Midwest Urbanism

Post 65: Cities and the K-Shaped Economy

noreply@blogger.com (Doug Johnson) — Sun, 08 Mar 2026 15:44:00 +0000

I’m not sure why, but whenever I read about the U.S. economy, images of the Titanic flash in my brain. On the surface, things look pretty good. The stock market is near record highs, the growth of GDP has been solid, and inflation is only a percentage point or so above the target rate. So why do I sense that danger is lurking just below the surface?

RMS Titanic

Perhaps my anxiety stems from Captain Edward Smith who dismissed warnings about sea ice from other ships and maintained his course at full speed. The “captain” of our economy seems equally determined to ignore warning signs and blast ahead as if our economy were unsinkable. As history has repeatedly taught us, however, there is no such thing as an unsinkable ship or an economy immune from recession.

As it turns out, there are a variety of economic icebergs that could sink the economy if they are left unaddressed. I’m going to touch on a couple of the more ominous ones, but then focus on the one factor that I think is particularly relevant to the development and prosperity of cities. The national economy is so complex, of course, that charting a successful economic path is as much an art as a science. Consequently, predicting economic collapse is a popular pastime among economists and financial pundits. Those predictions are occasionally right but mostly wrong because the U.S. economy has proven to be remarkably resilient.

So while I am personally pessimistic about our country’s near-term economic outlook, I’m not going to make this article a prediction of the future. Instead, I’m going to structure what I have to say on the economic trends that I find troubling as more of an exercise in scenario planning – if these trends continue, what would the impact be and how should cities respond. Scenario planning is a tool that can prepare cities for bad events that might happen even if the exact timing and nature of those events can’t be accurately predicted.

The Labor Market

By several measures, the U.S. economy is booming. The gross domestic product (GDP) for example, has more than doubled since 2010, and most of that growth has taken place in just the past 5 years. In fact, GDP has grown consistently for a very long time. Current GDP is more than 100 times larger than it was in 1950. During that time, total employment has grown consistently as well, although not at the same rate since worker productivity increased at the same time.

The odd thing is that recent employment has under-performed compared with economic growth. This is particularly true in the past two years. Nonfarm employment fluctuates to some degree, but total U.S. employment has averaged nearly 150,000 additional jobs each month since 2010. That drops to just over 70,000 since the beginning of 2024 and roughly 23,000 since Trump took office in January of 2025. In fact, total employment growth would have been negative in 2025 had it not been for robust expansion in the medical and social assistance sectors.

The current economy is now being called a “jobless boom” in contrast to the situation immediately following the pandemic when companies seemingly couldn’t hire people fast enough. The current quit rate is nearing 10-year lows and the rate of layoffs is trending upward. If 2021 and 2022 were characterized by “job hopping” because job openings were everywhere, 2025 and 2026 are being defined by “job hugging” – a term coined by Korn Ferry consultants. [1] Job hugging is when people cling to their jobs due to economic uncertainty rather than due to fondness for their work or loyalty to their companies.

The current lack of hiring may largely be a reaction to what is now perceived as the over-hiring in 2021 and 2022, but it increasingly reflects the impact of Artificial Intelligence which is making many white collar jobs unnecessary. Dario Amodei, the CEO of AI giant Anthropic, has warned that the technology could replace 50 percent of entry-level jobs before 2030. He has stated that AI’s “cognitive breadth” will replace not just a single type of worker, but will eliminate jobs across a broad swath of white-collar industries, thus preventing laid-off workers from finding employment in related fields. [2] The unemployment rate has remained fairly stable because of deportation efforts, immigration policy changes, and retiring baby boomers, but I expect the rate to increase significantly over the next year or two.

Debt

The total amount of U.S. national debt continues to surge to new record levels, now more than $37 trillion dollars. Of course our country has always had debt starting from its very inception after the revolutionary war. But the scale of debt is relatively new – it is now well in excess of GDP – and it has the potential to drastically alter our economic future. Just 20 years ago total national debt was roughly 60 percent of GDP. Recent presidents of both parties – from Bush to Obama to Trump to Biden and back to Trump – have piled on debt like there is no tomorrow. It has become the cocaine of the federal government, highly addictive and ultimately destructive.

President Trump has promised to substantially reduce the Federal debt by relying on revenue from rapid economic growth, his “gold card” immigration program, and DOGE spending cuts. So far none of those programs have had any significant impact on debt levels. Debt in Trump’s first year actually increased by more than $2 trillion dollars. His track record from his first term doesn’t inspire confidence either – debt rose more than $7 trillion during those four years. I am not trying to pin the problem solely on Trump because this is a problem that neither party has been able to solve. I just want to make it clear that there is currently no solution in sight.

The national debt qualifies as an economic iceberg for a variety of reasons:

High interest payments. In 2026, the estimated interest payments on Federal debt will top $1 trillion dollars. This level is three times higher than in 2020 and represents more than 18 percent of federal revenue. Money spent on interest is money that could have been spent more productively elsewhere.

Slower economic growth. Increased government debt hinders growth by reducing the capital available for private sector investments. In effect, debt hamstrings the very strategy that offers the best chance to reduce debt levels (i.e. economic growth).

Higher interest rates. As government borrowing increases, global financial markets are likely to increase interest rates which raises borrowing costs not only for the federal government, but for local governments, businesses and individuals as well. Higher interest rates, of course, lead to higher interest payments which spark the need for more borrowing and starts a downward spiral that no one wants.

Less fiscal flexibility. Increasing debt is like painting yourself into a corner. There is simply less room to maneuver financially the next time there is an economic crisis, a pandemic or a global war.

The K-Shaped Economy

There have been quite a few articles in the press in recent months about a phenomenon known as a k-shaped economy, although the definition of exactly what that term means is a little fuzzy and some debate is taking place as to whether we are really experiencing this phenomenon or not. The term is generally used to describe an economy where the rich are getting richer and the rest of society is struggling to make ends meet. Unfortunately, different writers describe “the rich” in different ways and the degree to which the rest of society is struggling might be more of a perception than actual reality. Consequently, a deeper dive into the data seems warranted.

Mark Zandi, chief economist at Moody’s Analytics, recently posted about trends in personal outlays by income group. [3] He found an interesting difference between U.S. households in the top 20 percent of all households, and those in the bottom 80 percent. Thirty years ago, the two groups had roughly equal amounts of personal outlays but the relative shares have been diverging ever since. Currently, the top 20 percent account for nearly 60 percent of personal outlays and the rest of society is down to just over 40 percent. He sees this trend as a bad sign because it means the economy is increasingly dependent on a relatively small group of wealthy households. This point is further backed up by a Federal Reserve research paper which found that since 2018 retail sales to households earning over $100,000 have increased by 16.7%, compared with 13.3% for households earning between $60,000 and $100,000, and just 7.9% for households earning less than $60,000 (all figures adjusted for inflation). [4] Thus, while all groups are spending more, the rich are spending considerably more.

A recent Gallup poll found that only 59 percent of Americans gave high ratings when asked to evaluate how good their life will be in 5 years. This is the lowest rating since Gallup started asking this question 20 years ago. Current life satisfaction is also declining but future scores are falling nearly twice as fast. [5] Jordan McGillis in a Wall Street Journal Editorial said that middle class families don’t feel as secure as they once did because of what he calls the Great Decompression – where incomes are rising across the board, but are rising much faster for families at the high end of the spectrum.

Families with income at the 80 percentile and above are pulling away in lifestyle and social status, opening a chasm that separates them significantly from families with median incomes.

For families with children, the household income of the 80th percentile in 1975 was 51 percent more than the median family. By 2000, that difference had risen to 68 percent more, and last year the difference was 85 percent more. McGillis references sociologist Richard Reeves as identifying this trend as allowing the upper classes to “hoard the American Dream.” [6]

Even more striking is the change in wealth as illustrated by the chart below which shows the trend in total household wealth over the past 25 years. The first thing to point out is that the bottom half of all households have only a trivial amount of total wealth – currently just 2.5 percent of the total, down from 3.5 percent in 1990. The second thing to notice is that the only group to move up substantially is the top 1 percent of households. That small group increased their share of total wealth from 22.5 percent to 31.7 percent. This increase came primarily at the expense of households that have historically been the heart of the American economy – the 50th percentile through the 90th percentile. Even though their actual wealth increased

(even in inflation adjusted dollars), their share of wealth dropped by almost 20 percent.

An Economic Conundrum

What all of this boils down to is a situation in which many people, while objectively better off than they were 10 or 20 years ago, feel subjectively worse off. In my opinion, part of the problem is that expectations – fueled by popular culture and social media – have grown faster than average incomes or wealth. We feel poorer than we actually are.

This may seem like a moment when I should write something like “don’t worry, everything is fine” but I’m not going to for two primary reasons. The first is that perception is reality. It doesn’t matter if average household income has risen in inflation-adjusted dollars, our behavior is determined by how wealthy we feel and right now many people are feeling like they are losing ground relative to where they think they should be in society. In a recent poll by ABC News, 74 percent of respondents said that a new car was unaffordable given their current budget. Taking a weeklong vacation (60%) and healthcare costs (56%) were also seen as unaffordable by a majority of people. The new reality is that a large chunk of our society feel they can no longer afford purchases that used to be taken for granted by many middle class households just a few decades ago. [7]

The second reason is that both income and wealth inequality is growing. Our economic success isn’t being shared as evenly as it once was. Increasing inequality is real, not just perceived, and it seems counter to what our country has historically stood for. The growing gap between the rich and the middle class may lead people to believe that the economy is rigged against them and that they can’t succeed no matter how hard they work. If that happens, our society is in real trouble.

Part of the issue is that the parts of the economy that are doing especially well are not evenly distributed across wealth classes. The stock market is near historic highs, for example, but the ownership of stocks and mutual funds is heavily skewed toward the top ten percent of households by wealth. A booming stock market simply doesn’t matter to most families.

A second issue is that companies are figuring out that star employees – the entrepreneurs, the innovators, the strategists, the specialists and the big producers – are the real source of profits. Middle managers, bean counters, and other worker bees are either necessary in far smaller quantities or can be replaced with AI agents. Salary and employment decisions are being made accordingly. Big bucks for some, minimal raises or layoffs for many. The fintech company Block, for example, recently laid off 4,000 of its 10,000 employees. That is probably an anomaly, but the fact that a company that recently reported a Q4 profit increase of more than 20 percent can find a way to operate with 40 percent fewer employees is scary.

What is potentially more worrisome is that the societal split embodied in the K-shaped economy may get worse before it gets better. The job destruction potential of artificial intelligence may just be ramping up. As with many disruptive technologies throughout history, the jump in productivity and the availability of excess labor will likely cause new types of jobs to be created that were not previously foreseen. Eventually, the overall impact of AI on society may well be positive. The problem is that job destruction happens first which means that there is a period of time when lots of people who thought they had dependable careers are suddenly unemployed and very angry.

A big economic shock like a jump in unemployment typically elicits a strong economic stimulus from the federal government. Witness, for example, the actions that followed the 2008 housing crisis or the 2020 COVID pandemic. That response, however, might be muted in the future because borrowing may be constrained by a heavy debt load (due to a middle east war, perhaps?) or by rising interest rates (due to tariff induced trade disputes?). I’m not predicting that these things will happen, but it is a scenario with odds well above zero.

The Impact on Cities

It may be a bit of a longshot, but what if the k-shaped economy continues to the point where there is a clear break between the top 10 or 20 percent and everyone else? What if legions of mid-level accountants, paralegals, sales managers, researchers, and software coders with years of experience are suddenly out of a job and unable to find work? What if the middle class decide that capitalism is not a meritocracy, but rather a system that is rigged so that the rich get richer and everyone else has to fight over the scraps?

Sorry, I’m getting too dystopian. Society isn’t likely to flip-flop into a new reality overnight. But what if society shifts in that direction? Would people elect politicians who promise to return things to a nostalgic past (make America great again)? Would people blame immigrants for job market woes? Would people reject science for internet conspiracy theories? What if the fringe become a potent political force? It might not take much of a shift for things to get weird. Particularly at the local level, our democracy depends upon a large block of society being level headed and relatively united in working toward a shared future vision. It is worth thinking about how cities should respond if disillusionment spreads and the ‘silent majority’ shatter into a dozen splinter groups.

Take care of the basics. This may sound overly simplistic, but when people are economically stressed, cities need to fill the potholes, keep people safe, fix the playground equipment, and keep utility systems running smoothly. Households that are worrying about making the next mortgage payment shouldn’t have the added stress of worrying whether their kids are safe walking to school or whether the water system is going to shut down because neglected pipes are breaking. When times are good, cities often expand into programs that are nice but not essential. If times turn bad, cities need to pare back or pull the plug despite the constituencies that have built up around them.

Don’t swing for economic home runs. If the local economy is struggling, every politician wants to be at the ribbon-cutting for the new factory (or office campus, or medical center) that is going to create a thousand new jobs. The problem is that economic development staffers can spend years trying to land the splashy new employer only to have the whole project go up in smoke or have it shift to some other city. Even the successes can have such an enormous cost in terms of economic incentives and tax breaks that the new jobs are an overall drain on the community. Community boosters like to claim that lavish incentives are needed to “prime the pump” for more growth in the future, but that approach can turn into a ponzi scheme if cities aren’t careful.

Cities would be better off nurturing home-grown economic expansion that might take the form of a thousand small entrepreneurs. How many people have started a “side hustle” that became a significant contributor to household wealth? The so-called gig economy will be a particularly useful safety valve if layoffs become commonplace. Twenty years ago, who would have thought that people could make a good living as a podcaster or social media influencer? Cities should reexamine their home occupation ordinances to make sure they are as flexible as possible and should think about sponsoring training resources for people wanting to start their own business.

Enable economic returns on existing assets. I am amazed that someone with a cellphone and a car – two of the most widely owned assets – can make a living as an Uber driver. No college degree, office building or special equipment needed. I don’t even really need the car. In many cities, an e-bike and a phone are all I need to do deliveries for Doordash, et al. These are examples of a secondary economy that is unexpectedly blooming because of technologies invented over just the past decade or two. Will a software developer laid off because AI made him redundant be happy with a career delivering pizza on an e-bike? Probably not, but my point is that economic growth can take place in surprising ways. A couple of cobbled together side hustles might make a second career or at least serve as a stop-gap until a more traditional job appears.

Real estate is an example of a local asset where significant economic returns are often locked away by unnecessary city regulations. Most cities have neglected neighborhoods filled with houses that are literally falling apart and in recent years developers have made decent money rehabbing and “flipping” those houses to buyers desperate for a reasonably priced place to live. That activity has unlocked value, boosted the local tax base, and reinvigorated neighborhoods that were headed toward blight.

The problem is that cities have unintentionally put a cap on how much can be accomplished by enacting a myriad of regulations and fees connected with almost any form of construction work. These regulations and fees may make perfect sense in the context of large scale projects or new subdivisions on the edge of the city, but for a small developer rehabbing just one or two properties a year they can be the difference between success and failure. Instead of spending a hundred million on expanding the convention center for conventions that may never appear, perhaps cities should spend money streamlining construction processes for small projects, and even subsidize infrastructure costs for builders willing to produce affordable housing.

In previous posts, I have written about the falling size of the average household and yet many cities have thousands of 4-bedroom, single-family homes on large lots. The houses were built for families of four, five or six people but are increasingly occupied by an elderly person or couple wanting to age in place in a familiar home in a familiar neighborhood. They are not only “over housed,” they are often overwhelmed by maintenance tasks they can no longer perform and expensive maintenance projects they can no longer afford. Cities should modify their zoning regulations to allow homes to have an accessory apartment or a freestanding accessory dwelling unit in the back yard. The existing owner is able to tap into a new source of revenue, the tax base grows, and new forms of affordable housing are created.

Keep debt levels low. Earlier I wrote about the iceberg of federal debt, but local governments frequently have their own debt problems. At least in theory, the federal government can print their way, inflate their way, or grow their way out of debt, but cities have far fewer options. A city mired in debt can significantly raise taxes, drastically cut budgets or declare bankruptcy – none of which are good options if the economy is depressed and the citizenry feels underwater. Spending on glitzy projects that promise a big return on investment can seem like progress, but the people doing the cost-benefit analysis are prone to exaggeration because they have a vested interest in getting the project built.

Even projects financed with federal grants should be examined with a jaundiced eye if the operational and maintenance costs are going to fall to the city. In particular, projects designed to support future growth may backfire during an economic slowdown because the “growth” turns out to be either nonexistent or simply a reshuffling of existing economic activity. The spigot of federal money seems like manna from heaven but it can lure cities into reckless spending and it can be unexpectedly shut down leaving cities holding the bag.

The Bottom Line

The point of this article, and scenario planning in general, is to highlight actions that can be taken in the near term which expand the range of future events that can be handled without disastrous results. A little planning during unsettled times can be a form of insurance against future risks. Unfortunately, cities often have a type of inertia that makes even minor adjustments in direction difficult until disaster is imminent – which brings me back to my analogy with the Titanic. In hindsight, it seems obvious that the disaster could have been avoided. As it turns out, the sinking of the Titanic did result in changes to the way ocean liners were built and operated, but at a terrific cost. My fingers are crossed that municipal captains will be able to steer clear of the financial icebergs that are looming ahead.

Notes:

Matt Bohn, et al.; “Job Hugging for Dear Life”; August 2025; Korn Ferry; https://www.kornferry.com/insights/this-week-in-leadership/job-hugging-for-dear-life
Sawdah Bhaimiya; “Anthropic CEO Dario Amodei warns AI may cause ‘unusually painful’ disruption to jobs”; January 2026; CNBC; https://www.cnbc.com/2026/01/27/dario-amodei-warns-ai-cause-unusually-painful-disruption-jobs.html#:~:text=Anthropic's%20CEO%20Dario%20Amodei%20warned,humans%2C'%22%20Amodei%20wrote.
Mark Zandi; Moody’s Analytics; February 2026; https://www.linkedin.com/posts/mark-zandi-667086350_the-k-shaped-economy-is-becoming-steadily-activity-7418691133180112896-Wz7h/
Sinem Hacioglu Hoke, et al; “A Better Way of Understanding the U.S. Consumer: Decomposing Retail Spending by Household Income”; October 2024; Federal Reserve System; https://www.federalreserve.gov/econres/notes/feds-notes/a-better-way-of-understanding-the-u-s-consumer-decomposing-retail-spending-by-household-income-20241011.html
Linley Sanders; “What a new Gallup poll shows about the depth of Americans’ gloom”; February 2026; AP; https://apnews.com/article/poll-gallup-optimism-future-republicans-democrats-4dc287cdbbaefb077895746613fea4e4
Jordan McGillis; “Why the Middle Class Feels Poor”; February 2026; Wall Street Journal; https://www.wsj.com/opinion/why-the-middle-class-feels-poor-cdb17587?mod=hp_opin_pos_4
Emily Guskin; “Over half of Americans say health care, a weeklong vacation and a new car are unaffordable”; February 2026; ABC News; https://abcnews.com/Politics/half-americans-health-care-weeklong-vacation-new-car/story?id=130538412

Post 64: Regulating Micromobility

noreply@blogger.com (Doug Johnson) — Mon, 26 Jan 2026 15:08:00 +0000

My decision to write an article on this topic was partially a result of a recent event less than six miles from my house. A 10-year old boy was riding an e-scooter on a moderately busy street when he decided to cross mid-block from one side to the other. He was struck by a car whose driver did not anticipate his actions and the boy suffered a significant head injury despite the fact that he was wearing a helmet. His injuries led to his death a few days later. After a police investigation, the driver of the car was found innocent of any wrong-doing.

It turns out that the micromobility world (e-bikes and e-scooters) has a dark side. The growing popularity of electric bikes and scooters is being accompanied by a growing concern about their safety and their impact on other forms of transportation. Unfortunately, hard data is hard to come by but anecdotal evidence is piling up. Doctors at Penn State Health Children’s Hospital, for example, treated more kids injured in micromobility related accidents in the first 10 months of 2025 than in the three previous years combined. [1] Social media posts showing riders weaving in and out of traffic, doing “wheelies” at high speed, or ignoring stop lights and traffic signs are commonplace. Such behavior puts both pedestrians and vehicular drivers on edge and undoubtedly contributes to accidents both trivial and serious.

The result is that city halls across the country are being flooded with complaints asking city leaders and police departments to take action. Some of those actions have been well-reasoned responses while others have been knee-jerk over-reactions. Micromobility laws already varied fairly widely on a state-by-state basis, but with new local regulations layered on top, the result is threatening to become an indecipherable mish-mash. My goal with this post is to suggest ways that micromobility can coexist with other forms of urban transportation and to suggest a general framework within which logical regulations could be developed if needed.

I approach this subject as an owner and regular user of both an e-bike and an e-scooter (although I have come to prefer my e-bike). I also drive a car on an almost daily basis, and I take mass transit on an occasional basis. I do have a bias, however. I firmly believe that cities function most effectively when a wide variety of transportation options are available, so I am not going to argue that cars or bikes or buses should be predominant. Cities need to figure out how to be multi-modal.

The problems posed by micromobility devices are not really new. The same problems have existed for years with traditional bikes and, more recently, skateboards. But for some reason, adding an electric motor has made the issues significantly worse. I’m going to focus on e-bikes and e-scooters but much of what I suggest applies to traditional (or analog) forms of personal transportation as well.

Understanding Transportation Scale

Much of the problem stems from the fact that we squeeze a variety of transportation modes into a generic street design with limited space. While there are streets with clearly separated pedestrian sidewalks, bike lanes and traffic lanes, they are relatively rare. Some streets don’t even have sidewalks, which means that everything happens on the street pavement in some form of transportation free-for-all. To make matters worse, streets can also be used as parking areas and, occasionally, playgrounds.

Here is rough description of the differences in speed and scale (using weight as a proxy for size) between common transportation users on an urban street:

A mother pushing a stroller: 2-3 mph, 130 - 180 lbs
An adult walking for exercise: 3-4 mph, 120 - 200 lbs
A 10-year old riding a traditional bike: 6-10 mph, 80 - 110 lbs
A 12-year old on an e-scooter: 8-15 mph, 90 - 120 lbs
A 15-year old riding an e-bike: 12-25 mph, 160 - 180 lbs
An adult commuting on a traditional bike: 12-20 mph, 180 - 220 lbs
An adult on an advanced e-scooter: 15-25 mph, 200 - 250 lbs
An adult on an advanced e-bike: 15-30 mph, 210-260 lbs
An adult(s) in a car: 25-45 mph, 3,000 - 4,000 lbs

There are two points I’m trying to make with this list. The first is that we routinely put transportation users of vastly different scale and speed in very close proximity to one another. This requires that we trust the other users to act in predictable ways that roughly follow an agreed upon set of “rules of the road” so that we are not constantly running into one another. Most of these rules are codified as traffic laws, but many are simply expectations about what others are likely to do. The second point is that simply adding a battery and electric motor to a bike or kick scooter suddenly ups their speed by 50 percent or more, and makes them so convenient to use that their popularity has exploded. This is particularly true among pre-teens and teenagers who can’t drive. E-bikes and e-scooters have provided not only increased mobility, but also independence from parents (and parental oversight).

Although an e-bike can go significantly faster than a traditional bike, it doesn’t become more visible to other drivers, the judgement and decision-making of the rider doesn’t suddenly improve, and the maneuverability of the bike actually declines because of its greater speed and weight. Combine that reality with the fact that most kids under 15 years of age have no clue about the rules of the road, and this is a recipe for accidents on a routine basis.

Not All Micromobility Devices Are the Same

Regulations generally begin by defining the thing being regulated. Unfortunately, the first problem facing anyone trying to develop reasonable regulations is that the generic terms “e-bike” or “e-scooter” cover a wide variety of vehicles. Consequently, requirements that treat all e-bikes or e-scooters the same run the risk of being overly broad or even nonsensical. There is a classification system for e-bikes – although I don’t think it is all that useful – but there is no equivalent system for e-scooters.

Car and Driver magazine recently tested eight e-scooters from popular manufacturers looking for the “best” e-scooter for 2026. [2] Included in the test was the Segway Ninebot E2 Plus which has a top speed of 15 miles per hour, a range of 10 miles, and a weight of 34 pounds. The E2 Plus can be purchased from WalMart for roughly $320. Also in the test was another scooter from Segway, the SuperScooter GT2 which has a top speed of 41 miles per hour, a range of 26 miles and a weight of 117 pounds. The SuperScooter can only be purchased from Segway, and it comes at a price of approximately $2,700. Although on the surface they look similar, the operational characteristics are so different that they are going to appeal to a very different customer base and be used in very different ways. As a result, regulations that treat them the same – not to mention the dozens of other scooters that fall on the spectrum in between these two – are unlikely to make much sense.

Segway E2 Plus
Range: 10 miles; Speed 15 mph

In theory, the 3-class system developed by PeopleForBikes (an advocacy group) in conjunction with the bicycle industry should make things better with respect to e-bikes. It does, for example, make it easier to distinguish e-bikes from state licensed vehicles such as mopeds and motorcycles. Beyond that, however, I am sceptical of its value. The system, in a nutshell, works like this:

Class 1: pedal-assist only (no throttle), max assisted speed = 20 mph
Class 2: pedal-assist and/or throttle, max assisted speed = 20 mph
Class 3: pedal-assist only, max assisted speed = 28 mph

This system sounds at least moderately useful if the goal is to limit speed (e.g. no class 3 bikes) or if the goal is to limit throttle-based bikes (e.g. no class 2 bikes). Unfortunately, there are three significant problems. First, there is a lot of rule-bending when it comes to class 3 e-bikes. Many bikes are sold as class 2 e-bikes with a throttle that is software-limited to a maximum assisted speed of 20 miles per hour. They are specifically designed, however, to be “switchable” to class 3 simply by changing a system setting and the internet abounds with tutorials on how to bypass the throttle limits so that the bike can reach 28 miles per hour (or more) without any pedaling involved. To make matters worse, some manufacturers simply ignore the class rules altogether and sell throttle equipped bikes that can top 30 miles per hour without any modifications.

Bandit X-Trail Pro
Dual Motors; Top speed 42 mph

Second, many e-bike owners are unclear on exactly what class of bike they own partly because of the whole “switchable” design thing and partly because many bike shops don’t tell buyers about the classification system. I found out that my e-bike was class 1 only because the bike had an identifying sticker and I took the time to look up what it meant online. The result is that regulations based on e-bike classes are likely to confuse many e-bike owners.

Third, aside from the existence of a throttle or not, most law enforcement personnel have no way to field verify what class a particular bike is in. Many class 1 and class 3 bikes are virtually indistinguishable from each other, and switchable designs can make class 2 bikes operate in ways that are legal in some situations and then clearly illegal when police officers aren’t looking.

Bans Are Not The Answer

Some communities – mostly small, suburban cities – have banned electric bikes and scooters entirely. This is a ridiculous decision to make, in my opinion. Imagine banning cars in 1910 because they were startling the horses. The micromobility genie is out of the bottle and bans are a lazy approach to the problem that labels a city as being backward in their transportation policies. Any new technology is disruptive, but the better approach is to develop ways to adapt and integrate the new technology, not ban it.

Several studies have shown that the spread of micromobility options has a variety of benefits: less traffic congestion, less air pollution, less land lost to parking lots, less money spent on transportation costs, and less time stuck in traffic jams. [3] Most importantly, however, is that micromobility has dramatically improved transportation options for the segments of the population that cannot afford a car or are unable to drive. E-bikes and e-scooters are far faster than walking, offer more flexibility than traditional transit services, and are far less expensive than taxis or Ubers.

A Better Regulatory Framework

A smarter approach to micromobility regulation is to focus more on the behavior of the rider and less on the physical vehicle. This is consistent with how other traffic regulations are enforced. The traffic laws don’t vary for minivans versus sports cars, they focus on whether the driver is speeding or running red lights. Similarly, cities should focus on the behaviors they find dangerous or threatening and craft ordinances that make those behaviors illegal.

There are, however, some regulations that could apply to all electric bikes and scooters which I feel should be considered at the state level. For example, should there be a minimum age requirement for using either e-bikes or e-scooters in the public right-of-way (roadways and public sidewalks)? In my opinion, the answer is “yes” and the minimum age should be at least 13 or 14 years of age. Should helmets be required? Again, my opinion is “yes”, at least until the age of 16 or 18. I would also support some type of rider registration if it can be done online with minimal cost. The value of this step is to require riders to verify their age and their familiarity with at least the basic rules of the road. It would give law enforcement personnel some field-accessible data about the rider and it would prevent the “I didn’t know” excuse if riders broke traffic laws. Finally, the state should clearly define what is an e-bike and what should be treated as a licensed moped or motorcycle. In my mind, anything with an assisted speed over 28 miles per hour does not belong in the e-bike category.

Having just outlined a role for state-level regulations, I want to point out the need not to go overboard. New Jersey, for example, recently rushed a bill into law that is being called the “most restrictive e-bike law in the country.” [4] It requires that all e-bike riders be at least 15 years of age, with some form of drivers license, and that all e-bikes be registered with the state. In addition, class 2 and 3 e-bikes must be insured. These requirements are a significant burden on the people who are most dependent on e-bikes for transportation and do relatively little to actually improve safety. In my mind, this is just a way to disincentivize e-bike usage.

Before any local regulations are crafted to go on top of state regulations, cities need to think about their transportation priorities, including their commitment to building streets that are safe for multiple modes of travel. For example, it is my opinion that enabling safe and convenient walking should be considered sacrosanct in virtually every city. Too many cities (or at least portions of cities) have been designed to make walking subservient to the automobile. Major progress has been made in remedying that situation by improving crosswalks and sidewalks, and slowing down vehicular traffic in key locations. I would hate to see that progress upended by allowing e-bikes and e-scooters to terrify pedestrians.

At the same time, micromobility options have become such a crucial transportation option that cities need to make sure they can be used to access the entire community. This may be difficult to do safely in some areas where we have built our roadway infrastructure to be so auto dominated that biking and scooter options are almost nonexistent. In those situations, cities need to devote a portion of their capital improvements budget to building bike lanes, or at least shared bike/pedestrian pathways.

The ideal solution. In a perfect world, there would be separate sidewalks for pedestrians, traffic lanes for automobiles and trucks, and bicycle lanes for all types of bikes and e-scooters. Traditional bikes, e-bikes and e-scooters are all relatively close in size and speed – close enough that they should be able to coexist in well designed bike lanes. Pedestrians are clearly slower, and motor vehicles are clearly much larger and often significantly faster. Unfortunately, we don’t live in a perfect world so streets with all three types of facilities are relatively rare. Where bike lanes do exist, bikes and scooters should be required to use them except when turning movements require that they use a lane of traffic – and when the bike lanes are reasonably maintained. A bike lane that is littered with branches, broken glass and trash is not really a functional bike lane. Cities need to not just build bike lanes, but maintain them as well.

No sidewalks. My opinion is that e-bikes and e-scooters do not belong on sidewalks, period. This is not a universally shared position, but it goes back to my opinion that the pedestrian realm should be sacrosanct. Most residential sidewalks are too narrow to safely accommodate pedestrians along with e-bikes or e-scooters, and most commercial sidewalks are too crowded with pedestrians to make it safe there either. I’m not crazy about bikes and scooters on shared bike/hike trails to be honest, but at least those paths are generally much wider than a typical sidewalk and pedestrians know that they should expect to be passed by riders going at a faster speed. Still, a speed limit of 10 to 12 miles per hour and a requirement to give an audible warning before passing (either a bell or a verbal “on your left”) should be enforced.

My first experience on an e-scooter was in downtown Dallas probably 10 years ago when I signed up for a scooter sharing service while attending a conference. The experience was exhilarating, but downtown Dallas was not a particularly friendly environment for either bikes or scooters. I split my time between riding on the sidewalks – where I felt I was a threat to pedestrians – and riding in the street in a lane of traffic where I felt I was an impediment to traffic flow. In retrospect, I probably should have stayed in the street but I’m sure I would have eventually gotten some crap from drivers unhappy with my 15 mile-per-hour speed.

This is the problem with moving a young teenager on an e-scooter or e-bike from the sidewalk to the street. They will be easily intimidated by motorists not wanting to share the road which is likely to lead to them riding in the gutter and having cars zoom past just inches away. On a side street, it is much easier to move toward the curb for a brief time to allow a car to pass, but on busier streets that can be a fatal mistake. E-bike and e-scooter riders need to learn when taking an entire lane of traffic is the right thing to do. The lesson here, of course, is that parents need to review with their children the safest routes to take to reach their normal destinations, and the streets that should be avoided at all costs. In fact, it would not be unreasonable in my opinion to prohibit bikes and scooters on streets with high traffic volumes unless riders can maintain a pace of 20 to 25 miles per hour.

Stop signs and stop lights. As a life-long bike rider (both analog and electric), I have to admit that I have cruised through countless stop signs without fully stopping. I do, however, slow down and look carefully both ways before proceeding. And if there is cross-traffic, I do stop completely until it has cleared. What I am describing is illegal in the Kansas City area, but legal in roughly 20 states that have adopted “Idaho stop” or “stop-as-yield” laws for bicycles. The other 30 states need to get on board with this trend.

This recommendation really has nothing to do with e-bikes or e-scooters in particular. In fact, traditional bike riders would probably benefit the most. This behavior, however, is often cited as proof that e-bike riders are just lawless idiots. The reality is that most cities go crazy installing stop signs more or less randomly throughout neighborhoods as a way to slow down vehicular traffic on side streets. This approach is needed because the streets have been so badly designed that drivers routinely go faster than they should. Stop signs are so common in many cities that even cars don’t come to a full stop. Bike riders pay the price for this poor design, particularly when they choose side streets as a safer alternative to riding on major streets clogged with cars. If cities want to shift e-bike and e-scooter traffic to routes with fewer cars, then allowing them to treat a stop sign as a yield sign is a must.

Traffic signals, on the other hand, are an entirely different matter. While stop signs are cheap enough that they can be scattered randomly, traffic signals are expensive pieces of equipment that are only installed when a series of guidelines specified by the Manual on Uniform Traffic Control Devices are met. This means that if you are riding up to a red light on your e-bike, there is probably a good reason why you should stop. Yes, there are situations in which the stop light is red but there is no cross-traffic in sight. But in contrast to stop signs, that is generally the exception not the rule. My opinion is that all bikes and scooters need to obey traffic signals at all times, and riders who don’t should be ticketed by the police.

A few states have carved out an exception for intersections where the traffic signal sensor is not sufficiently sensitive enough to realize that a bike or scooter rider is waiting for the light to turn green. In those states, the bike rider is allowed to proceed after coming to a full stop if the cross-traffic has cleared. I think signal technology has improved to the point where that shouldn’t be a major issue in most cities, but I understand the logic.

Another e-bike/e-scooter behavior that I find problematic is when a rider in traffic takes a full lane when moving, but at a stop light will move to the gutter to loop around cars so they can be first in the queue when the light turns green. If you are going to take up a lane when riding in traffic (which is generally justified), then abide by that decision when you are stopped at a signal. If bike riders want to be treated as a legitimate vehicle deserving of space on a public street, then they shouldn’t undermine that position by weaving through cars that are stopped or moving slowly. Doing so makes them an unpredictable traffic hazard that irks drivers to the point that they push for over-the-top e-bike regulations.

The Bottom Line

There certainly have been problems with e-scooters and e-bikes in many cities across the country but they should be seen as growing pains in a new mode of transportation, not as a fatal flaw. Regulatory adjustments may well be needed, but they should focus on the behavior of the rider more than the device itself. Above all, cities should not ban micromobility devices because they have proven their value to a segment of the population that doesn’t have many other options.

Although there is a role for state and local regulations, what is really needed is more education for bike and scooter riders. The problem is that there is no obvious organization to take on that responsibility. Schools are the most likely option, but transportation safety is not at the top of their priority list. There are good resource materials available, but getting kids (and adults) to take the time to understand them is another matter. I think the State of Oregon, for example, has done a reasonably good job in this regard. [5]

Notes:

1. “The Medical Minute: E-bike and e-scooter injuries on the rise in children”; October 2025; Penn State University; https://www.psu.edu/news/hershey/story/medical-minute-e-bike-and-e-scooter-injuries-are-rise-children

2. Katherine Keeler; “Tested: Best Electric Scooters for 2026”; November 2025; Car and Driver; https://www.caranddriver.com/car-accessories/g62530668/best-electric-scooters-tested/?utm_source=google&utm_medium=cpc&utm_campaign=mgu_ga_cd_md_comm_pmx_hybd_mix_us_18715054781&gad_source=1&gad_campaignid=18707942106&gbraid=0AAAAACfH9WjJxntGezPLolk_36PfUVewh&gclid=CjwKCAiAmp3LBhAkEiwAJM2JUIntMj8FZOo2m__ip3odpBaYoxncEsIok3GChFwW5XcDdEm63oXgxxoChwoQAvD_BwE

3. Yasemin Bayrak, et al.; “The micromobility city: Measuring the impact of greater bicycle use”; January 2024; McKinsey & Company; https://www.mckinsey.com/features/mckinsey-center-for-future-mobility/our-insights/the-micromobility-city-measuring-the-impact-of-greater-bicycle-use

4. Dr. Ash Lovell, “New Jersey Passes Most Restrictive E-Bike Law in the U.S.”; January 2026; People For Bikes; https://www.peopleforbikes.org/news/new-jersey-most-restrictive-ebike-law

5. “Oregon Bicycling Manual”; 5th Edition; Oregon Department of Transportation; https://www.oregon.gov/odot/programs/tdd%20documents/oregon-bicyclist-manual.pdf

Post 63: The Problem With Electricity

noreply@blogger.com (Doug Johnson) — Fri, 19 Dec 2025 19:39:00 +0000

Electricity has been so widely available and so reliable for so long that we take it for granted. That is the problem. The reason it is problematic is because the way we produce, distribute and consume electricity is changing. And as I have pointed out in numerous previous posts, change is often difficult and expensive – two things no one likes.

Electrical service is so useful and so relatively inexpensive that virtually every household not only has it, but uses it without thinking twice. It is so reliable (more than 99.9% up-time in the U.S.) that it is a major news event when widespread outages occur. And despite the potential for death every time we use it, we are absolutely shocked (figuratively) whenever anyone is seriously shocked (literally).

But what if all of that changed? What if you had to cross your fingers and hope for the best whenever you came home and flipped on a light switch? Or what if you had to ration your use of the washing machine, oven or air conditioner because you couldn’t let your electric bill get out of hand? I’m being intentionally over-dramatic – very few households in the U.S. are likely to be impacted in that way. The future does contain changes, however, that will be unpopular and uncomfortable enough that people will rethink how they use electricity in their life and complain to their elected representatives that “something needs to be done.” My goal with this article is to figure out what that “something” is likely to be and how it will impact both households and cities.

How Electrical Systems Work

The more you learn about how electricity goes from generation to distribution to eventual consumption the more amazing the entire process seems. It is like someone juggling a thousand balls at the same time. The fact that the system works at all is due to some seriously clever human inventions, some well crafted industry standards, and to some government regulations that keep various stakeholder interests in balance.

To begin with, electrical system operators have to constantly keep power supply in sync with power demand. Electrical equipment and appliances are built to operate within a specific voltage and frequency range. In North America, the reference power frequency is 60 cycles per second (or 60 Hertz). Voltage and amperage can vary depending upon the needs of each particular user, but frequency is constant and bad things happen if the frequency varies by more than one percent or so. In fact, frequency is a primary indicator of the balance between supply and demand. If the frequency drops it means there is more demand than supply and more power needs to be generated. If the frequency increases, then the opposite is true.

The demand for electricity, of course, varies constantly throughout the day. The basic pattern is relatively predictable, but weather fluctuations, equipment malfunctions, and a myriad of random events and consumer decisions can alter the basic pattern minute-by-minute. Consequently, power system operators (and their computer systems) are making constant adjustments in real time. In addition, system operators are expected to balance supply and demand in the most cost efficient manner possible, which means buying as much power as possible from low-cost providers and using higher-cost providers only when absolutely necessary.

To understand how all this plays out, a little background information will be helpful. Some power plants, for example, are best at providing a relatively fixed amount of power more or less continuously. Nuclear, coal and hydro-power plants fall into this category, and are generally referred to as baseload generators because they are used to supply the base threshold of power that is required 24/7. The downside of these generators is that they take a long time to start up and they aren’t very good at responding to sudden spikes in demand.

