient operation of both the economy and school systems requires that people work, go to school, and even run errands during about the same hours so they can interact with each other. That basic requirement cannot be altered without crippling our economy and society. The same problem exists in every major metropolitan area in the world.

In the United States, the vast majority of people seeking to move during rush hours use private automotive vehicles, for two reasons. One is that most Americans reside in low-density areas that public transit cannot efficiently serve. The second is that privately owned vehicles are more comfortable, faster, more private, more convenient in trip timing, and more flexible for doing multiple tasks on one trip than almost any form of public transit. As household incomes rise around the world, more and more people shift from slower, less expensive modes of movement to privately owned cars and trucks.

With 87.9 percent of America’s daily commuters using private vehicles, and millions wanting to move at the same times of day, America’s basic problem is that its road system does not have the capacity to handle peak-hour loads without forcing many people to wait in line for that limited road space. Waiting in line is the definition of congestion, and the same condition is found in all growing major metropolitan regions. In fact, traffic congestion is worse in most other countries because American roads are so much better.

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Coping With the Mobility Problem

There are four ways any region can try to cope with the mobility challenge. But three of them are politically impractical or physically and financially impossible in the United States.

Charging peak-hour tolls. Governments can charge people money to enter all the lanes on major commuting roads during peak hours. If tolls were set high enough and collected electronically with “smart cards,” the number of vehicles on each major road during peak hours could be reduced enough so that vehicles could move at high speeds. That would allow more people to travel per lane per hour than under current, heavily congested conditions.

Transportation economists have long been proponents of this tactic, but most Americans reject this solution politically for two reasons. Tolls would favor wealthier or subsidized drivers and harm poor ones, so most Americans would resent them, partly because they believe they would be at a disadvantage.

The second drawback is that people think these tolls would be just another tax, forcing them to pay for something they have already paid for through gasoline taxes. For both these reasons, few politicians in our democracy—and so far, anywhere else in the world—advocate this tactic. Limited road-pricing schemes that have been adopted in Singapore, Norway, and London only affect congestion in crowded downtowns, which is not the kind of congestion on major arteries that most Americans experience.

Greatly expanding road capacity. The second approach would be to build enough road capacity to handle all drivers who want to travel in peak hours at the same time without delays. But this “cure” is totally impractical and prohibitively expensive. Governments would have to widen all major commuting roads by demolishing millions of buildings, cutting down trees, and turning most of every metropolitan region into a giant concrete slab. Those roads would then be grossly underutilized during non-peak hours. There are many occasions when adding more road capacity is a good idea, but no large region can afford to build enough to completely eliminate peak-hour congestion.

Greatly expanding public transit capacity. The third approach would be to expand public transit capacity enough to shift so many people from cars to transit that there would be no more excess demand for roads during peak hours. But in the United States in 2000, only 4.7 percent of all commuters traveled by public transit. (Outside of New York City, only 3.5 percent use transit and 89.3 percent use private vehicles.) A major reason is that most transit commuting is concentrated in a few large, densely settled regions with extensive fixed-rail transit systems. The nine U.S. metropolitan areas with the most daily transit commuters, when taken together, account for 61 percent of all U.S. transit commuting, though they contain only 17 percent of the total population. Within those regions, transit commuters are 17 percent of all commuters, but elsewhere, transit carries only 2.4 percent of all commuters, and less than one percent in many low-density regions.

Even if America’s existing transit capacity were tripled and fully utilized, morning peak-hour transit travel would rise to 11.0 percent of all morning trips. But that would reduce all morning private vehicle trips by only 8.0 percent—certainly progress, but hardly enough to end congestion—and tripling public transit capacity would be extremely costly. There are many good reasons to expand the nation’s public transit systems to aid mobility, but doing so will not notably reduce either existing or future peak-hour traffic congestion.

Living with congestion. This is the sole viable option. The only feasible way to accommodate excess demand for roads during peak periods is to have people wait in line. That means traffic congestion, which is an absolutely essential mechanism for American regions—and most other metropolitan regions throughout the world—to cope with excess demands for road space during peak hours each day.

