Cities June 2010

Here Comes the Neighborhood

Conventional suburbs are overbuilt and out of favor. In cities and suburbs alike, walkable neighborhoods linked by train are the future. Here’s how a new network of privately funded rail lines can make that future come to pass more quickly and cheaply—and help reinvigorate housing and the economy.

While houses are (mostly) sturdy, the construction industry is as sensitive as a 19th-century debutante. At the first sign of trouble, it swoons, often knocking the economy down with it. In each of the three recessions before the Great Recession, the economy shrank by less than 2 percent—but housing starts, on average, declined by a third. In the years leading up to the 1990 recession, when real estate bankrupted about half of the savings-and-loans, housing starts fell 44 percent. Usually, an economic recession means a depression in the housing industry.

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It’s been worse this time around. From their pre-recession peaks, economic output fell 3.3 percent and employment 6.1 percent, but housing starts dropped 73 percent. Last year housing starts were lower by half than in any year since 1959, when the U.S. population stood at 178 million (compared with 309 million today). About a third of all the jobs lost in this recession have been in construction, real-estate finance, architecture, or building services. Housing prices, meanwhile, have fallen 28 percent, adjusted for inflation, since their peak in 2006—that’s far more than they fell during the Great Depression.

But housing hasn’t cratered everywhere. According to Stan Humphries, the chief economist of Zillow, an online housing-research firm, if you plot changes in home values within a typical metro region on a satellite map, the result “looks like an archery target, with the outlying areas having experienced substantially higher total declines in home values” than areas closer to the central city.

Zillow data for metropolitan Washington, D.C., for instance, shows that housing prices on average have declined 33 percent since the peak. But this average masks big differences. In densely built inner suburbs, like Arlington, Virginia, and in the walkable, urban neighborhoods of the District of Columbia, prices typically dropped about 20 percent. Housing on the suburban fringe, on the other hand, lost about half its value. Many exurban homeowners who had purchased or refinanced in the mid-2000s are now well underwater.

Housing is such a large part of the economy that a sustained, robust recovery is difficult to imagine without a corresponding recovery in the building, buying, and selling of houses. Indeed, housing has usually helped lead us out of prior recessions. While home buying typically plunges when the economy turns south, life goes on. People continue to age, children leave the nest, couples marry, babies are born, new jobs are taken. When consumer confidence returns, the pent-up demand for different housing choices sparks a boom in construction and renovation. The economic expansion during the 1990s, for instance, was fueled in part by a 44 percent rise in housing starts from 1991 to 1994, providing substantial job growth early in the recovery.

But this time may be different. As Zillow’s satellite maps begin to indicate, what we face today is not just a cyclical housing problem, but a structural one as well. Over the past decade, most house building occurred on the suburban fringe, in large part because that’s where houses could be built most easily and quickly. But now that the bubble has popped, we can clearly see that underlying demand in these areas is extremely weak, and oversupply is massive.

Nationwide, houses on the exurban fringes are now generally priced below the cost of the materials that went into building them. That’s usually the first step in the creation of a slum. Owners have no financial incentive to invest in their houses if they will not get that investment back upon resale. Developers have no financial incentive to build in those areas either.

Urban-style housing in walkable neighborhoods—including those in the inner suburbs—is what’s in demand today. And for a variety of reasons, that demand will intensify in the coming years. Only by serving it can the country kick-start growth in an enormous and essential part of the economy.

Yet the creation of new, attractive urban spaces is slow and difficult, and becomes all but impossible without substantial new infrastructure. Most of all, it relies on good transit options—especially rail links—around which walkable neighborhoods can develop. Rail, biking, and walking infrastructure is the backbone of urban development, and as a country we’ve for the most part neglected to build it in recent decades, in favor of new roads for new suburbs farther and farther away from metropolitan hubs. To support growth in the next decade, we need to change that dynamic—and nourish our walkable urban spaces and neighborhoods. Complicating matters, in these cash-strapped times we need to find a way to do so on the cheap.

Housing comes in two basic types. The first is the now-classic Ozzie and Harriet–style single-family house on its own large lot, from which nearly every trip is taken by car. The second is similar to what we predominantly built before the Great Depression: small-lot single-family houses, townhouses, and apartments that are within walking distance of most everyday needs and are typically connected by public transit to work, shopping, and entertainment—housing that is built at least five times more densely than that in conventional suburbs.

Ten years ago, conventional large-lot housing in wealthy suburbs was the highest-priced housing, per square foot, in nearly all metropolitan areas. Today, housing in walkable neighborhoods is typically the most expensive; the lines crossed in the 2000s.

Why did this happen? Cities, of course, have experienced a cultural renaissance over the past 15 years. Some suburbs, meanwhile, have become less attractive as they’ve grown more congested and lost open space, betraying suburbia’s original promise and pushing new subdivisions farther and farther out into the hinterland.

The increasing costs of driving, meanwhile, have put great pressure on suburban family finances. On average, traditional suburban households spend 24 percent of their income paying for and maintaining their cars; urban households in walkable neighborhoods spend only 12 percent of their income on transportation. The difference amounts to half of what a typical household spends on health care—nationally, $700 billion a year in total.

Two-thirds of all households today consist of singles, childless couples, or empty-nesters, and that proportion will rise over the next 20 years. All of these groups tend to prefer walkable urban housing. Millennials—the rising generation of 20- and 30-somethings—are particularly drawn to urban living, seeing it not only as exciting but as healthy and environmentally friendly.

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Christopher B. Leinberger is a visiting fellow at the Brookings Institution, a professor of urban planning at the University of Michigan, and a real-estate developer.

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