Intermediate, or load-following generators, are used to supply power to match the ups and downs that are relatively predictable on a day-to-day basis. These plants are generally powered by natural gas turbines that can ramp up and down relatively economically. The final category of power producers are known as peaking plants, which are used for the relatively short-duration peaks of the daily demand cycle and for unexpected surges in demand. These plants typically use quick-response gas turbines that can respond in minutes to changing demand, or – increasingly in recent years – large scale battery storage facilities which can supply additional electricity in seconds. Peaking plants are an essential element of the system but the power they supply is expensive.

Utility-scale solar arrays and large wind farms don’t fit neatly into any of the traditional categories. They are generally used as baseload generators because the cost of the power they produce is generally lower than both nuclear and coal plants, but their fluctuating output makes integrating them with other power sources a bit challenging. Pairing wind and solar with battery storage can smooth out the fluctuations considerably which makes life easier for system operators, particularly as renewables like wind and solar provide a larger and larger share of total power supply.

To make things even more complicated, it is often cheaper for the utility company (and “greener” from an environmental standpoint) to manage demand during peak periods rather than buy expensive power from peaking plants. This “demand management” approach uses rates that fluctuate during the day (time-of-use rates) to make using electricity during peak periods expensive, thus incentivizing consumers to shift their consumption to off-peak times. Unfortunately, most people don’t like doing their cooking and laundry in the middle of the night so time-of-use rates can increase bills for some residential households.

Defining the Problem

Exploding demand. From 2005 to 2020, demand for electricity was almost flat (average increase of 0.1% per year). Improvements in energy efficiency were largely offsetting economic and demographic growth. [1] That has changed in recent years, however, as electrical demand set a new record in 2024 and again in 2025, and is now growing rapidly enough in many areas that electrical utilities are struggling to keep up.

Nearly four years ago I posted an article to this blog that talked about the “electrification of everything.” That trend is still continuing as battery powered electric vehicles replace vehicles with internal combustion engines, heat pumps replace natural gas furnaces and water heaters, induction stoves replace gas stoves, and on and on. The things I talked about in that post primarily affected residential demand, and while they still are trending upward they represent a relatively small portion of recent demand increases. While modest in terms of total demand, the trend is still significant because it means that demand is increasing everywhere, which means that the distribution grid will eventually need to be upgraded everywhere rather than in just a few places.

More relevant in recent years has been the proliferation of data centers, each containing thousands and thousands of computer servers. Data center construction is booming in order to meet the insatiable computing needs of artificial intelligence and cloud data storage. It is estimated that in 2024 U.S. data centers consumed approximately 4 percent of total electrical demand, an amount roughly equal to the demand for the entire country of Pakistan. Data center demand is expected to grow by 133% over the next five years [2] but some analysts consider those forecasts to be too low. The mania over artificial intelligence is leading to announcements for data center investments that are enormous in scale. If it all comes true, and that is a big if, the combined impact might bring the power grid to its knees.

Take for example, the $11 billion data campus that Amazon is building in northern Indiana known as Project Rainier. Currently seven data center buildings are operational, but a total of 30 buildings are planned. The full site will eventually draw roughly 2.2 gigawatts of electricity, equivalent to the power consumed by 1.6 million homes. [3] Every major player in the AI industry has similar projects either under construction or on the drawing board.

While there are data centers in every state, a third of the roughly 4,000 data centers in the U.S. are clustered in three states: Virginia (643), Texas (395) and California (319). In addition, there are significant clusters in Chicago, Phoenix, Atlanta, Columbus and Des Moines. Typically, an AI-focused “hyperscaler” data center contains at least 5,000 servers and consumes electricity equivalent to the demand from 100,000 homes. Newer designs currently under construction are expected to increase that demand by at least a factor of ten. Although there are advantages to clustering data centers together (e.g. network access), power demands are stretching the capabilities of local utilities to the point where proposed data centers are having difficulties getting power supply commitments and consequently are postponing construction or are looking at locations where power is more available.

Supply constraints. If demand is growing, won’t the market respond by building more power plants in order to increase supply? The answer is yes, but there is a significant timeline mismatch. Utility scale power plants, wind farms or solar panel arrays can’t simply be added to the grid willy-nilly without upsetting the delicate balance that keeps the grid functioning smoothly. Transmission lines, substations, transformers, switching gear, and grid control systems all need to be upgraded as the new power source comes online. All of that takes five years or more to get planned, permitted and built. The process is so time consuming that there is currently a queue of power generation projects waiting to get approval to connect to the grid. That sounds like a good problem to have, but many proposed projects never get built because of problems that are uncovered during the approval process. The current system is a roadblock to new power capacity, but it is a necessary evil.

The reality is that AI data center demand has ramped up quickly in just the past few years, but growing the power capacity of the grid is a much slower process. A new data center can be planned and built in a couple of years, but the matching power supply might take twice as long – or in some cases three or four times as long. [4] This is particularly true for some of the more exotic solutions that have been proposed such as geothermal or modular nuclear power plants.

Things have gotten desperate enough that old nuclear power plants are being brought out of mothballs. Microsoft recently signed a 20-year power purchase agreement with Constellation Energy to restart a reactor at Three Mile Island to power planned AI data centers. Three Mile Island, of course, was the site of America’s worst nuclear accident back in 1979. A second, undamaged reactor was eventually restarted and ran until 2019 when it was shut down because it was too costly. [5] The needs of AI have apparently changed the economic equation because costly power is better than no power at all.

Shaky infrastructure. The period of flat demand growth from 2005 to 2020 lulled utility companies into thinking that infrastructure upgrades were a relatively low priority. That has changed recently for three reasons. First, the combination of aging infrastructure, high winds (or other extreme weather) and drought conditions have caused enormous liability issues. Pacific Gas & Electric in California filed for bankruptcy in 2019 and pled guilty to 84 counts of involuntary manslaughter following the 2018 Camp fire. Hawaiian Electric has been hit by a dozen lawsuits over its alleged role in the wildfire that killed more than 100 people and burned the town of Lahaina to the ground. The Fitch rating agency warned that the company faces more than $3 Billion in potential liability claims. PacifiCorp and Xcel Energy are facing similar problems for the 2020 Labor Day fires in Oregon and the 2021 Marshall fire in Colorado. [6]

The average age of the country’s transmission lines is 40 years old, and roughly a quarter of the lines are more than 50 years old which is the typical intended lifespan. More than half of US transformers will reach their intended lifespans in the next five to ten years. Utilities are spending billions of dollars annually to remedy the problem, but supply line disruptions and tariffs make the work more expensive, and the scale of the problem makes the solution a decades long affair. Utility companies are finally taking extreme weather seriously but there is a lot of catching up to do.

Second, the electrical grid is having to supply power to the above-mentioned data centers which are 24/7 power hogs. Take, for example, the 2,250-acre data center campus currently being built by Meta in Louisiana. The project, named Hyperion, is being built in Richland Parish which is pretty much in the middle of nowhere – more than 100 miles from either Shreveport or Jackson, the only towns of any size in the area. Upon completion, it is estimated that the campus will consume three times as much electricity as the City of New Orleans. Consequently, the local utility company (Entergy) is spending $1.2 Billion to build a 100-mile, 500kV transmission line, along with eight substations, and eight 230kV transmission lines. In theory, Meta is covering the cost, but projects like this distract utility companies from addressing the underlying fragility of their electrical networks.

Finally, utility companies are being pushed to harden the electrical grid against possible cyber attacks. The grid has long been considered a soft target for terrorists or enemy nations because of outdated (and easily hacked) control systems and the distributed nature of the grid itself. Steps are being taken, but again, this is likely a decades-long effort.

Rising prices. So let’s quickly recap. Electrical demand is rising, supply is constrained by long approval times, and the distribution network is aging and fragile. Should we be surprised that prices are rising? Unless you completely slept through your economics class, the answer, of course, is no. According to the St. Louis Federal Reserve, during the six years from 2014 through early 2020, the average US City electricity price per kilowatt hour was basically flat (actually declining on an inflation adjusted basis). During the five years prior to that the average price rose a total of just over six percent. But in the five and a half years since early 2020 (through August of 2025) the average price has gone up over 40 percent.

To be fair, this increase is just a third more than the increase in the Consumer Price Index, so it is bad but not disastrous. Coming on the heels of a ten year period of hardly any increase, however, it seems much worse. Now in addition to the rapidly rising costs of household essentials like food, medical care, and housing, working class families have to worry about the electrical bill being beyond their budget.

Interestingly, in the states with the highest average increases, the cost of power generation has declined slightly. It is the cost of electrical transmission (long distance) and distribution (short distance) that has been rising faster than inflation. [7] The decline in power generation costs coincides with a shift away from relatively expensive coal power plants to less expensive natural gas and renewable sources. Coal produces just a third of the US electric power that it did twenty years ago and our pocketbooks and lungs are better off as a result.

However, skyrocketing demand from data centers may change all of that. Power generation costs have ticked back up over the past two years and are likely to continue rising. As noted earlier, power providers are so desperate for new capacity that old nuclear reactors are being brought back to life and coal plants slated for retirement are being kept operational. These are not low cost sources for electricity, so overall rates will increase. Fortunately, the vast majority of new power generating capacity will come from solar and wind – often supplemented by large scale battery storage – since renewables produce relatively cheap power and can be brought online faster than other sources.

The final point to understand is that electricity demand and price increases are not evenly distributed across the country, nor is there even a clear pattern. The ten states with the lowest average residential rates (starting with the lowest) are Nevada (11.95 ¢/kwh), Louisiana, Idaho, Tennessee, Kentucky, North Dakota, Arkansas, Washington, Nebraska and Mississippi (13.97 ¢/kwh). The ten states where residential rates have gone up the most (Sept 2024 - Sept 2025, starting with the worst) are New Jersey (21.1%), Illinois, Indiana, Pennsylvania, Maryland, Florida, Georgia, Ohio, New Hampshire, and Washington (11.3%). [8]

Helpful Trends

The gloom-and-doom statistics above may lead you to think that we are going to suffer major grid disruptions and pay more each month for the privilege. While that is a possibility, it isn’t very likely for a variety of reasons. To begin with, the electrical grid is run by people who are smart (and cautious), and the system has a lot of built-in redundancy (even if much of it is getting outdated). Yes, we are likely to pay more and there may be an increase in localized outages or brown-outs, but there are several countervailing factors that I think will save us from anything catastrophic.

Bursting the AI bubble. The list of data center construction projects that have been announced by various tech companies is very long and their potential power demand is enormous. Oddly, however, that potential impact isn’t showing up in the energy futures market. For some reason, the “smart money” isn’t buying the story that electrical demand is going to outstrip supply because of the data centers powering artificial intelligence.

Every tech company, it seems, is jumping on the AI bandwagon and to be taken seriously you apparently have to announce expensive initiatives like billion dollar data centers. It is possible that many of these announcements are from AI unicorns that will be bankrupt before any ground is broken, or are gross exaggerations designed to garner press coverage. It is too soon to know for sure, but demand increases might be modest enough to be handled without threatening grid stability.

Soaring solar. Nearly all forms of electrical power production have gotten less costly over time due to technological improvements and manufacturing efficiencies. But there is one form of electrical production that has outshone the others, and that is photo-voltaic solar. Using data from industry analyst Lazard for the Levelized Cost of Energy – total construction, maintenance and fuel costs divided by total energy production over the life of the facility – shows that the cost per megawatt-hour for utility scale solar has fallen by a remarkable 88 percent over the past 15 years. [9] The energy produced by each solar cell has nearly doubled during that time and production costs have plummeted as manufacturing volume has increased.

Solar power has been the great “democratizer” of energy – simple and cost-effective enough that individual households and companies can generate their own power and store it for use at any time when paired with batteries. This “behind-the-meter” electricity saves the individual user a significant amount of money but it disrupts the economic model behind the electric utility industry. Utility companies generally spread operational costs across their customers based on total consumption, so if private solar causes demand to drop it can result in rates going up for everyone else.

Not every location is ideal for solar facilities, but in the best locations solar now has the second lowest cost behind on-shore wind farms. Ongoing innovations are likely to keep the cost per watt falling faster for solar than for other competing options. Even less than ideal locations are generally cost competitive now and may have outright cost advantages within the next five years.

Many solar projects are now paired with large battery storage installations to make it easier for grid operators to dispatch electricity around the clock as needed. As with solar cells, battery efficiency and the cost of manufacturing have improved dramatically over the past ten years. New battery configurations and chemical compositions are being announced almost weekly which will improve performance, reduce costs and lower environmental impacts. Battery storage facilities may eventually account for 20 to 30 percent of electricity supply during periods of high demand.

Decentralizing the grid. One of the advantages of solar power production and battery storage is that moderately sized facilities can be distributed across the grid as opposed to traditional power plants which are centralized in just a few locations. This characteristic is not only reducing transmission costs, but it is allowing the overall electrical grid to be subdivided into microgrids which can be isolated from the main grid during times of instability or weather-related disaster. Microgrids with their own battery storage and/or solar arrays (or other generating source) are not likely to be self-sufficient for more than a day or two, but that might be enough to significantly lessen the spread of major outages.

Microgrids are currently being created primarily for commercial and industrial facilities where uninterrupted 24/7 operations are critical (e.g. medical campuses, airports, logistics hubs, military bases), but they are likely to spread gradually to more mundane parts of the city. Distributed power generation and storage will eventually simplify transmission and distribution needs, and reduce demand for expensive peaking plants.

The Bottom Line

To summarize, the electrical grid is likely to be stressed over the next few years in several different ways:

Total electrical demand is likely to continue rising for the foreseeable future, for both residential and commercial customers;
Utility companies are likely to continue investing heavily in infrastructure upgrades for capacity reasons and to replace aging equipment;
Extreme weather events and changing climate patterns will continue to test grid resiliency; and
Power generation decisions are likely to be influenced by not only spiking demand near data centers, but also by shifts in political policies at the federal level.

All of this, in my opinion, is likely to cause rates to continue to rise over much of the country. Here are a couple of ways this is playing out. First, the Colorado River basin – which is lined with hydroelectric dams – is in the midst of an extended drought. The “full pool” elevation for Lake Mead, for example, is approximately 1,220 feet but it is currently at around 1,060 feet. The turbines at Hoover Dam are continuing to produce power, but at a reduced rate which means that many of the utility companies that depend on that electricity are having to purchase power from the open market which is generally more expensive. [10] If Lake Mead water levels drop to roughly 1,000 feet then electricity can no longer be generated at all, and while that is unlikely in the near term it is a possibility if the drought continues.

This may seem like an isolated issue, but extreme weather events – or even the threat of extreme weather – affects the electrical grid on a regular basis. In Asheville, North Carolina, for example, it took 10 days to restore power to the majority of customers following the torrential rains from Helene in September of 2024. Restoring power to more isolated customers in the surrounding area took weeks and even months. Xcel Energy in Colorado cut power to roughly 100,000 customers just recently due to the threat of wildfires stemming from drought and high winds. The components of the electrical grid are uniquely exposed to extreme weather which multiplies the risk associated with aging infrastructure.

Second, spiking demand and political pressures at the federal level may push some energy producers into making decisions that are questionable from a long-term economic perspective. I doubt anyone is stupid enough to build a new coal powered generating plant despite the administration’s “mine, baby mine” attitude, but there is likely to be a shift toward more natural gas power plants despite the relatively high cost of the electricity they produce. Even though natural gas prices have historically been volatile and are currently at relatively high levels, the Trump administration considers natural gas plants as “dependable” and a good match for the 24/7 demand from data centers. In my opinion, however, power from the combination of solar, wind and battery storage is the most economical long-term strategy. Unfortunately, utility company profits are based largely on a pre-set rate of return applied to all system assets, so building inefficient (and polluting) power plants is fine as long as they can be justified in some other way (e.g. “dependable”).

Finally, there is the not insignificant risk that technological change will either reduce the demand for AI data centers or will reduce the power demands of AI data centers. After all, the history of computer performance over the past several decades has shown exponential improvements in calculations per watt of energy consumed. In fact, the next-big-thing in computing is known as a quantum computer, and while it might be a decade or more until quantum computers are commonplace, when they arrive they will undoubtedly be used for things like artificial intelligence and their performance will be orders of magnitude more efficient than today’s best CPUs. This raises the possibility that the data centers which need huge amounts of electricity in the near-term will suddenly need substantially less at some point in the future – leaving us over supplied with electrical capacity. Unlike most businesses, however, utility companies can never lose money because they overestimated demand. They are guaranteed a profit which means that rates will go up because total costs will need to be spread across a smaller base of power consumption.

In short, I don’t see electric bills doing anything but going up in the foreseeable future. The long term trend of declining power production costs seems likely to continue – although it may be temporarily interrupted by the short term scramble for power at any cost – but it will be overwhelmed by increases in transmission, distribution and grid resiliency costs. We are so dependent upon electricity that we have no option other than paying the bill, but it is one more straw on the camel’s back that is the household budget. I worry about how much more working class families can take before our economic system starts to break. Changes to the electrical grid are just another example of the economic squeeze that families are facing. As a society, we continue to paint ourselves into a corner, one incremental decision at a time, and I don’t see an easy way out.

Notes:

1. “After more than a decade of little change, U.S. electrical consumption is rising again”; U.S. Energy Information Administration; May 2025; https://www.eia.gov/todayinenergy/detail.php?id=65264

2. Rebecca Leppert; “What we know about energy use at U.S. data centers amid the AI boom”; Pew Research Center; October 2025; https://www.pewresearch.org/short-reads/2025/10/24/what-we-know-about-energy-use-at-us-data-centers-amid-the-ai-boom/

3. MacKenzie Sigalos; “Amazon opens $11 billion AI data center in rural Indiana as rivals race to break ground”; CNBC; October 2025; https://www.cnbc.com/2025/10/29/amazon-opens-11-billion-ai-data-center-project-rainier-in-indiana.html

4. Martin Stansbury, et al; “Can US infrastructure keep up with the AI economy?”; Deloitte Touche; June 2025; https://www.deloitte.com/us/en/insights/industry/power-and-utilities/data-center-infrastructure-artificial-intelligence.html

5. Kris Maher and Jeanne Whalen; “Three Mile Island’s Nuclear Revival Pits Those Who Fled Against Job Seekers”; The Wall Street Journal; December 2025; https://www.wsj.com/business/energy-oil/three-mile-islands-nuclear-revival-pits-those-who-fled-against-job-seekers-2758e115?gaa_at=eafs&gaa_n=AWEtsqc5EYPgpOJS0JxWkorwIudTw0ivXgcmCYu6RyHmprKhC1UB6JVgFpP5s9qGFiw%3D&gaa_ts=692f6098&gaa_sig=ue2UXdB7U9wD2_Tz9UCgKqLwWaypCRIyF-igVa5GHxvFUjWsHHxfgxThCf_sN5wxktvjaIaWVn0BaSMgRmKQpA%3D%3D

6. Spencer Kimball and Gabriel Cortes; “Electric utilities face billions in wildfire liability with aging power lines risking another catastrophe”; CNBC; August 2023; https://www.cnbc.com/2023/08/28/wildfire-risk-electric-utilities-face-billions-in-liability-with-aging-lines.html

7. Jesse Buchsbaum and Jenya Kahn-Lang; “What’s Happening to Electricity Affordability? In Five Charts”; Resources; October 2025; https://www.resources.org/archives/whats-happening-to-electricity-affordability-in-five-charts/

8. Caitlin Ritchie; “Electricity Rates by State”; Choose Energy; Dec 2025; https://www.chooseenergy.com/electricity-rates-by-state/

9. Max Roser; “Why did renewables become so cheap so fast?”; Our World In Data; April 2025; https://ourworldindata.org/cheap-renewables-growth

10. Daniel Rothberg; “Many miles from Lake Mead, rural electric utilities struggle with Colorado River shortage”; The Nevada Independent; October 2022; https://thenevadaindependent.com/article/many-miles-from-lake-mead-rural-electric-utilities-struggle-with-colorado-river-shortage

Post 62: Housing Affordability and Tough Choices

noreply@blogger.com (Doug Johnson) — Wed, 22 Oct 2025 18:13:00 +0000

If you read the first two posts in this series (Post 60 and Post 61), then you should understand why housing affordability has been such a tough problem to solve. The basic issue seems simple enough: the cost of housing production and ownership needs to come down – or at least stay flat long enough for income growth to catch up. The multi-dimensional nature of housing construction cost components, however, means that there is no simple solution. Even addressing just half of the cost components will force some uncomfortable compromises.

With this post I’m going to throw out some ideas that – used in combination – might be enough to actually lower housing costs. They are unlikely, however, to be particularly popular and I will identify the likely objections as part of my discussion. To begin with, existing homeowners are unlikely to want housing construction costs to drop because that would, at the very least, interrupt the housing appreciation trend which has added considerable wealth to many homeowners. Many markets are starting to see modest price declines for existing homes as the over-inflated housing bubble starts to pop. If new construction options undercut prices further, then modest declines could turn into significant drops.

Aside from waving a magic wand that instantly raises the household income for middle-class families, significant drops are exactly what is required. The housing market is badly out of whack compared to income, and fixing it will result in some pain.

Solutions That Don’t Work

In addition to ignoring the “increase everyone’s income” type of solution, there are a few other popular “solutions” that I am not going to support because they are band-aids that don’t really solve the long-term problem. So let’s get them out of the way right up front:

Rent control. This is an idea that periodically surges in popularity when renters blame greedy landlords for rent increases instead of bothering to understand the economic forces that are at work in the housing marketplace. The latest advocate is New York City mayoral candidate Zohran Mamdani whose popularity is surging partly due to his calls to expand rent control of privately owned housing units. The problem is that I can’t think of a single example where this approach has been a successful long-term strategy. Rent control disincentivizes both housing maintenance and new housing construction which means that the existing housing stock spirals into decay and fewer new units are constructed which further warps the supply/demand balance. Renters might celebrate in the short term, but in the end it typically becomes a lose/lose solution.

Down-payment assistance for first-time homebuyers. This is an idea that was recently pushed by presidential candidate Kamala Harris when she proposed giving first-generation homebuyers up to $25,000 in downpayment assistance and other first time buyers up to $10,000 in tax credits. This idea at least has the advantage of being somewhat targeted toward segments of the population that arguably need help, and it might actually be beneficial for some recipients. It does absolutely nothing, however, to lower the cost of housing production which in my mind is the core problem. It would also be likely to lure people into homeownership who will ultimately fail and end up worse off financially than before. If a household doesn’t have sufficient income (or sufficient budgetary discipline) to save for a downpayment, what is the likelihood that they will be able to weather unexpected expenses such as a roof repair or HVAC replacement that can easily be in the tens of thousands of dollars? As I have argued previously, homeownership is a wise financial move for some households, but not for everyone. Spending a lot of tax dollars to give people the illusion that they are ready to be homeowners might be more cruel than helpful.

Convince the Federal Reserve to lower interest rates. This seems to be a popular option lately because it is seen as leading directly to lower mortgage rates. Unfortunately, the federal funds rate which the Federal Reserve controls is only loosely connected to mortgage rates. Long-term treasury notes/bonds are a much better predictor of mortgage rates and they are set by the market, which in turn is influenced by overall economic strength, inflation fears, and demand for U.S. debt instruments. Despite a recent rate cut by the Federal Reserve, mortgage rates have stayed relatively unchanged – likely due to concerns about stubborn inflation levels and a weakening job market.

Privatize Fannie Mae and Freddie Mac. Seventeen years ago these two organizations were placed under federal conservatorship in order to stabilize the housing finance industry which was in meltdown mode at the time. That action was successful, but what was considered a temporary measure at the time has now stretched to nearly two decades. [1] There is now considerable discussion about selling the government’s stake in Fannie and Freddie so that they can operate as a completely private entity without government interference or constraint. Some proponents have argued that privatization would make the organizations more efficient and innovative, thus benefiting home buyers and improving affordability. There are interesting arguments on both sides of this issue and I don’t know enough to take a position one way or the other, but I am skeptical of the suggestion that this will have any significant impact on housing affordability. I think the ultimate impact on mortgage rates will probably be minimal and the odds are probably about 50/50 whether rates would go slightly up or slightly down.

Build more housing. This is a popular solution that has the support of basic economic theory – build more supply and prices should fall. The problem is that this approach is too simplistic to be very useful. Yes, we need to build more housing, but building more of what we are already building won’t work. To begin with, no government agency in the U.S. has the ability to compel the private sector to build housing it doesn’t want to build. And if homebuilders or developers could profitably build more of what they are already building they would already be doing so. We need to build housing differently to supplement what we already build, with new construction and ownership options that have lower monthly costs.

Things Outside of Local Control

There are three factors that could have a significant impact on housing costs (either for better or for worse) which I am also going to largely ignore because they are federal issues that are wrapped up in other policy objectives. Consequently, I think they will be unaffected by pleas from local officials concerned with housing affordability. The first factor is the mortgage rate which is tied up with issues related to both the national and world economy. If the average rate for a 30-year fixed mortgage were closer to 5 percent it would make a huge difference but I think that is unlikely in the next few years.

The second factor is the tariff rate on lumber, cabinets, and other wood products. The Trump administration’s position on tariffs seems to yo-yo all over the place but the current path is likely to raise the cost of housing production which is obviously bad for housing affordability. Trump’s tariff strategy seems to be a long-term play to increase internal production and employment, but I think it will be painful in the short run and I’m doubtful of long run success as well. Again, I don’t think housing concerns will sway the tariff strategy.

The third factor is construction labor availability which has been strained for years and is likely to get significantly worse with the federal focus on deportation of undocumented residents. Efforts to recruit young people into the construction trades have not been successful enough to counterbalance retiring workers and increasing demand. Deporting workers will make that worse, which will increase housing costs. This is part of a much larger issue relating to border control and immigration which means that the impact on housing affordability isn’t likely to have much influence.

Actions Which Might Work

I have four general ideas (each with multiple parts) that I think could make a significant difference in housing production and ownership costs. As I mentioned earlier, none of them are likely to be particularly popular which makes me pessimistic about any real success. True improvements to housing affordability will require a community that is committed to making it a high priority, to the point where they are willing to shake up the status quo and implement unorthodox strategies.

Reduce Land Costs Per Unit

Land can account for 10 to 20 percent (or more) of the final cost of a housing unit so it is a logical place to start looking for potential savings. The price of land, of course, is set by the market and isn’t likely to drop unless the housing market and the broader national economy really go south. Thus, the key to reducing the land cost per unit is to increase the number of units allowed on a given parcel of land. Increasing housing density is rarely popular, however, because it is seen as an attack on the character of the community and on the value of existing housing.

Most single-family homes are surrounded by spacious yards that are rarely if ever used. Yes, there are exceptions for families with lots of kids or households that do lots of entertaining, but most yards rarely see a human presence outside of someone mowing the grass or trimming the shrubs. Required yard sizes could easily be reduced by a third, or perhaps even half, without materially affecting the lifestyle of most households.

The reality is that most communities use their zoning authority to limit the majority of their land to single-family homes on lots that are far larger than are reasonably necessary. This is being documented by an ambitious (but unfinished) effort known as the National Zoning Atlas. [2] For example, St. Charles, Missouri, is a city of 70,000 people located in the St. Louis metro area. Of the 88 percent of the land that is subject to zoning controls, 54 percent is limited to primarily residential uses, 10 percent is limited to mixed uses which include residential options, and 36 percent is limited to nonresidential uses. Single-family homes are allowed by right on nearly 70 percent of the residential land (and not prohibited anywhere) while no form of multifamily development from duplexes on up is permitted by right on more than 10 percent of the land. [3] As skewed toward single-family as this might seem, many communities are actually much worse. Take a look, for example, at Stamford, Connecticut, a city of 135,000 people: [4]

Housing Units Allowed - Stamford (by percent of land area)

1-family 2-family 3-family 4+family

Allowed (by right) 97% 11% 10% 10%

Conditionally allowed 2% 2% 2% 16%

Prohibited 0% 88% 89% 75%

There is a growing movement to create neighborhoods that blend duplexes or tri-plexes in with single-family homes. Given the shrinking size of American households, it would seem to be a relatively straightforward way to increase housing density and housing diversity. Several years ago, Minneapolis amended its zoning regulations in this exact manner to allow duplexes and tri-plexes in areas previously zoned for just single-family homes. While there has been political pushback and several lawsuits, early results are encouraging. Between 2017 and 2023, the housing stock grew by 12% (compared to 4% statewide); and rents increased more slowly at just 1% (compared to 14% statewide). [5]

So why isn’t this approach more common? The answer is that while we like to support the concept of affordable housing, supporting that reality is a different matter if it might impinge on the sanctity of our neighborhood. A recent study came to the following conclusion:

We show that the residents of neighborhoods with mostly single-family zoning, on average, have significantly higher household incomes and are much more likely to be white, much less likely to be Black or Hispanic, more likely to have a bachelor’s degree, and much more likely to own their homes than residents of neighborhoods where zoning allows for multifamily building construction. [6]

Having mostly single-family zoning seems to lead to mostly good things, but it does so by largely excluding middle-income households and households of color. NIMBYism is alive and well because most people don’t want to jeopardize the value of their home. These are the difficult trade-offs that housing affordability requires.

If the Minneapolis approach is too extreme, there are other approaches that can lower the cost of land per unit of housing. Examples include allowing accessory dwelling units in back yard areas, aggressively redeveloping vacant land controlled by urban land banks, and allowing denser forms of transit oriented development adjacent to commuter rail stations in suburban communities. If done correctly, all of these things can improve housing affordability without ruining the character of a community or neighborhood. At the very least, communities should amend their zoning regulations to provide for districts which allow small-lot development (e.g. 5,000 square foot lot sizes) and cluster development where several homes share common open space. This would enable new neighborhoods to be more dense without impacting existing neighborhoods.

Reduce Construction Bureaucracy

Part of the housing affordability problem is that we have skewed the building process to favor big companies that build big subdivisions of single-family homes or big apartment complexes. Small developers who might be more in touch with the needs of the community and more willing to build nontraditional housing tend to get lost in the shuffle. This isn’t intentional, but rather the inevitable result of community pressure for building departments to be as efficient as possible. Review and inspection processes get designed for big, complicated projects with requirements that big companies are used to but which small developers find burdensome or unnecessary.

In addition, the relationship between builders and the municipal building departments that regulate construction is often adversarial, particularly in larger cities. This probably isn’t surprising given the complexity of the building code and pressure on contractors to stay under budget (i.e. cut corners), but it can discourage small builders from entering the market and reduce their odds of being successful when they try something new.

Cities that are really committed to housing affordability should consider carving out a distinct approach for small housing projects. This is likely to be more labor intensive (i.e. less efficient), but growing the capabilities of ten or twenty small builders might be more productive in terms of increased housing diversity than luring another large developer who is going to build more of the same. For example, I would like to see a simplified building code created for housing units below a certain threshold (perhaps 2,000 square feet per unit). Most cities already have a separate code for 1- and 2-family structures, but I’m thinking of a step-by-step document that is heavily illustrated and focused on simple construction techniques. Builders wanting to do a more elaborate or exotic project could always opt for the standard code documents, but small scale builders would likely embrace a simplified approach that is easy to understand.

I would also like to see this simplified code focus on low-cost design requirements, even if this means somewhat lower performance in terms of energy efficiency or fire safety. I think we have excluded buildings that are “good” by insisting that everything be “excellent” and the cost of that approach has become counterproductive. To supplement this simplified approach, building departments need to have reviewers and inspectors that view their role as being collaborative problem solvers as much as code enforcers. Instead of just failing an inspection and letting the builder figure out what changes are needed, inspectors could explain the logic behind the requirement and suggest a possible solution. This would be more time consuming and it would also require a very knowledgeable staff – the type who are typically put on the most complicated projects, not the simplest.

Along the same line of reasoning, there is a new trend spreading across the country known generally as Pattern Zoning. Under this approach, cities pre-approve full building plans for modest single-family homes and duplexes and make those plans available to builders for a minimal fee in selected parts of the city. The approval process is entirely administrative in most cities, meaning that there are no public hearings, no neighborhood protests, and no extended review times prior to permit approval. The choices are limited, but it can result in homes under construction in record time and with a very low up-front cost. [7]

More Factory Production

There are three types of housing that are built entirely, or at least partially, in a factory: (1) manufactured housing (what used to be called a “mobile home”), (2) modular housing, and (3) panelized housing. Although the numbers fluctuate from year to year, in general terms all three types account for 10 to 12 percent of total housing construction. In my opinion, that percentage needs to at least double for there to be a significant impact on average home prices. There are, unfortunately, some obstacles standing in the way of that happening.

Manufactured housing has come a long way from its mobile-home roots, but its impact on the housing market is largely under the radar. Roughly 100,000 units are built each year – triple the amount for the other two forms of factory housing combined – and studies have estimated that it is 20% to 45% less expensive per square foot than site built housing. [8] Manufactured housing is subject to a federal building code (known as the HUD code) which is roughly equivalent to most local building codes. The standardization enabled by this single code has substantial advantages for factory production where the final product might be shipped to a wide variety of locations. There are, unfortunately, some significant limitations that the manufactured housing industry is subject to which limit the appeal of this housing option.

For example, the HUD code requires that manufactured units be built on a chassis or frame. This is a throwback to the days when it was assumed that the unit might be moved from place to place and wheels were often attached to the chassis so that it could be towed on the highway. In reality, manufactured housing is rarely moved once it is installed on a foundation and units are typically shipped on flatbed trailers, so the need for a chassis is obsolete. The requirement for a chassis, however, makes it more difficult to permanently attach to a normal foundation and it makes it almost impossible to stack units vertically. Proposals are actively being considered to remove this requirement, but they have not been formally adopted.

Another vestige from the past is the default treatment of a manufactured home as a piece of personal property with a title, much like a car. This stems from manufactured homes traditionally being placed in “mobile home parks” where the land is rented by the resident rather than owned. It is possible to convert a manufactured home to real estate if it is placed on property that is owned by the owner of the unit, but it requires additional time and paperwork. The industry needs to push for the default option to be real estate, rather than the other way around.

The third obstacle that keeps manufactured housing from being more popular is its appearance which traditionally has been long and skinny, with a very low roof pitch and virtually no overhangs (eaves). This distinctive look has been stereotyped as being cheap or insubstantial despite the fact that a well made unit can be as comfortable and modern as many site-built homes. The industry is addressing the issue with a new category of manufactured home known as a CrossMod. These units have much more normal roof designs and can incorporate additions such as porches, attached garages, and decks.

A CrossMod Home (Source: Clayton Homes)

The final obstacle is the local zoning code which in most jurisdictions limits manufactured housing to rarely used districts that are frequently located near floodplains, railroad tracks or industrial parks – sites that aren’t ideal residential neighborhoods. As the manufactured housing product improves, cities need to modify their codes and practices to find ways to locate manufactured home subdivisions in attractive residential areas near other types of housing.

Modular and panelized housing techniques are distinguished from manufactured housing in that they are designed to comply with local building codes. They also offer a great deal more flexibility in terms of the design of the final product, require more on-site finishing work, and yield somewhat less cost savings. The result, however, is often indistinguishable from site built housing. Unfortunately, neither type of construction has really caught on in the U.S. I think the problem is that, unlike manufactured housing, modular and panelized housing requires a third-party builder who does the site work, buys the modular/panelized components, does the on-site assembly and finish work, and then sells the final product. So far, there haven’t been enough companies willing to play that middleman role. Factories are expensive to build and to keep running, so there needs to be a steady stream of buyers (i.e. builders) to make them profitable.

Still, I think the potential is great and the skyrocketing cost of traditional construction might be enough to shake builders out of their comfort zone and into the world of modular and panelized construction. That world is different enough that architects and builders will need to think about housing design in a slightly different way. Successful builders will have to understand and tap into the strengths of modular and panelized construction so that the cost savings are as substantial as possible. In particular, builders will need to find designs that are smaller and simpler but still appealing to modern buyers. Designing modest homes specifically laid out with expansion in mind might be a start. In any case, building old house plans with new technology isn’t likely to yield the necessary cost efficiencies.

A New Form of Ownership

In the world of housing, you are either an owner or a renter, and there are troubling trends affecting both of those options. On the ownership side, I have already detailed the rapidly growing gap between the average cost of owning a home and the average income of a typical household. On the rental side, the share of total housing expenditures represented by rent has been trending higher for at least the past 20 years across all income levels, meaning that affordability is not just an ownership issue. [9]

Equally troubling, in my opinion, is that the ownership of rental housing is increasingly concentrated in large corporations that are often remote from the people who occupy those units. Large corporations are good at creating algorithms that maximize profits, but housing is an essential human need with a social aspect that is just as important as the economic one. Balancing the economic need for profitability with the moral imperative of being a responsible landlord is where impersonal corporations often fall short. Maybe AI will save us someday, but there currently isn’t an app or an algorithm that can replicate decision making based on a personal relationship.

What I would like to see more of is what I’m going to refer to as “co-owning”. This third category requires the participation of a housing-focused organization – most likely a not-for-profit, community- or faith-based organization that is willing to partner with individual households. The role of the co-owning organization is akin to the role of a traditional landlord, but with the profit motive of the landlord replaced by a mission to provide affordable housing, build wealth, and smooth the transition from renter, to co-owner, to traditional owner. Ideally, the co-owning organization would acquire multiple housing units in close proximity and maintain an active partnership with the residents in order to facilitate a sense of community.

From the perspective of affordable housing, the key advantages of a co-owning organization would be:

Reducing the financial impact of closing costs and down payments so that moderate income households could “own” housing without a huge up-front cost;
Building relationships with local lending institutions so that financing arrangements for first-time buyers would be less intimidating;
Developing a list of trusted repairmen, contractors, insurance providers, and similar local services that homeowners are likely to need;
Assembling a shared pool of tools, ladders, and lawn care equipment so that each owner doesn’t need to buy their own;
Providing short-term financial assistance to smooth over unexpected expenses at interest rates far below what a credit card or payday loan business would require; and
Facilitating the eventual sale of the residence if the household needs to move or wants to upgrade to a traditional ownership role.

In exchange, the organization needs to have a revenue stream to not only cover its costs but to also provide an incentive to expand its services. This revenue stream might be a monthly fee like dues for a homes association, or a differential in the interest rate between what the organization borrows at and what it charges the individual household buyers, or an agreement to split any appreciation in property values. Whatever the arrangement, the idea is that the co-owners split the financial benefits of owning a home while providing an opportunity for a moderate income household to not only have safe and sanitary living quarters but to also build equity and learn the ins and outs of home ownership.

This might seem like a Utopian dream, but it might not be as far-fetched as it seems at first glance. As an antidote to NIMBYism, there is a fledgling movement in several states known as YIGBY (or Yes in God’s Back Yard). It turns out that religious institutions own a great deal of undeveloped or underutilized land which could be used for residential purposes, and many churches view affordable housing as being consistent with their mission. [10] The YIGBY movement is distinct from my thoughts on co-ownership, but the two would seem to fit well together. In any event, what I am arguing for is a hyper-local, community focused approach to housing supply that bridges the gaps in what the private housing market provides.

The Bottom Line

For better or worse, we live in a capitalistic society and we occasionally need to face up to the fact that while capitalism does many things well, it does not do everything well. This is particularly true in a time when the income disparity between the top twenty percent of society and the remaining eighty percent seems to be growing larger. The prices for many of the necessities of life – food, housing, health care, transportation – seem to be rising faster than the wages of the middle class (not to mention the lower economic rungs). The “American Dream,” which motivated us to work hard in order to earn a good life, seems to be slipping from our grasp. If young families give up on the dream because they feel the economic deck is stacked against them, what does that mean for the future of our society?

With respect to affordable housing and the current economic climate, the primary point I'm trying to make is that I don’t believe that the private market can provide the quantity or quality of housing that the broad middle-swath of our society needs. I am convinced that the private market needs to be supplemented by efforts from local government, local community organizations, and local businesses working in tandem. No single actor will be sufficient because no single actor has the ability to pull enough levers to really address this multi-dimensional problem. And sadly, I’m convinced that the Federal government will be largely useless until their priorities change significantly.