Although congestion can seem intolerable, the alternatives would be even worse. Peak-hour congestion is the balancing mechanism that makes it possible for Americans to pursue other goals they value, including working or sending their children to school at the same time as their peers, living in low-density settlements, and having a wide choice of places to live and work.

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The Principle of Triple Convergence

The least understood aspect of peak-hour traffic congestion is the principle of triple convergence, which I discussed in the original version of Stuck in Traffic (Brookings/Lincoln Institute of Land Policy, 1992). This phenomenon occurs because traffic flows in any region’s overall transportation networks form almost automatically self-adjusting relationships among different routes, times, and modes. For example, a major commuting expressway might be so heavily congested each morning that traffic crawls for at least thirty minutes. If that expressway’s capacity were doubled overnight, the next day’s traffic would flow rapidly because the same number of drivers would have twice as much road space. But soon word would spread that this particular highway was no longer congested. Drivers who had once used that road before and after the peak hour to avoid congestion would shift back into the peak period. Other drivers who had been using alternative routes would shift onto this more convenient expressway. Even some commuters who had been using the subway or trains would start driving on this road during peak periods. Within a short time, this triple convergence onto the expanded road during peak hours would make the road as congested as it was before its expansion.

Experience shows that if a road is part of a larger transportation network within a region, peak-hour congestion cannot be eliminated for long on a congested road by expanding that road’s capacity.

The triple convergence principle does not mean that expanding a congested road’s capacity has no benefits. After expansion, the road can carry more vehicles per hour than before, no matter how congested it is, so more people can travel on it during those more desirable periods. Also, the periods of maximum congestion may be shorter, and congestion on alternative routes may be lower. Those are all benefits, but that road will still experience some period of maximum congestion daily.

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Triple Convergence and Other Proposals

Triple convergence affects the practicality of other suggested remedies to traffic congestion. An example is staggered work hours. In theory, if a certain number of workers are able to commute during less crowded parts of the day, that will free up space on formerly congested roads. But once traffic moves faster on those roads during peak hours, that will attract other drivers from other routes, other times, and other modes where conditions have not changed to shift onto the improved roads. Soon the removal of the staggered-working-hour drivers will be fully offset by convergence.

The same thing will happen if more workers become telecommuters and work at home, or if public transit capacity is expanded on off-road routes that parallel a congested expressway. This is why building light rail systems or even new subways rarely reduces peak-hour traffic congestion. In Portland, where the light rail system doubled in size in the 1990s, and in Dallas, where a new light rail system opened, congestion did not decline for long after these systems were up and running. Only road pricing or higher gasoline taxes are exempt from the principle of triple convergence.

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How Population Growth Can Swamp Transportation Capacity

A ground transportation system’s equilibria can also be affected by big changes in the region’s population or economic activity. If a region’s population is growing rapidly, as in Southern California or Florida, any expansions of major expressway capacity may soon be swamped by more vehicles generated by the added population. This result is strengthened because America’s vehicle population has been increasing even faster than its human population. From 1980 to 2000, 1.2 more automotive vehicles were added to the vehicle population of the United States for every 1.0 person added to the human population (though this ratio declined to 1 to 1 in the 1990s). The nation’s human population is expected to grow by around 60 million by 2020—possibly adding another 60 million vehicles to our national stock. That is why prospects for reducing peak-hour traffic congestion in the future are dim indeed.

Shifts in economic activity also affect regional congestion. During the internet and telecommunications boom of the late 1990s, congestion in the San Francisco Bay Area intensified immensely. After the economic “bubble” burst in 2000, congestion fell markedly without any major change in population. Thus, severe congestion can be a sign of strong regional prosperity, just as reduced congestion can signal an economic downturn.