A coordinated approach is needed because attacking just one slice of the affordability problem runs two sizable risks. First, a single actor addressing just one aspect of the problem is likely to have too small of an impact to be really noticeable. Many housing affordability initiatives have started with high hopes, burned through time and resources, and then petered out when the results were underwhelming. Second, a narrow approach to solving housing affordability can simply end up distorting the market through unintended secondary effects rather than really leading to the desired outcome. The housing industry involves a lot of moving parts and tweaking one part without understanding the others can be more negative than positive. Arguably, the whole subprime mortgage meltdown was started by efforts to relax mortgage qualification standards so that more families could buy a home. Juicing demand from households inexperienced with home ownership – at a time of falling interest rates – during a period of lax regulatory oversight – without increasing housing supply at the right place and the right price point – was a recipe for disaster.

I am basically an optimistic person, but the complexity of the housing affordability problem might be enough to change me into a cynic. I hope my ideas spur some effective action, but I’m not holding my breath.

Notes:

1. Willy Walker; “The future of Fannie Mae and Freddie Mac: Why this debate matters now”; March 2025; Walker & Dunlop; https://www.walkerdunlop.com/insights/the-future-of-fannie-mae-and-freddie-mac-why-this-debate-matters-now#:~:text=The%20problem%20with%20conservatorship,market%20that%20thrives%20on%20stability.

2. National Zoning Atlas; https://www.zoningatlas.org/atlas

3. National Zoning Atlas; St. Charles Zoning Snapshot; https://www.zoningatlas.org/snapshots/?jurisdiction=3067

4. National Zoning Atlas; Stamford Zoning Snapshot; https://www.zoningatlas.org/snapshots/?jurisdiction=304

5. Richard Kahlenberg; “Rallying the Voices of the Excluded for Zoning Reform: The Case of Minneapolis”; The Century Foundation; December 2023; https://tcf.org/content/report/rallying-the-voices-of-the-excluded-for-zoning-reform-the-case-of-minneapolis/

6. Yonah Freemark, Lydia Lo, Sara Bronin; “Bringing Zoning Into Focus”; Urban Institute; June 2023; https://www.urban.org/research/publication/bringing-zoning-focus

7. Mathew Petty and Mathew Hoffman; Pattern Zones Company; https://www.patternzones.com/

8. Chadwick Reed; “Comparing the Costs of Manufactured and Site-Built Housing”; The Harvard University Joint Center for Housing Studies; July 2023; https://www.jchs.harvard.edu/blog/comparing-costs-manufactured-and-site-built-housing

9. Lauren Bauer, et al; “Ten economic facts about rental housing”; The Hamilton Project; March 2024; https://www.hamiltonproject.org/publication/economic-fact/ten-economic-facts-about-rental-housing/#:~:text=Data%20from%20the%202021%20RHFS,(Goodman%20and%20Zinn%202023).

10. Frances Nguyen; “The YIGBY Movement – Unlocking Church-Owned Land For Affordable Housing”; Shelterforce; February 2025; https://shelterforce.org/2025/02/28/the-yigby-movement-unlocking-church-owned-land-for-affordable-housing/

Post 61: We Have Met the Enemy and He Is Us

noreply@blogger.com (Doug Johnson) — Thu, 18 Sep 2025 19:43:00 +0000

During the war of 1812, Commodore Oliver Hazard Perry sent a victory message to his boss, General William Henry Harrison, which contained the line: “We have met the enemy and they are ours.” In more recent times, that message has been turned on its head (most famously by the cartoon character Pogo) to indicate a situation in which we are our own worst enemy. “We have met the enemy and he is us” pretty accurately describes the housing affordability dilemma that we are currently facing.

Commodore Perry

It would be nice to have someone or something to pin the blame on, especially if that could lead to a quick solution. Alas, that is not the case. The reality is that there are numerous contributors to high housing costs and nearly all of them exist because they support some other laudable goal, because of some human foible, or because of some systemic factor that is beyond local control. There is no quick fix, there are only difficult trade-offs. My goal with this article is to make the trade-offs clear in preparation for next month’s post which will suggest some possible paths forward.

In last month’s post, I tried to outline the scale of the problem, gave a brief overview of the history of housing finance, and explained why Wall Street bankers or federal housing agencies are unlikely to lead the charge on reducing housing costs. To be clear, there are only two ways to close the housing affordability gap: significantly increase household income (particularly for low-income and middle-income families) or significantly reduce the cost of home ownership. As appealing as it might be, I’m going to ignore the first option as unrealistic and focus exclusively on ways to reduce the costs of housing production and ownership.

Contributing Factors

Housing costs have risen over the past decade because of a dozen different reasons, not just one or two. What is even more important to understand is that very few of these cost factors will be easy to reverse. They are either the result of other worthwhile goals that simply have the side effect of raising housing prices or they are so baked into our society or our systems that convincing people to change will be a long, hard slog.

I have outlined below what I see as the main factors, with a particular emphasis on those that I think are not given enough discussion in the popular media. High interest rates, for example, are repeatedly called out as the main affordability culprit even though current rates are fairly close to long term averages and only appear “high” in comparison to the unusually low rates that followed the 2008 financial crisis. Yes, they have contributed to the problem but they are just one piece of the puzzle. The list is not in any particular order and is not necessarily comprehensive.

Neighbors like us. The vast majority of people like living in neighborhoods where they are surrounded by people who are more or less the same as they are. We like to think of ourselves as open minded with respect to people from different backgrounds, but the reality is that most of us aren’t when it comes to where we live. We want neighbors who have similar economic resources, have similar commitments to home maintenance, and similar feelings on public behavior. We have outlawed provisions that were obviously racist, but there are dozens of subtle provisions in zoning codes, deed restrictions, and development practices that almost guarantee that neighborhoods have a high degree of homogeneity – particularly with respect to housing value.

To be blunt, people in an upper class neighborhood don’t want my middle class house next to theirs and people in my neighborhood don’t want a cheap house to be built nearby that might be occupied by a poor family. Large minimum lot sizes, big yard setback requirements, off-street parking requirements, expensive homes association dues, and similar actions all raise the cost of housing even if they are not technically necessary for high quality construction. Consequently, housing prices in “nice” neighborhoods are higher than they need to be and it is often difficult to find good locations to build modestly sized, affordable housing.

Energy codes. The building industry typically updates the model building codes every few years and cities typically adopt them with only minimal modifications. Over the last several decades, each revision has included stricter standards for energy efficiency. The latest code version has forced most builders to switch to 2 x 6 framing instead of the traditional 2 x 4 framing in order to make room for additional wall insulation.

In addition, new houses are required to be so air tight now that builders have to pump in fresh air and pump out stale air in order to meet air quality standards. During the winter, cold incoming air is warmed by the outgoing air (vice versa in the summer) using a heat exchanger which is a relatively new piece of equipment that was rarely seen in home construction even a few decades ago. No one disputes that energy efficient construction saves money on utility bills and increases comfort levels, but it comes at a cost that makes producing affordable homes more difficult. At what point are we energy efficient enough?

Lumber prices. Single family homes use a lot of wood and thus home prices are very sensitive to lumber prices. The cost of various wood products account for somewhere between six and ten percent of the cost of construction. Unfortunately, the process of harvesting timber, cutting it to useful sizes in saw mills, shipping it to distributors, and selling it to builders is lengthy and complex. As a result, the lumber industry has difficulty responding to demand surges, which means that lumber prices tend to jump up and down frequently in response to changing housing demand levels.

COVID caused all sorts of things to go wrong which resulted in lumber prices nearly quadrupling between 2018 and 2021. Things have settled down a bit since then but prices are still roughly double what they were 10 years ago – higher by a factor of nearly three compared with the consumer price index. Future prices may well trend up again as a result of Trump’s tariffs on Canadian lumber which are currently in the vicinity of 35 percent. Steps have been taken to increase domestic production but that will take years before the effects are felt.

Insurance costs. Buying home insurance is generally mandatory if you have a mortgage and is generally a good idea for most people regardless of how a home is financed. The monthly payment for insurance is almost always rolled into your mortgage payment which means that higher insurance costs effectively mean a higher cost for home ownership. Insurance costs have skyrocketed in recent years, with the national average increasing at roughly double the rate of inflation over the past four years. In some states, including several in the midwest, the increases have been much higher. The insurance industry blames more frequent disasters due to climate change, higher construction costs for repairs, and our tendency to want to live in places that are scenic but dangerous (in heavily wooded areas, near the ocean, near rivers, etc.). On a $300,000 mortgage, a typical increase in insurance costs over the past five or six years is equivalent to a roughly $13,000 increase in the price of the home.

Labor shortages. Over the past decade, there has been a growing problem with the construction labor market. Too few new workers are entering the construction trades to replace workers who are retiring or changing jobs. This problem is now being exacerbated by federal efforts to deport illegal immigrants, many of whom work in construction. The result is that builders are reporting widespread shortages in virtually all construction trades. [1] These shortages are lengthening typical construction times by roughly two months and causing builders to pay higher wages to retain workers. The net impact can be several thousand dollars added to the cost of a new home.

Fire safety codes. As with energy codes, fire safety requirements in local building codes have gotten increasingly strict over time. The result has been a steady decrease in fire fatalities (currently less than 3,000 per year). The latest push, however, is a relatively costly recommendation to install fire sprinkler systems in all residential construction, including single-family homes. This move is being opposed by home builders because of the additional cost – estimated at roughly $2 per square foot of floor area or $4,000 to $8,000 for a typical new home. Given that nearly 60 percent of home fire fatalities occur in houses where there is not an operational smoke detector (a $40 item), an argument can be made that further reductions in fire fatalities should focus on upgrading existing homes rather than making newly constructed houses more complicated and expensive.

Bureaucratic red tape. Forty or fifty years ago, cities generally embraced new residential development requests and there were often subtle (and not so subtle) subsidies given to builders to make the process as painless as possible. Those days are long gone as existing residents complained about traffic congestion, overcrowded schools, and property tax increases that they blamed on new development. Now cities painstakingly review each development request and every building permit to make sure that new growth is paying its own way and complying with every community goal and code requirement. Major development requests can take years to get approved and even a simple building permit can take months and account for 25 percent of total construction time. Every city can cite a list of legitimate reasons why the extended review times are warranted, but the net result adds thousands of dollars to each housing unit.

The demise of the starter home. Following World War II, the firm of Levitt & Sons built thousands of starter homes for returning service men and their families on Long Island, New York, in an area that became known as Levittown. The average house size was between 750 and 800 square feet and there was little variation between units. The definition of “starter home” has expanded considerably since then, but the generally accepted standard is around 1,400 square feet. Forty years ago, roughly 40 percent of all new single-family homes were that size or below. Today, fewer than 10 percent of new homes meet that definition. [2] The primary reason is that the fixed costs of building a new home (land, utility connections, permitting costs, etc.) are so expensive that it is significantly less profitable to build a starter home than a home which is $500,000 or more. In the Kansas City area, the cost of a ready-to-build lot in a nice subdivision is at least $75,000 and can easily be double that amount. The rule of thumb is that land accounts for 20 percent of the total home cost which yields a range of $375,000 to $750,000.

In my opinion, however, there is a secondary reason related to social media and our societal expectations. We have all watched Fixer to Fabulous or Extreme Makeover: Home Edition on TV and scanned Pinterest and Instagram for the home details that social media influencers are obsessed with. What percentage of the home buying market would accept a 750 square foot Cape Cod in Levittown or even a 1,400 square foot home in the suburbs? Even first-time homebuyers have become conditioned to expect a large, open kitchen, a spacious family room and walk-in closets the size of garages. It could be that starter homes aren’t being built because no one wants to buy them.

Construction productivity. Since the end of World War II, the productivity of the American worker has roughly tripled. Up until about 1970, construction productivity grew as well, but then entered a gradual decline while the remaining economic sectors continued their upward climb and doubled in productivity. [3] There are arguments about how productivity is measured, but virtually everyone agrees that the construction sector has been a laggard. Construction equipment has gotten better over time but the general process of building each house on-site with very little automation and very few factory built components is largely unchanged over the past 50 years. We have learned to automate and mass produce virtually everything else in our lives but we build each house like a bespoke suit from Savile Row. Is it surprising then that homes seem expensive compared with everything else?

The Bottom Line

Everyone expects prices to gradually rise over time. The crux of the problem with housing affordability is that housing prices over the past 15 years have risen roughly four times faster than the median household income. The nine factors I’ve listed above don’t account for all of that increase but I’m willing to bet that they account for the vast majority. No single factor, however, accounts for enough of the cost increase to make it the obvious target for housing reform.

Unfortunately, several of my nine factors cannot have their cost easily calculated. If I were to make an educated guess, I would say that the nine factors have collectively made the cost of a modest new home $50,000 to $80,000 more expensive over the past 10 years. And if anything, I’m probably being conservative in estimating the impact.

The conundrum that we face is deciding which of these factors we are willing to tackle to make housing more affordable. Are we willing to push back on NIMBYism and tell a room full of homeowners that they need to accept lower priced housing in their neighborhood? Are we willing to roll back energy and fire safety codes to allow houses to be built to a “good” level instead of a “great” level? Are we willing to simplify review procedures knowing that the result will inevitably be an occasional missed issue? Are cities willing to lobby at the federal level for tariff exemptions on lumber or a guest worker program for immigrants in the construction industry? None of these actions will be in the comfort zone for most local politicians, and to make a significant difference they will have to tackle not just one issue but four or five.

In next month’s post, I will make some suggestions on how to move forward toward more affordable housing. I suspect that all of my ideas will be unpopular with some influential group or another – but nothing ventured, nothing gained. Tune in to see just how far out into left field I’m willing to go!

Notes:

1. “The Home Builders Institute Construction Labor Market Report”; Fall 2024; Home Builders Institute; https://hbi.org/wp-content/uploads/2024/09/Fall-2024-Construction-Labor-Market-Report.pdf

2. Carlos Waters; “Why it’s so hard to find starter homes in the U.S.”; January 2025; CNBC; https://www.cnbc.com/2025/01/14/few-starter-homes-in-us.html

3. Chen Yeh; “Five Decades of Decline: U.S. Construction Sector Productivity”; August 2025; Federal Reserve Bank of Richmond; https://www.richmondfed.org/publications/research/economic_brief/2025/eb_25-31

Post 60: Digging the Hole Deeper and Deeper

noreply@blogger.com (Doug Johnson) — Tue, 26 Aug 2025 19:58:00 +0000

One of the most enduring dilemmas of the past decade has been the “housing affordability crisis.” The press has churned out story after story detailing how American families are being priced out of the housing market. A recent article in the Kansas City Business Journal was titled “Kansas City homebuyers now need six figures to afford a house.” [1] This headline is a little misleading because a household making $90,000 a year could qualify for a mortgage to purchase a home in Kansas City, it just might have to be a home that is less expensive than the median priced home which is now approaching $400,000. This is newsworthy because the median household income is closer to $75,000 which means there is arguably a mismatch between income and housing prices.

Credit: iStock

The general perception that a household making the median income should be able to afford to buy the median-priced house has some rough logic to it, although the actual math is more complicated than it seems on the surface. The “price” of the median priced home is only part of the issue because the ability of a particular household to afford that home is also affected by interest rates (which have remained stubbornly high), by insurance costs (which have been rapidly rising), and by local property taxes (which have also been trending upward). A typical mortgage payment includes all three of those costs and yet most articles focus solely on home price as the issue.

That is our first clue to the nature of the housing affordability dilemma. If all you have is a simplistic understanding of a really complex problem, it is going to be really hard to come up with a good solution. It is common for people analyzing the problem and proposing a solution to focus on one aspect of the housing market when in fact the issue of housing affordability has many dimensions. The problem has lots of moving parts and it is easy to get distracted by one small element of the housing market or some short term trend that tends to suggest a pain-free solution.

A recent CMBC article was titled “Nearly one-third of major U.S. housing markets now see falling home prices.” [2] Pop the champagne! The problem will solve itself as falling prices restore affordability for the average American. Of course, that same title implies that prices are not falling in two-thirds of major U.S. markets, so maybe put the champagne back on ice. Yes, home prices have moderated over the past year or two in some locations, but the forces that are causing that to happen will not come close to solving the problem. For reasons I will discuss later, the “falling prices” trend is likely to be short-lived because there are powerful forces that don’t really want prices to fall and they will push back until the trend peters out.

That brings us to clue number two in our quest to solve the housing affordability dilemma. There are a lot of actors who influence the housing market and they are not all pushing in the same direction. Everyone says they want to solve the housing affordability problem but every actor has their own agenda and their own set of blinders that prevent seeing the big picture. It even makes it hard to discuss the problem because what I mean by housing affordability is likely to be subtly different from what you mean. Thus, housing discussions often go in circles because we use the same words but with slightly different meanings.

But here is the real kicker – every actor sincerely believes they are doing the right thing. There is no deep, dark conspiracy and no greedy genius intent on destroying the American dream of homeownership. The recurring theme of this article (and a companion article that I will post next month) is that the problem of housing affordability has been caused by organizations and institutions with good intentions trying to do the right thing. There is an old proverb that says “the road to hell is paved with good intentions” and our current housing problem is a good example. We think we are helping dig ourselves out of the hole we are in, but in reality we are making the hole deeper and deeper.

Just How Bad Is It?

Pretty bad, but perhaps not quite as bad as many people in the press would have you believe. Housing tends to be a relatively cyclical market with periodic booms and busts. The accompanying chart shows that volatility in terms of total housing starts over the past seven decades. We appear to be coming out of a bubble with housing starts returning to the historic trend line. Typically, housing prices fall slightly, or at least plateau, during the post-bubble phase – unless it was a really big bubble and then prices fall dramatically (e.g. the 2008 Great Recession). Unfortunately, I don’t expect housing prices to fall enough to really solve the affordability problem.

Source: St. Louis Federal Reserve Bank

The worst part of the current situation is that income and housing prices have diverged dramatically over the past 10 to 15 years. The second chart illustrates that separation (all values are indexed to 2011 = 100 to simplify comparisons). I am intentionally focusing on median household income and median housing price because I think that is the essential dilemma that we face. No one thinks that rich people will have difficulty affording a nice home and very few people expect the private market to solve the problem of housing the very poor. But there is a widespread expectation that the middle class should be able to buy a reasonably nice place to live. That expectation may or may not be realistic, but in the age of social media perception is reality. If I work hard and make a decent salary but feel priced out of the housing market, I am going to be unhappy. As the chart shows, real income has grown by roughly 25 percent while the median home price has nearly doubled. Our society and our cities need to deal with that reality.

Source: St. Louis Federal Reserve Bank

The second chart also includes the U.S. Consumer Price Index for housing which is a much broader indicator of what people spend for housing than housing price alone. That measure tracks much more closely with income until the pandemic hits and then it rises significantly faster than income as well. There is also the perception that housing affordability is primarily a coastal problem. It is certainly true that housing affordability is especially bad in Los Angeles, San Francisco, New York, Boston and other big, coastal cities, but it is also a problem in midwestern cities. In fact, the chart shows that the midwest is slightly worse off than the national average. There is a lot of variation that is hidden by the averages, but this is a problem that affects just about every city of significant size.

One final measure of housing affordability is the ratio of home prices to income. According to the Joint Center for Housing Studies at Harvard University, that ratio is at historic highs. [3] For the 100 largest metro areas, only in the run-up to the Great Recession did the ratio equal current levels. For the past several years, the average home price has been roughly 5 times higher than the average household income. What is just as striking is the degree to which high ratios have become widespread across the top 100 markets. Even at the previous peak in 2005 - 2006, only 40 to 50 percent of metro areas had a ratio of 4 or above. In 2024, that share has ballooned to 75 percent. Similarly, in ‘05/’06 a quarter of the metro areas had a ratio of 3 or below, but that share is now down to less than 5 percent.

The Wall Street View of Affordability

We often think of housing as a very local, very personal thing. Our friendly realtor helps us find the perfect home, our friendly loan officer helps us navigate the purchase process, and our friends and family help us move in. The reality, however, is that housing is big business, one which is complicated, heavily regulated and impersonal. The housing industry as a whole accounts for 16 to 18 percent of the nation’s gross domestic product in a typical year, and any industry that big is going to attract a lot of attention from Wall Street bankers and financiers.

In many ways, the financial side of the industry is the tail that wags the housing dog, but it is a world which most people don’t understand and its impact on housing affordability is often underappreciated. To get an understanding of where we are, it is helpful to look back at where we started and to track the key changes along the way.

For much of the 1800s, a personal loan to buy a house was relatively rare. The required down payment was often more than 50 percent, the term was relatively short (5 to 8 years), and payments were mostly interest followed by a balloon payment at the end for the remaining balance. Consequently, most loans were made to wealthy individuals, most housing was built incrementally (not in big subdivisions), and most people were renters not owners.

In the last decades of the 1800s, a new form of financing known as a building and loan association became popular. This was typically a small, local, self-help approach to home ownership. Associations were formed by a group of local investors who paid an initial fee and subscribed to purchase a certain number of shares (typically less than 10, each with a value of just a few hundred dollars). They made monthly payments toward the purchase of those shares at a rate which often took 15 years or more to pay off. Members could apply for loans to purchase or build a home using their shares as collateral. Profits from interest on the loans were returned to the members as a dividend. Fully paying off the shares would effectively cancel the loan.

This approach significantly improved access to home financing for the average worker and became so popular that there were more than 12,000 building and loan associations by 1927. Unfortunately, the Great Depression hit the associations hard and many of them folded which meant that the members lost the value they had accumulated by buying shares. The role of the building and loan associations was gradually taken over by a new, federally chartered institution known as a Savings & Loan Association (S&L). In exchange for complying with federal regulations, S&Ls could borrow money from the Federal Home Loan Bank Board and their deposits were guaranteed by the Federal Savings and Loan Insurance Corporation.

At the same time, the Home Owners’ Loan Corporation was formed to buy delinquent mortgages and refinance them with longer terms and lower interest rates. These actions (and others) stabilized the mortgage market and lessened the rate of foreclosures, but ushered in an era of federal involvement in the housing finance arena. The rise of S&Ls (and rule changes that made it easier for commercial banks to issue mortgages) meant that loans were no longer managed by groups of neighborhoods banding together for mutual aid, but rather by the owners and investors of financial institutions.

In 1938, the Federal National Mortgage Association (commonly known as Fannie Mae) was formed with the express purpose of greatly expanding the secondary mortgage market and providing federal money to local banks to finance home loans. Fannie Mae operated by buying mortgages from local financial institutions, bundling them together into mortgage backed securities (MBS), and then selling those securities to investors around the world. The net effect was to expand the pool of money available for mortgage loans and to relieve local banks from having to carry long-term mortgages on their books.

Banks could hold onto loans if they wished, but would generally sell the loans to Fannie Mae and use the proceeds to issue more mortgages. Banks made money by charging fees for their role in the loan origination process and by earning a portion of the interest rate spread between what they charged borrowers and what they received when selling the loan. Fannie Mae makes money from the spread between what they buy the loans for and what they sell the mortgage backed securities for. They also charge fees for guaranteeing the prompt payment of principal and interest on the mortgages that underlie the securities.

The securitization of mortgages has become an enormous market and Fannie Mae is one of the world’s largest corporations based on asset value. The mix of government organizations and financial institutions that comprise the secondary mortgage market have undergone a variety of changes since 1938, some good and some bad. But the bottom line is this: Fannie Mae has provided liquidity to the mortgage market through both good economic times and bad, which has been a huge benefit to the housing industry. It has also removed much of the risk from local mortgage originators and has standardized the mortgage application and approval process. On top of all of that, it has probably lowered interest rates to at least some degree. All of these are good things.

There is, however, a dark side to all of this. While the ultimate investor makes money from the interest on the mortgage, all of the other players – the banks, the S&Ls, Fannie Mae (and the various spin-offs), and the Wall Street financiers involved in the MBS process – make their money from fees and from the spread on each transaction. They value volume more than anything else. So when they say “we want to make homebuying more affordable” what they really mean is “we want more people to qualify for a mortgage so that our volume remains high.”

That is the motivation behind “innovations” such as the adjustable rate mortgage, low down payment requirements, private mortgage insurance, or reduced qualification requirements for veterans or low-income households. All of these actions have been touted as making housing more affordable, but that is not what most people mean when they think of affordability. None of these things lower the actual price of the home being purchased to any great degree – if anything, they make prices go up by stimulating demand.

In fact, one could argue that Wall Street financiers and the leaders of Fannie Mae (et al) don’t really want housing prices to fall. A significant period of declining home prices would be great news for middle class households who feel priced out of the market, but it would have two side effects that the MBS industry would hate:

Mortgage delinquency rates and foreclosures would rise, particularly among mortgage holders with low down payments, and rising delinquencies make selling mortgage backed securities more difficult. This isn’t likely to be serious enough to trigger a financial crisis, but it could easily put a crimp in profits.
Falling home prices almost always lead to falling housing starts which would reduce the volume of MBS business – another hit to profits.

Hypocritical But Not Alone

It is easy to call out bankers and the securities industry as being hypocritical. Expanding access to the mortgage process does benefit their business (and their annual bonuses) but it also benefits people who are on the margins of qualifying for homeownership. So their behavior isn’t terrible, it just isn’t very helpful at solving the real problem of home prices being out of whack with income levels.

Mortgage bankers might be somewhat hypocritical but they certainly aren’t alone. Charles Marohn, the founder of the Strong Towns movement, put together this list of who benefits from rising home prices and who doesn’t: [4]

Benefits Doesn’t Benefit

Local government Renters

State government The poor

Federal government

Existing homeowners

Banks & insurance companies

Developers & contractors

Land speculators

Realtors

Pension funds

To be clear, I am on the “benefits” side of the list as an existing homeowner so by all rights I should be working against housing affordability. The point that I think Marohn is making is that there are a lot of people and organizations who might say they want housing to be more affordable but which might be engaging in the type of double-talk that the mortgage securities industry has been accused of. No wonder the problem has been so difficult to solve.

The reality is that if we really want to solve the mismatch between housing price and income then a lot of people are going to feel some pain. Not catastrophic pain, but enough to be uncomfortable. My house, which has appreciated in value nicely over the past decade or two, might actually fall in value. The property tax revenue stream which for many cities has been on an upward trajectory due to rising home prices might flatten for several years. Developers who bought land on the urban fringe thinking that they could build expensive houses and sell them at a lucrative price might have to put their plans on hold. I think the long term result of falling home prices would be beneficial for our society but I’m not sure that we are public-spirited enough to actually follow through.

The Bottom Line

Over the past 15 years, there has been a widening gap between household income (which has risen slowly) and the price of housing (which has risen rapidly). Most of the stories in the press focus on the cost of buying a home even though the cost issues affect rental housing as well. I have argued against the notion that owning your home is an essential part of the American dream (see Post 51), but the belief seems to be as strong as ever. Still, there is an undeniable logic to the idea that a middle class household with stable employment and a decent paycheck should be able to afford a median priced home. The fact that they can’t in most metro areas is the source of considerable dissatisfaction and angst.

What is particularly frustrating is that most of the trend lines are moving in the wrong direction despite all the talk about solving the affordability dilemma. Doing more of what we have been doing appears to be simply making the hole we are in deeper.

You would think that politicians at all levels of government would be scrambling like crazy to solve this problem and, in fact, most of them claim to be working diligently on the problem. Donald Trump even proposed opening up federal land for the building of up to 10 “Freedom Cities” the size of Washington, D.C. to increase housing supply and bring prices down. No progress seems to have been made on implementing this idea, perhaps because there is little evidence that a lack of land at the national level is the key issue that needs to be addressed.

Predictably, the proposals which have gained traction – expanding credit score options, reducing the impact of student loan debt, or allowing cryptocurrency to be considered a household asset – are all oriented toward expanding the pool of potential mortgage applicants rather than lowering the actual cost of housing. In short, don’t count on the Federal government (or Wall Street) to solve this problem. Instead, I believe we need to combine some out-of-the-box thinking with some hard choices on priorities to really shift the way we produce housing. Do I have all the answers? No, but I have some ideas that might move us in the right direction. Check back next month for the second part of this discussion.

Notes:

1. Elizabeth Yost; “Kansas City homebuyers now need six figures to afford a house”; August 2025; Kansas City Business Journal; https://www.bizjournals.com/kansascity/news/2025/08/15/kc-buyers-income-to-afford-a-home-2025.html

2. Diana Olick; “Nearly one-third of major U.S. housing markets now see falling home prices”; July 2025; CNBC; https://www.bizjournals.com/kansascity/news/2025/08/15/kc-buyers-income-to-afford-a-home-2025.html

3. “The State of the Nation’s Housing 2025”; Joint Center for Housing Studies, Harvard University; https://www.jchs.harvard.edu/sites/default/files/reports/files/Harvard_JCHS_The_State_of_the_Nations_Housing_2025.pdf

4. Charles Marohn; “Who Benefits From Lower Housing Prices?" April 2019; Strong Towns; https://www.strongtowns.org/journal/2019/4/9/who-benefits-from-lower-housing-prices

Post 59: Zombies and Doom Loops

noreply@blogger.com (Doug Johnson) — Tue, 05 Aug 2025 22:52:00 +0000

Perhaps I should have waited until late October to write this article because it certainly sounds from the title like the content is going to be about scary costumes or horror movies. My topic, unfortunately, has nothing to do with the entertainment industry or collecting candy door-to-door. Instead, I’m going to be writing about the dysfunctional office market and its impact on investors, developers and cities. This is a much less exciting topic, but it is one that should be important to city planners and people concerned about the health of cities generally. The slow-motion collapse of the office market isn’t going to cause a new financial crisis, but it is likely to cause a significant number of people to lose a significant amount of money and it will crimp the tax revenue stream for a significant number of cities.

Just how bad is it? According to Cushman and Wakefield, national vacancy rates have risen from 15.2 percent in Q1 of 2021 to 20.8 percent in Q2 of 2025. National office space absorption rates have been negative for the past 12 quarters, and new office space construction has dropped from 53 million square feet in 2021 to just 6 million square feet for the first half of 2025. [1]

There are four primary reasons for the current office market weakness:

Leasing retrenchment. Ten years ago, many white collar employers were hiring almost as fast as they could and leasing (or building) office space in crazy amounts. The pendulum is now swinging back the other way as employers realize that they have both more people and more office space than they need. White collar layoffs are increasingly common and the focus is no longer on raw growth, but on growth through efficiency (more with less). Office space needs are shrinking accordingly.

Work from home. The impact of the COVID pandemic on remote work has been well documented and as companies realized that they needed fewer workers in the office they also realized that they needed less office space. Many assumed that as the pandemic waned, workers would return to their offices en masse, but that has not been the case despite several high profile companies demanding that workers return to the office full time. In fact, a recent Working Arrangements and Attitudes survey found that employer plans and employee desires for remote work averaged 2.3 and 2.9 days per week respectively. [2] While the difference between what employers and employees want is interesting, the real story in my opinion is that both numbers are well above 2 days per week which means that the push to be back in the office full time is the exception not the rule.

This result is consistent with Kastle System’s 10-city office occupancy barometer based on actual employee access card swipe data. Their barometer shows occupancy levels between 50 and 60 percent on average (compared with over 90 percent before the pandemic). [3] Although employee occupancy levels have inched up over the past couple of years, they show no signs of going back to pre-pandemic levels. Hybrid work schedules are very popular with employees and most employers are willing to accommodate those desires to at least some degree. Consequently, companies are revamping their office space to be more flexible and they are reducing total space requirements.

Artificial intelligence and off-shoring. These two unrelated trends both serve to reduce the white collar head count in U.S. offices. Artificial intelligence, in particular, is a new enough trend that it is hard to predict its eventual impact, but I think it is indicative of the growth-through-efficiency push mentioned above which limits both hiring and office space expansion. The range of tasks given to AI systems or to workers in India, Mexico or eastern Europe has steadily grown over the past few years and shows no sign of slowing down. While I don’t think that mass layoffs are likely in the near term, there has certainly been a chilling effect on total employment and on the hiring of entry level workers in this country.

The declining importance of proximity. There are undoubtedly still a lot of face-to-face client meetings, sales pitches, power lunches and professional meet-ups but the number is a fraction of what it used to be 20 years ago. Back then, it was crucial for many businesses to be physically near their clients, supporting businesses and even their competition. But now, virtual meetings are common and often preferred because they take less time. Social media of various forms can connect people with common interests far more efficiently than meeting after work for drinks. Business data can be shared in milliseconds electronically which means that bankers and auditors no longer have to visit in person to “go over the books.” Finally, globalization means that key decision makers may be spread across states, countries or continents instead of housed at a headquarters building, which makes arranging a face-to-face meeting difficult even if such a thing would be useful. In short, the forces which used to tightly cluster office uses into dense downtowns or edge-city office parks are dramatically weaker.

The net result has been a reduction in office space demand and a subsequent surplus in office space supply, particularly in areas with historically high office concentrations. This has not played out, however, in a uniform, everyone-feels-a-little-pain kind of way. There have been distinct losers in the office market which have led to the addition of “zombies” and “doom loops” to the real estate vocabulary. These two phenomena deserve a deeper examination to understand their impact on our society, economy and the urban form.

To illustrate what is happening with the office market, I am going to use St Louis as my primary example, although I will include other examples as well. This is not because St Louis is in terrible economic shape. It is, in fact, a growing metro area that is thriving in several respects. While it is not exactly booming, the metro population is up 1.5% over the past three years. The metro GDP is growing, job growth is strong, and unemployment is lower than the national average. Per capita personal income has grown by 33 percent over the past five years according to the Bureau of Economic Analysis. [4]

St Louis does have its challenges, however, and they tend to focus on the urban core represented by St Louis City. There the population has been in a long, slow decline and poverty has been a particularly acute problem that has been difficult to remedy.

Zombie Buildings

An office zombie is a building that is almost dead, but not quite. Normally the business world is pretty ruthless in dealing with failure, but for some reason office buildings are often allowed to hang around in zombie status for years while desperate owners, investors and mortgage bankers try to bring it back to life. A building typically earns zombie status by being at least 50 percent vacant. Often the owners cannot lease the space at a rent level which would be profitable because demand is so low that market rent levels have plummeted. This leads to fights between investors and mortgage holders over what limited revenue exists. This, in turn, makes it almost impossible to get agreement over any plan to reinvest in the property to improve its appeal to potential tenants.

Owners cling to the hope that the market will bounce back while bankers “extend and pretend” rather than put mortgages into default. Eventually reality sets in and the true value of the building drops precipitously. At that point a new buyer might emerge to snap up the building at a bargain basement price with a plan to reuse the building for some other purpose that now makes sense given the new valuation. But it is hard for the original owners to accept multi-million dollar losses, so the zombie phase can last for quite some time.

St Louis provides two excellent examples of zombie buildings – so good, in fact, that perhaps they should be classed as “super zombies.” The first is the One AT&T Center (or 909 Chestnut) which is a 44-story office building containing approximately 1.4 million square feet of floor area. AT&T moved its employees out roughly 12 years ago and the structure has been largely unleased and vacant for the past 8 years. The building, which reportedly sold for $205 million in 2006, changed hands again last year for just $3.6 million – an astounding 98 percent drop in value. [5] The new owner is apparently considering converting the building to residential use.

The second example is the Railway Exchange Building, a 22-story structure containing roughly 1.2 million square feet of floor area located just 4 blocks from the AT&T Center. The bottom seven floors of the century-old building were once home to the flagship location of the Famous-Barr department store. The upper 15 stories were used as office space, including the headquarters of the Famous-Barr parent company (May Department Stores). The department store went through a variety of identities and renovations, but eventually closed for good in 2013. Office tenants soon fled the building as well and it has been entirely vacant for the past 10 years. A city-financed appraisal of the building returned a value of $5.3 million and the city offered to purchase the property for that amount. The owner, who had purchased the building in 2017 for $20 million and invested another $30 million for initial renovation work, rejected the offer. [6]

These two examples are particularly mind-boggling because of the enormous loss in value, but they are not all that unusual. Virtually every major office market has similar zombie buildings. Two years ago, CBRE estimated that 7 percent of all office buildings were less than 50 percent leased. [7] Given recent market trends, that number has probably not improved since then. What is perhaps more concerning is that there is a relatively large number of office buildings that are between 50 percent and 80 percent leased – or what we might call “zombie adjacent.” A building that is only two-thirds leased is not in good financial shape and runs the risk of spiraling into zombie territory if things go the wrong way. This is particularly true for large buildings with over 300,000 square feet of space. For those buildings, roughly 30 percent fall into the zombie adjacent zone. If the market recovers soon, most of them will likely survive but if not then the list of zombie buildings could grow rapidly.

So who is losing money when an office building becomes a zombie? The answer is a lot of people all around the world. Many office projects are financed through Commercial Mortgage Backed Securities (or CMBS) which are then sold to investors, pension funds, banks, insurance companies, real estate investment trusts (REITs), and on and on. CMBS delinquency rates have skyrocketed from less than 2 percent in 2023 to over 10 percent currently, matching the previous high that occurred following the financial crisis (2012 - 2013). Since the CMBS process tends to spread the risk pretty widely, zombie office buildings aren’t likely to trigger an economic meltdown, but they are likely to cause a fair number of business bankruptcies in the real estate development world and in the small businesses (e.g. restaurants, bars, dry cleaners, hair salons, etc.) that used to thrive on the employees that worked in those buildings. In addition, zombie offices act as a drag on urban growth, holding back local economies that otherwise might be prospering.

The flip side of this story is that many office buildings are doing just fine. The ones that are doing the best tend to be relatively new buildings that have invested in tenant amenities. In the push to get workers back in the office, there has been a “flight to quality” as companies have either moved to nicer buildings or convinced their landlords to make significant building improvements. Among the top five in-demand amenities are nearby public transit and easy access to parking – underscoring the conclusion that simplifying commutes is high on employee wish lists if their bosses are going to insist on a return-to-work policy.

Older, class B or C buildings which have not kept up are the most likely zombie candidates, but class A buildings are not immune. Factors that are out of the control of building owners may be the final straw that pushes a building into zombie status. A huge, 1.7 million square foot office zombie in the River North neighborhood of Chicago is dragging down the surrounding area and putting other office buildings at risk. Office utilization in River North is 48 percent of its 2019 level, well below Chicago and national averages. [8] One obvious failure can taint an entire district.

In Portland, the precipitating factors likely included the city’s accommodating approach to homelessness and the State’s experiment with drug decriminalization. U.S. Bancorp Tower, a 42-story office building that is now more than 50 percent vacant, is a case in point. When Digital Trends, a major tenant, moved out recently they filed a lease termination lawsuit that included charges of vagrants sleeping in hallways, starting fires, smoking fentanyl, and defecating in common areas. The building is reportedly up for sale with an asking price in the neighborhood of $70 million – approximately 80 percent below what the owners paid for it a decade ago. [9]

Urban Doom Loops

A zombie office building is bad, but a cluster of zombie buildings is much worse. The fear is that multiple zombie buildings could produce a self-reinforcing downward spiral for an entire downtown or office district. The theory goes as follows:

High vacancy rates in multiple buildings causes the number of employees in the area to drop substantially compared with previous times when buildings were full;
The drop in office foot traffic causes nearby retail uses (restaurants, bars, hair salons, dry cleaners, etc.) to go out of business and makes it less likely that the remaining office workers will hang around the area after work;
Property taxes and sales taxes collected by the city fall because empty office buildings have much lower valuations and closed retailers have no sales;
Reduced tax revenue causes budget cuts which force reduced service levels for policing, sanitation, infrastructure repair, and transit frequency;
Closed storefronts, vacant offices, poor service levels and a limited number of people on the street make the remaining office workers feel unsafe and the area is perceived as being on a downward path – which causes more companies to leave the area which deepens the cycle of decline.

This negative spiral was given the name “urban doom loop” by a team of university business professors from Columbia University and New York University. To date the urban doom loop has been more theoretical than real since there are no actual examples of office districts that have gone completely down the drain. There are, however, quite a few cities where office vacancies have soared to levels where the doom loop label is being tossed about. This includes many markets where office development had boomed in the past such as Seattle, Boston, Atlanta, Portland, San Francisco, and Houston.

St. Louis is perhaps the downtown office district that has gone furthest down the doom loop spiral. Just over a year ago the Wall Street Journal did a profile of the downtown area titled “The Real Estate Nightmare Unfolding in Downtown St. Louis.” According to the article the St. Louis central business district had the biggest drop in foot traffic of 66 major North American cities between the start of the pandemic and the summer of 2023. The Journal article focused on a 15-block area where it claimed there were two closed storefronts for every open one. [10] Foot traffic and leasing activity have bounced back somewhat since that time, but the perception of failure and danger still linger.

A recently released study of downtown St. Louis cited the statistic that 25 office buildings in the area are at least 25 percent vacant and that 10 of those buildings – all within a quarter-mile radius – account for 76 percent of all downtown vacancy. In inflation-adjusted terms, average office rents have declined by 14 percent between 2019 and 2024. Similarly, office leasing activity in downtown St. Louis has declined from an average of 616,000 square feet per year (2014 through 2019) to just 152,000 square feet in 2024. [11] The depressed office market has convinced several building owners to convert from offices to residential units. Three such projects have been completed since 2020, three more are in the planning stage, and there is the potential for several more.

Lessons Learned

Fortunately, doom loops are typically interrupted at some point when building values have fallen so far that a new round of investors are willing to take over failed buildings and either convert them to some other use or substantially remodel them so that they can compete in the office market. The problem is that one rescued building is not likely to be enough to turn around an office district in the midst of a doom loop spiral. Multiple investor groups have to rescue multiple buildings at more or less the same time so that the public perception changes from a place of failure and danger to one of exciting new possibilities.

It takes a lot of work to make that shift happen and there is a decent chance that the rescue effort will also fail. Consequently, investors will be interested only if the potential payback is very lucrative – which means that the buildings they are buying have to be dirt cheap. That only happens when the original owners have given up all hope of coming out unscathed.

From the perspective of cities, the zombie/doom loop phenomenon is another lesson in urban dynamics. I think there are at least three things that cities should learn from what is currently happening:

Success is fragile and complacency must be avoided at all costs. Twenty or thirty years ago the office market was booming and downtowns and office parks were being filled with gleaming office towers. City leaders and office developers couldn’t pat each other on the back hard enough and every rock turned out to be gold. Success made us blind to the changes in technology which made remote work roughly as productive as being in the office and to the productivity increases that made many white collar jobs superfluous. Too few people were thinking about what would come after the office boom, they just wanted to get one more office tower built.
Single-use districts are generally a mistake. When the office market was booming, no one wanted to build anything other than office buildings. You couldn’t hardly pay developers to build residential buildings when building an office building was a virtual printing press for money. Unfortunately, the city planning profession was complicit in this mistake by devising zoning rules which made building mixed-use districts difficult. We turned large chunks of our urban core from interesting, self-sufficient urban hearts into sterile containers for workers. We ignored all the other things that cities should do in order to focus on one thing. Healthy cities are a constantly shifting mix of uses and structures, not a monoculture.
Buildings need to be adaptable. Any structure which is built reasonably well will last a long time. In many cases, longer than its original use will last, which means that it may need to be adapted to some other use or be torn down. While tearing a building down is not a disaster, re-using a building is almost always more economically efficient. The problem is that building adaptable buildings is more expensive and if no one is placing value on adaptability, then such an expense seems like a waste of money. This often seems to play out most clearly in smaller cities where the economy cannot tolerate waste. It is common to see houses get converted to small business locations, or vacant supermarkets get converted to churches or medical clinics. Every structure gets re-used until it physically falls apart. That lesson was lost during the office boom when buildings were so optimized for office uses that they are now difficult (i.e. expensive) to adapt to anything else. Yes, some office buildings are being converted to residential apartments but that tends to work only for an older office building that pre-dated the boom (and was built in a more adaptable way), or when the value of a newer building has plummeted to almost nothing.

I would like to say that the office market is rapidly improving and the issues caused by zombie buildings will soon be gone, but alas that is not the case. There are signs of improvement and in some areas new office construction has picked up a little steam. The economy is expanding and employees are gradually adapting to being back in the office. Consequently, many office buildings that are currently on the edge of the abyss will likely survive.

Unfortunately, that is not universally true. In fact, the national office vacancy rate might well creep a percentage point or two higher before it stabilizes and eventually declines. There is still an enormous amount of vacant space – more space, in my opinion, than is likely to be absorbed by normal office demand growth in the next five to ten years. That means that a lot of current office floor area needs to be removed from the market through either conversion to other uses or by being torn down. And by a lot I mean hundreds of millions of square feet.

The most promising path to the goal of floor area removal is through the conversion of office buildings to residential apartments or condominiums, because it not only removes office space from the market but it also increases the supply of residential units to areas that are frequently undersupplied. That can be a win-win scenario for downtowns that desperately need more people on the street for the perception of safety and more disposable income in the pockets of people who might support downtown restaurants, shops and other businesses.

It is not, however, an easy path to follow. To begin with, there is a lot of expense involved with turning office space into residential space. The plumbing and HVAC needs are completely different and it is often difficult to retrofit modern office buildings for residential units. In addition, the resulting rentable floor area and the rent-per-square-foot is often lower by a significant amount. Finally, no one wants to live in an area that is deserted outside the hours of 8 AM to 5 PM which means that multiple projects need to be happening at the same time to convince potential residents to take a chance on living in a converted property. The bottom line is that only some buildings are good candidates for conversion and the economics of the project will only make sense if the value of the building drops substantially from what it was worth during its office heyday.

For better or worse, there are going to be a lot of conversion candidates to consider. Hundreds of billions in office debt will need to be refinanced in the next couple of years. High interest rates and falling office valuations are going to make that difficult, so building owners may be looking for alternatives. In the midwest, several cities are leading the way. Chicago, Cleveland, Cincinnati, Minneapolis and Kansas City have all been active in conversions. That trend needs to spread to other cities and the pace of conversions needs to stay high if the doom loop spiral is to be avoided. I am cautiously optimistic but we are not out of the woods yet.

Notes:

1. “U.S. Office Reports - Q2 2025”; Cushman & Wakefield; July 2025; https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-office-marketbeat-reports#:~:text=Only%202.3%20msf%20of%20new%20office%20space,four%20markets%20have%20over%201.5%25%20of%20inventory

2. Edward Pierzak; “Office REITS: High Quality Properties Attract and Retain Tenants, Outpace Peers”; January 2025; Nareit; https://www.reit.com/news/articles/office-reits-high-quality-properties-attract--retain-tenants-outpace-peers

3. “Getting American Back to Work”; Kastle Systems; July 2025; https://www.kastle.com/safety-wellness/getting-america-back-to-work/#workplace-barometer

4. “New GDP Numbers Show St Louis’ Economic Momentum Continues”; December 2024; Greater St Louis, Inc.; https://greaterstlinc.com/news/press-release/new-gdp-numbers-show-st-louis-economic-momentum-continues#:~:text=The%20data%2C%20released%20by%20the,income%20divided%20by%20its%20population.

5. Mark Heschmeyer; “One of St. Louis’ Tallest Office Towers, Empty for Years, Sells for Less Than 2% of Its Peak Price”; April 2024; CoStar News; https://www.costar.com/article/642008108/one-of-st-louis-tallest-office-towers-empty-for-years-sells-for-less-than-2-of-its-peak-price

6. Stephen Davis; “St. Louis should be leery of eminent domain as a solution to downtown’s ‘doom loop’ “; July 2025; Pacific Legal Foundation; https://pacificlegal.org/st-louis-should-be-leery-of-eminent-domain-as-a-solution-to-downtowns-doom-loop/

7. “Most US Office Buildings More Than 90 Percent Leased”; August 2023; CBRE Insights; https://www.cbre.com/insights/briefs/most-us-office-buildings-more-than-90-percent-leased

8. Matt Wirz; “The ‘Zombie Buildings’ at the Heart of the Office Meltdown”; April 2025; The Wall Street Journal; https://www.wsj.com/real-estate/commercial/chicago-office-buildings-real-estate-market-1913fe3a?mod=Searchresults_pos2&page=1

9. Peter Grant; “A Fire Sale of Portland’s Largest Office Tower Shows How Far the City Has Fallen”; May 2025; The Wall Street Journal; https://www.wsj.com/real-estate/commercial/a-fire-sale-of-portlands-largest-office-tower-shows-how-far-the-city-has-fallen-322e0f2d

10. Konrad Putzier; “The Real Estate Nightmare Unfolding in Downtown St. Louis”; April 2024; The Wall Street Journal; https://www.wsj.com/real-estate/commercial/doom-loop-st-louis-44505465?mod=Searchresults_pos2&page=1

11. Mary Elizabeth Campbell, et al.; “Reversing an ‘urban doom loop’ in St. Louis through office-to-residential conversion”; March 2025; Brookings; https://www.brookings.edu/articles/reversing-an-urban-doom-loop-in-st-louis-through-office-to-residential-conversion/#:~:text=Annual%20average%20leasing%20activity%20has,2019%20numbers%20(Table%2011).

Post 58: Robotaxis Revisited - Part 2

noreply@blogger.com (Doug Johnson) — Mon, 07 Jul 2025 19:03:00 +0000

Autonomously driven taxis (AKA “robotaxis”) are currently popping up in cities around the globe and I have little doubt that the robotaxi expansion will continue for the foreseeable future. This observation, however, begs two important questions: (1) How fast will this expansion take place? and (2) What impact will this expansion have on urban life and urban form? The answers, of course, are not precisely known and the forecasts vary widely.

Elon Musk, for example, thinks that there will be millions of robotaxis from Tesla alone on the road by 2026. I think that hallucinogens were involved with that particular prediction, but he has been wrong so many times in the past that he is bound to be right sooner or later. Optimists see robotaxi expansion as a revolutionary advancement in transportation technology that will transform our lives for the better. They see robotaxis as so prevalent, so reasonably priced, and so useful that families will give up their second or third cars, and perhaps eventually all of their privately owned cars.

Others, however, see robotaxis in more apocalyptic terms. They see hordes of empty vehicles clogging city streets in search of their next rider, similar to zombies wandering the streets searching for their next victim. To them, robotaxis are a “solution” that only makes the problem of urban transportation worse. They worry that the initial public excitement over robotaxis may be the final nail in the coffin for mass transit systems, but that robotaxis will inevitably fail to deliver an affordable and scalable option for a large swath of urban residents.

My goal with this post is to bring some sanity to this topic. Yes, there are distinct advantages that robotaxis bring to the table that will continue to fuel their expansion. But there are also clear constraints that will slow that expansion and limit its eventual penetration of the urban transportation market. Those advantages and constraints will mutate over time, but it will not be a particularly quick process. As I have pointed out before, urban forms and systems (and human behavior) change slowly.

Near Utopia

The key for those who see explosive expansion is a rapid decline in the price per mile for a typical robotaxi ride. Optimists think that the average cost per mile could be as low as $0.25 to $0.50 by 2030, or soon after. [1] That is a significant savings over the cost of a typical Uber or Lyft ride which is currently estimated to average $1.25 to $2.00 per mile (and often much more in congested cities, or during surge pricing periods). The aggressive cost per mile estimates are based on falling vehicle costs as mass production kicks in, the lower maintenance costs and longer life spans of electric vehicles typically used for robotaxis, and the absence of a human driver.

Volkswagen Robotaxi Prototype

No wonder that robotaxi evangelists foresee the rapid replacement of human-driven Uber rides with autonomously driven rides. In fact, at the cost per mile rates estimated above, a robotaxi trip is arguably cheaper than driving your own car, particularly if you have to pay for parking at the trip destination. If robotaxi trips start replacing a broad range of trips in privately owned vehicles then the potential market does indeed explode.

Broader mobility. The most obvious advantage of this Utopian vision is that many people who can’t (or shouldn’t) drive their own car suddenly have a reasonably priced and highly flexible transportation option. The elderly, teenagers, people with certain disabilities, or even the poor may find that robotaxis give them a level of mobility that is far better (more precise, more private and less stressful) than their current options.

Cleaner and quieter. Since most robotaxi rides would replace a ride in an internal combustion vehicle with one in an electric vehicle, urban environments would benefit from less ground-level pollution and less vehicular noise. Although electric vehicles are not pollution free, there would likely be a reduction in total greenhouse gas levels.

Better land utilization. If private car usage drops, then that also means that parking demand would drop as well. As I have pointed out in previous posts, most urban areas need a greater level of tax revenue per square mile of service area in order to achieve a reasonable level of fiscal stability. Replacing low-value surface parking lots with more intensive, high-value buildings would be an important step in the right direction.

Productive time. City driving is generally more stressful than enjoyable, so a competent autonomous driver would free us to do other things instead of navigating through a chaotic urban environment. People might choose to send emails or texts, check their social media accounts, or just relax by listening to music or playing a game. Whatever option you choose, a robotaxi ride could recapture time that previously was lost to driving.

Paradise Lost

Robotaxi naysayers see just another variation on our love affair with the automobile, and arguably one which is worse for urban life than what we have now. After all, robotaxis will simply replace a human-driven trip in a car with a computer-driven trip in a car. There is no particular reason to think that the number of occupants per vehicle will suddenly go up, and cautious robo-drivers might actually slow vehicle throughput down. In addition, robotaxis are likely to cause the total vehicle miles traveled (VMT) to go up which will worsen current congestion levels. A robotaxi trip (or any ride-hailing trip) isn’t just from my house to my destination, it is from some random starting point to my house and then to my destination. This increase in trip length (not to mention empty trips waiting for the next rider) might not be a problem during off-peak hours, but it is a potential disaster during rush hours in dense urban areas. [2]

What big cities desperately need is a transportation option that increases passenger density and robotaxis do not currently offer that type of solution. The core problem is that urban transportation is inherently “peaky” and concentrated. People do not move from random point to random point at evenly distributed times throughout the day. There are distinct peaks where transportation demand is focused on certain times (e.g. rush hour) or certain places (e.g. an office district, a factory, a school, etc.). This pattern creates an obvious physical problem – not enough street space to accommodate vehicles carrying just one or two people – but it also creates a financial problem that undercuts robotaxi profitability.

If there are enough robotaxis to meet peak demand, then there will be far too many during off peak hours. Robotaxis will only be profitable if they have high utilization rates, which means that the number of robotaxis that the free market will provide will always be well short of peak demand. This, in turn, means that during peak hours robotaxis will be in short supply which means that surge pricing will kick in which means that the magical $0.25 to $0.50 per mile price point goes out the window for the most important times of the day and the busiest places. Thus robotaxis will be just numerous enough and just inexpensive enough to stay busy the vast majority of the time, but not numerous enough or cheap enough to be a paradigm-shifting transportation option for the next decade or so.

In addition, a robotaxi is not a good fit for many of the trips that we take on a daily basis. Do I really want a robotaxi to drive me to the supermarket, come back in 20 minutes to pick me up and take me to the dry cleaners, then inch through the drive-thru lane at Chick-Fil-A to get some lunch, and then wait patiently at the curb while I carry all my stuff into the house? And if my trip includes small children, do I have to carry car seats with me and figure out how to install them in various robotaxi vehicles? Not ideal. The fact of the matter is that most of us treat our cars like a combination of a rolling storage locker and a school bus – we haul things and people in all sorts of combinations and situations, some of which we can’t always anticipate when we start our trip. For example, I have my golf clubs, shoes and an assortment of hats in my trunk from March to November in case a driving range and a free hour of time happen to coincide. Despite its faults, a personal car gives people a great deal of flexibility that reliance upon a robotaxi would not.

One last problem to burst the robotaxi bubble: think of the curb space chaos in front of the departure gates at most major airports, with vehicles stacked two or three deep as people jump out and try not to get run over. Now extrapolate that mess to every office building, factory or school as hundreds of robotaxis fight for space to drop off or pick up their riders all at the same time. Airports are just now figuring out how to handle pick-up and drop-off lanes in a rational manner, but cities are nowhere near ready for that kind of transportation adjustment. Curb space is already in short supply because of demand for parking spaces and delivery zones – robotaxis will be queued up around the block waiting for what limited curb space exists to become available for their needs or people will get frustrated and disembark in the middle of the street.

The Likely Middle Ground

In order to get a realistic grasp on what the robotaxi world will be like over the next five to ten years, I think it is important to keep three things in mind. First, autonomous driving is really hard. This is a problem that the smartest minds in the business thought would be solved ten years ago and yet true autonomous driving (known as SAE Level 5) is not available in any production car or in any operational robotaxi. [3] The best that is currently available (and likely to be available for the next few years) is Level 4 which provides autonomous driving without any user engagement, but only in limited circumstances.

This is why all robotaxi services to-date operate in limited geographic areas that have been extensively mapped and carefully vetted so that vehicles avoid confusing or dangerous routes. This approach, known as “geo-fencing,” is why a Waymo ride in Phoenix won’t take you to some of the outer reaches of the metro area and why the route will often avoid using interstate highways even when that would be most efficient.

Second, no one is making money providing robotaxi services and no one is likely to make money for several more years. This is why all the leading players are huge corporations with very deep pockets that can afford to lose money while they perfect their service and build market share. This is an industry that is going to experience serious consolidation at some point in the future which is why the big players are desperate to have enough market presence to remain standing when the mergers and bankruptcies start to happen.

Eventually, of course, shareholders and corporate activists are going to insist that robotaxi services turn a profit. This pressure to be profitable is why, in my opinion, the rosy forecasts of average ride costs below $0.50 per mile are mostly fantasy for at least the next five to ten years. The pressure to be the absolute lowest cost provider is not something that happens in a young, rapidly growing industry, but rather in a mature industry where growth is hard to come by. Thus I expect the cost for robotaxi rides to hover just below the cost of a human-driven Uber ride until robotaxi services are routinely profitable. This is low enough to cannibalize business from human-driven ride-hailing platforms but not so low that people will ditch their cars for the robotaxi lifestyle.

Third, the regulatory environment is a complicated, patchwork mess. Some states have lenient laws that favor autonomous driving, but most either have very strict regulations, vague regulations or regulations that include limits which are unfriendly to robotaxi businesses. Major cities are generally interested in being part of the “leading edge” so that they are seen as progressive and tech-savvy, but they are absolutely paranoid about being so compliant that they become the “bleeding edge” where the blood is literally from their citizens. As a result, no jurisdiction is anxious to cede control to a higher level of government unless mandated by State law. No one is fast-tracking an overriding Federal standard for robotaxi regulations because most local governments want to remain “hands on” in protecting the safety of their residents.

This means that robotaxi expansion is going to be a slow (and expensive) city-by-city slog rather than a tidal wave that washes across the country. It also means that expansion is likely to be labor intensive because cities where service is new are going to want plenty of personnel on hand to (1) deal with operational glitches that block traffic, (2) provide tele-operators monitoring each ride so that citizens feel safe, and (3) keep vehicles clean so that the ride experience is as positive as possible. This is great for making the rollout of robotaxi service seem successful from a politician’s point of view, but it is another obstacle on the road to profitability.

The Impact on Cities

The most obvious initial impact is that robotaxis will steal rides away from human-driven taxis and riding-hailing apps. Uber, Lyft and other ride-hailing companies will be willing participants in this process because their main source of profit comes from being the platform that arranges the ride and processes payment – they have no innate preference for humans versus computers when it comes to who is driving the vehicle. How fast this transition takes place depends on a variety of factors, but mainly upon how quickly costs per mile can fall so that robotaxi services can turn a profit, or at least break even. My guess is that profitability is still a few years away so the transition will be relatively slow to keep losses from becoming so huge that they are unsustainable.

Still, in the next two or three years I expect there to be robotaxi operations in 15 to 20 cities in the U.S. alone. There will be four or five major players (perhaps more if the Chinese can break into the market) and the total robotaxi fleet will be in the tens of thousands of vehicles. That may sound like a lot, but it is really just a drop in the proverbial bucket. Uber by itself is currently estimated to have roughly a million U.S. drivers.

If my guess is correct, then the initial impact on most urban areas will be fairly minimal. Robotaxi service won’t expand the ride hailing market substantially until the cost drops significantly. If the cost does drop substantially (and this is a big “if”), the result will be a dramatic increase in robotaxi trips which in turn will increase total vehicle miles traveled and overall congestion levels. Depending on where this happens, the result could vary from mildly annoying to disastrous. Think of the impact, for example, of adding thousands of new trips to the Chicago loop if a door-to-door robotaxi ride becomes cheap enough to woo the more affluent commuters off of the “L.”

The trick will be figuring out at what point on the path of “falling average-price-per-mile” will people shift in significant numbers from trips in their own personal car or trips on mass transit to a robotaxi trip. That tipping point could potentially have a huge impact on urban life as some of the negative side effects discussed above (e.g. increased congestion and insufficient curb space) become readily apparent. At that point there is likely to be some public pushback on the robotaxi movement, quite possibly leading to local regulations that limit the number of allowed robotaxis (or ride-hailing services generally) and their allowed distribution throughout the metro area. If that happens, the market will raise the price of robotaxi rides that now are under-supplied relative to demand. This in turn will scale back demand, but the damage to urban transportation infrastructure may already have been done. If middle-class commuters are lured into robotaxi rides from the subways and buses, will they ever return to mass transit even if costs and travel time creep back up? Most mass transit systems are on thin financial ice already so even short term shifts could be catastrophic.

Cities (or metro areas) will be searching for the right balance, but are likely to find that the right point is hard to pin down and shifts over time. Unfortunately, people may come to view robotaxi service as the urban transportation version of Pandora’s Box, with “evils” being released before the lid can be slammed back into place. The hard truth is that most urban areas during rush hour would be hard pressed to handle even a 10 percent increase in VMT without commute times spiraling to unacceptable levels.

Another Option

There is potentially another path that would allow substantial robotaxi expansion without as many negative side effects. As mentioned above, what urban areas need are transportation options that increase passenger density – in other words, more people being moved per lineal foot of available street lanes. In the U.S., nearly 75 percent of all commuters drive alone which is 15 to 18 feet of lane space (ignoring the space between cars) per person. The average for all automotive trips is not much better at roughly 1.5 occupants per vehicle (or approximately 10 to 12 feet per person). A bus on the other hand, might be just 1 to 3 feet of lane space per person. Ride-hailing vehicles are currently no better than other automotive trips (excluding the driver). Precise numbers aren’t available, but estimates are that only 10 percent of Uber rides have three or more passengers. But what if cities could push robotaxi companies (and ride-hailing companies generally) to increase average passengers-per-trip numbers?

Zeekr Robotaxi Prototype

Current designs for custom-made robotaxis such as the Zoox (Amazon) or Zeekr RT (Waymo) are 12 to 15 feet in length and can comfortably accommodate 4 people. If occupancy levels during peak times (or in peak areas) could average 2.5 or 3, then lane space per person might fall to 4 to 6 feet. Doubling or tripling passenger density versus privately owned cars would be a potentially huge benefit in terms of roadway congestion.

I know what you’re thinking: “No way am I sharing my robotaxi ride with a stranger,” but hear me out. Obviously many robotaxi trips will continue to be similar to a typical riding-hailing trip where you (or you and a friend) go from point A to point B, but I think there are a variety of scenarios where a robotaxi “trip” could include multiple stops and/or include passengers that you either don’t know at all or know only tangentially.

Uber is already experimenting with this type of service with an option called Route Share, which is currently available in half a dozen cities. This service, targeted toward commuters, has a vehicle running a fixed route every 20 minutes during the morning and evening rush hours. Riders can reserve a space and select their pick-up and drop-off location. Since it is not a door-to-door service, riders may need to walk at either end of the ride, but in return they can save up to 50 percent off the cost of an UberX. [4] Although it is being tested now with human drivers, this service would be ideal for an autonomously driven robotaxi since the route could be mapped in great detail and optimized for safety and efficiency.

I envision a more flexible service that is actually door-to-door so that it feels less like a bus ride and more like a limousine service. It should take advantage of the ride-hailing platform’s computing ability to optimize routes, adjust for exceptions, and handle billing. What if, for example, your employer joint-ventured with a robotaxi company to provide rides to work. You could pick which days you wanted to participate and approximately when you would like to arrive. The robotaxi’s computers would find other employees near your home who also want a ride, select the best route, and notify you of your pick-up time. Since each trip would be limited to three or four people, the added inconvenience would be minimal and your cost per trip would drop substantially – and perhaps even be subsidized by your employer as an incentive to return to the office! Need to stay late for an emergency meeting or leave early because your daughter is sick at school? No problem; just cancel your spot on the shared ride, arrange for an individual ride, and pay a few bucks more.

There are a wide variety of situations in which this “super car-pooling” approach to robotaxis would be useful. A retirement community, for example, might arrange a ride that drops a group of seniors at the shopping mall and returns an hour later to pick them up. Parents might arrange for their 14 year old son and two of his teammates to be picked up from Middle School and taken to swim team practice (including sending a video clip to verify safe drop-off). Or perhaps you arrange for a robotaxi to take you and your BFFs out clubbing, and then return at 1 AM to take you home. Since virtually everyone has a smartphone, these rides would be easy to set up, easy to adjust and easy to pay for. Phones could be used to notify you when your ride is approaching so you don’t forget or keep others waiting, and to verify identities so that your fellow riders are vetted by the robotaxi company.

The real payoff for sharing your ride, of course, is that you might actually approach a cost-per-mile threshold where ditching your car saves you money without imposing a great deal of inconvenience. Plus there are the added bonuses of being able to relax in a comfortable seat, avoid the stress of urban driving, go online while traveling, and skip the hassle of searching for a parking spot. The end result might be a transportation option that fills the gap between driving your own car and taking mass transit. It will not, however, meet so many people’s needs that robotaxis take over the world – but it might make their expansion mostly beneficial rather than mostly detrimental.

The Bottom Line

Robotaxis are coming and my guess is that they will be operating in the vast majority of the top 50 metro areas within five or six years. This gives cities some time to prepare, but planning for this change needs to start now. In particular, cities need to ramp up lobbying efforts at the state and national levels to make sure that they retain the ability to impose reasonable restrictions on robotaxi operations. I don’t favor the ability to ban robotaxis (or autonomous vehicles generally) but some local control is essential. Robotaxi regulations may end up being similar to the way cities restrict electric scooter-sharing or ebike-sharing businesses. In areas with an effective regional government, cities might need the ability to cede some operational control because a regional set of rules makes a lot more sense than city-by-city rules.

Cities also need to be able to require data sharing from robotaxi companies. Details such as pick-up point, drop-off point, time, date and number of passengers will be essential for integrating robotaxis into transportation systems and infrastructure. Locational data can be generalized to protect privacy, but the more data cities have the more likely robotaxi expansion will be positive rather than negative. Robotaxi companies are likely to resist by claiming this data is proprietary or that it violates their customers’ right to privacy, but cities need to insist on data sharing even if they have to sign some type of nondisclosure agreement.

Cities also need to insist on clear lines of communication with robotaxi operations. There will inevitably be problems with the rollout of this type of technology, but effective communication channels can minimize major issues. As self-driving software improves, there will be less and less need for human monitoring but robotaxi companies need to demonstrate that their vehicles can be safely integrated into an urban area before that happens. Police Departments, in particular, need to have communication protocols in place so that accidents and stalled vehicle incidents can be resolved quickly and effectively.

In the long term, cities need to build the ability for transportation infrastructure to share data back to robotaxis and other autonomously driven vehicles. Congestion levels, signal timing data, accident locations, and construction zones are examples of types of information that vehicle computers will eventually be able to process in order to optimize route and speed decisions. A truly “smart city” will share as much data as possible as transparently as possible.

I am generally an optimistic person when it comes to new technology, but I must admit to having some concerns when it comes to robotaxi expansion. I fear that an unfettered rollout could lead to an unmitigated disaster. The potential is high but the dark side can’t be ignored.

Notes:

1. Kyle Harrison; “The Trillion-Dollar Battle To Build a Robotaxi Empire;” April 2025; Contrary Research; https://research.contrary.com/deep-dive/the-trillion-dollar-battle-to-build-a-robotaxi-empire

2. Jeral Poskey; “The unseen environmental costs of autonomous cars;” February 2025; Smart Cities Dive; https://www.smartcitiesdive.com/news/robotaxis-environmental-costs-ghg-sustainability/740947/

3. “SAE Levels of Driving Automation Refined for Clarity and International Audience;” May 2021; SAE International; https://www.sae.org/blog/sae-j3016-update

4. “Introducing Route Share: Uber’s More Affordable, More Predictable Commute”; May 2025; Uber Blog; https://www.uber.com/blog/route-share/#:~:text=What%20is%20Route%20Share?,with%20more%20cities%20to%20come.

Post 57: Robotaxis Revisited - Part 1

noreply@blogger.com (Doug Johnson) — Mon, 09 Jun 2025 20:32:00 +0000

Autonomously driven taxis – generally referred to as a “robotaxis” – are nonexistent in midwestern and most east-coast cities, but they are a relatively common sight in San Francisco, Phoenix, Las Vegas and a few other test-bed locations. I actually rode in a Waymo robotaxi in early 2023 and wrote about it a couple of months later (Post 34). Those guinea pig cities have allowed the robotaxi companies to work out the details behind turning an interesting experiment into a viable business, and now the stage is set for expansion across the country and around the world.

Zoox Robotaxi Prototype

There are wildly different visions for how that expansion will play out and for the impact robotaxis will eventually have on urban life and the form of our cities. Elon Musk, for example, has predicted that:

“By the middle of next year, we’ll have over a million Tesla cars on the road with full self-driving hardware, feature complete, at a reliability level that we would consider that no one needs to pay attention.”

And:

“From our standpoint, if you fast forward a year, maybe a year and three months, but definitely next year for sure, we’ll have over a million robotaxis on the road.”

That prediction took place in April of 2019 and Tesla has still not initiated any public robotaxi service although they are apparently close to doing a test service with 10 to 20 cars in Austin, Texas. In addition, the Tesla cars that ship now with autonomous driving hardware and software are not certified for driving without the driver being ready to take back control at any moment. Elon Musk, of course, has made so many outlandish predictions that never came true that he isn’t a very reliable guide to the future. [1] My goal with this post is to give you a factual assessment of where the robotaxi industry stands and what is likely to happen with its expansion over the next few years. In part two of this post I will look a little further out to try to predict the long-term impact of robotaxi technology on urban transportation and urban form.

The Players

The companies that are making the biggest waves in the robotaxi industry have shifted somewhat from my previous post. In particular, Cruise (General Motors) has apparently dropped out of the business entirely after a checkered experience with robotaxi service in San Francisco. In addition, several Chinese companies have become major players in this market, particularly overseas. I’m going to focus here on the U.S. market primarily, although I will mention other markets simply because what happens there will eventually affect the U.S. This is also not going to be an exhaustive list of companies with their fingers in the robotaxi pie. Instead, I want to emphasize the companies that I think are going to shape the future of robotaxi service and the ensuing impact on urban form.

Waymo (Alphabet). The clear leader in domestic robotaxi service is Waymo, and the company is starting pilot programs in Japan and France with an eye toward building a worldwide presence. While many competitors are still in the testing or limited service phase, Waymo has been providing paid service to the general public for several years in a variety of cities. The Waymo fleet of robotaxis has now exceeded 25 million miles of autonomous driving and currently provides well over a million paid rides per month. Operations are currently limited to San Francisco, Phoenix, Los Angeles and Austin, but Waymo has plans to expand to 10 additional cities over the next couple of years including Atlanta, Miami and Washington, DC.

Waymo adapts other production vehicles for robotaxi use rather than build its own custom robotaxi. The Jaguar I-Pace has been the vehicle of choice for the past few years, but the Hyundai Ioniq and a Chinese vehicle from Geely are apparently in contention for the next generation Waymo product. Each vehicle is fitted with numerous cameras, as well as Lidar and Radar sensors. In the near term, Waymo expects to expand their fleet from 1,500 vehicles to 3,500 vehicles, but the eventual goal is to produce “tens of thousands” of robotaxis each year from their conversion factory in Mesa, Arizona.

Uber. The ubiquitous ride-sharing company has abandoned plans to build its own robotaxis in favor of partnering with a variety of robotaxi producers in the U.S., Europe, Asia and the Middle East. Waymo’s expansion into Austin, for example, is being handled through Uber instead of Waymo’s own ride-hailing app. The Waymo/Uber partnership will expand to Atlanta later this year. Uber has the advantage of having the most widely used app and millions of daily customers which simplifies expansion plans for robotaxi producers.

Uber not only provides the internet platform, it will also handle fleet operations, including cleaning, maintenance and charging. This partnership approach makes so much sense that I expect Uber to expand its robotaxi operations as rapidly as possible. Uber CEO Dara Khosrowshahi has stated that the roughly 100 Waymo vehicles in Austin are busier than over 99% of Uber drivers in terms of trips completed per day.

Zoox (Amazon). The approach that has been taken by Amazon-owned Zoox focuses mainly on a purpose-built vehicle rather than on adapting traditional cars, although it initially tested its autonomous driving software using Toyota Highlanders. The all-electric, bi-directional, 4-passenger Zoox vehicle has no steering wheel or control pedals so it can’t be used for anything other than robotaxi service. However, it does have wide doors, comfortable seats, 4-wheel steering, and high-tech interior controls which make the riding experience as pleasant as possible.

Zoox has been doing intensive testing in Las Vegas, San Francisco and Foster City, California for several years and is reportedly near to providing public service. They recently signed a deal to be the “official robotaxi partner” for Resorts World in Las Vegas, although it is not entirely clear exactly what that means. In any case, Zoox has a unique product but needs to get real-world, paid-passenger experience if it is to keep up with the competition.

Tesla. The wildcard in the robotaxi world is Tesla which hasn’t actually provided any public service, but which has sold millions of cars, many of which included their “Full Self Driving” (FSD) software and hardware package. FSD is somewhat misleadingly named because it doesn’t actually provide fully autonomous driving – the human behind the wheel is still expected to take back control in certain situations. Robotaxi service is expected to start this month in Austin, Texas, although it is likely to be just 10 to 20 cars operating within a tightly limited area and closely monitored with remote “teleoperators.” Still, if the debut goes smoothly, Tesla hopes to be able to ramp up operations quickly and many analysts expect it to be a major player in the next few years. There are, unfortunately, question marks galore surrounding Tesla’s robotaxi capabilities because it has been so hard to separate the hype from the reality.

In my opinion, the odds of Tesla rapidly becoming a dominant robotaxi service are about equal to the odds that its service falls flat on its face. The more likely middle ground is that Tesla eventually masters the intricacies of providing robotaxi service, slowly gains traction in the robotaxi race, but ends up being just one of many providers. The idea that current Tesla owners will convert their cars to part-time robotaxis strikes me as complete fantasy, and the company is years behind Waymo and other providers in building the corporate capacity to run robotaxi operations in multiple cities.

Tesla Cybercab Prototype

Tesla’s strength is their manufacturing capability and they have unveiled a slick, two-seat “Cybercab”product that is expected to enter production in 2026. The initial robotaxis in Austin will likely be adapted Model Y vehicles, however, and the actual timeline for Cybercabs to play a significant role in the robotaxi service is up in the air.

The Chinese. The U.S. has made it nearly impossible for Chinese companies to compete directly in this country’s robotaxi market for reasons that range from national security and data privacy concerns to global trade tensions. That translates to less publicity in the American press, but it does not mean that they are lagging behind American technology. Companies such as Baidu, Pony.ai and WeRide have already deployed thousands of driverless robotaxis in various cities in China and are actively expanding into the Middle East and Europe. In addition to car-like vehicles, Chinese companies are leaders in driverless trucks, buses, and specialty vehicles such as streetsweepers. Although their direct impact in the U.S. may be muted, their global aspirations means that Waymo, Tesla and Zoox may find it difficult to dominate the worldwide robotaxi market.

Safety

Advocates for autonomous driving technology have long predicted that computers linked with advanced sensors will eventually be much safer drivers than humans. As robotaxis move from test deployments to a full-fledged public transportation option, the question remains whether they have reached the “safer than a human” tipping point. Only Waymo has a large sample of real-world rides and a history of safety transparency at this point. Other companies either don’t have many vehicles in public use or are being very tight lipped about their safety record. Yet nearly everyone agrees that the public perception of safety is a key to robotaxi success.

A study was recently issued by insurance giant Swiss Re based on the 25 million miles of autonomous driving completed by the “Waymo Driver” and the resulting claims history for both property damage and bodily injuries. The study included Swiss Re’s data from over 500,000 claims and 200 billion miles of exposure. It found that compared with human drivers, the Waymo Driver had an 88% reduction in property damage claims and a 92% reduction in bodily injury claims. Over its 25 million miles of driving, Waymo had just 9 property damage claims and 2 bodily injury claims. For the same amount of driving, human drivers would be expected to have 78 property damage and 26 bodily injury claims. This pattern holds true even when compared with late model cars equipped with advanced driver assistance systems such as emergency braking, forward collision warning, or blind spot warning. [2 ]

These results are largely due to Waymo’s extreme focus on passenger safety. Their vehicles, for example, are typically equipped with 29 cameras, 6 Radar sensors and 5 Lidar sensors. In addition, prior to providing public service Waymo does extensive testing and mapping of new service areas, and route selection is biased away from confusing intersections or dangerous roadways.

In contrast, Tesla relies primarily on cameras for the FSD system and Elon Musk has derided sensors such as Lidar as a “crutch” and “stupid.” Although there are some recent indications that Tesla is now using Lidar for its FSD development and testing, their vehicles are still reliant primarily on cameras. Tesla is just now starting actual robotaxi operations, but their prior FSD systems in the cars they have sold have been linked to a variety of serious accidents, including fatalities.

Most other robotaxi companies are much closer to Waymo’s approach than to Tesla’s, although no one else has been as transparent with accident data as Waymo. Still, I think most companies realize that just a few high-profile accidents could put a serious crimp in their business plans, so safety seems to be a high priority for just about everyone.

Profitability

So far, no one is making any money as a robotaxi provider. Yes, there isn’t a driver to split the revenue with, but building and operating autonomous vehicles is expensive. The prices charged for robotaxi rides are typically competitive with or slightly cheaper than a typical Uber ride, but each ride is losing money. How much money is being lost is hard to say because no company is releasing that data, but the estimates are pretty high.

If robotaxis are losing money, why are so many big companies chasing this market? The answer is that the eventual market is expected to be enormous and the cost of providing service is expected to fall dramatically over time.

Currently, the cost of running a robotaxi business is substantial. There is the cost of the car with all its cameras and sensors, of course, which most analysts place at well over $100,000 per vehicle. And then there is the cost of all of the people that are needed for cleaning, recharging, maintenance and monitoring. Yes, the driver is gone but there is still a lot of labor involved, including “teleoperators” that monitor robotaxi operations. They don’t generally operate the vehicles remotely unless there is a major issue, but they do track robotaxi operations continuously. As autonomous driving software improves, the number of monitors will decline significantly but it will not go away any time soon because regulators will likely not allow it until the robotaxi safety record is not just “better than a human” but nearly spotless.

This ongoing need for teleoperations support despite 10 years of autonomous driving software development and testing underscores the difficulty in deploying truly autonomous operation in a complex urban environment. It is not just hard, it is really hard. [3] Is the ratio of active robotaxis to teleoperators 10 to 1? 20 to 1? No one is really saying and it probably varies from city to city and provider to provider. In fact, the teleoperations ratio is probably a significant negotiating point when providers are seeking approval to operate in a new city or state. In any case, it means that the dream of fully autonomous robotaxis is as much mirage as reality.

Plus, there is a lot of overhead involved with ride scheduling software and fleet maintenance, along with mundane stuff like marketing and insurance. Again, all of this will decline in terms of cost per ride as volume scales up – perhaps to half or even a third of what it is now. Robotaxi vehicles, for example, might end up costing $40,000 to $50,000 per unit. But robotaxis rides will never be mostly profit, because while the costs will drop over time, the cost curve will flatten out eventually and it won’t be anywhere near zero.

On the flip side of this equation, just how big is the potential market? Well, for starters Uber provides roughly 40 million rides per month in the U.S. alone, and Lyft probably accounts for another 10 to 15 million. Robotaxis won’t be able to steal all of those rides, of course, but I think taking 50 percent is a realistic target five years out in the cities with robust robotaxi operations. The real gold mine, however, is the roughly 20 billion trips Americans make every month in their cars. If just five percent of those trips were converted to robotaxis that would be a billion trips per month. Expand those numbers globally, and the potential market is staggering.

The Bottom Line

Very smart people are investing billions of dollars in the robotaxi race so I have little doubt that Waymo, Tesla, Zoox, et al will be spreading across the country. Advocates believe that robotaxi service will usher in an era of convenient, safe, and stress-free transportation that will improve both our cities and our lifestyles. The only questions seem to be when will they get to your city and will you be brave enough to trust them to get you from point A to point B?