The most obvious reason traffic congestion has increased everywhere is population growth. In a wealthy nation, more people means more vehicles. But total vehicle mileage traveled has grown much faster than population. From 1980 to 2000, the total population of the United States rose 24 percent, but total vehicle miles traveled grew 80 percent because of more intensive use of each vehicle. The number of vehicles per 1,000 persons rose 14 percent and the number of miles driven per vehicle rose 24 percent. Even without any population gain in those two decades, miles driven would have risen 47 percent.

One reason people drove their vehicles farther is that a combination of declining real gas prices (corrected for inflation) and more miles per gallon caused the real cost of each mile driven to fall 54 percent from 1980 to 2000. That helped raise the fraction of U.S. households owning cars from 86 percent in 1983 to 92 percent in 1995.

Furthermore, American road building lagged far behind increases in vehicle travel. Urban lane-miles rose by 37 percent versus an 80 percent increase in miles traveled. As a result, the amount of daily traffic that was congested in the 75 areas analyzed in studies by the Texas Transportation Institute went from 16 percent in 1982 to 34 percent in 2001.

Another factor in road congestion is accidents and incidents, which some experts believe cause half of all traffic congestion. From 1980 to 2000, the absolute number of accidents each year has remained amazingly constant, and the annual number of traffic deaths in the United States fell 18 percent, in spite of the great rise in vehicle miles traveled. So accidents could only have caused more congestion because roads were more crowded, and each accident may now cause longer back-ups than before.

Incidents are non-accident causes of delay, such as stalled cars, road repairs, overturned vehicles, and bad weather. No one knows how many incidents occur, but it is a much greater number than accidents. And the number of incidents probably rises along with total driving. So that could have added to greater congestion, and will in the future.

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Low-Density Settlements

Another crucial factor contributing to traffic congestion is the desire of most Americans to live in low-density settlements. In 1999, the National Association of Homebuilders asked 2,000 randomly-selected households whether they would rather buy a $150,000 townhouse in an urban setting that was close to public transportation, work, and shopping or a larger, detached single-family home in an outlying suburban area, where distances to work, public transportation, and shopping were longer. Eighty-three percent of respondents chose the larger, farther-out suburban home. At the same time, new workplaces have been spreading out in low-density areas in most metropolitan regions.

Past studies, including one published in 1977 by Boris S. Pushkarev and Jeffery M. Zupan, have shown that public transit works best where gross residential densities are above 4,200 persons per square mile; relatively dense housing is clustered close to transit stations or stops; and large numbers of jobs are concentrated in relatively compact business districts.

But in 2000, at least two thirds of all residents of U.S. urbanized areas lived in settlements with densities of under 4,000 persons per square mile. Those densities are too low for public transit to be effective. Hence their residents are compelled to rely on private vehicles for almost all of their travel, including trips during peak hours.

Recognizing this situation, many opponents of “sprawl” call for strong urban growth boundaries to constrain future growth into more compact, higher-density patterns, including greater reinvestment and increased densities in existing neighborhoods. But most residents of those neighborhoods vehemently oppose raising densities, and most American regions already have densities far too low to support much public transit. So this strategy would not reduce future traffic congestion much.

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Possible Improvements

While it’s practically impossible to eliminate congestion, there are several ways to slow its future rate of increase:

Create High Occupancy Toll (HOT) lanes. Peak-hour road pricing would not be politically feasible if policymakers put tolls on all major commuter lanes, but HOT lanes can increase traveler choices by adding new toll lanes to existing expressways, or converting underused high-occupancy vehicle (HOV) lanes to HOT lanes, and leaving present conventional lanes without tolls. True, HOT lanes do not eliminate congestion. But they allow anyone who needs to move fast on any given day to do so, without forcing all low-income drivers off those same roads during peak periods. In some regions, whole networks of HOT lanes could both add to overall capacity and make high-speed choices always available to thousands of people in a hurry.

Respond more rapidly to traffic-blocking accidents and incidents. Removing accidents and incidents from major roads faster by using roving service vehicles run by government-run Traffic Management Centers equipped with television and electronic surveillance of road conditions is an excellent tactic for reducing congestion delays.