Well, perhaps that’s not quite true. There are actually dozens of unanswered questions surrounding how the robotaxi revolution will play out and it is certainly not clear whether it will lead to urban nirvana or whether we will need to amend Dante’s Inferno to include a tenth circle of hell. I’m generally optimistic but that optimism is tempered by the knowledge that urban systems and human behaviors are inherently resistant to change. As always, reality is likely to fall somewhere between nirvana and hell. Check out part two of this series for my take on what is likely to work and what is likely to disappoint.

Notes:

1. Carlton Reid; “There’s a Very Simple Pattern to Elon Musk’s Broken Promises”; May 2025; Wired; https://www.wired.com/story/theres-a-very-simple-pattern-to-elon-musks-broken-promises/

2. “New Swiss Re Study: Waymo is safer than even the most advanced human-driven vehicles”; December 2024; Waypoint, Waymo blog; https://waymo.com/blog/2024/12/new-swiss-re-study-waymo#:~:text=It%20found%20that%20the%20Waymo%20Driver%20demonstrated,damage%20claims%20and%20two%20bodily%20injury%20claims.

3. “Fleet response: Lending a helpful hand to Waymo’s autonomously driven vehicles”; May 2024; Waypoint, Waymo blog; https://waymo.com/blog/2024/05/fleet-response#:~:text=Much%20like%20phone%2Da%2Dfriend%2C%20when%20the%20Waymo%20vehicle,for%20additional%20information%20to%20contextualize%20its%20environment.&text=Fleet%20response%20provides%20the%20Waymo%20Driver%20guidance,street%20and%20make%20way%20for%20the%20truck.

Post 56: Transportation Pricing and Behavior

noreply@blogger.com (Doug Johnson) — Wed, 14 May 2025 19:17:00 +0000

All of us realize that there are costs involved every time we travel from one place to another. Some of those costs are obvious and we think about them almost every time we decide whether to travel or not. For example, if I am traveling to another city I think about the expense and time involved with flying (e.g. buying a ticket and moving very fast) versus the expense and time involved with driving my car (e.g. buying gas and moving much slower).

Other costs are more subtle or indirect and we give those a lot less consideration because we tend to form habits around those other costs that save us from having to think about them each time we travel. For example, if I am going to the store to buy groceries I could drive my car, arrange for an Uber ride, walk to the store, or ride my bike. All of those options aside from the Uber ride have zero out-of-pocket costs but they do have different costs in terms of time. So if I’m in a hurry, the time cost of walking may be too great for me to take that option seriously. But there are also indirect costs like exertion which people might value positively if they like exercise and fresh air, or negatively if they dislike those things or are disabled in some way.

Driving a car has a boatload of indirect costs such as depreciation, maintenance and taxes, which we all understand that we pay but which are not associated with any given trip so we tend to minimize their impact on our decision. My point is that while we understand these costs we tend to form transportation habits that eliminate the need for us to think about them for every trip. Unfortunately, these habits can result in sub-optimal decisions. On a beautiful day when I am unscheduled, a walk to the store might actually be my best option, but I generally end up driving my car without really considering the walking option because I am in the habit of doing so.

Finally, there are costs that are “hidden” because most people rarely think about them or even connect those costs to their own transportation decisions. If I drive my car to the store to buy groceries, for example, I add to the congestion of the public streets that I share with other drivers and I add to the pollution of the air which all of us breathe. These are costs that I impose partly on myself, but mainly on others in the community. While real, these costs are abstract enough and my contribution is tiny enough that I am likely to write them off as too insignificant to worry about if I even think of them at all.

Although we might ignore most of these costs when we make individual decisions, city governments (and State and Federal governments as well) should be giving all transportation costs a great deal of thought before they make decisions about transportation improvements and their operating budgets. Unfortunately, governments fall into habits just like we do as individuals which often leads to sub-optimal decision making – and in some cases not just sub-optimal but downright awful. My goal with this post is to shine some light on transportation costs – particularly direct out-of-pocket costs and time – in order to shift the way we think about the options we have for moving from point A to point B and to potentially shift the way governments set transportation policy.

Place Matters

Before I get into the nitty gritty of transportation pricing, it is important to point out that there is no one-size-fits-all solution. Your location at the time you are making a transportation decision will have an enormous impact on what decision is best. A common example in midwestern cities is the proximity to transit. Midwestern cities are so spread out that the distance from my starting point to the nearest transit stop and the distance from the transit drop-off point to my destination can be so great as to disqualify the transit option as a serious contender. If the beginning and ending walk is just two or three blocks, then transit might well be a smart choice but the odds of that happening in most midwestern cities is small.

In very large cities such as New York, Chicago or Boston, the cost of parking – both the time-cost of finding a space and the out-of-pocket cost of the parking itself – is so large that driving is far less viable than in smaller cities. Parking can be so expensive and inconvenient that even owning a car is financially unattractive which means that driving is seldom considered as a transportation choice. Keep this point in mind as you read the rest of this post. I’m writing primarily from the perspective of someone who lives in Kansas City, and while that might be relevant to many other midwesterners, it will be less applicable to those who live in much larger or much smaller locations.

Technology Has Changed Pricing

The second caveat to keep in mind is that technology has changed the entire pricing landscape in transportation (and most other industries as well). The payment platform that has developed around the internet and our smartphones has not only made it more convenient to pay for transportation, it has also changed how much we pay and what exactly we are buying when we travel. Over the past thirty years, the rise of internet commerce has largely eliminated the role of the travel agent which has reduced the cost of flying by cutting out an unnecessary middle man. Now smartphones have largely eliminated paper tickets and have enabled the travel industry to shift to “al a carte” pricing. Paying for checked luggage, snacks, drinks and WiFi access with a few taps on our phones has made possible a concept that previously would have been too convoluted to be feasible. We can now customize our transportation choices and pay for exactly what we want. This trend is so powerful it is essentially forcing Southwest Airlines to change their entire business model.

Technology is also changing the way we drive. Tag sensors, online toll accounts, and now license plate readers are rapidly eliminating the need for toll booth operators and are increasing opportunities for governments to charge for the privilege of driving on certain roads or in certain lanes. Many locations implemented High-Occupancy Vehicle (HOV) lanes to encourage car-pooling as a way to reduce congestion but those lanes are often underutilized. So some HOV lanes are being converted to High-Occupancy Tolling (HOT) lanes which use modern electronic tolling systems to allow single occupant vehicles to use the restricted lanes simply by paying a toll.

Even the lowly parking meter has evolved to allow payment via your smartphone instead of requiring you to dig for loose coins. The change (no pun intended) has not only allowed cities to charge more for parking, it has also made enforcement easier and enabled convenience features such as phone notifications when your time is almost up. Collecting small payments, such as for metered parking, used to be so inefficient that it often was not worth the effort. Now, collecting a small payment is just as easy as collecting a large one which opens up new potential revenue streams.

An underappreciated aspect of all of this technology is that it allows dynamic pricing of just about every transportation option. This changes both how we travel and when we travel. Pricing that changes instantly in response to demand means that transportation infrastructure can be used more efficiently by smoothing out normal peaks and valleys. Many airports, for example, are busy in the early morning hours not because people like flying at 6:00 AM but because that’s when the cheapest flights are offered. The result is a win-win: people spend less money and airports spread out demand to avoid congestion.

The Hidden Cost of Free

We all like a bargain, and there is no better bargain than free. Except, of course, that very few things are really free – someone ends up paying and that someone is almost always you. That is particularly true with transportation choices, some of which appear to be free but really aren’t. The misconception of free is sometimes beneficial or at least harmless, but it often skews our decision making in ways which are detrimental to ourselves and our cities.

There is a basic concept in economics that states that when people are given unfettered access to a finite but valuable resource, they will tend to overuse it to the point where it is damaged or destroyed. It is not rational for any individual to exercise restraint because someone else will simply supplant them, but the inevitable result is bad for everyone. This is often referred to as the “tragedy of the commons” and I wrote an entire post about it roughly eighteen months ago (Post 39).

Mass Transit. In the world of transportation, there are three primary examples of things that appear to be free but really aren’t. The first is the occasional mass transit service that is provided at no cost to riders. For example, I recently rode Miami’s Metromover which is a 4.4-mile elevated tram that loops through the frequently congested downtown area and a few adjacent neighborhoods. I found it to be useful, although as a tourist it seemed too limited in its geographic coverage. The locals must find it more useful because it averages more than 20,000 riders per day which is trending up over the past several years, but still a little short of the pre-pandemic year of 2019. As I understand it, the system is funded primarily by a special sales tax levy, supplemented by general tax revenue and federal grants.

Similarly, Kansas City has a streetcar line that is also free to ride. It follows a two-mile out-and-back route that primarily follows Main Street. Construction is nearly complete on two extensions to that route which will triple its length to just over 6 miles. Ridership has grown steadily over the past several years and now averages over 4,700 rides per day. As with the Metromover, Streetcar ridership dropped steeply during the pandemic and is just now approaching 2019 numbers. Funding comes from additional sales tax and property tax levies within a Transportation Development District that surrounds the streetcar route.

Transit services on a limited route such as Metromover and KC Streetcar may have occasional riders who are simply satisfying their curiosity, but generally they are free of the “overuse” issues that often plague free services. There is no economic or personal advantage to be gained unless you actually want to travel to some point along the route, which is a naturally limiting set of people. Despite the surface appearance, however, the rides are not free as I pointed out above. In theory, the businesses and property owners who pay the added levies required for these transit services get a reasonable return on their investment from increased business or from increased property valuation, although that is certainly up for debate. As with nearly every tax, my guess is that some reap benefits that exceed what they pay while others fall short.

Public roads and highways. The second transportation service that has the perception of being free is the use of public streets and highways. Toll roads and bridges are obvious exceptions, of course, but generally people can drive pretty much anywhere without an out-of-pocket expense. In contrast to limited-route transit, the free use of public streets does influence behavior in ways that often causes significant congestion and thus damages the value of the street or highway as a public asset. The phenomenon is known as “induced demand” and I discuss it at some length in the earlier post mentioned above. I won’t go into detail here but all of us have experienced bumper to bumper traffic that approaches gridlock even on highways that have recently been widened.

Recent events in New York City provide an interesting illustration of the impact of “free” streets versus streets that have an explicit out-of-pocket cost. In January of this year, New York City implemented a fee known as “congestion pricing” on vehicles entering Manhattan south of 60th Street. The amount charged is $9 for cars, SUVs and light trucks during peak hours (Monday through Friday, 5 a.m. through 9 p.m.). The fee falls to $2.25 in off-peak hours. Specialty vehicles such as large trucks have separate pricing.

I have a modest level of experience with Manhattan traffic because I frequently travel to visit my daughter and her family in Hoboken, New Jersey. I typically fly into LaGuardia Airport and take an Uber to a hotel near their apartment. The trip takes me through Brooklyn, into Manhattan via the Midtown Tunnel, across Manhattan at roughly 34th Street, and into New Jersey via the Lincoln Tunnel. During the day, traffic is heavy virtually the entire trip, but prior to this year, the portion across Manhattan was excruciatingly slow. The distance from tunnel exit to tunnel entrance is less than two miles but it could often take nearly 30 minutes. On a trip in late March, the same segment took just over 15 minutes – the difference was amazing.

It is way too early to draw definite conclusions from the congestion pricing program, but early results from the first quarter of the year are extremely promising. Approximately 10 percent fewer vehicles are entering the congestion pricing zone each weekday, congestion levels are down, and average travel speeds are up. Ridership levels on mass transit systems leading into the city are also up as would be expected. What is unexpected is that restaurant reservations, Broadway ticket sales, and general retail sales are also up which means that with congestion down more people are willing to come into the city to do business. Anecdotally, delivery drivers are wasting less time, emergency vehicles arrive sooner, and complaints about “excessive honking” are down substantially. [1, 2 ] Finally, the system has raised $159 million in the first three months (to be spent on transit improvements), an amount that is within 1 percent of projections.

Parking. In midwestern cities, parking is typically provided at no direct cost to drivers. There are exceptions in areas where demand is high such as downtown business districts or event venues, but those exceptions are rare. The perception that parking is almost always going to be free and plentiful affects our transportation choices – with a clear bias toward driving – although most of us don’t think of parking explicitly when making a trip. We just assume that parking will be free and readily available at the end of our trip and if it is not we are surprised, annoyed or both.

The result is that city planners, developers and landowners have a difficult time determining the optimal amount of parking to provide. When a valuable commodity is offered on the open market, the price helps determine the quantity of that product that is needed. Giving the commodity away for free means that market signal is lost and the result is that both demand and supply are likely to be overstated.

I have written an entire article on the problems associated with over-supplying parking (Post 52) so I won’t go into great detail here. The bottom line is that the perception of free parking is a form of market distortion that warps our behavior and harms our cities.

The Collective Good Versus Individual Choice

When we buy a ticket to fly from one city to another, most of us understand that the price of that ticket helps cover the cost of the airplane, the aviation fuel, the pilots, and a variety of other direct costs, as well as leaving a little money left over for profit that is distributed to the airline shareholders. What most people don’t understand is that commercial air travel is subsidized by the government. In fact, virtually every form of transportation is subsidized by the government. Even people who walk to work are walking on sidewalks that someone else paid for.

That subsidy is not necessarily a bad thing. After all, being able to move people and goods from one place to another is essential to our economy and our way of life. However, many people have the perception that they are “paying their own way” when they make transportation choices when, in fact, they are not.

There are two issues related to our system of transportation subsidies that deserve more attention than they typically receive. First, the amount of subsidy varies wildly from one form of transportation to another and from one place to another. How do we know if we are subsiding in the right amounts? Unfortunately, transportation subsidies come from so many sources and in so many forms that it would be difficult for anyone to accurately calculate the subsidy per passenger mile or similar statistics – and certainly not the average user.

Second, the indirect costs and benefits associated with each form of transportation also vary wildly and are often difficult to quantify. Obviously there is a value in moving people and things from place to place and there are direct costs in terms of time and money. But the deeper you dig into the topic, the fuzzier and fuzzier the issues become. Mass transit, for example, has been shown to reduce both traffic congestion and air pollution. [3] How exactly do we place a value on those benefits? Building bike lanes is thought to provide health benefits, reduce bicycle fatalities, and reduce greenhouse gas emissions. Is anyone doing the math in a systematic way to balance the subsidies against the advantages? Not that I know of.

To make matters worse, transit, bike lanes and sidewalks all increase the mobility of people who can’t afford to drive a car or who can’t drive a car due to age or disability. There is a definite value to both our economy and our society that flows from enabling that segment of our community to be independently mobile. How much subsidy is that benefit worth? I have no clue and I doubt anyone else does either.

The Bottom Line

The end result is that all of us make transportation decisions every day without even a rudimentary understanding of the cost (both obvious and hidden) of the options at our disposal. Most of us, in fact, not only don’t know the answer, we don't even take time to think about the question. Would knowing the answer change our behavior? Maybe or maybe not. The majority would probably choose whatever option seems most convenient regardless of the true price, but there is clearly a significant minority who are sensitive to cost and would adjust their behavior if the system were less opaque.

In addition, there are leaders at every level of government that routinely make decisions on infrastructure improvements and financial support of various transportation systems without a true accounting of the efficiency or fairness of those decisions. They are practicing what former Yale professor Charles Lindblom called the “science of muddling through” – a decision making process based on making incremental changes to what has been done in the past rather than a comprehensive analysis. [4] This process acknowledges the complexity of many policy decisions and the limitation of human analytical abilities, but it rarely questions the efficacy of past patterns or whether changes to underlying conditions might warrant a radically new distribution of resources. Instead, we muddle through from year to year with only small changes at the margins, and even those small adjustments are driven more by the constituencies with the loudest voices rather than careful study.

Given the huge impact that transportation has on city building, this decision to muddle through means that our cities are largely stuck in the same form that they have had for the past hundred years or more. Think of the enormous changes that have occurred in technology, the economy, and society in general during that time span. If we were designing cities from scratch would we still copy patterns from a hundred years ago or would we balance transportation options differently? Muddling through may be politically expedient but I suspect that it is making the goal of strong, resilient cities harder to reach rather than easier.

Notes:

1. Christopher Bananos; “How Well Is Congestion Pricing Doing? Very.”; April 2025; New York/Curbed; https://www.curbed.com/article/100-dayscongestion-pricing-mta-results.html

2. “Clearer roads, faster trips: The data behind NYC’s congestion pricing success”; April 2025; TomTom Blog; https://www.tomtom.com/newsroom/explainers-and-insights/the-data-behind-nyc-s-congestion-pricing-success/

3. Robbie Webber; “Contrarian research: Transit relieves congestion, but park-and-rides do not”; April 2013; State Smart Transportation Initiative; https://ssti.us/2013/04/08/contrarian-research-transit-relieves-congestion-but-park-and-rides-do-not/#:~:text=Michael%20Anderson%2C%20an%20economist%20at,congestion%20would%20continue%20to%20drive.

4. Charles E. Lindblom; “The Science of ‘Muddling Through’ “; 19 Public Administration Review 79; 1959.

Post 55: The Climate Change Conundrum - Part 3

noreply@blogger.com (Doug Johnson) — Wed, 09 Apr 2025 19:00:00 +0000

Most climate change experts tend to describe the impact of unrestrained global warming in apocalyptic terms. However, there are scientists and politicians who believe that climate change will have largely beneficial effects on much of the planet. They point to fewer bitterly cold winter days, longer growing seasons, and more atmospheric carbon dioxide to boost plant growth. To be clear, this group is a distinct minority but what if they are correct? What if – at least in some places – a warming planet is an opportunity rather than a problem?

I am not going to take the time to discuss scenarios where agricultural output goes up by 25 percent or where living in Indianapolis is suddenly like (weather-wise) living in San Diego or Miami. In my opinion, those are fantasies that aren’t worth serious contemplation. But it is at least plausible that climate disasters in some areas could create beneficial ripple effects in other places as a result of climate migration. In particular, the northern tier of midwestern states, as well as several areas in the northeastern U.S. have been mentioned as possible “climate havens” to which people will flock when they get fed up with hurricanes, high-tide floods, wildfires, and unbearably hot weather. Just as the combination of COVID and remote work fueled a flow of young professionals to scenic rural areas and quaint small towns a few years back, perhaps rising sea levels will create a stream of migrants from Boston or Charleston to Madison, Wisconsin or Buffalo, New York in the relatively near future.

Buffalo, New York -- Photo 1
Source: Getty Images

Thus, the third climate change conundrum is whether city officials in potential climate haven cities should actively market themselves to residents in climate challenged cities. For example, tens of millions of people live in coastal areas that are likely to be affected by sea level rise in the next 25 years. And millions more live in close enough proximity to the coast to be threatened by hurricanes that move inland. If only 10 or 20 percent of those people moved to the midwest it would represent a significant population shift for cities that have either grown slowly or not at all.

In recent decades, Phoenix has grown rapidly from the in-migration of people largely from cold-weather states. In addition to the normal problems that come with rapid growth, Phoenix is now starting to feel the effects of global warming. In 2024, Phoenix experienced the warmest year on record. There were 113 consecutive days with temperatures over 100 degrees, breaking the previous record of 76 days. There were 70 days with high temperatures of 110 degrees or more, breaking the previous record of 55 days. There were 39 nights when the low temperature never dropped below 90 degrees, more than 5 times the typical average. [1] Similar records could be found across much of southern California, Arizona, New Mexico and most of Texas. What if those residents simply got fed up with the unrelenting heat (and soaring energy costs) and sought out the cool summers and the now milder winters (thanks to climate change) of the northern midwest?

The potential appeal of branding your city as a climate haven might be irresistible to some, but is it a smart move to make? Let’s dig a little deeper to see if this conundrum has an answer.

The Push/Pull of Migration

Meaningful migration (not simply a move within a metro area) usually has both a “push” component (a reason for leaving) and a “pull” component (a reason for moving to a particular place). In order to really understand the potential dynamics, it will be helpful to look at both elements in more detail. Although climate change is the generic reason that we will focus on, there are multiple types of “push” events that have differing results.

Catastrophic disaster. Each year, there are tens or hundreds of thousands of people displaced in the United States by tornadoes, hurricanes, floods, wildfires, and other types of natural disasters. If your home were heavily damaged or destroyed, it is certainly conceivable that you might want to relocate to a different region of the country. As it turns out, however, most households displaced by a catastrophic event don’t actually move very far and often rebuild in exactly the same spot. These households typically have jobs, family and friends in the area that are too powerful of an attraction to justify moving very far away.

Circling the drain. Some places, such as New York City, Miami or Los Angeles, contain so many people and represent so much economic value that billions of dollars are being spent (and will continue to be spent) to protect them from whatever climate related disaster is most threatening. But what about Myrtle Beach, South Carolina; Savannah, Georgia; Biloxi, Mississippi; Slidell, Louisiana; or Port Arthur, Texas; or dozens or similar communities that are much smaller and much less affluent? Some protective efforts will certainly be made, but in many cases it will be too expensive to really salvage those communities in their current form. This means that they will eventually come to accept the idea of “managed retreat” which means abandoning the most at-risk areas and moving to someplace safer. That place might be a “climate haven” city, but more likely it is a place less than 50 miles away. The wealthiest households are likely to move first, leaving the poorest to deal with the inevitable disaster. These cities are likely to enter a slow, downward spiral of disaster, half-hearted rebuild, followed eventually by another disaster.

The final straw. In my opinion, the most prolific source of climate migrants is likely to be people who have simply become fed up with the daily hassles or elevated cost-of-living caused by climate change. Residents of Florida, for example, may have lived through multiple hurricanes and may be struggling with the high cost (and limited coverage) of homeowner’s insurance. Residents of Arizona might be tired of the stifling heat, skin cancer risk, and water shortages that are increasingly commonplace. Others might be stressed out over the potential for wildfires and the possibility of their home going up in flames. This group has the highest potential to become climate migrants because moving a few miles isn’t likely to solve their problem. If they are truly fed up, they might be willing to move across the country to someplace that is completely different.

Thus, there are a variety of scenarios that might push households to become climate migrants. There is no reliable way to estimate how many people that might be, but I suspect it is currently just a trickle. Under the right circumstances, however, that trickle might someday become a steady stream or even a flood. Jesse Keenan, an associate professor of sustainable real estate at Tulane University, has estimated that as many as 50 million people could eventually relocate due to climate change over the coming decades. [2] For that to happen, things would need to get really bad because – aside from people in their 20s – most of us just don’t like moving and we especially don’t like moving great distances.

Where Is the Pull?

Cities that want to become climate havens need to be able to attract those households that are considering a move. After all, households fleeing east coast hurricanes, southern heat, or west coast wildfires have a lot of possible destinations. What are the minimum qualifications for a city wanting to be considered a safe haven from climate change?

First, climate havens are going to need to be well away from the ocean. Cities affected by sea level rise or potentially impacted by hurricanes need not apply. Unfortunately, being away from the coast doesn’t narrow things down much.

Second, climate havens are going to need to be cool enough that people will consider them to be reasonably resistant to the heatwaves and extended droughts that are being forecast for the deep south. The central plains might be acceptably cool in the near term, but most of the serious candidates are in the northern tier of states (e.g. Minnesota, Michigan, New York, Vermont, etc.) or at higher elevations in mountain states.

Third, climate havens are going to need to be moist enough to minimize wildfire potential, but not so rainy as to invite flooding or simply be too gloomy. Unfortunately, it is difficult to guarantee the right level of rainfall. Cities can point to past weather patterns, but with climate change that might not be indicative of the future.

Fourth, climate havens need to have a reliable and plentiful source of drinking water. Past societies may have treasured salt, gold, or oil, but the key resource for the next century might well be potable water. It is not only essential for human life, it is a key component for many forms of economic activity. There are a variety of water sources, but cities near the Great Lakes can point to one of the world’s largest supplies of fresh water as a crucial asset.

Finally, most climate migrants are not looking to become hermits hiding from civilization. That means that successful climate havens will need a reasonable quality of life component. In particular, a strong job market and affordable housing market would be major advantages. In addition, a robust transportation infrastructure and diversified recreational opportunities are important as well. Those characteristics are likely to rule out most small towns with populations below roughly 50,000 people, and even that threshold might be much too small for households coming from major metro areas.

Climate Haven Candidates

I do not have the time, expertise or inclination to do a ranking of potential climate friendly cities, but there are several places that have started to market themselves as such. Places like Buffalo, New York; Ann Arbor, Michigan; Duluth, Minnesota; Madison, Wisconsin; and Burlington, Vermont, have jumped on the climate haven bandwagon in recent years. [3] This trend may have all started in 2019 when Buffalo mayor Byron Brown suggested that Buffalo might become a “climate refuge city”, a place where people could move to escape climate-induced disasters.

Buffalo, New York -- Photo 2
Source: Getty Images

The movement picked up steam when research by Stephen Vermette, a geography professor at Buffalo State University, found no increase in extreme weather events in the Buffalo region. Of course, the weather in Buffalo is not perfect nor is it immune to the effects of climate change. Professor Vermette went on to say:

I’m not saying climate change is going to be good for Buffalo, or Buffalo is going to be an oasis. We’re not an oasis, we suck less. [3]

That sums up one of the key problems with proclaiming your city to be a climate haven: past weather patterns do not guarantee a future free from disasters. Asheville, North Carolina, was sometimes mentioned as a climate haven until Helene dumped 15 inches of rain and washed away much of the city.

Another issue is that what constitutes a climate haven in one person’s mind might be completely unacceptable to someone else. Duluth, Minnesota, picked up the nickname “Climate Proof Duluth” because of its cool weather and abundant water supply from adjacent Lake Superior. However, a tongue-in-cheek review by Michael Kosta of the Daily Show pointed out some of the flaws in Duluth’s strategy (Click Here to view).

The Bottom Line

In the end, marketing a city as a climate haven strikes me as civic boosterism run amok. Our ability to predict the long-term impacts of climate change is in its infancy, so claiming to be a haven is mostly speculation. A better strategy, in my opinion, is for cities to focus on being as strong and resilient a community as possible. Good schools, an affordable housing supply, a diversified economy, an efficiently run local government, and well-maintained infrastructure are going to be more attractive to potential residents and businesses than claims of being climate proof. Cities should focus on those things they can control rather than something as fickle as climate change.

Notes:

1. “2024 Climate Year in Review for Phoenix, Yuma and El Centro;” US Department of Commerce, National Weather Service; https://www.weather.gov/psr/yearinreview2024

2. Sheri McWhirter and Lindsay Moore; “Michigan Is a Climate Haven in a Warming World. Will Everyone Move Here?”; January 2023; Council of the Great Lakes Region; https://councilgreatlakesregion.org/michigan-is-a-climate-haven-in-a-warming-world-will-everyone-move-here/

3. Mike De Socio; “US cities are advertising themselves as ‘climate havens’. But can they actually protect residents from extreme weather?”; July 2024; BBC; https://www.bbc.com/future/article/20240628-us-climate-havens-cities-claim-extreme-weather-protection

Post 54: The Climate Change Conundrum - Part 2

noreply@blogger.com (Doug Johnson) — Thu, 20 Mar 2025 19:22:00 +0000

In my last post, I used the analogy of jungle quicksand to explain the potentially sticky situation that cities can find themselves in when the issue of climate change rears its ugly head. I recommended a middle-ground approach that emphasized actions that were both good for the environment and made good economic sense for the municipal budget as well. These actions are what I consider low hanging fruit – things that are relatively easy to do and are justifiable enough on multiple grounds that no one is likely to get fired or kicked out of office.

The problem with this approach is that it ignores longer-term issues that are potentially far more serious and far more expensive to address. Cities and counties have always assumed responsibility for protecting their citizens from a certain range of hazards and for proactively enhancing their quality of life by providing basic services that make urban living convenient and productive. Police Departments protect against criminals, Fire Departments respond when a structure catches fire, and utility departments (or private utility companies) provide water service, sanitary sewer service, electrical service and a variety of similar services that almost all of us have come to depend upon. Cities have also acted in response to occasional natural disasters (e.g. floods or tornadoes) with recovery services to help people get back on their feet when nature acts unpredictably. Both our society and our economy would be much worse off were it not for these cooperatively run services provided or organized through government action.

Increasingly, however, municipal officials and many citizens are worried that the landscape has fundamentally shifted to include life-safety issues that are, if not completely new, at least significantly different in scale, frequency and character. The recent wildfires in Los Angeles and the torrential rains and resulting flooding in Asheville, North Carolina, are two examples of the kinds of life-safety issues that I have in mind. I cannot categorically say that either event was caused by climate change or was even made worse by climate change. Wildfires and floods have been happening for a long time and there are always multiple contributing factors. But it is a reasonable assumption that climate change played some role and it is a connection that gets a lot of play in the popular press. More to the point, it may not matter whether climate change was involved or not. It is human nature to want an explanation for why bad things happen, and regardless of why these events happened, we as a society seem to believe that local government should help protect us.

Hence, part two of the conundrum: What should cities (and counties) do, if anything, before disaster strikes again? The flooding in the Asheville area, for example, was the result of Hurricane Helene moving inland with huge amounts of moisture that eventually fell in western North Carolina. Climate scientists have been warning that warmer oceans were likely to super-charge hurricanes, and various weather stations in the Asheville area reported unprecedented amounts of rain during the three day storm (14 to 23 inches). Should local officials have anticipated that this might happen and have taken steps to minimize damage or speed recovery efforts? Such steps, particularly if they were viewed as “extreme” compared with prior flood protection actions, would probably have been met with derision and concerns about wasted taxpayer dollars for such an unlikely event. Yet in hindsight, additional preventative actions might have saved lives and millions of dollars in property damage.

Unfortunately, hindsight tends to warp our perspective on what is reasonable. Actions that appear logical in hindsight might well have appeared wasteful or borderline crazy before the natural disaster occurred. Climate change, however, may have altered the nature of the game. If, in fact, citizens perceive that climate change is making disasters more frequent as climate scientists are predicting, then the range of preventative actions that city officials should consider will need to expand to include things that might have been rejected as government overreach just 20 or 30 years ago. No mayor or city manager wants to be at the front of a post-disaster press conference being asked “Why didn’t you do more to prevent this destruction?” This is an especially hard question to answer when climate activists have been ringing the alarm bells for years.

This post is not about preventing global warming or debating the merits of climate science. All of that is irrelevant because the earth has already warmed to 1.5 degrees C above the pre-industrial baseline and reaching 2 degrees C in the near future seems almost inevitable. This post will be about adapting to a warming planet regardless of why that warming is taking place. The narrative – already firmly entrenched in the public mind – can be summarized as follows:

The data shows the earth is warming to worrisome levels;
Climate scientists warn that global warming can make bad things happen; and
Bad things are happening.

It makes no difference whether climate change caused a particular disaster to happen or not, because government officials are going to be held accountable if there is a perception that they did not take “reasonable” steps to prevent or respond to the disaster. Unfortunately, they will also be held accountable if they take expensive actions to mitigate a disaster that never occurs. Navigating this minefield will be tricky.

The Basics of Climate Adaptation

Cities obviously change over time, but they don’t change their form quickly or easily. Much of the physical form of a city is literally poured in concrete and is designed to last for decades. Yes, anything that is built can be torn down, redesigned and rebuilt, but that is expensive and disruptive. If climate change is really tilting the playing field in a way that is so fundamental that it will affect city form, then cities need to start planning for how best to adapt to that new playing field as soon as possible. The cruel reality is that cities need to start the adaptation process before they know exactly the nature and extent of the changes that will be taking place.

Consequently, I am going to focus on the basics – the two climate impacts that seem most likely to happen and the three secondary effects that are potentially the most serious. Given my geographic emphasis on the midwest, I am going to ignore sea level rise and warming oceans even though those issues are crucial for coastal areas. I’m also going to ignore (at least for now) one of the most obvious ripple effects from global warming which is the negative health impacts from extreme heat days. Extreme heat is a clear problem, but I think the actions in response to that problem are likely to be easier to implement quickly than the topics I want to address in this post.

The first predicted climate impact is that droughts will be more frequent and longer in duration than what we are used to experiencing. A warmer atmosphere increases evaporation from both the soil and plants which then leads to drought conditions that can affect water supplies, agricultural production, and wildfire potential. Much of the midwest is already considered “abnormally dry” or in a “moderate drought” and continued climate change is likely to make that worse.

The second predicted impact is that rain storms will get more torrential in nature – in other words, heavier rains in shorter periods of time. These torrential storms may not be very frequent, but when they happen they will cause significant flooding to structures that are out of the traditional floodplain and damage to infrastructure that was thought to be safe from flood waters.

At first glance, it might seem that these two climate impacts would cancel each other out – several months of drought followed by a heavy rain that restores the normal balance. In practice, however, it rarely works out so neatly. A drought, for example, might last for years and create a moisture deficit that a single storm cannot overcome. In addition, a drought tends to bake the soil which makes it less able to absorb moisture when it eventually rains. The water from a heavy storm simply runs off and increases potential flooding rather than soaking into the ground where it is really needed. Even under non-drought circumstances, a really heavy rain saturates the top inch or two of soil very quickly and then the volume of water tends to overwhelm the soil’s absorptive capabilities and everything that follows becomes runoff anyway. A series of smaller storms or a long, drawn out storm where rain falls at a slower rate is much better for recharging ground water levels.

On the surface, neither of these projected climate impacts seem all that terrible. The midwest (and most of the world) has experienced droughts and heavy rains before and survived just fine. But what if climate change turns what used to be rare events into commonplace ones? That possibility might trigger changes to the way we build and operate cities, and it is that scenario that I will examine for the rest of this post.

Beware the WUI

Everyone likes a house with a view of nature. Perhaps a home in a low-density neighborhood in the green foothills overlooking the urban core. Or maybe a home in a wooded subdivision where deer enter your yard to nibble at your flowers. Close enough to the city to take advantage of all it has to offer, but far enough away that you feel like you live in the country. Welcome to the Wildland Urban Interface (WUI). This is the fringe area surrounding many cities where urban development is intermixed with a substantial amount of nature.

Not every city has a WUI, but most do and in some cases they are quite large in area. In fact, roughly 44 million homes are in the WUI nationwide (roughly a third of all housing units), up from 30 million units in 1990. During that same period of time, the estimated area of the WUI increased by nearly 70,000 square miles – an area roughly the size of the State of Washington. [1]

Why is this trend important? Because an expanding WUI combined with increasing drought levels has substantially reshaped urban fire risks. Traditionally, fire departments were primarily concerned with how fast they could respond to a house fire or how effectively they could fight a fire in a high-rise building. Now, fighting wildfires in suburban fringe locations is rapidly growing in importance. The recent Los Angeles wildfires are a particularly horrific case in point, but each year there are dozens of smaller WUI fires that are largely limited in scope but which have the potential to be much worse if conditions change.

Source: National Interagency Fire Center

Wildfires in general are much more common than most people realize. On any given day, there are typically hundreds of wildfires scattered across the country. Thankfully, the vast majority are relatively small, easily contained, and do little damage to occupied structures. The threat is growing, however, as evidenced by the accompanying chart. While the number of wildfires has not grown substantially, the number of acres burned by wildfires has roughly tripled in the past 40 years. South Carolina recently reported 175 fires burning across the state, forcing multiple evacuation orders and straining fire response resources. The largest was in Carolina Forest, a community west of Myrtle Beach. At one point, the fire grew to more than 1,600 acres and forced residents of half a dozen neighborhoods to evacuate. [2]

There is a perception that wildfires are just a California problem, but as the South Carolina example illustrates, that is not the case. Dozens of states have areas where the risk of wildfires is high and if drought conditions continue to spread that list will grow. The problem from a local government standpoint is that fighting a WUI wildfire is extremely difficult and many communities are unprepared. Unlike wildfires in remote locations, it is politically impossible in urbanized areas to define a defensible boundary and let the fire burn out within that area. In the WUI, firefighters feel obligated to try to save each residence even when high winds and rapidly spreading fires make that a dangerous and often futile approach. The difficulty of fighting a WUI wildfire is exacerbated by the need to notify and evacuate potentially hundreds or thousands of residents. WUI areas are often full of long, dead-end streets or neighborhoods with just a couple of exits and the logistics of getting people to safety can be daunting.

Residents of WUI neighborhoods often have a false sense of security because they have municipal water systems with regularly spaced fire hydrants. As the LA wildfires pointed out, however, municipal water lines are not designed to fight wildfires across hundreds of acres. Just a month prior to the LA fires, the Wall Street Journal published an article touting private fire hydrants as the latest trendy accessory for homes in fire prone areas. [3] Most of the examples cited had private water tanks for supplying the hydrants or were able to pump out of swimming pools. The fact of the matter is, however, that a WUI wildfire fueled by high winds is likely to spread so fast and be so intense that neither public or private hydrants are likely to make much difference. Just four years ago, the Marshall fire east of Boulder, Colorado, destroyed over 1,000 homes in just a few hours despite the fire hydrants located throughout the community.

At a minimum, cities with WUI neighborhoods need to have a specific strategy for wildfire detection, resident evacuation, and firefighter response. This is true even in cities that have not historically had wildfire problems. When it comes to wildfires, an ounce of prevention is worth several pounds of cure. Specialized equipment and supplementary water sources are desirable if budgets allow. In particular, new types of remote sensors backed by artificial intelligence can dramatically improve the odds of early detection which can trigger a response before fires get out of control.

The ultimate strategy would be to enact limits on WUI development or to require special construction and site design elements to reduce fire damage. In a sense, property owners in the WUI are creating their own problem by building in an area with elevated fire risk and by creating so much value in natural areas that firefighting strategies are forced to change. Controlled burns that preemptively reduce wildfire risk are nearly impossible where million dollar homes are scattered throughout the area. Requiring property owners to spend money or prohibiting development in scenic areas, however, is a politically difficult concept to sell.

Rain Rain Go Away

The seemingly opposite problems caused by too much rain are equally challenging to address. Most urban residents are familiar with the flooding of property near rivers and creeks when a heavy rain forces those bodies of water outside their normal channels. The problem is that climate change could force cities to deal with flooding on an entirely different scale and in locations that were previously thought to be safe from flooding. Where wildfires create largely operational problems for cities, flooding creates largely physical problems.

To appreciate the nature of the challenge, it is helpful to understand how civil engineers have historically dealt with stormwater runoff. In a normal rain, the water that isn’t absorbed into the soil runs to the gutters along most streets, is collected by stormwater inlets which route the water into underground storm sewer pipes, which eventually empty into larger drainage channels or streams. This all works pretty reliably in most situations, but it is an expensive system to build for cities and developers. Consequently, the underground stormwater system is typically designed to handle storms that are relatively common – for example, a storm that might happen every five to ten years on average.

Should a larger storm occur, the underground system gets overloaded and the surplus water flows downhill toward the nearest creek over the surface of the ground. This “overland flow” takes place mainly in streets and in swales (shallow channels) in between buildings. This secondary system generally works well, although nuisance-level flooding (e.g. wet basements) can be common. In addition, the larger drainage channels, creeks and rivers can get overloaded to the point where they overflow their banks into what is known as the floodplain. Most cities try to keep floodplain areas free from substantial structures so that occasional flooding does not do much damage. Natural areas, ballfields, pedestrian trails, and parks are commonly located in floodplains for this very reason.

What happens if a really big storm takes place? Then the whole system gets overwhelmed and serious flood damage is widespread. Even structures near the top of the hill can get flooded because the stormwater can’t find a way to the creeks and rivers fast enough. City officials count on really big storms being rare enough that they can be absolved of responsibility because “no one could have predicted” such a terrible event. Such events can, of course, be predicted but if they are rare enough then politicians are typically given a pass. A once-in-a-lifetime event is not something that gets a mayor or council person voted out of office. Climate change, however, might be escalating that once-in-a-lifetime event into something that happens every 20 or 30 years. Ignoring catastrophic events that used to be rare but now are common can get you voted out of office, which means there are a lot of politicians praying that climate change isn’t real because taking effective action is too expensive to contemplate.

The core problem that underlies all of this engineering design work is a table of rainfall probabilities called the Precipitation-Frequency Atlas of the United States. The current version is known as Atlas 14. This atlas contains estimates for hundreds of locations across the country of how much rain will fall in a storm with a particular frequency – a 20 percent chance of happening each year (a 5-year storm), a five percent chance of happening (a 20-year storm), a 2 percent chance (a 50-year storm), a 1 percent chance (a 100-year storm), and so on and so on. This data is used by engineers to calculate how big a storm sewer pipe needs to be to accommodate a 10-year storm, or how much clearance a bridge needs to allow a 50-year storm to pass without damage, or where the boundary line of the 100-year floodplain should be. In short, this atlas of rainfall probabilities is foundational to the engineering design decisions behind most of what is built in urban environments. And, unfortunately, it is fatally flawed. [4]

The rainfall estimates in Atlas 14 are based upon actual rainfall records going back at least decades, and in some places, hundreds of years. The problem is that each data point is equally weighted in the probability calculations as if rainfall patterns were unchanging. Unfortunately, rainfall patterns are changing and this reality will be incorporated in the next Atlas version, but that is not scheduled to be released until 2027. Earlier in this post I noted that Asheville, North Carolina, received over 14 inches of rain during their three-day storm. The Atlas 14 precipitation estimate for a three-day event in Asheville is 6.56 inches for a 100-year storm and 7.89 inches for a 500-year storm. What actually occurred as a result of Hurricane Helene was literally off the charts. The bottom line is that cities are facing a double whammy when it comes to stormwater. First, heavy rain events are forecast to be significantly more likely than in the past, and second, much of the public infrastructure that cities rely upon is under-designed to a significant degree.

There is no way that cities can afford to redesign and replace existing storm sewer systems to accommodate larger storms. Cities can, however, identify areas where higher flood risks due to climate change are likely to be most problematic. In fact, private companies such as the First Street Foundation are already providing such risk assessments. My opinion is that local government should take the lead in providing that information because they have the most knowledge of local circumstances and development trends. Regardless of who provides the data, property owners need to know that past flooding trends are no longer representative of future events so that they can take steps to prevent flood damage.

Many cities already have an inventory of known stormwater problems and their response has typically been to require new, upstream development to install what is known as on-site stormwater detention basins. These are holding areas designed to temporarily keep stormwater on site during a heavy rain so that downstream pipes and creeks are not overwhelmed. This approach works but in my opinion it is a long-term maintenance nightmare. Private property owners do not have much incentive to spend maintenance dollars on a system that doesn’t benefit them directly. Cities can mandate maintenance and do periodic inspections, but those programs are often underfunded and only half-heartedly enforced.

Instead of dozens of small, privately owned detention facilities, cities would be better off with larger facilities owned and maintained by the local government. Cities will need to be opportunistic and aggressive in finding places to install large-scale detention but I think it will be the best long-term approach. Many parks and public facilities with open land are already used for this purpose or for other stormwater mitigation actions, but most cities will need to do more than they have done in the past. For example, cities need to get serious about buying properties that flood repeatedly and turning those properties into detention basins. FEMA can supply grants to assist with this process through their Hazard Mitigation program (assuming that funding is not cut by the new administration). This is not, however, a quick-fix solution. It is a long-term grind that will pay benefits eventually but which will be messy and controversial in the near term.

The Things We Take For Granted

The direct damage caused by wildfires, floods or other natural disasters is bad enough, but there are secondary impacts that don’t get as much play in the press despite the problems they cause. These impacts include long-term environmental damage and the destruction of infrastructure systems that are essential for urban life. The Los Angeles wildfires, for example, left behind ash and debris loaded with toxic chemicals such as lead, asbestos, PFAS, pesticides, battery acids and more. Although clean-up efforts are well underway, no one really knows how effective those efforts will be and what long-term effects might linger in the area. It is possible that normal activities like outdoor exercise, or planting a garden, or playing in the park will become sources of health risk that we typically don’t associate with climate change.

In addition, natural disasters often damage or destroy water systems, sewage treatment systems, electrical grids, bridges, roadways, transit systems and other critical infrastructure components we depend on for normal day-to-day life. In previous posts, I have written about the fragility of many infrastructure systems due largely to poor maintenance procedures, but that fragility is particularly apparent during a disaster. It can take weeks, months or even years to restore service to previous levels and there is not a single city that is immune to this type of disruption. The fact of the matter is that we design infrastructure systems to handle normal loads during a normal range of events and normal weather fluctuations. Building systems that are hardened against torrential rains, tornadoes, hurricanes, wildfires or other climate disasters is simply more costly than we can afford.

Consequently, the focus tends to shift to resiliency – or the ability to bounce back after a disaster has occurred. Here there are substantial differences between cities and utility providers because some are prepared for things to go wrong while others are not. In this post, I am going to focus on water systems as an example of what can go wrong in response to climate change, but every infrastructure category has a similar set of risks. I have chosen water systems because I think they are particularly vulnerable to climate related disasters and because living in a city without water service for more than a brief time has major health and economic consequences. In a nutshell, here is what can go wrong:

Water quantity issues. The source of water for the vast majority of public systems is either a local reservoir, nearby rivers, or wells that tap into underground aquifers. All of these sources are subject to serious curtailment during an extended drought. The possibility of a city running out of water is known as a “Day Zero” event and the odds of it happening are higher than most people realize. Cape Town and Mexico City are particularly at risk and only extreme conservation requirements have kept them from a Day Zero disaster. [5] No U.S. cities are in imminent danger of running out of water, but in the future it is not an inconceivable outcome. The Colorado River basin, for example, provides water to 40 million people in cities like Los Angeles and Phoenix and continued drought endangers that supply. Many cities in the western Great Plains draw their water from the Ogallala Aquifer which is being drained much faster than it can be recharged. Irreversible shortages are still decades away but the warning signs are clear.

Cities need to diversify and protect their water supply sources, or at least have contingency plans in place to do so. There are engineering solutions available in most locations – new reservoirs, pipelines from other watersheds, or water desalination plants – but they are expensive to build and take years to bring online. Access to plentiful, clean water may eventually be more valuable than gold mines or oil fields.

Water quality issues. While running out of water is certainly scary, water source contamination is a much larger potential problem. Natural disasters exacerbated by climate change have the potential to destroy access to potable water by introducing pollutants that are not easily filtered out using typical water purification techniques. Wildfires, for example, can leave behind ash and other particulates that can flow into downstream rivers and reservoirs in large enough quantities to create major alkalinity and turbidity problems for water treatment plants. The Hermits Peak-Calf Canyon fire in New Mexico, for example, caused the Gallinas River to run black for a period of time and dumped so much toxic debris into the reservoirs for the city of Las Vegas, New Mexico, that the city’s water treatment plant failed. [6]

The City of Miami is seemingly surrounded by water but fears are mounting that contamination of the Biscayne Aquifer could render much of that water unusable. Saltwater intrusion caused by sea level rise and high rates of water extraction, combined with pollution from septic tanks and industrial properties, could significantly curtail the amount of fresh water available to the 6 million residents in the Miami metro area.

Infrastructure damage. The torrential rains in Asheville, North Carolina, not only deposited tons of silt into the city’s reservoirs, but also damaged all three water treatment plants and destroyed several supply lines from the treatment plants into the city’s distribution system. It took roughly three weeks for non-potable water to be available throughout most of the city [6] and 53 days before potable water service was restored. After a disaster, the headlines tend to focus on the number of residences or major commercial structures destroyed, but infrastructure damage hurts even the structures that were spared direct damage.

As noted earlier, it would be incredibly expensive to build urban infrastructure that was impervious to natural disasters. However, it is possible to identify the crucial pieces that are essential to recovery and make those as hardened against disaster as possible. Resiliency is mostly about planning and preparing for the unexpected.

The Bottom Line

There is no easy answer to the climate change conundrum. How much money should cities spend to prepare for a deluge, firestorm or drought that might never come? This is a particularly vexing question given the current political environment in which even innocuous mentions of climate change are being scrubbed from federal websites. It is almost as if climate change has become the political equivalent of Lord Voldemort – an evil too terrifying to even say out loud.

In an effort to gain some objectivity, I have been paying close attention to the current chaos in the property insurance industry. If anyone should know about risk it should be insurance companies and their recent actions seem ominous indeed. Companies are dropping long-time clients in risky areas even if they have never filed a claim. State funded insurers-of-last-resort have more clients than they ever thought they would and arguably more than is financially prudent. Insurance companies are raising rates as fast as state regulators will allow and yet financial returns for property and casualty lines (particularly homeowners insurance) are generally below expected norms. Insurance companies aren’t debating climate science, they appear to be girding for Armageddon.

My focus is not so much on the current state of the world as it is on the trend line. In my opinion, things are trending in the wrong direction. If I had to err on one side or the other, I would err on the side of doing too much to prepare for a new normal rather than doing too little in hopes that the old normal returns. I have, of course, been known to be wrong, but that is where I currently stand and if anyone is listening that is the advice I would give.

Notes:

1. “Where Humans and Forests Meet: The Rapidly Growing Wildland-Urban Interface”; U.S. Forest Service (Department of Agriculture); April 2024; https://research.fs.usda.gov/nrs/products/rooted-research/where-humans-and-forests-meet-rapidly-growing-wildland-urban-interface#:~:text=Between%201990%20and%202020%2C%20the,30%20million%20to%2044%20million.

2. Christopher Cann and Thao Nguyen; “Wildfires rage across the Carolinas; South Carolina governor issues State of Emergency”; March 2025; USAToday; https://www.usatoday.com/story/news/nation/2025/03/02/wildfires-south-carolina-myrtle-beach-north-carolina/81062101007/

3. Nancy Keates; “Hot Home Feature: A Fire Hydrant”; December 6, 2024; The Wall Street Journal

4. Thomas Frank; “We’re Building Things Based on a Climate We No Longer Live In”; June 2023; Scientific American; https://www.scientificamerican.com/article/were-building-things-based-on-a-climate-we-no-longer-live-in/

5. “2 Billion People Are at Risk of a ‘Day Zero’ Crisis – Here’s How We Can Avoid It”; March 2024; XPrize; https://www.xprize.org/prizes/water/articles/water-scarcity-day-zero-crisis

Patrick Lohmann; “Las Vegas to get $98 million to replace water treatment facilities after 2022 wildfire damage”; August 2024; SourceNM; https://sourcenm.com/briefs/las-vegas-n-m-to-get-98-million-to-replace-water-treatment-facilities-after-2022-wildfire-damage/#:~:text=by%20Patrick%20Lohmann%2C%20Source%20New,that%20polluted%20the%20city's%20reservoirs.

6. Sarah Honosky; “Non-potable water returns to nearly 95% of Asheville’s system”; October, 2024; Asheville Citizen Times; https://www.citizen-times.com/story/news/local/2024/10/21/non-potable-water-service-returns-to-nearly-95-of-ashevilles-system/75722093007/

Post 53: The Climate Change Conundrum - Part 1

noreply@blogger.com (Doug Johnson) — Fri, 14 Feb 2025 17:45:00 +0000

I have an irrational fear of accidentally wandering into a pit of quicksand. You know, a place where you get unexpectedly stuck and the more you struggle to free yourself the deeper you get sucked in until you die a horrible death – unless you are lucky enough to grab a jungle vine and pull yourself to safety. The rational side of my mind tells me that: 1) I’m unlikely to come within miles of an actual quicksand location, let alone wander in accidentally; and 2) that quicksand sucking you in until you die is a ridiculous trope used only in B-grade jungle movies.

I’m telling you this because I’m writing this post (and probably one or two more) on the topic of climate change which, in my opinion, is the public policy equivalent of jungle movie quicksand. I have avoided this topic over my past 52 posts partly because of my irrational fear, but mainly because most cities have successfully been able to tip-toe around the topic. I think that is going to be increasingly difficult in the future, so I’m going to jump into the topic with both feet and hope there is a handy vine that I can use to extract myself.

Roughly two-thirds of Americans believe climate change is real and see it as a threat that needs to be addressed. However, only 37 percent believe it should be a top priority for the government. Overall, climate change ranks 17th out of 21 national issues in terms of importance. [1] Hence the conundrum for local government: what exactly should be done? Should local governments move aggressively toward a net-zero carbon footprint, take only token actions, or something in between? I’m going to focus on the middle ground which is where I think most communities will end up, but I will touch on some paradigm-shifting issues before I am done.

The Quicksand Nature of Climate Change

Most of you probably still think I’m being irrational by trying to avoid the climate change discussion. But this is a topic where the degree to which local governments can “move the needle” is unclear, the cost of effective action is unknown, and the odds that you will irritate more people than you please is high. Precisely the set of characteristics that politicians try to avoid. Here are the reasons this is so:

Fanatics on both sides. Climate change is a discussion that tends to be dominated by the extremes. There are those who see the issue in apocalyptic terms and who demand extreme action that is often politically and financially unworkable. The Just Stop Oil movement, for example, wants to end the extraction and burning of fossil fuel by 2030. [2] No mention is made of how the world economy is going to continue to function. This may be the lunatic fringe, but there are people in most communities who are sympathetic to that point of view.

On the other side are climate science deniers who think in terms of world conspiracy. They see climate change as an attempt to use “fictional” science to enslave society, end capitalism and take away their gas-powered SUV. This typically takes the form of rejecting any data that indicates the climate is warming, or claiming that any warming trend is just part of a natural cycle rather than something influenced by human actions. The mountain of scientific data to the contrary is just proof that experts can’t be trusted because they will manufacture data to support whatever story will give them the power to control our lives.

Although climate science deniers make up less than a third of the population, they have gained political power because of the recent election of President Trump who downplays climate change at every opportunity. I suspect that deep down he believes that climate change is a real issue, but he has found it to be politically expedient to take the opposite point of view. The foundation of the MAGA movement, after all, is the rejection of societal change that is being forced down the throats of the common man by the leftist elites. Climate change fits neatly into that scenario.

Climate science is both settled and unsettled. People have been tracking the weather for a long time. There are global records of temperature, for example, going back over a hundred and fifty years. There are decades of data on ocean currents, atmospheric jet streams, greenhouse gas concentrations, and numerous other climate indicators. High-tech satellites now measure ocean levels, glacier extents, and surface reflectivity to the nth degree on essentially a continuous basis. Thus, the level of certainty regarding climate trends over the relatively recent past is quite high.

Unfortunately, climate change questions can span not just decades or centuries, but thousands and thousands of years. To go back in time, scientists use “proxy records” such as ice cores, tree rings, coral reefs, ocean sediments, and fossil records. These data provide strong clues to past climatic conditions but are obviously less precise and less thorough in their geographic extent than the direct measurements of today.

In addition, the most contentious climate questions often involve the future which can only be answered through climate modeling. The factors which influence climate are numerous and the way factors interact is complex. No model can guarantee that all of the factors and interactions are correctly interpreted. Backward testing on historic data is obviously helpful, but that doesn’t necessarily account for future events which might alter weather trends, feedback loops that might accelerate change, or tipping points which might change the behavior of a particular factor when it passes a key threshold. Advances in computing power and artificial intelligence allow climate models to be continuously refined, but ultimately there is no way to precisely measure the accuracy of a climate projection decades into the future.

Confusion between weather and climate. Weather is the near-term atmospheric condition at a localized geographic scale, while climate refers to average weather patterns over a long period of time (typically decades or more) and over a large geographic area. These are two related and yet very distinct things that are frequently confused – often leading to observations that a local heatwave is proof of climate change or that a cold snap proves that global warming is a hoax. Weather conditions are the result of a variety of factors interacting in complex ways. Long term climate trends are one of those factors, but not necessarily the predominant one.

Blaming climate change for every natural disaster. Hurricanes, torrential rains and wildfires existed long before global warming became a concern and yet virtually every such event is seemingly linked by the media to global warming as a primary cause. It might be plausible to say that global warming increases the likelihood of such events or increases the severity of such events, but blaming climate change for each natural disaster is so far-fetched that it actually undermines climate science and legitimate concerns about weather volatility. Exaggeration leads to greater polarization of opinions, not consensus on how to move forward.

Linking climate change to other political positions. Perhaps because climate activists have called for massive federal spending programs and invasive government mandates, climate change has been equated with other liberal causes that also call for federal spending and regulations. In recent elections, conservatives have felt compelled to downplay climate concerns and liberals have taken the opposite point of view. This makes a rational discussion on climate change almost impossible because it is immediately laden with baggage from immigration, health care, foreign aid and a dozen other issues.

No wonder local politicians tend to tip-toe around climate change as if it were an unexploded bomb, and yet the issue has clear public safety ramifications for many cities and many citizens see climate change as a stewardship issue for future generations. My goal with this post is to lay out an approach to climate change action at the local level that is as pragmatic and non-confrontational as possible.

In this post I will focus on incremental steps that can reduce the carbon footprint of local government operations, but it is impossible to have a discussion of climate change action without the flooding in Asheville, North Carolina, the wildfires in Los Angeles, or some other natural disaster being raised as a major concern. Although I cautioned against blaming climate change for a specific event, it is highly likely that climate change is making extreme weather more common and more severe, and that climate change is setting the stage for related disasters such as wildfires or water shortages. I will tackle those issues in the second part of this series. For this initial post, I will focus on broader strategic issues that might shape a municipality’s approach to a climate change program.

Read the Room

Before any strategic plan is put into place, cities need to know how to align that plan with the general perception of the issue in their community. Opinions, of course, are likely to be all over the place but cities need to have a general sense of how important this issue is to the local citizenry. Absent that general understanding, any initiative is likely to be hijacked by climate activists or scuttled by climate skeptics.

Most cities with a population over 100,000 should have a regular program of community surveys that could be used to gauge how high a priority climate action should be. These surveys are typically used to measure citizen satisfaction with government services and they are designed to be a statistically valid representation of the population. The question list should include a ranking of the importance of climate action compared with other city programs. Ideally, climate priority questions should be included in several consecutive surveys so that trends, if any, can be determined. If done properly, the answers from community surveys can provide guidance for a reasonable plan of action and political cover if the issue becomes a hot potato.

Don’t Get Bogged Down in the Data

Local governments are not staffed with climate science experts (and shouldn’t be). As a result, it is probably best to keep things simple. In fact, it might be best to avoid the term “climate change” entirely and use something more generalized like “environmental sustainability.” That may sound cowardly, but discretion is the better part of valor when it comes to politically sensitive topics. If the topic is unavoidable, stick to the basics that are likely to be generally accepted:

1. 2024 was the hottest year globally on record (over the past 150 years) and the top 10 hottest years on record have all occurred within the past 10 years. [3]

2. A warming planet can have negative consequences for the health, safety and welfare of our citizens.

3. It is simply prudent for the community to think about how best to adapt to a warming world and to take reasonable steps to reduce the likelihood that we are making the problem substantially worse.

Getting into the nitty-gritty of climate change won’t make anything in your plan more effective or make the governing body’s decisions any easier.

Source: NOAA Climate.gov

For people who insist on details, refer them to one of the dozens of climate websites run by respected scientific institutions. The fact of the matter is that no municipal climate action plan is going to save the world from climate change. Arguing about the precise impact that fossil fuels have on greenhouse gas levels, or the merits of this climate projection versus that climate projection are simply distractions that won’t help the community reach a consensus.

Focus on Low-Hanging Fruit

This probably sounds so obvious as to be worthless, but do the simple things first. These types of actions are going to fall into two general categories: things that reduce the amount of energy the organization consumes, and things that exchange fossil fuel energy sources for sources that (at least in theory) have minimal or no impact on greenhouse gases. A simple example would be switching to LED streetlights. Modern LED fixtures use less than half the electricity of high-pressure sodium fixtures and have a longer life span to boot. It costs money to make the switch, of course, but the typical payback period is two to three years.

A more aggressive community might want to put solar panels on the roof on community buildings and replace backup power generators with battery storage. Many municipal buildings have large, flat roofs that are ideal for solar panel installation and the typical payback period is five to ten years. For buildings that need backup power capability or where existing generators need to be replaced, a battery storage system can provide emergency power during outages as well as increase the savings from rooftop solar panels.

Focusing on the payback period is helpful because it speaks to economic stewardship as well as environmental stewardship. Who is going to object to actions that save money and help the environment? It is a little misleading, however, because local governments do not make a profit in the way that private businesses do. The key economic measure for cities is balancing annual revenues and expenditures. If cities have to borrow money to implement climate actions then the whole economic rationale gets shakier. Ideally, climate actions should stay consistent with the resource limits and the broader needs of the organization. For example, adding solar panels to the roof might be best accomplished when the roof needs to be replaced anyway, and should be paired, if possible, with incentives from the local electric utility or federal grant programs.

Beware of the Limits of Change

As I have pointed out in several previous posts, one of the biggest challenges that our society faces is the ability to adapt to the constantly escalating pace of change. While most people accept some change as being inevitable, having change pushed on you when you don’t agree with or understand the underlying rationale is particularly difficult to accept. That is the situation that most cities face with the most aggressive climate change actions.

The limits of climate change has two dimensions. The first is the limitation on implementing change within your particular local government organization. You don’t want to implement change faster than your organization can handle it because it will be cost inefficient, less effective than intended, and will harm employee morale. Programs that look great on paper but which are too ambitious for effective implementation are bound to either fail or at least underperform. Start with a pilot project to (1) prove that the change will not undercut the city’s mission, (2) identify any support programs needed for long term maintenance, and (3) allow city staff to get some hands-on experience without mandating that they change the way they do their work. If the pilot project is successful, then full rollout will be easier. If problems appear, then you can either make adjustments or cancel the program with minimal cost.

The second dimension is the capacity for change within the broader community. Hopefully, the survey questions from the Read the Room section will help gauge that capacity. The general rule to keep in mind, however, is that the more that a city initiative requires behavioral change the less popular it will be. People might question the wisdom of spending tax dollars on rooftop solar panels, but they are unlikely to get too irate because it won’t impact their daily lives. But ban propane grills on backyard patios and tempers are likely to flare. New York City is currently implementing a ban on natural gas furnaces, water heaters, and appliances in new buildings less than 7 stories in height. There are reasons behind this program and New York is a pretty liberal place that generally supports climate change action, but this is likely to be viewed as overly invasive by a significant number of people.

Don’t Over-Promise or Over-Reach

Climate activists who see the issue in apocalyptic terms are likely to push for municipal programs that are heroic in scale or technical ambition. In justifying these programs, proponents will often underestimate the costs, or estimate benefits that would only happen in a perfect world. Examples might be an extensive carbon sequestration program or a requirement that all new public buildings receive Platinum LEED certification. While they might provide a short-term public relations opportunity, the potential for cost overruns and long-term maintenance headaches is enormous.

Most cities, in my opinion, should just say “no” or at least should dramatically simplify the proposal and value-engineer whatever remains to be as cost effective as possible. An extensive tree planting program, for example, is a low-tech way to remove carbon from the atmosphere that is relatively low cost and readily integrated into the city budget. Most cities already have the staff expertise to implement such a program and to provide the minimal maintenance required to keep the trees healthy. It won’t be as sexy as a technology based solution that extracts carbon from the air and injects it into underground aquifers or geologic formations, but it is also less likely to fail.

Similarly, it is fairly easy to build buildings that are energy efficient, have low water usage requirements, and have low life-cycle maintenance costs. Doing so makes a great deal of economic sense, but the LEED certification process is expensive and time-consuming, and provides little long-term benefit beyond the PR value. Proponents will argue that certification demonstrates environmental leadership, but that is a tough sell when many worthwhile projects are competing for limited tax dollars.

The Bottom Line

Climate activists may call me a coward for my conservative approach on this issue, but given the current political environment I think it is the prudent course of action. Racking up some simple wins that have both climate and economic benefits isn’t likely to get a staff member fired or a council member voted out of office.

The trickier issue is dealing with the life safety and property security concerns that can accompany climate change scenarios. Torrential flooding, wildfires and infrastructure failure are all reasonably foreseeable outcomes from a warming planet. Tune in next month as I wade even deeper into the quicksand.

Notes:

1. Alec Tyson, Cary Funk and Brian Kennedy; “What the data says about Americans’ views of climate change;” August 2023; Pew Research Center; https://www.pewresearch.org/short-reads/2023/08/09/what-the-data-says-about-americans-views-of-climate-change/

2. “The Spark: Just Stop Oil Strategy 2025”; https://juststopoil.org/our-strategy/

3. “2024 Was the Warmest Year on Record”; NASA Earth Observatory; https://earthobservatory.nasa.gov/images/153806/2024-was-the-warmest-year-on-record

Post 52: A Plethora of Parking

noreply@blogger.com (Doug Johnson) — Mon, 13 Jan 2025 16:49:00 +0000

I’m sure we have all experienced a desperate search for a parking space that seems nonexistent, particularly when we are pressed for time. Perhaps it is in front of your favorite coffee shop on your way to work, or at the doctor’s office when your child has a mystery fever and won’t stop crying, or maybe at a popular restaurant when you are running late for a dinner reservation. Those frustrating experiences tend to stick in our minds which is why very few people tend to complain about there being too much parking.

That is starting to change in professional city planning circles, although it is a long way from being a hot topic at cocktail parties. Our bad memories of those occasional parking shortages tend to blind us to the day-in, day-out reality where most parking lots we visit are at least a third empty, and many are far more underutilized than that. No one really knows how many parking spaces there are in the U.S. but estimates range from four to eight spaces for each and every car. That means that for every parking space which always seems to be full, there are several spaces which are almost always empty.

Half Full Suburban Office Parking Lot

This may not seem like an actual problem. After all, there are certainly places in every city where there legitimately are too few parking spaces, but in most cities those locations are the exception not the rule. Furthermore, who really cares if a shopping center or office park has too many parking spaces? Yes, this problem pales in comparison to war in the Middle East or homelessness in our cities, but it is costing you money and reducing the quality of life in most metro areas. Don’t believe me? Read on and see if I can convince you otherwise.

The Hidden Hand of Government

Most people assume that the size of the parking lot at your neighborhood shopping center was determined by the developer who built the center, perhaps with some input from the businesses that are located there. The developer does have some say in the matter, but the primary force in determining parking lot size is the local government through its zoning regulations. Just about every city in the country has a section in their zoning ordinance that specifies the minimum number of parking spaces that are required as part of the development process, generally based on the zoning district, the land use being proposed, and the amount of floor area being built. The developer might build more than is required or might appeal the requirement in hopes of getting a slight reduction, but most parking lots are within a few spaces of the number required by the zoning ordinance.

Minimum parking requirements started out – as most requirements do – as a solution to a vexing problem. Going back to horse and buggy days, cities have struggled with a transportation space problem. Particularly as buildings got larger, finding space for people to park their horse, buggy, or (eventually) car was difficult. Initially, people simply parked in the street in front of the building they were visiting. But as motor vehicles became more popular and buildings became taller and closer together, that approach no longer worked. Citizens demanded a solution and that solution became the mandatory parking lot for each new building.

This is particularly true in midwestern cities and in suburban areas pretty much anywhere. In those locations, parking is seen as an essential element of any new development because the car is the predominant mode of transportation to the exclusion of just about anything else. If private development didn’t provide parking, then the convenience of car travel would plummet and we would all be whining to our city council members. Hence, the minimum parking requirements that are nearly universal throughout the midwest. The problem is that the minimum requirements, which were wildly approximate to begin with, are now badly out of date. So cities end up requiring developers to build parking lots that are unlikely to be anywhere near the correct size.

There are a variety of reasons for our current predicament, but four are particularly relevant in my opinion. To begin with, nearly all parking requirements can be traced back to a thick book called the Parking Generation Manual published by the Institute of Traffic Engineers. This manual has parking demand estimates for a wide variety of land uses based on field surveys done in a variety of cities. All of this detail is useful information but it tends to get simplified for ease of administration. Plus, it is all based on averages from small sample sizes that are assumed to be relevant for a wide variety of cities and an even wider variety of business characteristics. The surveys often yield parking rates that vary widely, but that variation is masked by utilizing the average. The end result is that a 50,000 square foot Kroger’s, a 20,000 square foot Trader Joe’s, and a 7,500 square foot Asian specialty market may all be subjected to the same parking ratio despite notable differences in the number and timing of the trips that each will attract.

Second, the parking surveys that form the basis for the Parking Generation Manual’s recommendations are based on observations of businesses in largely suburban locations that offer their customers free parking. If you have something of value (i.e. a parking space) and you give it away for free, then you can’t expect a survey of usage to give you an accurate measure of demand. This is Economics 101. If I want to open a business selling hamburgers for $4 each, but I estimate my potential market by counting the number of people who show up when I give my hamburgers away for free, I haven’t really gained much useful information. The same is true for parking studies, but it gets even worse if I only survey suburban locations with little or no transit service. Applying these rates to denser locations or to mixed use developments where transit, walking or biking are viable options is just silly but it happens all the time because this is the best information available and planners use it without enough critical thinking.

Third, most parking requirements were originally developed decades ago which means they aren’t based on the most recent edition of the Parking Generation Manual but one that is probably fifty or sixty years old. Zoning ordinances get updated from time to time but many parking requirements have simply been copied from prior versions. In fact, many cities don’t even consult the ITE Manual directly, they just copy the requirements from the zoning ordinances in places that they consider to be their “peer” cities. Laziness leads to errors being replicated from city to city.

Fourth, cities have to simplify the application of parking ratios to actual development requests because no one really knows exactly what businesses are going to end up in a development when the initial plans are approved. Is the anchor tenant going to be a supermarket or a furniture store? Is the strip center space going to house an insurance agent or a bar and grill? Is the office building going to be filled with lawyers who have large offices and conference rooms or a call center filled with 6-foot by 8-foot cubicles? It is rare to know the initial tenants when design decisions are being made and certainly no one knows who the tenants will be 10 years into the future.

So educated guesses are made and the standards that seem so precise on the surface:

For example, 3.4 spaces per 1,000 square feet times 5,480 square feet equals 18.63 spaces (rounded up to 19)

are actually averages on top of assumptions on top of simplifications, and the result is almost always designed to err on the side of too many spaces rather than too few.

The Times They Are A Changin’

The issues discussed above are bad enough by themselves, but to top it off the past five or ten years have seen societal changes that make traditional parking ratios even more obsolete. For example, e-commerce has reduced the number of retail shopping trips that most people make, and consequently reduced the demand for parking spaces in most retail locations. Not all retailers are affected to the same degree, however, so the change cannot be represented as a universal adjustment factor. Coffee shops and hair salons, for example, are pretty much unaffected by e-commerce trends, while stores that sell clothing or office supplies have seen a significant drop in in-person visits.

Half Full Target Parking Lot (the week before Christmas)

The pandemic accelerated the work-from-home trend substantially and even though the pandemic is largely behind us, remote work is still popular with many employees. Consequently, many office businesses reduced their floor area needs and their parking space demand over the last few years. Despite a growing economy focused mainly on white collar work, office building vacancy rates remain stubbornly high, averaging roughly 20 percent in most major metropolitan areas. [1] Return-to-the-office mandates have garnered some headlines in the press in recent months, but the reality is that relatively few employers have gotten 100 percent of their white-collar employees back in the office 100 percent of the time. Hybrid work schedules are common (and very popular) which means that a typical employee does not need a parking space Monday through Friday, 8 AM through 5 PM.

Rideshare companies such as Uber, Lyft – and increasingly robotaxi companies such as Waymo – are providing door-to-door transportation similar to driving a car but without the need for a parking space at either end. This is particularly significant for nightlife businesses such as concert venues, restaurants and bars where parking is often a hassle and where people are reluctant to drink and drive.

The bottom line is that parking requirements which were sketchy to begin with are now sketchy and out of step with reality. No wonder parking lots increasingly look like urban wastelands. Parking is still needed because most of us still drive, but the frequency, timing and destination of our trips has changed and parking lots have not made the transition. As I mentioned earlier, this has become at least a moderately hot topic among urbanists across the country. Go on Instagram, Facebook, X or similar social media sites and search for #BlackFridayParking to see pictures of mostly empty parking lots taken on what is presumably the busiest shopping day of the year. The system is broken and people are starting to take notice.

Why It Matters

The concept of a separate parking lot for each store, office building, church, hospital, factory or apartment building has become so ingrained in our way of life that we don’t give much thought to whether there is a better way. Before we start building a better mousetrap, however, it might be instructive to analyze the problems with our current situation. Entire books have been written on the problems associated with our current approach to parking requirements, but here are my top four issues:

Parking lots are expensive to build. The cost to build a surface parking lot can range from $2,000 to $10,000 per space depending largely on the cost of the underlying land and the amount of site work that needs to be done. The cost of a parking garage is typically $20,000 to $35,000 per space, but can be much more in some circumstances. Since the majority of parking spaces in midwestern cities are “free” and are empty for much of the day, this turns out to be a significant – and relatively unproductive – expense for most businesses. The developer, of course, passes the cost along to the owner, who passes the cost to the tenants, who pass the cost to you and me in every product or service that we buy. The amount might not be significant for any given transaction, but it adds up over time.

Parking lots take up an inordinate amount of land. In newer, suburban developments, parking lots are often huge – typically taking up more land area than the buildings that they serve. In fact, parking lots for office buildings are often several times larger than the building footprint. To the degree that parking requirements are too high, it means that everything is more spread out than it needs to be. Many people drive from one store to the next within the same shopping center rather than make the unpleasant trek across a massive parking lot.

Even in relatively dense downtown areas, parking takes up a lot of land. In my hometown of Kansas City, Missouri, an estimated 29 percent of developable land in the downtown core is used entirely or predominantly for parking. [2] This number does not include parking garages that are underneath buildings. This is some of the most valuable land in Kansas City, which means that there is untapped potential for economic growth. If parking ratios are too high by even 25 or 30 percent, then that equates to roughly 20 to 30 acres of development that could take place which would not only bolster the local economy but produce a significant bump in property tax revenue – potentially millions of dollars worth. The amount of land dedicated to parking in downtown Kansas City is typical for most midwestern cities. Only very large cities such as Chicago, New York or Boston dip below 10 percent.

High parking ratios make us more dependent on cars. In previous posts, I have argued that cities would function better, and we would be healthier and more connected to our community if there were several viable transportation options at our disposal for the routine trips we take each day. Oversupplying parking makes every transportation option – except for driving a car – less desirable. This happens because too much parking means that everything is more spread out, and greater distances between the places we want to visit make walking, biking or transit harder. It actually makes driving slightly less desirable as well, but stepping on the gas for an extra minute is much easier than having to walk another five or ten. In addition, seeing parking lots everywhere we go sends the subliminal message that driving is the “normal” mode of transportation and everything else is somehow “abnormal.”

Parking lots are ugly. No one says “Hey, I saw a really cool parking lot the other day. Let’s go hang out there.” When you read articles on fun places to visit, do the pictures ever show parking lots? No, they show cute shops, sidewalk restaurants, and walkable areas filled with people. Parking lots are not an urban feature, they are a necessary evil. We need them for our cities to function but they are a destroyer of any “sense of place” so we certainly don’t want any more parking than we really need. City planner Jeff Speck once wrote “. . . city engineers – worshiping the twin gods of Smooth Traffic and Ample Parking – have turned our downtowns into places that are easy to get to but not worth arriving at . . .”

How to Fix the Problem

You have probably guessed that one of my recommendations here is going to be “require less parking.” In fact, dozens of cities all across the country have done just that, and some have gone so far as to eliminate parking requirements entirely. I think, however, that simply reducing parking requirements across the board is only a partial solution, and one which might actually backfire in some situations. But it is a reasonable place to start and I think that many cities could reduce their requirements by 30 to 50 percent without causing major problems.

Furthermore, while reducing parking requirements is probably a good idea, I think eliminating parking requirements is a mistake. Yes, the private sector will generally supply parking in appropriate amounts simply because that will make it easier to get long-term financing and to lease their building in a reasonable amount of time. That will not be universally true, however, and the exceptions will be annoying enough that there will eventually be a push to reinstate parking minimums. Plus, eliminating parking requirements means that cities lose an important lever in getting what is really needed – parking reform.

The crux of the problem is not just the number of spaces but the common assumption that each building should have its own parking lot for the exclusive use of its tenants and customers, and that this parking should be provided for free. This is obviously not the case for every property, but it is the default assumption for most city officials and most parking regulations. And while it may seem like a reasonable assumption on the surface, it is in fact the underlying cause for parking dysfunction and needs to be discarded.

The second common assumption that needs to be abandoned is that parking requirements need to be uniform across the city for property of the same development type (e.g. retail, office, industrial, etc.) or in the same zoning district. The reality is that different parts of town may have similar land uses but different parking needs. My recommendation is that cities should adopt parking standards that specify a base requirement, but then allow that requirement to be modified using parking overlay districts for particular areas of town that have unique characteristics. A commercial center in a midtown location with good transit service, for example, doesn’t need as many parking spaces as a similar commercial center in a peripheral location that has no transit service.

Aside from transit service, what characteristics should cities incentivize through this parking overlay approach? Here are the factors that I think are most important:

Shared parking lots. Nearly every business would prefer to have several dozen parking spaces reserved exclusively for their own customers and located directly in front of their door. Traditional parking requirements actually encourage this type of thinking despite the fact that it results in a hugely inefficient parking layout when viewed at a community scale. Multiple businesses and organizations sharing common parking facilities is far more cost effective and less confusing for the general public. Shopping center developers figured this out years ago, but the principles of shared parking can be applied to many different development types. Neighborhoods or developments willing to share parking should be allowed to reduce the number of spaces that they need to provide as a reward for doing the right thing.

Mixed uses. Traditional parking standards require that a particular property contain “x” number of spaces all day long, seven days per week despite the fact that the actual parking demand is likely to fluctuate throughout the day and from one day to the next. An apartment complex, for example, has relatively low parking demand during the day (residents are mostly out doing things) but high demand at night (residents are mostly at home). An office building is almost the exact opposite – demand is high during the day and the parking lot is nearly empty after 5 or 6 PM. Restaurants have two peaks (noon and early evening) but relatively low demand at other times. Churches have a huge peak on Sunday mornings, but low demand on most other days.

A mixed use district within a city can take advantage of these differing demand profiles by sharing parking so that spaces are utilized a greater percentage of the time while still providing adequate parking for all uses. It is rare for a district to get the ideal mix of uses which yields the most efficient parking demand pattern, but even a sub-optimal mix can still justify a parking reduction of 20 to 40 percent.

Fees in lieu of spaces. In areas where the city has the ability to provide public parking facilities, businesses should be given the option to pay the city a fee instead of providing a physical parking space on their property. This “in lieu of” fee can then be used by the city to expand public parking options in the area. Businesses benefit because the fee is often less than the cost of building a parking lot and cities benefit because they get a neighborhood with a more efficient parking layout that generally leads to greater tax revenue per acre of land. The problem is that this approach only works if the city can actually deliver the necessary number of spaces as new development causes an increase in parking demand.

Dynamic parking pricing. Basic economic theory tells us that providing a valuable commodity for free will result in people using that commodity inefficiently – in other words, using more of the commodity than they really need. This basic principle is as true for parking as it is for anything else and yet parking is frequently provided at no direct cost to the consumer. Worse still, when a charge is made for parking it is almost always done badly which makes cities reluctant to implement paid parking even when they know they should. The classic example of this theory is a traditional downtown district where there is on-street parking on the main business streets and off-street parking lots in peripheral locations a block or two away. The business owners all agree to have their employees park in the off-street lots so that the more convenient on-street spaces are available for their customers. Parking survey after parking survey reveals, however, that the on-street spaces are impossible for customers to find because they are heavily used by not only employees but the business owners themselves. This inevitably leads to complaints that there is not enough parking when in fact there is plenty of parking just a short distance away.

To make matters worse, some cities respond to this “parking shortage” by building a central parking garage with hundreds of spaces. Since the parking garage is expensive to build, a fee is charged for parking in the garage but not for parking on the street. The result, of course, is that hardly anyone ever parks in the parking garage, but people will circle the block endlessly looking for one of the free on-street spaces. If there were even a minimal cost for the on-street parking, the employees would park elsewhere and the customers would be able to find convenient parking and the “parking shortage” would disappear. If any parking should be free, it should be the peripheral spaces or even the ones in the parking garage in order to encourage people to use them despite being less convenient.

Many people resist the idea of charging for parking because they think the cost and inconvenience will drive customers away. That may have been true in the past when you had to have the exact change for parking meters or had to return to your car to plug more money into the meter in order to stay for more time, but times have changed. New payment, tracking and notification technology on our phones and in public spaces has made paying for parking almost frictionless, similar to the way highway toll booths have largely disappeared because electronic toll collection has gotten so effective. Plus, the technology can implement dynamic pricing so that the cost is low (or free) when demand is low and is high when demand peaks. The goal of dynamic pricing is not to maximize revenue but to ensure that there are always 10 to 15 percent of the parking spaces available for use.