Build more roads in growing areas. Opponents of building more roads claim that we cannot build our way out of congestion because more highway capacity will simply attract more travelers. Due to triple convergence, that criticism is true for established roads that are already overcrowded. But the large projected growth of the U.S. population surely means that we will need a lot more road and lane mileage in peripheral areas.

Install ramp-metering. This means letting vehicles enter expressways only gradually. It has improved freeway speed during peak hours in both Seattle and the Twin Cities, and could be much more widely used.

Use Intelligent Transportation System devices to speed traffic flows. These devices include electronic coordination of signal lights on local streets, large variable signs informing drivers of traffic conditions ahead, one-way street patterns, Global Positioning System equipment in cars and trucks, and radio broadcasts of current road conditions. These technologies exist now and can be effective on local streets and arteries and informative on expressways.

Create more HOV (High Occupancy Vehicle) lanes. HOV lanes have proven successful in many areas such as Houston. More regions could use HOV lanes effectively if there were more lanes built for that purpose, rather than trying to convert existing ones. Merely converting existing lanes would reduce overall road capacity.

Adopt “parking cash-out” programs. Demonstration programs have shown that if firms offer to pay persons now receiving free employee parking a stipend for shifting to carpooling or transit, significant percentages will do so. That could reduce the number of cars on the road. However, this tactic does not prevent the offsetting consequences of triple convergence.

Restrict very low-density peripheral development. Urban growth boundaries that severely constrain all far-out suburban development will not reduce future congestion much, especially in fast-growing regions. And such boundaries may drive up peripheral housing prices. But requiring at least moderate residential densities—say, 3,500 persons per square mile (4.38 units per net acre)—in new growth areas could greatly reduce peripheral driving, compared to permitting very low densities there, which tend to push growth out ever farther. In 2000, thirty-six urbanized areas had fringe area densities of 3,500 or more. Those thirty-six urbanized areas contained 18.2 percent of all persons living in all 476 U.S. urbanized areas.

Cluster high-density housing around transit stops. Such Transit Oriented Developments (TODs) would permit more residents to commute by walking to transit, thereby decreasing the number of private vehicles on the roads. However, the potential of this tactic is limited. In order to shift a significant percentage of auto commuters to transit, the number of such “transit circles” within each region would have to be very large, the density within each circle would have to be much greater than the average central city density in America’s fifty largest urbanized areas, and the percentage of workers living in the TODs who commuted by transit would have to greatly exceed the 10.5 percent average for central cities in 2000. Even so, developing many of these high-density clusters might make public transit service more feasible to many more parts of large regions.

Give regional transportation authorities more power and resources. Congress has created Metropolitan Planning Organizations to coordinate ground transportation planning over all modes in each region. If these were given more technical assistance and power, more rational systems could be created. Without much more regionally focused planning over land uses as well as transportation, few anti-congestion tactics will work effectively.

Raise gasoline taxes. Raising gas taxes would notably slow the rate of increase of all automotive travel, not just peak-hour commuting. But Congress has refused to consider it because it is politically unpopular and fought by industry lobbyists. Despite Americans’ vocal complaints about congestion, they do not want to pay much to combat it.

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Conclusion

Peak-hour traffic congestion in almost all large and growing metropolitan regions around the world is here to stay. In fact, it is almost certain to get worse during at least the next few decades, mainly because of rising populations and wealth. This will be true no matter what public and private policies are adopted to combat congestion.

But this outcome should not be regarded as a mark of social failure or misguided policies. In fact, traffic congestion often results from economic prosperity and other types of success.

Although traffic congestion is inevitable, there are ways to slow the rate at which it intensifies. Several tactics could do that effectively, especially if used in concert, but nothing can eliminate peak-hour traffic congestion from large metropolitan regions here and around the world. Only serious economic recessions—which are hardly desirable—can even forestall an increase.

For the time being, the only relief for traffic-plagued commuters is a comfortable, air-conditioned vehicle with a well-equipped stereo system, a hands-free telephone, and a daily commute with someone they like.

Congestion has become part of commuters’ daily leisure time, and it promises to stay that way.

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