The bottom line is that we have allowed parking to be the tail that wags the urban design dog. It is far too prevalent and far too visible in just about every corner of every midwestern city. Yes, there are places where there is too little parking, but that is the exception not the rule. The result costs us money, degrades the aesthetics of our communities, and warps the design fabric of our neighborhoods.

We can do better but it will not be a one-size-fits-all type of solution. Cities need to do individualized studies and hold community discussions to craft parking regulations that really make sense for their particular needs. There are a variety of cities that have done excellent work in this regard and their efforts can be a template for other cities wishing to move forward with parking reform. The example that I am most familiar with was implemented recently by the City of Overland Park, Kansas with the help of Stantec consulting (see Note 3 below), but there are numerous other examples. In the on-going struggle to improve the functionality and financial stability of our cities, parking reform is a small but crucial element.

Notes:

1. “A new working order: Reimagining offices in a hybrid world”; Moody’s; September, 2024; https://www.moodys.com/web/en/us/about/insights/data-stories/us-commercial-real-estate-vacancies-downtown-vs-suburbs.html

2. “Parking Lot Map”; Parking Reform Network; https://parkingreform.org/resources/parking-lot-map/

3. “Overland Park Parking Standards Update & Community Parking Strategy;” Stantec and the Overland Park Planning & Development Services Department; September 2021; https://drive.google.com/file/d/1eCQ65p3zDQ8c6etUnq8EQSqM7bXxZAEK/view

Post 51: Homeownership Myths

noreply@blogger.com (Doug Johnson) — Tue, 03 Dec 2024 21:35:00 +0000

During my years as a professional city planner, I helped create and implement a variety of zoning ordinances and reviewed dozens of others. One feature that was almost universal was a clear bias toward housing – particularly single-family housing – over other forms of land use. Throughout most zoning regulations there are exemptions and special provisions that favor single-family homes in ways that are not available for office buildings, shopping centers, schools or anything else. I came to think of the single-family residence as the “sacred cow” of traditional zoning. It was never clear why this was the case, but it seemed to be accepted by everyone that it was normal and necessary.

The sacred cow status of homeownership starts at the Federal level where generous subsidies are given to homeowners that are not given to renters. For starters, interest paid on a home mortgage is deductible on federal tax returns. In practice, this deduction is most useful to wealthy households with big mortgages, of little use to low- or middle-income homeowners, and of absolutely no use to renters. Thus, it is a subsidy for the people who need subsidizing the least. Secondly, there is the exemption (up to $500,000 for married couples) for capital gains that can occur when a homeowner sells their primary residence. To my knowledge, no other investment gets this same type of treatment. Together, these subsidies cost the taxpayers billions each year and do little to solve the housing problems that the country faces.

I live in a single-family home that I have owned for more than 35 years. It provided a place for my family to grow and prosper, and it is full of memories that I will cherish for the rest of my life. So I am definitely not against single-family homes. But as I think of the problems this country faces with respect to housing affordability and supply, I wonder whether the single-family home deserves the sacred cow status it has been given. In fact, there are a variety of beliefs about housing that are so ingrained in our American psyche that many people accept them – and act on them – without really thinking about whether they are always true.

These beliefs are so widely held that they have attained almost mythical status, and we have shaped a significant part of our economy and a significant number of our governmental institutions around the assumption that these beliefs are part of the foundation of our society. I try not to get wrapped up in crazy conspiracy theories, but the more I have looked into the housing industry and the beliefs and policies that support that industry, the more I see a dark side that needs to be brought into the light. There is a business constituency that benefits mightily from the current subsidies and housing mythology, and they are loath to give up that advantage regardless of how inefficient or misguided those housing policies might be.

My goal with this post is to question the “myths” that have grown up around housing and homeownership, and suggest changes to housing policies at both the local and national levels in order to better address the affordability and supply challenges that we currently face. Here is my list of the top “myths” that need to be reexamined:

Homeownership is a Great Investment

How many young adults or newly married couples have been advised to buy a house as soon as possible because it is a great investment? Probably millions. This myth is actually the foundation of several other myths so it is the one I will tackle in the greatest detail. The problem with debunking this myth is that buying a home can be a great investment – provided you buy at the beginning of a long period of price appreciation, hold onto the home for a long period of time, and avoid plowing a lot of additional money into the house for repairs or remodeling. For the vast majority of people, buying a home is a mediocre investment decision, and for some an investment debacle. Buying a home should be seen as a lifestyle decision that hopefully brings you joy and utility. If it turns into a good investment, then that is icing on the cake.

Here is what can go wrong:

Not all housing appreciates in value. Yes, housing in general has risen in value faster than the rate of inflation over a long period of time. The problem is that the average hides times and locations where housing has fallen in value or remained stagnant. After the housing bubble burst in 2008, hundreds of thousands of people suddenly owed more for their home than the home was worth – and that remained true for most of a decade in the areas that were hardest hit. In addition, price appreciation often bypasses people who buy homes in undesirable neighborhoods or in small towns that are losing population. Buying at the wrong time or place can be an investment disaster.

Transaction costs are huge. When I buy or sell stocks or bonds there is a transaction cost but it is very small compared with the value of my investment. When you buy or sell a house, however, the transaction costs can easily be 5 to 10 percent of the cost of the home. These costs are sometimes hidden from the buyer because they are rolled into the monthly mortgage payment, but they reduce the return on investment. In fact, a new homeowner typically needs 4 to 8 years of solid price appreciation to recover the transaction costs and return to a break-even position. Need to move sooner than that? Sorry, you lose.

Homeownership is illiquid and indivisible. If I own 500 shares of Apple or Microsoft and experience a short-term cash crunch, I can easily sell some of my holdings to raise money. The asset value of a home, however, is harder to tap in times of need. Yes, it may be possible to do a cash-out refinancing of the mortgage or take out a Home Equity Line of Credit, but those options are not always available, and they take time and have additional transaction costs. In fact, a home is often hardest to sell (or refinance) when the need for money is greatest (e.g. during an economic downturn).

Housing often requires unplanned injections of cash. If I own Apple stock, no one calls me from Cupertino to ask for $1,000 to replace the water heater. The truth is that owning a home – particularly an older home – frequently entails spending a substantial amount of money on the structure of the home itself or on one of the key systems that make the home liveable. These expenses are typically unexpected and thus difficult to budget for. This is particularly problematic for low- or moderate-income households who often have fewer financial resources. A recent survey by the Federal Reserve, for example, revealed that nearly 40 percent of US households could not cover an unexpected $400 expense without borrowing money or selling an asset. [1] Yet failure to come up with the money for an essential repair can undermine both the ability of the home to provide safe shelter and the long-term value of the home as a supposed investment.

Tracking the investment performance of homeownership is difficult. To make wise investment decisions, you need to be able to easily track the performance of each investment. For most traditional investments (e.g. mutual funds, stocks, CDs, etc.), the return on investment can be calculated at just about any point in time with great precision. That is not the case for homeownership. People often buy a house at a certain price, live in the home for 20 or 30 years, sell it at a much higher price and assume that it has been a great investment.

My house, for example, has gone up in value by roughly 425% and has provided my family with a safe and comfortable place to live (which has a value on top of the price appreciation). That seems awesome until you consider that I have owned the house for 37 years, have spent hundreds of thousands of dollars remodeling, repairing and redecorating, and have donated a couple of thousand hours of my labor mowing the grass, repainting the trim, shoveling the driveway, doing miscellaneous repairs, and more. So now what is my real return on investment? It is almost impossible to calculate and the same is true for the vast majority of homeowners. The myth makes us think we are getting a good return on our investment but the reality is completely unknown.

The bottom line is that wealthy people who can buy nicer homes in nicer neighborhoods probably have benefited from housing appreciation, but the results are almost assuredly more mixed for moderate- and low-income populations. Yet the strength of this myth endures and households of all types and income levels continue to make homeownership a key component of their investment portfolio. A recent study found that the 2021 median net worth of all U.S. households – counting all asset types – was $166,900. If home equity is excluded, however, that number falls to $57,900 despite the fact that roughly a third of households don’t even own their home. For people who do own their home, that equity tends to be a disproportionately large share of their total wealth particularly for minority households. For a majority of black and hispanic homeowners, the equity in their home represented two-thirds or more of their total wealth. [2] Touting homeownership as a universally good investment is a serious disservice to those who are most in need of good investment advice.

The Value of Single-Family Homes Needs to be Protected by Government Intervention

One of the side effects of people thinking of their home primarily as an investment and having that home represent a disproportionately large chunk of their wealth is that they become paranoid about protecting that investment. This largely plays out in decisions at the local government level. Despite the fact that throughout history cities have contained a mix of uses in relatively close proximity, we have now convinced millions of homeowners that the value of their home will be undermined by just about any new development type other than more single-family homes. Particularly in suburbia, this has resulted in acre upon acre of single family subdivisions isolated from shops, offices, apartments, retirement facilities and sometimes even churches and schools.

This behavior is so wide-spread that it has earned its own acronym: NIMBY (Not In My Back Yard). Although in this case, “backyard” can be a development site that is a mile away or more. Many a development request that would have been good for the city or region overall has been turned down because nearby homeowners thought that it would destroy their property values. Very little actual evidence is ever presented to support the alleged destruction of value, but local decision-makers are generally reluctant to challenge a room full of angry constituents.

This is partly where the “sacred cow” status of single-family housing has come from. People recognize the fragility of their house as an investment vehicle and so discussions get skewed toward property values of nearby homeowners and away from discussions of what would provide the most utility to the maximum number of people.

Buying a Home Is a Good Investment for Just About Everyone

As I pointed out early on, buying a home can be a good investment under the right circumstances. The problem is that this “sometimes” circumstance gets extrapolated to be general advice applicable to the general population under all circumstances. Here are two examples of groups that should not buy a house:

People living paycheck to paycheck. Recent research by Bank of America showed that about a quarter of all U.S. households spend basically all of their income each month and have little accumulated savings. This makes it difficult to come up with the traditional down payment required for a mortgage, of course, but even if this obstacle can be overcome it would still be a bad idea for this type of household to buy a home. As I pointed out earlier, homeownership entails unexpected expenses that keep the house liveable and maintain its value as an investment asset. Households that can’t come up with the necessary funds whenever those minor emergencies happen are likely to see the value of their home slip quickly away.

People with job instability. A sudden loss of income can force a homeowner to sell when they don’t want to or even lead to foreclosure. Both options are likely to create financial difficulties that could have been avoided. And while anyone can lose their job unexpectedly, there are some households where either voluntary quitting or involuntary layoffs are reasonably predictable. Recent graduates, for example, are the most likely segment of the population to move across the country to a new city. Other people work in industries that are notoriously cyclical and tend to go through periods of both hiring and layoffs. Still others are unsure of their career goals and tend to switch jobs frequently – either voluntarily or involuntarily. Buying a home and then failing to make mortgage payments because of a job disruption is likely to be much worse than missing a rent payment and having to change apartments. In addition, people with job instability are probably best served by being as mobile as possible so that they can take advantage of better job opportunities wherever they might be located.

A Low Down Payment is Fine Because Housing Appreciates in Value Rapidly

Many areas of the country have seen a relatively rapid escalation in housing prices as supply has failed to keep up with demand. This has made it more difficult to come up with the traditional 20 percent down payment on a mortgage. The Federal government has a variety of programs that address this issue by allowing mortgages to be issued with as little as 3 percent down. This makes the loan riskier from the lender’s perspective so typically the borrower is required to pay for private mortgage insurance (PMI) which protects the lender in case of default.

PMI can add hundreds of dollars to your monthly mortgage payment which is a significant penalty, but it can often be removed once the home reaches a loan-to-value ratio of 80 percent. Of course, each mortgage payment adds to the homeowner’s equity, but early in a mortgage the vast majority of each payment goes toward interest rather than principal reduction. Five years of mortgage payments might reduce the loan principal by only 10 percent.

Frequent stories in the press of double-digit increases in housing values, however, make some people assume that they can reach the 80 percent LTV in just a couple of years. That may be true in some isolated markets that are extremely hot, but it is not true generally and particularly not true throughout the midwest. To begin with, the average sales price of U.S. homes falls from the previous quarter about a third of the time, and can fall several quarters in a row. In addition, the press tends to cover exceptional cases rather than the more typical situations. Here are the actual rates of price appreciation over the long term for a variety of markets – some hot, and some not so much: [3]

Average Annual Rates of Housing Price Change
20-year average    40-year average
Tampa FL    4.32%        4.94%
Austin TX    6.35%        4.73%
San Jose CA    4.63%        6.01%
Cleveland OH    2.46%        3.50%
Indianapolis IN    3.74%        3.91%
Kansas City MO    3.89%        3.90%

The reality is that no one sees double digit increases for very long, and the midwest in particular has relatively pedestrian rates of housing price increases. This means that borrowers can be stuck paying the PMI penalty for longer than they planned.

The Federal Government Is Doing All It Can to Reduce the Cost of Home Construction

Since the primary housing problems our country is facing are high housing costs and inadequate supply, you would think that the Federal government would have all sorts of programs to encourage innovative ways to reduce construction costs and to encourage local governments to resist the NIMBYs and expand housing opportunities. Although it has tried such programs in the past (with mixed success), there are virtually no major initiatives in this regard currently. In fact, I would argue that it is in the Federal government's best interest for housing construction costs to keep rising despite all the official moaning and weeping about housing affordability.

Two of the Federal government’s primary housing tools – Fannie Mae (FNMA) and Freddie Mac (FHLMC) – would be in a much more precarious position if the cost of new housing fell because that would cause the value of existing housing to fall as well. Fannie and Freddie are in the business of buying mortgages from the originating banks, bundling them into Mortgage Backed Securities (MBS), and selling those securities to investors, all of which allows local banks to keep making loans. If housing values fall, then the all important loan-to-value ratio gets worse for all of the mortgages they have packaged which makes the probability of default go up (especially those 3% down mortgages). This was the essential problem during the 2008 housing default crisis – housing values which everyone assumed would keep rising suddenly started to fall. People who held risky mortgages couldn’t refinance and couldn’t sell at a price that would pay off their mortgage, so they defaulted.

The current situation is not nearly as dire as it was in 2008, but no one at the Federal level really wants housing prices to fall. Arguably, Federal priorities seem more focused on keeping Fannie and Freddie profitable – not to mention the investment bankers making billions off of various forms of housing securities – rather than on finding affordable housing for those in need. Instead, Fannie and Freddie claim to be addressing affordability by lowering down payment requirements so that it is easier for people to get a mortgage. It doesn’t really make anything more affordable, it just expands access to the overpriced home buying market.

The Bottom Line

There are a lot of good reasons to own your own home. Perhaps you are starting a family, or need room for multiple pets, or want a large garden, or like to customize your living environment in unusual ways – these reasons (and more) are a perfectly logical basis for homeownership. They are not, however, sufficient reasons for treating homeownership as some type of sacred cow that is deserving of special protections or subsidies.

Yet the storyline persists that homeownership is worthy of special treatment because it is somehow essential to the American way of life. Homeownership, it is said, makes for more stable communities, higher levels of community commitment, and a more productive economy. But is that really true or have we simply accepted the myth without much critical thought? This might be a situation where we see homeowners being active in the community and reinvesting in their neighborhood, and simply confuse correlation with causation.

It turns out that homeownership rates vary widely among western democracies. Here is a partial list of countries with rates above ours, about the same as ours, and less than ours:

Poland (87%), Norway (79%), Italy (75%), Greece (70%)

USA (66%), UK (65%), Sweden (65%), France (63%)

Denmark (60%), Austria (54%), Germany (48%), Switzerland (42%)

If there is a connection between homeownership, societal stability, or economic productivity I certainly don’t see it. [4]

In 1917, John Harvey Kellogg popularized the phrase “breakfast is the most important meal of the day.” Mr. Kellogg, a prominent member of the cereal industry, didn’t have any real evidence that breakfast was any more important than any other meal and yet this phrase has been repeated so often that it was accepted as common wisdom for decades. Similarly, we have allowed the housing industry to repeat the mantra that owning your own single-family home is an essential part of the American dream so often that it is accepted as true by many people. The result is a system of developers, contractors, realtors, bankers and financiers who are focused on a very narrow segment of the housing market, and a large pool of households who have been convinced that buying into that narrow segment is the key to their happiness. That narrow focus has been extremely profitable for the developers, contractors, realtors, bankers and financiers, but it has, in my opinion, been detrimental to many households and our society in general.

There are two things this country needs to focus on: first, we need to incentivize households to save money in ways that build generational wealth; and second, we need to incentivize the expanded production of safe, energy-efficient housing in more diverse forms and locations than has been produced in recent years. Housing mythology has unnecessarily bundled these two things together, with a particular emphasis on single-family homeownership to the detriment of other forms of housing and other arrangements for paying housing costs.

In many cities, the monthly cost of homeownership is hundreds of dollars more than the cost of renting an equivalent house or apartment. In that situation, renting instead of owning and putting the savings into an IRA or 401(k) account (especially one that is matched by your employer) might be a much smarter financial strategy. This would be particularly true if Federal subsidies for homeownership were dismantled and replaced with incentives for wealth building in any form. For years, the educational establishment has boosted literacy as a key to a better life. Perhaps boosting financial literacy should be a close second.

Notes:

1. Board of Governors of the Federal Reserve System; “Report on the Economic Well-Being of U.S. Households in 2022 - May 2023”; https://www.federalreserve.gov/publications/2023-economic-well-being-of-us-households-in-2022-expenses.htm

2. Rakesh Kochhar and Mohamad Moslimani; “The assets households own and the debts they carry”; The Pew Research Center; December 2023; https://www.pewresearch.org/2023/12/04/the-assets-households-own-and-the-debts-they-carry/

3. Federal Reserve Bank of St Louis; “Economic Data: All Transactions House Price Index for Cleveland-Elyria Ohio (MSA)”; August 2024; https://fred.stlouisfed.org/series/ATNHPIUS17460Q

4. Morris Davis; “Questioning Homeownership As A Public Policy Goal”; Cato Institute; May 2012; https://www.cato.org/policy-analysis/questioning-homeownership-public-policy-goal

Post 50: Slouching Toward Insolvency

noreply@blogger.com (Doug Johnson) — Wed, 23 Oct 2024 15:33:00 +0000

Ernest Hemingway’s 1926 novel The Sun Also Rises contains the following bit of dialog:

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said, “Gradually and then suddenly.”

This quote is the source of the title of the documentary on the 2013 Detroit bankruptcy, perhaps the most notorious municipal bankruptcy in American history. At the time, Detroit had over $18 Billion in debt – an amount estimated to be more than 30 times its readily available assets. That financial condition was not reached quickly as a result of some cataclysmic event, it was something that built slowly over decades as a result of bad luck mixed with bad decision after bad decision.

At one time, Detroit was an American success story. The city grew rapidly in the first half of the twentieth century reaching a population of 1.8 million in 1950. Detroit was the fourth largest city in the country and had one of the highest per capita incomes. But economically, Detroit was a one-horse town whose fate was tied to the auto industry. The struggles of the American auto companies in the 70’s and 80’s popped the Detroit bubble. That bad luck was reinforced by race riots, white flight, and urban renewal failures. Efforts to restore its glory led the city to promise too much, spend too much and borrow too much. The subprime mortgage disaster and the subsequent Great Recession were the final straws.

Fortunately, local government bankruptcies are relatively rare. Only 31 general purpose local governments (out of nearly 39,000 such entities) have filed for bankruptcy since 2001. [1] Many states, in fact, do not allow municipalities to file for bankruptcy or place severe limitations on the process. However, the conditions that lead to bankruptcy – the inability to pay one's bills – are more of a threat than many people realize. Many cities across the country are borderline insolvent and yet their citizens probably don’t know the full scope of the problems that exist or the ramifications that an unexpected economic blow could have for their day to day lives.

The issues are generally obscured by the gradual nature of the problem. Insolvency is almost always a slow, meandering journey to the edge of a financial cliff, and bankruptcy is the abrupt shove that pushes you over the edge. No one intentionally races into insolvency, we get there almost accidentally by not paying attention and by not looking ahead. We get there by slouching step by step down a path we didn’t even know we were on.

A Local Example

My interest in this topic was piqued recently by two different articles that touched on different aspects of this problem. The first was an article in my local paper on the difficulties that Kansas City, Kansas was having with bridge closures. For those not versed in midwestern geography, Kansas City, Kansas (KCK) is the smaller and poorer sibling to the better known Kansas City, Missouri (KCMO). KCK has a population which is about 70 percent smaller and a per capita income which is about a third lower. It is also a city that is bordered by the Missouri River on the north and bisected by the Kansas River and broad rail yards. Thus, bridges are an essential part of KCK’s connectivity to the rest of the metro area and from one part of the city to another.

The article in the Kansas City Star details six bridges that are currently closed for repairs, including the east-bound lanes of I-70 which connect downtown KCK with downtown KCMO and which abruptly closed just a couple of weeks ago for emergency repairs. [2] What is particularly troubling is that two of the bridges over the Kansas River – the Central Avenue bridge and the Kansas Avenue bridge – have been closed to traffic for several years with no clear timeline for repairs and no funding in place. Even if federal grants could be obtained for repairs, local leaders are not confident they could come up with the estimated 10 percent local matching funds.

If the repairs are critical, why not sell bonds to raise the necessary money? The answer is that the city is already awash with debt, over $800 Million according to the recently adopted budget. According to the County Administrator, nearly 44 percent of the property taxes collected by the city are used to finance debt, more than double what he considers to be healthy. [2]

The core issue is that Kansas City, Kansas has more infrastructure than its tax base can sustainably maintain. Virtually all midwestern cities have suffered from low-density sprawl in recent decades, but Kansas City, Kansas is worse than most. The value of its tax base per square mile is 40 percent lower than comparable cities such as Topeka or Wichita – and neither of those cities are in great financial shape themselves. This is particularly problematic for a city reliant on high-dollar infrastructure such as bridges. A cash strapped city can allow a roadway to crumble and it is annoying but not likely to be life threatening. Allowing a bridge to crumble, on the other hand, can be catastrophic.

Houston, We Have a Problem

During a budget meeting several months ago, Houston Mayor John Whitmire made the following statement in an effort to sum up their financial status:

“I think we can all agree on that, we are broke.” [3]

This is likely as much political theater as it is a realistic assessment of Houston’s financial condition, but it is true that Houston has a serious budget gap that needs to be plugged (as with many large cities). In Houston’s case, the shortfall is approximately $160 Million, or nearly 6 percent of the Houston budget. Unfortunately, efforts to solve the problem are likely to be just bandages that cover up the problem temporarily only to have it resurface in a few years.

The immediate problem is a recent agreement with the city’s firefighters that compensates them for being underpaid for the past seven years in which they worked without a contract. The settlement is going to cost Houstonians $650 Million for back pay and an additional $180 Million for wage hikes over the next five years. But the real mistake, in my opinion, is that Houston is proposing to pay these costs by selling a roughly $1 Billion bond that will take 25 to 30 years to pay off. Paying a short-term operating cost with long-term general obligation bonds is almost always a bad idea. As Strong Towns leader Charles Marohn points out, “A child born today in Houston will make final payments on firefighter back pay from 2018 when they turn 30 years old.” [4] And yes, if you do the math, that means that today’s operating cost problem isn’t likely to be paid off until roughly 2054.

Some observers have criticized the city for having too many employees (including firefighters) and paying them too well. I’m going to stay out of the pay issue, but it is valid to ask why the city needs so many employees. The answer is the same reason Houston has too many streets, too many water lines, too many fire hydrants, and on and on. Houston is a prime example of uncontrolled, low-density sprawl. The infrastructure and city personnel to support that development pattern is why Houston (and many other cities) are slouching toward insolvency.

Marohn refers to this as the “growth Ponzi scheme.” It appears to make financial sense in the short run – new growth delivers new tax revenue with relatively low initial maintenance cost (after all, everything is new). But with each new subdivision, shopping center, and suburban office building comes a commitment made by the city to maintain that infrastructure forever. In the long run, the tax revenue from the low density development cannot sustain the cost of infrastructure maintenance (and firefighters, police officers, maintenance workers, etc.). To remedy the problem, cities chase more growth to gain more revenue which again seems to be helpful in the short term but simply makes long term problems worse because that growth comes with more infrastructure obligations – hence the Ponzi scheme analogy.

The Allure of Low Density Growth

The term “suburban sprawl” is almost always used in a derogatory manner, but there are a few advantages to that form of development. To begin with, Americans are used to living in a big country with lots of land relative to the population, and our nation has deep, agrarian roots that make us think of owning our own chunk of land as an essential part of the American dream. For many of us, there is something psychologically fulfilling about owning a single-family home on a tract of land that is ours and ours alone.

Beyond that, however, low-density development is relatively inexpensive to build – assuming, of course, that transportation costs are low. Hundreds of years ago when the structure of many European cities were being formed, transportation costs were high and most people never traveled more than a few miles from where they were born. Consequently, the development pattern was relatively dense since most people walked from place to place making distance a major “cost.” In the U.S., transportation costs started high, but innovation after innovation has gradually changed the equation. Particularly after World War II, personal transportation via the automobile made distance almost irrelevant.

There are costs, of course – someone has to build the roads, install utility lines, buy the cars, etc. – but those up-front costs seem manageable to most people. The problem is that there are a number of “hidden” costs that people don’t realize exist or have chosen to ignore. The most substantial of these costs is long-term maintenance of physical assets such as roads, bridges and utility lines, and the ever expanding personnel costs associated with operating cities that are expanding geographically. Calling these “hidden” costs is misleading, of course, because all of them can be estimated with relative precision if you are willing to do the work. Unfortunately, these long-term costs can easily be dismissed as someone else’s problem which won’t need to be solved for decades. From the point of view of a politician, is it better to set aside funds for future maintenance and personnel costs or to build something new and shiny for the voters to enjoy? The answer is obvious and so are the eventual ramifications.

The other hidden cost is that if everyone is driving, then the initial street capacity built by the developer is never enough. New development inevitably attracts traffic demand from outside the immediate area. After all, everything is new – new roads, new shops, new restaurants, etc. – who wouldn’t want to break away from the old parts of town to experience the latest and greatest? At the same time, the focus on driving makes alternative transportation modes (walking, biking or transit) so inconvenient that there are no options left other than street expansion. So money that could have been used to maintain infrastructure gets diverted to street widening projects which deliver only temporary relief because they just reinforce the belief that driving is the only way to move from place to place. It becomes a feedback loop that is almost impossible to exit.

A Different Kind of Asset

If cities were run like private corporations, they would account for every asset (every road, bridge, fire hydrant, etc.) with maintenance schedules, depreciation tables, and replacement costs using what is known as the accrual method of accounting. Cities, on the other hand, use what is known as modified accrual accounting which combines aspects of traditional accrual accounting with the simpler cash-basis accounting. In general, the modified accrual method allows short term events (e.g. account receivables and account payables) to follow cash-basis rules while long term events (e.g. fixed assets and long-term debt) follow the accrual accounting rules.

The two approaches reflect fundamental differences between private business entities and governmental entities. Private corporations are required to use accrual accounting because it allows stakeholders to see an accurate reflection of the company’s financial health. Local governments, on the other hand, are more focused on whether current year revenues are enough to cover current year expenditures, and whether such expenditures are following the budget plan that they have adopted. The modified accrual method accomplishes this task reasonably well. [5]

There are, however, a couple of important differences that apply to the accounting of long-term debt and infrastructure assets. First, in full accrual accounting, long-term debt is recognized in the financial period in which it is incurred. The modified accrual method recognizes the current portion of long-term debt as it matures, which means the impact is spread out over time. Second, most public infrastructure is allowed to be treated as an “inexhaustible capital asset,” thereby eliminating the need for depreciation accounting. [6] To take advantage of this modified approach, governments must demonstrate that they are maintaining the infrastructure to a selected condition level. The problem is that defining the appropriate level of maintenance and assessing the degree to which that maintenance is being accomplished is largely left to the government itself which means there is a lot of room for fudging the true state of maintenance efforts and appropriate expenditure levels.

Many cities attempt to track all of their infrastructure assets and maintenance costs but the process is extremely labor intensive. There is the potential payoff of better allocation of municipal resources but that goal is often undermined by political expediency which shifts money away from maintenance in order to solve a short term budget issue or build something with more political appeal.

Part of the problem is that an infrastructure asset is different from a normal business asset (like a factory) or personal asset (like jewelry). To begin with, infrastructure assets are almost always acquired by the city for free. The developer “gifts” the streets, water lines and storm sewers to the city as part of the development process. The only “cost” is the implied promise to maintain those assets forever. Second, the value of the infrastructure asset is very difficult to pin down. No one wants to buy the sidewalk in front of my house so exactly what “value” does that asset have? It does have some value to kids walking to school or people walking their dogs, but pinning that value down – and deciding how much money should be spent to maintain it – is very difficult.

Perhaps the best approach to the concept of value is to think of public infrastructure as an asset that enables the abutting private property owners to create value with their property. After all, a shopping center wouldn’t have much value if it weren’t for the streets and bridges that allow goods to be sent to the shopping center and customers to reach the shopping center to make purchases. The catch, however, is that two virtually identical assets (e.g. streets) can produce wildly different pools of value depending upon the success of the partnership between the city and the private property owners. In some locations, the street may produce a great deal of value that lasts for a long time. But in other locations, private development might not produce much lasting value at all due perhaps to poor planning, shoddy construction, or just bad luck.

This approach refocuses the issue to be “how can cities encourage private property owners to create as much value as possible with the city’s infrastructure assets?” There is no easy answer to that question because cities have other goals (such as maintaining a certain community character) that can conflict with the goal of maximizing property value. Finding the right balance is never easy but to me it suggests a development approach which emphasizes design, durability and adaptability rather than simple development volume.

The Bottom Line

It probably shouldn’t be a surprise that few cities actually follow a detailed maintenance plan for their infrastructure. Cities have a detailed plan, of course, they just find excuse after excuse for not following it. For most cities, the infrastructure maintenance budget is a relatively random number that grows or shrinks depending upon other budget priorities. Municipal decision-makers know they should spend more on maintenance but the allure of growth and the political appeal of something new and improved overwhelm their better judgment.

What is really unfortunate is that every level of government, from the federal bureaucracy to the smallest village board, is structured to focus on building new infrastructure to support new growth despite the fact that the vast majority of cities and counties are actually static or shrinking. It is almost always easier to get a grant to build something new than to get a grant to fix something that is old.

Houston provides an interesting example of this phenomenon. The City of Houston has approximately 16,000 lane-miles of streets that it is responsible to maintain. Given the average life of a street, it means that they should be resurfacing roughly 400 lane-miles of street each year. According to data from the City (via the Bill King Blog), the last time the city resurfaced that many lane-miles was 2004. The average for the past five years has been 146 lane-miles. Clearly, Houston needs help with street maintenance. You might think the State of Texas would assist, but instead the State is pushing the North Houston Highway Improvement Project – estimated to cost between $7 Billion and $10 Billion – to improve Interstate I-45N from downtown Houston to Beltway 8. Repairing stuff is boring, building something new and “improved” is always better!

Our country is growing and community needs change over time so new development is a necessity. There is, however, a right and a wrong way to grow and more often than not American cities are opting for what is familiar and easy instead of doing the harder, more innovative work of building cities that are focused on the needs of the next 50 years rather than the past 50. The Ponzi scheme is going to break down eventually, as all Ponzi schemes do. The question is how much damage is going to be done to your city before you have slouched your way to insolvency?

Notes:

1 Jeff Chapman, Adrienne Lu and Logan Timmerhoff; “By the Numbers: A Look at Municipal Bankruptcies Over the Past 20 Years;” The Pew Charitable Trusts; July 2020; https://www.pewtrusts.org/en/research-and-analysis/articles/2020/07/07/by-the-numbers-a-look-at-municipal-bankruptcies-over-the-past-20-years

2 Bill Lukitsch; “Leaders, residents alarmed by number of bridges on repair list;” The Kansas City Star; September 12, 2024.

3 Greg Groogan; “Mayor John Whitmire says the City of Houston is ‘Broke’ ”; March 2024; Fox 26 Houston; https://www.fox26houston.com/news/mayor-john-whitmire-says-the-city-of-houston-is-broke

4 Charles Marohn; “Here’s the Real Reason Houston Is Going Broke”; April 2024; Strong Towns; https://www.strongtowns.org/journal/2024/4/1/heres-the-real-reason-houston-is-going-broke

5 The Corporate Finance Institute; “Modified Accrual Accounting;” https://corporatefinanceinstitute.com/resources/accounting/modified-accrual-accounting/

6 Government Finance Officers Association; “Modified Approach for Infrastructure Reporting;” January 2019; https://www.gfoa.org/materials/modified-approach-for-infrastructure-reporting

Special thanks to Eileen Johnson and Gina Bauman for their advice on explaining accounting principles.

Post 49: Air Conditioning -- Hero or Villain?

noreply@blogger.com (Doug Johnson) — Tue, 27 Aug 2024 20:51:00 +0000

It is August and it is hot outside. Right on cue, the press is full of stories about record setting heat waves at both the local and global level. I’m not a climate scientist or a meteorologist, but I have no reason to doubt the accuracy of these articles. From my limited research, the overwhelming scientific consensus seems to be that the earth is warmer now than it has ever been since people started measuring temperatures on a systematic basis (roughly 150 years ago) and probably warmer than it has been for at least 120,000 years (according to paleoclimate scientists).

Where I sit at the moment, however, is a comfortable 72 degrees thanks to a wonderful invention known as air conditioning. I suspect I could live without this invention – after all, billions of people currently do – but I really don’t want to find out. It is central to my comfortable lifestyle. As an urban planner, I also know that air conditioning is central to the development of modern cities and to the migration patterns that have shaped our country.

Unfortunately, the pleasure I take from air conditioning was undermined recently by an article in the Washington Post entitled “Addicted to Cool: How the dream of air conditioning turned into the dark future of climate change.” The article pointed out the huge demand air conditioning places on our electrical supply grid and the greenhouse gasses created by our current generation sources – not to mention the leaking refrigerants which are greenhouse gasses in their own right. In effect, the more we use air conditioning the more we need air conditioning. It went on to view this situation with almost existential angst:

“It’s possible to see a future in which we are dependent on the perfect, continuous performance of air conditioning the way many people are dependent on lifesaving drugs, planes are dependent on air traffic control, and a colony on the moon or Mars would be dependent on perpetual sources of oxygen and water. It is a technology so deeply embedded in our daily lives, and so increasingly important to our survival, that when we think of it, it is not with pleasure, as a luxury, or with pride, as an exemplar of our technical ingenuity. Rather, it reminds us of our frailty.” [1]

Other articles have used terms like “climate antihero” [2] and “absolutely disastrous” [3] to describe our dependence on air conditioning. Exactly how guilty should I feel? I decided to dig a little deeper to learn more about a technology I have largely taken for granted, and then to take several steps back to gain some much needed perspective on how it fits into our society and economy, rather than simply viewing air conditioning through an environmental lens.

The History

Ancient Romans experimented with buildings that had double walls and the ability to circulate water in the space in between to keep the indoor rooms cooler. Clever, but expensive and tricky to maintain. People have long known that allowing a big chunk of ice to melt lowers the temperature of the surrounding air. It is even more effective if you can blow air across the melting ice and circulate that throughout the building. The first “air conditioned” buildings – such as Chicago’s Auditorium Building and New York’s Carnegie Hall – used this technique in the late 1800s.

Unfortunately, ice was expensive, particularly in the hot climates where it was needed the most. Enter John Gorrie, an Apalachicola, Florida doctor who noticed that his patients symptoms became more severe during hot weather. In order to help cool them, he invented a machine in 1851 that used compressed air to make ice in a 10” x 10” x 4” mold. Despite the ingenuity of his device, it never became popular with the public. In fact, he was mocked because what he was producing was not “God’s ice” and he ended up dying penniless a few years later.

Technology (and public opinion) moved on, however, and in a few decades mechanical ice production was far more efficient and more accepted. In fact, the modern system for rating the capacity of an air conditioning system is referred to as “tons” of capacity. One ton of capacity is technically the ability to remove 12,000 British Thermal Units (or BTUs) from a given space in one hour. But it originated as the amount of heat necessary to melt a one-ton block of ice!

The next major step forward occurred in 1902 when Willis Carrier invented a mechanical way to cool and dehumidify a printing plant in Brooklyn, New York. The plant did color printing which entailed running paper through a printing press multiple times – once for each layer of color. The problem was that the heat and humidity would fluctuate during the day and cause the paper to expand or contract, thus ruining the quality of the color image. Carrier's invention solved both problems.

Air conditioning was initially popular primarily with industrial buildings that produced products that were sensitive to heat and humidity (e.g. pasta, chocolate, printing and chewing gum, etc.). Industries that previously had to shut down for the summer could now operate year-round. [4]

Two decades later it started showing up in commercial buildings frequented by the public such as movie theaters and hotels. On a hot day, people would buy a ticket to an air conditioned theater regardless of what movie was showing. In 1928, the Milam Building in San Antonio became the first air conditioned, high-rise office building in the country. Traditionally, urban office buildings were built in a “U” or “H” shape and covered with operable windows so that they could capture breezes on hot days. Unfortunately, when it was really hot or the air was still you ended up with lots of sweaty (and unhappy) office workers. Again, air conditioning became a boon to productivity.

After World War II, air conditioning technology became cheaper and more compact. It became a standard feature of most new commercial buildings outside of areas that were traditionally cool such as the Northwest and Northeast. In the 1950s, inexpensive window units became widely available in stores which made home air conditioning economically feasible for the first time. It gradually was incorporated into suburban tract housing as “central air” and by 1957 ten percent of all households had some form of air conditioning. By 1975, that number was over 50 percent of all households, and air conditioning was commonplace not only in buildings but in transportation vehicles such as personal automobiles. In fact, the iconic features of suburban development – long commutes, enclosed shopping malls, and high-rise office buildings – would not have been nearly as popular absent the rise of air conditioning.

The Ripple Effects

Air conditioning did not just make us cooler, it changed our lives and our society. The increase in productivity was mentioned briefly above, but it is hard to overstate the economic impact on our country. People are simply more productive at working, thinking or learning when they are housed in a building with a relatively stable temperature range regardless of the outdoor weather.

This was a point that was not lost on the air conditioning and advertising industries. Ads in the 50s and 60s depicted indoor workers as elegantly dressed in modern surroundings (made possible by air conditioning, of course) while outdoor workers were gritty and sweaty as they struggled with the heat. A 1949 Carrier ad in the Saturday Evening Post showed a man sleeping outside under a sombrero with text that read: “Temperature 102° – Productivity 0.” [1] Executives of the day might have missed the subtle racism, but they certainly understood the potential impact on their bottom line.

The fact is that productivity drives the quality of life that we enjoy. If we didn’t have air conditioning (and other productivity enhancing technologies), we also wouldn’t have many of the other perks that come with living in a country that is an economic powerhouse.

The productivity we have gained from air conditioning is not just an important technical detail, it is also an important geographic detail. Air conditioning helped transform the southern swath of the United States from a sleepy backwater into an economic dynamo. Hot, humid locales that many people found unlivable for much of the year suddenly became attractive as air conditioning became ubiquitous. As an example, look at the chart below which shows the growth rate over the past 80 years for Florida, Texas and Arizona.

For comparison, the population of the United States went up by 250 percent during the period from 1940 to 2020. The rate of growth in Texas over the same period was almost double that amount (455%), Florida grew by more than 1,100 percent, and Arizona grew by more than 1,400 percent. The migration from north to south has been one of our country’s biggest demographic stories of the past century.

Air conditioning not only promoted migration to the south, it also facilitated migration from rural to urban areas. Cities lost their image as hot, treeless deserts and became both literally and figuratively “cool.” The urban heat island effect – which results in inner city temperatures that are 5 to 10 degrees warmer than surrounding rural areas in the summer – is certainly a real thing but it became irrelevant with air conditioning.

Unfortunately, what also became irrelevant was the ability to design buildings that fit their environmental surroundings. Architects and builders spent centuries creating a design vernacular that reflected the local climate. Buildings in the southwest were often made from adobe which could absorb heat during the day and slowly release it during the cool nights. Southern residences often had enormous multi-level porches that served as shady outdoor living spaces when it was too hot to be inside. Desert cultures employed evaporative cooling towers to take advantage of the arid climate and perforated screens to maximize airflow. All of that was largely forgotten with the advent of air conditioning.

Creating a building that kept its occupants comfortable was no longer a matter of architectural design but simply a calculation of air conditioning capacity done by an HVAC engineer. The architect’s job became delivering a building that was flashy in appearance but relatively inexpensive to build. Hence the popularity of “glass cube” office towers consisting of a few simple geometric shapes sheathed in reflective glass. Operable windows and “U”-shaped buildings were now a detriment. The “U” shape that kept workers close to an open window on hot days now is a waste of potential leasable area, and operable windows simply mess up the balance of the HVAC system and increase costs.

It didn’t make any difference what the local weather patterns were like or that the west facade and the north facade looked exactly the same despite wildly different solar heat gain coefficients. Architects were focused on building construction costs – the cost of running an air conditioner in a poorly designed building was an operating cost that many architects chose to ignore.

It also meant that residential construction in Phoenix, Las Vegas and Palm Springs moved away from adobe and other forms of masonry to the same type of wood frame construction that was used in Minneapolis, Chicago and other northern cities. Fast and cheap were the key parameters when comfort was simply an issue of twisting the thermostat dial a little bit further.

The Bad News and the Good News

Most current air conditioners use what is known as the vapor compression cycle. A refrigerant vapor is compressed and sent to a condenser outside the building where it releases heat into the atmosphere and changes from a vapor into a vapor/liquid mix. The refrigerant is then routed through an expansion valve where it drops in pressure and expands. This change in pressure and form (the refrigerant is now about 75% liquid) causes the refrigerant to drop in temperature. It is then run through an evaporator (inside the building) where it absorbs heat (i.e., cools the building) while converting from mostly liquid back to a vapor.

This is a reliable and effective form of cooling technology, but it has three environmental drawbacks. First and foremost, the process uses a considerable amount of electricity. It is estimated that roughly 6 percent of the electricity generated in the U.S. is used for cooling (globally it is closer to 10 percent). Since about 60 percent of our electrical capacity comes from burning fossil fuels, it means that keeping cool contributes to the greenhouse gasses that in turn contribute to global warming.

Secondly, the heat that air conditioners release into the atmosphere actually makes a hot day even hotter. The impact is pretty minimal, but in dense urban areas the combined heat from air conditioners could raise the ambient outdoor temperature by perhaps one degree. Finally, many air conditioners use hydrofluorocarbons as refrigerants which are far more potent greenhouse gasses than carbon dioxide. Of course, air conditioners are designed not to leak and refrigerants are designed to be recycled, but as equipment ages, leaks do occur and there are a lot of old air conditioners still in use.

Fortunately, not all the news is bad. We have steadily improved our air conditioning technology with better compressors, better heat exchangers, better refrigerants and better thermostats. It is estimated that a modern air conditioning system is roughly 50 percent more energy efficient than a similar capacity unit from 30 years ago. In addition, progress is being made on replacements for the vapor compression style of air conditioner that have the potential to improve efficiency by another 50 percent in the next 10 to 15 years.

At the same time, the sources of electrical power are getting greener each year. As recently as 2007, nearly half of all U.S. electricity was generated by coal-fired plants – the dirtiest source we have. As of 2023, that share was down to just 16 percent and it will continue to fall. Most of that loss in electrical capacity was replaced by power plants fueled by natural gas – another fossil fuel – but one which is far cleaner than coal.

In addition, the use of renewable sources for electricity has been booming. The amount of electricity generated by renewables has increased by more than 250 percent between 2007 and 2023, and that share will continue to grow. [5] In the first half of 2024, just over 20 gigawatts of commercial-scale generating capacity was added to the electrical grid. Of that amount, approximately 60 percent was solar, 12 percent was wind, and 21 percent was utility-scale battery storage. Just 2 percent of new capacity was powered by natural gas. [6] Assuming those trends continue, in 10 years the US electrical grid will have very little contribution from coal-fired plants, and renewables plus nuclear will account for well over half of total capacity.

The Bottom Line

The end result is that we have become lazy and complacent in the use of air conditioning, and that is indeed a bad thing. It is not that difficult to design buildings that have lower air conditioning (and heating) loads, and the resulting buildings not only have lower operating costs and a reduced environmental impact but often are more interesting to look at. Building owners and developers need to insist that architects pay more attention to those details.

On the other hand, while we certainly could be more efficient in our use of air conditioning, I have a hard time understanding why air conditioning should make us feel any more guilty than Bitcoin mining or massive AI server farms or any of hundreds of other power-intensive activities. Air conditioning has had enormous benefits for human health and productivity that seem to more than offset the environmental impact.

I find it fascinating that articles decrying our dependence on air conditioning seem far more common than articles advising a reduction in our dependence on furnaces to keep warm in the winter. At least air conditioning has the potential to get “greener” as the electrical grid continues to shift toward renewables, while heating technology is still reliant to a considerable degree on the direct burning of fossil fuels such as natural gas, heating oil and even wood. Yes, global warming is slowly increasing the need for air conditioning and reducing the need for furnaces, but the disparity is hard to understand.

Given that countries around the globe have missed climate target after climate target, I think the goal of stopping or reversing global warming at any time in the foreseeable future is mostly wishful thinking. Realistically, I think we need to start thinking about adapting to a warmer world and air conditioning seems like a key technology in that regard. We should, of course, continue to improve its efficiency and continue to expand the use of renewable energy sources, but disparaging a technology that might be crucial to our societal well-being seems silly.

A more rational approach would be to encourage greater energy efficiency in all of our daily activities. If anything, we should favor technologies that are largely electrical like air conditioning since the impact of renewable power sources for electricity are likely to decrease our overall carbon footprint over time. City planners have a role in encouraging urban design strategies that reward energy efficient buildings and lessen the urban heat island effect – but that is a topic for a different post. In the meantime, I’m not going to feel guilty about keeping the AC on until fall weather arrives.

Notes:

1. Philip Kennicott; “Addicted to Cool: How the dream of air conditioning turned into the dark future of climate change”; The Washington Post; September 2023; https://www.washingtonpost.com/style/of-interest/interactive/2023/air-conditioning-climate-change/

2. Casey Crownhart; “Why air-conditioning is a climate antihero”; MIT Technology Review; July 2023; https://www.technologyreview.com/2023/07/27/1076774/air-conditioning-climate-antihero/?gad_source=1&gclid=Cj0KCQjwiOy1BhDCARIsADGvQnCMq3it_HKW4UAv2n1JL0EIV_xkwAWV4uR0-XmVMjAjoDT01SxdeigaAmb0EALw_wcB

3. Charlotte Elton; “Absolutely Disastrous: Air conditioners take horror toll on the environment, campaigners warn”; EuroNews; July 2022; https://www.euronews.com/green/2022/07/30/absolutely-disastrous-air-conditioners-take-horror-toll-on-the-environment-campaigners-war

4. Matt Largey; “Birth of the cool: A brief history of air conditioning”; KUT News; July 2018; https://www.kut.org/science/2018-07-17/heat-hot-weather-invention-of-ac

5. “Electricity explained”; U.S. Energy Information Administration; March 2024; https://www.eia.gov/energyexplained/electricity/electricity-in-the-us.php

6. “Today in Energy: U.S. power grid added 20.2 GW of generating capacity in the first half of 2024”; U.S. Energy Information Administration; August 2024; https://www.eia.gov/todayinenergy/detail.php?id=62864#:~:text=Plans%20for%20changes%20in%20capacity,and%20wind%20(4.6%20GW).

Post 48: The Population Crisis That Isn't - Part 2

noreply@blogger.com (Doug Johnson) — Mon, 22 Jul 2024 19:24:00 +0000

One of the trends in the city planning profession these days is known as scenario planning – a technique designed to help communities prepare for an unknown future. The process begins by evaluating current conditions, reviewing relevant forecasts, and identifying important trends and limitations that might shape the future. With this information, a variety of plausible scenarios are developed that represent a range of possible futures. This is in contrast to more traditional planning efforts where there is just one future under consideration, typically one that is just an extension of the past, but somehow magically better.

Each scenario is then analyzed to determine what life would be like, what problems would have to be addressed, and what steps the community could take to make the scenario as liveable as possible. It is a labor-intensive approach to community planning. If done correctly, however, it can be extremely helpful in getting a community to face a realistic range of options and reach conclusions about the future that are much more helpful than an approach based on a singular vision. In particular, it gets communities to face the possibility of unpleasant future events – something which can be very useful if life doesn’t go as planned.

For this Part 2 look at population change, I’m going to do something similar in that I’m going to try to analyze a possible future scenario. Due to limitations on space (not to mention your patience and my time), I’m just going to look at one scenario, not many. But I’m going to select a relatively negative one that should highlight the potential pitfalls that many of the population naysayers are fretting about.

Assumed Parameters for the Future

The U.S. Census Bureau does a range of projections that are updated every year or two. I’m going to use the 2023 “low” projection, which is certainly not the worst possible population outcome. It is, however, a professionally done projection (with lots of supporting detail) which is significantly below the middle or main projection series that is typically used for most official decisions. The main projection, for example, shows the US population peaking in 2080 at 370 million people and then dropping slightly to 366 million by 2100. The low projection, on the other hand, has the population peaking in 2043 at 345 million people (just 11 million more than today’s population) and declining to 319 million by 2100. [1]

It is always entertaining to talk about apocalyptic changes because they make such great headlines, but the fact of the matter is that the apocalypse simply doesn’t arrive very often. This is why I’m so skeptical of the gloom-and-doom population forecasts. The projection I have chosen is lower than what most professional demographers think will happen, but it is at least reasonably plausible. Besides, if you want to be apocalyptic, you should focus on the death side of the population equation because both mankind and nature have been quite creative in figuring out how to kill people. Births may go up or births may go down, but they don’t go away because there is a strong human urge to procreate.

Aside from the possibility of World War III, the biggest population variable for our country is going to be the rate of immigration. The low projection that I will be using includes immigration rates that are significantly lower than what we have experienced in recent decades.

All of this comes with one enormous caveat – a population projection to the year 2100 has little science or professional judgment involved. It is simply a mathematical extension of assumed trends. It is as much fiction as anything. Seventy six years into the future is three full generations in a world where the pace of change in just one generation is breathtaking. I am doing it simply to illustrate what might happen if trends remain unchanged, but the likelihood of trends going unchanged for that long is extremely low.

Think of going back in time 76 years to 1948. The birth rate was more than double what it is now and the country was entering what would come to be known as the “baby boom.” How many people would have predicted that birth rates would fall so dramatically despite huge advancements in our standard of living? How many people would have predicted that the average person getting married would be nearly 30 and that young couples would be comparing the advantages of having a baby with getting a dog? Not many, and our ability to see what life will be like in 2100 is equally blurry.

But, IF IT DID HAPPEN, here is what the numbers might look like. I’m going to focus on three age groups to keep things simple: ages 0 through 14 (children), ages 15 through 64 (workers), and ages 65 and up (retirees). These proxies have some weaknesses, but the simplification they allow is worth it. I’m also going to focus on three 25-year increments: 2025 to 2050, to 2075 and to 2100. Each step is roughly one generation.

U.S. Population Estimates by Age Group (in thousands)

Source: U.S. Census Bureau - Low Projection

	2025	2050	2075	2100

0-14	57,734	51,209	45,933	41,615

15-64	215,523	213,001	195,637	179,687

65+	63,221	80,819	96,040	97,730

Total	336,478	345,029	337,610	319,032

As you would expect with low birth rates, the number of young people declines. In this scenario, it goes from roughly 58 million children in 2025 to less than 42 million in 2100, a drop of 28 percent. The middle age range drops as well, although not as quickly. It starts at 216 million in 2025 and ends up at 180 million by 2100. Although not everyone in this age range will actually be in the labor force, it represents a loss of 36 million potential workers. The elderly group is the only one that gains, going from roughly 63 million in 2025 to nearly 98 million in 2100, an increase of more than 50 percent.

This means that the ratio of people of working age compared with people who typically don’t work (children and retirees) grows to worrisome levels. Known as the dependency ratio (and expressed as the number of “dependents” per 100 people of working age), it goes from 56 in 2025 to almost 78 in 2100. Especially worrying is that these “dependents” are increasingly retirees who are big users of medicare and social security.

Equally important is that the number of females of childbearing age declines steadily from roughly 76 million in 2025 to less than 60 million in 2100. Fewer females of childbearing age means fewer babies even if birth rates start to go back up. This is part of the demographic momentum that has some people so freaked out. They see declining birth rates as a self-reinforcing trend that doesn’t end until humankind is basically extinct. While possible, it is certainly not inevitable, nor even likely in my opinion. The trend can be reversed, it just takes several generations of women with birth rates above the replacement rate of 2.1 births per woman.

Ramifications for Our Country and Society

So what do the numbers mean in terms of changes to our everyday life? Aside from human extinction, many experts are predicting a variety of mostly negative effects that we would have to deal with as a society. Although I’m going to be focused on the U.S., these impacts are shared to much the same degree with every country that is experiencing low birth rates and population decline.

Declining rate of production. Fewer workers is likely to lead to labor shortages which could easily put a major crimp in our long-standing pattern of economic growth. It is not clear which industries would be most affected, but my guess is that the industries which pay the worst or which have the least attractive jobs will suffer the most (e.g. the fast food business or elder-care assistants). Companies will either have to figure out how to do more with fewer workers or face a future where output shrinks instead of grows.

Inflation. Labor shortages will lead to increased labor costs as companies bid more and more for increasingly scarce workers. Increased labor costs combined with potential product shortages (due to labor shortages) could fuel a general rise in the cost of day-to-day life. There are likely to be some anti-inflationary forces at the same time so it is not clear how things will balance out, but labor intensive industries in particular will feel inflationary pressure.

Lowered consumer expenditures. According to the U.S. Bureau of Economic Analysis, consumer spending makes up 65 to 70 percent of our country’s gross domestic product (GDP). Fewer people mean fewer purchases, which is bad for retailers as well as a significant chunk of the manufacturing industry. Declines in the number of children and working age people are particularly painful because they tend to buy more stuff. Old people already have closets full of clothes and houses full of furniture, for example, and thus are less likely to buy as much.

Funding shortages for Medicare and Social Security. Both of these Federal programs depend to a significant degree on payroll taxes paid by the current workforce to fund benefits to retirees. As the number of workers decline and the number of retirees grows, the already tenuous balance in funding will become unsustainable given current funding sources. A 2023 Gallup poll found that 47 percent of non-retired U.S. workers believe that Social Security will not be able to pay them benefits when they retire. This percentage has been relatively stable for several decades, but the fear is much more justified as the dependency ratio increases.

Declining influence on world affairs. America’s ascendency to world leadership starting roughly one hundred years ago was fueled in part by a young and rapidly growing population coupled with a robust economy and an innovative manufacturing sector. How will our world image change if we are rapidly aging and losing population? Will the free world look elsewhere for leadership? For a country that touts its “exceptionalism,” a decline in global influence would be hard to swallow.

Shifting politics. Retirees have always been an important political bloc because they are such reliable voters, but their importance will increase dramatically as their population numbers grow. Issues that are of particular concern to older voters – such as long-term medical care or enhanced crime fighting initiatives – are likely to gain more traction while issues that are important to younger voters – such as climate change or gay rights – may be put on the back burner.

Withering school districts. As the population under the age of 18 continues to fall, there will be corresponding drops in student enrollment numbers even in suburban districts that grew rapidly in the past. This means that there will be a surplus of both teachers and school facilities that will need to be downsized. It also means that political support for educational expenditures and school bond issues may be harder to come by, which may lead to school infrastructure that is increasingly antiquated.

Real estate crash. The commercial real estate market is already struggling due to low office occupancy rates, but stagnant or falling population numbers could make it much worse. Fewer workers would push commercial vacancy rates even higher, and if the overall population falls then the housing market could flip from housing shortages to housing surpluses. Buildings don’t last forever so there will always be some demand for new development, but it could be a fraction of what it is now which would decimate the real estate industry.

Tax base erosion. There have only been a handful of cities that have actually gone bankrupt, but they share a common attribute: falling populations. Local governments seem particularly susceptible to the delusion that their economy and population numbers will keep expanding more or less indefinitely. This is why local governments and their economic development arms are constantly pushing for new growth, even if many of their constituents are fed up with the negative ripple effects. Future demographic changes threaten the stability of government revenue streams in several ways: income tax revenue may fall if the number of workers declines, property tax revenue may fall if the real estate industry struggles, and sales tax revenue may fall if people buy less stuff.

Taken in combination, this list of negative effects from falling birth rates seems dire indeed. No wonder many people are predicting that our standard of living is going to decline, our influence is going to wane, and our prospects for the future are going to dim.

Countervailing Trends

One of the problems with trying to predict the future is that we tend to focus on just one issue that is of particular concern at the moment (e.g. birth rates). This is understandable given the complexity of our world, our economy, and our social interactions. Unfortunately, it is also a fatal flaw because nothing changes in isolation from other things that are happening simultaneously. Many of these ‘other things’ end up counterbalancing the one thing we thought was so catastrophic. That is why catastrophes are predicted far more often than they actually occur.

I’m going to look at four such counterbalancing trends that will not reverse falling birth rates but which will lessen the negative effects. All four are important, but I’m going to present them in what I think is their ascending order of importance.

The ‘gig’ economy. Fifty years ago, the labor market was much more structured than it is today. If you were a worker, you worked full time for perhaps two or three employers during your lifetime. When you retired, you traveled or worked on hobbies or watched TV until you died. Today, things are a lot more fluid. Many workers change jobs every few years, and roughly 10 to 15 percent are self-employed. But that number roughly doubles if you include people who work at a regular job while also having a ‘side-gig.’ Many work with platform-based apps like Uber, Doordash or TaskRabbit to find work, but others use personal or professional connections to find lucrative side hustles outside of normal job market channels.

The result is that retirement is no longer a firm dividing line between working and not working. According to a 2023 survey by the Transamerica Center for Retirement Studies, more than half of the respondents planned on working past “retirement” – mostly part time. [2] The end result is that while the number of people who are over 65 years of age will indeed grow dramatically, many of these people will continue to work. This means they will continue to pay employment taxes and continue to build wealth to help them through medical or end-of-life expenses. The internet, phone apps, and widely available broadband connections enable retirees to have more ways to earn money than ever before.

Declining births is a world-wide trend. Despite the population problems that the U.S. is facing, the reality is that nearly all of the other countries that we compete with economically or militarily are in no better shape than we are. In fact, most of them are worse off. As an example, let’s look at Russia which has always had a population that was much smaller than the U.S. but now things are really getting bad. First, the Russian birth rate is lower than the U.S. birth rate and has been since roughly 1990. Second, nearly 150,000 Russian soldiers have been killed in Ukraine – mostly men who otherwise might be starting families. Third, hundreds of thousands of Russians (perhaps close to a million) left the country after the Ukrainian invasion – again, mostly young people who should be starting families. Fourth, life expectancy in Russia is roughly 10 percent lower than in the U.S., and not just because of the war. Finally, immigration into Russia is minimal because not that many people are interested in living in a dictatorship. [3]

The bottom line is that if America is losing its global prominence, it isn’t because of the potential for future population declines. Military and economic power is diffusing across the globe primarily due to changes in technology. America is not the only game in town and our power no longer dwarfs everyone else’s. Somali warlords with drones that can attack commercial shipping or western military targets may be a more of an immediate threat than traditional warfare with Russia, China or Iran.

Robots and drones. Most people are familiar with industrial robots that do much of the work on automobile assembly lines or retrieve boxes of goods in Amazon warehouses, but that is just the tip of the iceberg in the rapidly expanding field of robotics. The newest versions are being designed to work side by side with humans to help with tasks such as cooking french fries, providing hotel housekeeping, bricklaying, simple medical operations, and dozens of similar activities. Jobs that are repetitive, reasonably standardized, or dangerous are likely to be the first targets.

Similarly, drones are being tested to supplement the productivity of delivery drivers. Some day your pizza may arrive via an autonomous drone that won’t expect a tip. On the battlefield, drones have turned into a major weapons system that is both flexible and deadly while minimizing the direct exposure of troops.

At a macro level, the concern about labor shortages caused by falling populations may largely be balanced by the rise of workforce robots, drones and other forms of automation. At a micro level, however, there are likely to be mismatches caused by workers losing their jobs to robots that do not have the proper skills for the job openings in other industries. That redefines the problem not as a labor shortage, but as a workforce training issue.

Artificial intelligence. People may be getting sick of all the hype around artificial intelligence when practical examples seem lacking or trivial in nature. Sure, I can use ChatGPT to write a memo to my boss with little effort on my part, but that isn’t going to change my life or redefine my job. In my opinion, however, artificial intelligence is not being hyped enough. Yes, the truly useful applications may still be 5 or 10 years out, but it is hard for me to think of any industry that isn’t going to be substantially enhanced and redefined by this technology. Artificial intelligence will cause worker productivity to skyrocket which means that overall economic productivity should grow at healthy rates even as the human labor force declines in size.

Concerns about who will take care of the growing elderly population may melt away if most retirees have a personal assistant powered by artificial intelligence that prompts you to take your medications, reminds you if you left a stovetop burner on, can direct you to the place you left the car keys, warn you that the email you just opened is likely a scam, and make sure bills are paid on time. Such an assistant could even engage in friendly conversation during the day to lessen loneliness and could send a message to loved ones if your cognitive abilities decline to dangerous levels. This level of human/computer interaction may sound creepy now, but I think it is likely to be the norm in the not-too-distant future, and it will be replicated in industry after industry.

The issue will not be the amount of available labor, but the knowledge and sophistication of the available labor. Again, the problem is redefined away from one that is population centric to one that is technology and education centric.

Adaptations

Human beings are wonderfully adaptive creatures. When problems occur, we can either fix whatever is wrong, avoid the problem or adapt to the new normal. Falling birth rates, and eventually falling populations, might not be our preferred future but there are a number of things that can be done to minimize the negative impacts. In fact, the rapid population growth of the past 100 years is the anomaly – for virtually all of human history population growth was glacial and full of temporary setbacks. We adapted in the past and we can adapt in the future.

Raise the retirement age. In 1950, the average life expectancy was 68 years and the standard retirement age was 65. That means that the average worker – in rough terms – had just 3 years of life in retirement before dying. The current U.S. life expectancy is 79 years and the retirement age is 67 – a difference of 12 years. No wonder Social Security funding is out of whack. Raising the retirement age by one year every three to five years until the retirement age is 72 or 75 would go a long way toward putting Social Security funding back in balance. Similar adjustments could be made to Medicare.

Of course, workers in France virtually rioted when a proposal was made to raise their retirement age from 62 to 64, so some opposition should be expected. But working a couple of extra years in exchange for a reliable Social Security system seems like a reasonable trade off.

Focus on corporate taxes. As noted above, many of the traditional sources for government revenue may weaken if populations start to fall. The one exception is that corporate profits should soar as the benefits of artificial intelligence and robotics kick in. Taking care of a big elderly population will be expensive so the overall tax burden is likely to go up. Raising taxes is never popular, of course, but my guess is that corporations will end up footing much of the bill.

Reinvent school districts. Low birth rates are going to cause school districts to end up with too many buildings, too many teachers, and too few students. One option, of course, is for schools to shrink and consolidate. But a better option, in my opinion, is for schools to redefine their mission to not just educate children, but to educate the entire community. Workers, for example, will need to learn new skills if they lose their job to artificial intelligence. Retirees will need to learn how to best take advantage of new technology. Local schools are in the best position to fill those needs.

I could write a series of posts on this topic alone, but suffice it to say that I think school districts need to think outside the box – WAY outside the box. Schools need to be the foundation upon which continuous, life-long learning is built. Change is already happening too fast for many people to keep up and schools need to fill the void.

Conclusions

It should be obvious that I don’t see the current trend of falling birth rates to be an existential threat to human survival. There will be challenges to face, but the end result in 100 years is just as likely to be positive as negative, in my opinion. The human race has always made adjustments as society, technology or the environment changed, and we will continue to do so in the future.

The most serious problem is that the fallout from falling birth rates and the adjustments and countervailing trends will not be synchronized in a way that minimizes suffering. Artificial intelligence, for example, may replace thousands and thousands of jobs before population trends lead to a falling workforce. A new balance will eventually be found – as it always has in the past – but there will be considerable pain and angst to work through. Mankind certainly has things to worry about, but falling birth rates are not worth losing sleep over.

Notes:

1. United States Census Bureau; “ U.S. Population Projected to Begin Declining in Second Half of Century”; November 2023; https://www.census.gov/newsroom/press-releases/2023/population-projections.html

2. Transamerica Center for Retirement Studies; “The Multigenerational Workforce: Life, Work and Retirement”; June 2024; https://www.transamericainstitute.org/docs/research/generations-age/multigenerational-workforce-life-work-retirement-survey-report-2024.pdf?sfvrsn=ef00c973_9

3. Betsy McKay and Georgi Kantchev; “Putin’s Existential Problem: Not Enough Russians”; June 2024; The Wall Street Journal; https://www.wsj.com/world/russia/putin-russia-population-birthrate-war-904d74a7?mod=djem10point

Post 47: The Population Crisis That Isn't - Part 1

noreply@blogger.com (Doug Johnson) — Fri, 28 Jun 2024 18:20:00 +0000

It seems that there is a nearly endless list of “crises” which are threatening to destroy the earth, the human race, or at least our way of life. Will Russia use nuclear weapons in an attempt to win their war in Ukraine? Will global warming turn the earth into an uninhabitable wasteland? Will the current economic malaise turn into another Great Depression? Will the USA be sucked into a war with China over Taiwan? Will either (or both) of our presidential candidates fall into full senility before the election? I’m surprised I can sleep at night.

Lately, another crisis has been dumped on our already overflowing plate: low fertility rates and the impact that will have on the human population. That expert on all things – Elon Musk – recently was quoted saying that “Population collapse due to low birth rates is a much bigger risk to civilization than global warming.” He has also been quoted as saying “. . . let’s not gradually dwindle away until civilization ends with all of us in adult diapers, in a whimper.” Finally, at a conference on artificial intelligence in 2019 he said that “Assuming there is a benevolent future with AI, I think the biggest problem the world will face in 20 years is population collapse.” [1] Fortunately for all of us, he is on the job and doing his part. Musk has reportedly fathered 12 children with three different women and recently got into hot water for apparently asking a SpaceX employee to “have my babies” or something of the sort. [2] Not surprisingly, that woman later left the company with a very healthy exit package.

But it is not just Elon Musk ringing the alarm bells. Last fall the New York Times published an op-ed piece written by Dean Spears, an Assistant Professor of Economics at the University of Texas entitled “The World’s Population May Peak In Your Lifetime. What Happens Next?” In the article, he writes about the likelihood of world population peaking before the end of the century and then rapidly declining over the next two centuries. He includes a graphic which appears to show (the graphic has no scale) world population dwindling to virtually nothing and he laments the millions (or billions) of lives not lived had birth rates only remained high. Unfortunately, he does not provide any information on what the quality of those lives would be like if world population were to continue climbing without end.

Numerous other articles have been written on declining birth rates, although most of them are considerably less apocalyptic, and they continue to show up in my news feed on a weekly if not daily basis. My goal with this blog post is to put the issue into perspective and give you the facts to form your own opinion. Yes, declining birth rates pose challenges for both governments and our society as a whole. But the changes will happen relatively slowly compared with other societal challenges, the trends are reversible, not inevitable, and there are parallel changes taking place elsewhere in our society that may well minimize the negative effects of slowing (or even negative) population growth.

The Basics of Population Change

At the most rudimentary level, population change is determined by the number of births minus the number of deaths in any given year. Both of those numbers are variable and difficult to predict precisely – especially as you move further and further into the future. This is particularly true of the death side of the equation because it is subject to the effects of war, plagues and pandemics, famine, poor medical care, etcetera, etcetera, etcetera. Births are a little more predictable but are also variable due to the effects of contraceptive availability, religion, economic well-being, and several other factors.

The impact of time is crucial because population change in one generation is compounded (both positively and negatively) in future generations. If you get something wrong in a population projection, the mistake is magnified by each subsequent generation. Thus, the further into the future you project, the sketchier population estimates become. In my opinion, population projections more than 20 or 30 years into the future are tenuous, more than 50 or 60 years are just guesses, and projections more than 100 years into the future are fictional. Given the current pace of change, we have no idea what the world will be like in 2124 and that includes not knowing the fertility rate of women in the next century. Yes, we can extrapolate the current trend lines (a la Dean Spears and others) but that is a meaningless exercise because it ignores the human ability to evaluate the current situation and act independently of what previous generations have done.

To illustrate just how crazy long-range population estimates can be, look at the projections for world population done by the United Nations (one of the more respected projection sources). They do multiple projections using different assumptions and then use the median result as their preferred estimate. As of 2022, that median estimate for world population in the year 2100 is just over 10 billion people. But the range of all projections goes from a high of 14.5 billion to a low of 6.5 billion people – a spread of 8 billion! [3] The fact is that no one knows which demographic assumptions are correct.

Hopefully, that line of reasoning dissuades you from worrying about the population numbers in the next century and beyond, and particularly from losing sleep over the extremely unlikely scenario that human civilization will be threatened by the population dwindling to almost nothing. There are however, good reasons to look at fertility rates, human longevity, and economic growth over the next several decades to think about what might happen to our society if current trends do not change. Not that things can’t change, but if they don’t there will be significant impacts on our society and on the decisions that governments will be forced to make to keep our world moving forward.

To put a little more sophistication into the births minus deaths equation, there are a couple of factors that should be discussed in order to really understand what the current brouhaha is all about. In particular, the birth side of the equation is dependent on the number of women who are in the appropriate age range for giving birth (generally assumed to be 15 to 50) and the average number of births per woman during their lifetime. It is that last number, often referred to as the fertility rate, that is at the core of current concerns. Women over much of the world are having far fewer babies than they used to. So few, in fact, that the population of some countries is falling and many more are on the cusp of falling.

Centuries ago, childhood mortality was so high that women would need to have six or eight children just so that two or three would survive into adulthood. The birth rate was high but longevity was so low that total population grew at a snail’s pace. Advancements in medical care, child care, and economic well being have greatly reduced childhood mortality rates in most parts of the world. So much, in fact, that if the average woman has 2.1 births during her lifetime the population would eventually stabilize. That 2.1 number is known as the “replacement rate.”

The problem is that the fertility rate has been dropping rapidly. Worldwide, the rate is estimated to be about 2.3 births per woman (down from nearly 5 births per woman in 1970) and is much lower in many countries. In the US the rate is 1.7, in Germany it is 1.5, in Japan it is 1.3, and in South Korea it is 0.8.

To illustrate how all of this plays out over time, let’s look at what has happened to China over the past 60 years. China used to be the world’s most populous country (recently replaced by India) and in the 1960s it had an average fertility rate of over 7 births per woman. The concern of the Chinese government at that time was over-population despite the fact that the birth rate was falling rather quickly. In 1980, China instituted the “one child policy” which had two primary effects. First, it caused the fertility rate to drop even further, from 3.6 births per woman in 1975, to 2.6 births per woman in 1985, to 1.6 births per woman in 1995. The one child policy was officially dropped in 2015, but fertility rates have continued to decline to approximately 1.2 births per woman in 2022.

Second, the one child policy caused a distortion in the Chinese gender balance. In Chinese culture, the bloodline is passed down through the male side of the family, so if only one child is allowed, there is a strong preference for a male child rather than a female one. This preference was implemented through abortion, infanticide and sending female babies off for adoption to the point where China now has roughly 30 million more men than women. [3]

This situation is a double-whammy for China’s population because not only are birth rates low, but there is an unnaturally low number of women that are of prime childbearing age. The result is that for the first time in many decades, China’s population is falling. To be clear, there are still more than 1.4 billion people in China, but that number could fall below one billion by the end of the century. In addition, the Chinese population will age fairly rapidly and will eventually reach the point where there are more people outside of normal working ages (younger than 15 or older than 65) than there are people of working age (15 to 65). That ratio, known as the dependency ratio, has obvious implications for the Chinese economy and society.

What is happening in China is an example of what is happening in several other countries and a preview of what is likely to happen in many more countries in the near future. It is not, however, an illustration of what is happening everywhere. Globally, the population is still increasing, particularly in sub-Saharan Africa. The world’s population just recently passed 8 billion people and is expected to reach roughly 9 or 10 billion before the end of the century. Thus, the issue – at least for the foreseeable future – is not so much the total population of the world, but the distribution of that population on a country by country basis, and the distribution by age range within each country.

That is the discussion that really needs to take place. A thoughtful discussion of our future is always a good idea, and to be fair, that is a part of what Dean Spears was advocating in his op-ed article. I hope to make you aware of the issues and the data to an extent that you can be an effective participant in that discussion. For the remainder of this post – and the second part which will come soon – I am going to focus primarily on the USA, although I will occasionally reference other countries for comparison.

Population Trends in the United States

The population of the U.S. has grown almost uninterrupted throughout its history, and recent decades are no exception to that trend. Looking at the past 100 years on a decade by decade basis, the slowest growth (both as a percentage of change and in total population numbers) occurred during the 1930s. The largest percentage change occurred during the 1950s and the biggest change in total population took place during the 1990s. What is remarkable is the consistency of population growth for that entire time with only a couple of minor fluctuations.

Source: US Census Bureau

All of this has taken place despite the fact that fertility rates have dropped considerably during that time, particularly from roughly 1960 to 1975 when effective birth control options became much more widely available. In 1960, the fertility rate was 3.7 births per woman but had fallen to 1.8 by 1975. The fertility rate bounced back for much of the 1990s and early 2000s to around 2 births per woman, but has fallen steadily since about 2008 to a rate of 1.7 births per woman today.

When you are focused on the population of a single country versus the entire planet, migration is another factor that needs to be added to the population equation. The number of births minus deaths is known as “natural” population change, but total change is natural change plus (or minus) migration. In the case of the U.S., that has consistently been a significant “plus” factor throughout our history. Although there is a considerable amount of political controversy over immigration at the moment (particularly illegal immigration), the current number of immigrants living in the U.S. expressed as a share of total population is virtually identical to the immigrant share from 1850 to roughly 1930.

Compare that to China which has experienced out-migration virtually every year for the past several decades. Although precise numbers are hard to find and can fluctuate dramatically from year to year, the average out-migration for the past 30 years has typically been roughly 250,000 people. This is now a triple whammy for the Chinese population (low birth rates, fewer women, and out-migration) which will have economic and political ramifications for years to come.

So what impact does all of this have on the U.S. population going into the future? Census Bureau projections – again based on assumptions that may or may not prove true – show the total population growing to roughly 370 million people by 2080, and then falling back slightly to 366 million by the end of the century. Natural population change (births minus deaths) turns negative somewhere in the early 2040s, which means that immigration becomes the driver for population growth. Assuming that all of this is correct, that still means that our country will have 30 to 40 million more people by the end of the century than it does today – hardly a “population collapse.”

The Changing Face of Age Distribution

A more serious issue is the impact that declining birth rates will have on the number of children, the number of workers, and the number of elderly people. Those changes will have serious ramifications for school enrollment, economic growth, senior living/senior care arrangements, and many other aspects of community life. Those ripple effects will affect both government expenditure patterns and government revenue streams at the local, state and national levels.

Demographers have traditionally used what is known as a population pyramid to illustrate the age and sex distribution of a given population. It is essentially a specialized chart that shows the share of the population that is male or female, broken down into five-year cohorts. See, for example, the population pyramid for the United States in 1970 below. The male share of the population is on the left and the female share is on the right, with age groups from 0 to 4 at the bottom ranging to over 100 at the top.

Source: PopulationPyramids.net

For the purposes of this analysis, I’m going to focus on four specific groups: (1) children aged 0 to 15, (2) working age adults aged 15 to 65, (3) women of childbearing age (15 to 50), and retired people over the age of 65. These categories are far from perfect. Many parents don’t consider their children to be adults until they have graduated from college at 22 (or older). Most people would actively discourage a 15- or 16-year-old from having a baby even though it might be physically possible. And many people retire before the age of 65 or work beyond 65. Still, these categories are reasonable proxies that will illustrate the points I am trying to make.

In 1970, notice that 28.3 percent of the population is less than 15 years of age, while only 9,7 percent are 65 or over. The working age category (15 - 64) represents 61.9 percent of the population, which means the dependency ratio is 61.3 (the number of “dependents” - under 15 or over 65 - per 100 people of working age). The share of the population that are females of childbearing age is 23.9 percent.

Compare the 1970 chart to the one for 202o, and notice how much less pyramidal it is. Only 18.5 percent of the population is less than 15 years of age, a drop of almost 10 percentage points. The category over 65 has grown to 16 percent, while 65.5 percent are working age. This means the dependency ratio has fallen to 52.7. The share of the population that are females of childbearing age has dropped slightly to 22.7 percent.

Source: PopulationPyramids.net

The changes are even more dramatic if you look at the projected population pyramid for 2060. The “children” category has fallen to 14.9 percent of the total population, and the “retired” category has risen to 25.7 percent. The “working age” category has dropped to 59.6 percent, which means that the dependency ratio is projected to be 68.4. The share of the population that are females of childbearing age has dropped to 20 percent.

Source: PopulationPyramids.net

The bottom line is that the number of retired people is growing rapidly, both numerically and as a percentage of the total population. And even though the share of the population that is younger than 15 is falling, the number of “dependents” per 100 people of working age is rising. Finally, the share of women that are of childbearing age is steadily falling which means that fewer babies will be born even if birth rates stabilize. This compounding effect is why natural population change will turn negative in less than two decades. In fact, fertility rates would have to climb back to the replacement rate (or above) for several generations for the population to stabilize.

Why Are Fertility Rates Falling?

Attempts to answer this question have resulted in a great deal of speculation, but I’m not sure there is really a definitive answer. The decision to have a child or not is an intensely personal one that is subject to multiple, and often conflicting, influences. Different people in different cultures and different circumstances are likely to reach different decisions.

This is also an area where I suspect there could be a fair amount of confusion between correlation and causation. Many factors might be highly correlated with declining birth rates but whether they cause declining birth rates is another issue. Despite the difficulty, I think it is important to try to understand the underlying causes because if efforts are made to reverse the decline, then the more the reasons are understood the more effective those efforts are likely to be. I am going to present several of the theories that I find most persuasive, but I am certainly no expert so take the following section with a grain of salt.

Increasing female empowerment. Two factors which are highly correlated to declining fertility rates are increased educational attainment and increased labor force participation by women. I think they are also closely linked so I’m going to combine them under the heading of female empowerment. Both education and workforce participation broaden horizons for women beyond the traditional roles of mother and homemaker. Having a child is no longer the primary way to seek a sense of accomplishment, it is just one way out of several that are open to women who are educated and skilled. In this sense, an economist might view the decision to have a child as an increased opportunity cost – the more successful a woman becomes the more that having a child is likely to entail giving up or compromising some other personal goal. [5]

Improved contraceptive choices. Over the last several decades, contraceptives have become more effective, less expensive, more socially accepted, and easier to acquire. One of the watershed moments, of course, was the release in 1960 of the first oral contraceptive pill, Enovid. The “pill” and other contraceptive drugs and devices allowed women to shrink the gap between actual fertility and desired fertility. In this sense, contraceptives are less a reason for lowered fertility than a facilitator of preferences for lowered fertility. But they also allowed women to avoid unwanted pregnancies which has caused a marked reduction in the number of births. For example, the teen birth rate has fallen dramatically – from roughly 60 births per 1,000 adolescent females (15-19) in 1990 to roughly 15 births per 1,000 adolescent females today – largely due to the wide availability of contraceptives. [6]

Improved well-being and status of children. Two other factors closely associated with declining fertility rates are the declining rate of child mortality and the increasing prevalence of child labor laws. Several hundred years ago over much of the world, and even today in some third-world countries, children were seen as an important economic resource for the family, albeit one that was often cut short by premature death. Having many children was an economic boon for the household and a way of ensuring that at least a few children would make it to adulthood and be able to care for the parents in their old age. Now having children is mostly an economic cost that the parents must bear for 18 years or more, although improved medical care has removed much of the uncertainty about children reaching adulthood. Due to the cost factor, parents must balance the number of children they want versus the amount of resources they want to spend on each child. Many couples are apparently opting for quality rather than quantity. [5]

Delayed parenthood. In 2001, the average age of a first-time mother was under 25. Now the average age of a first-time mother is nearly 28. This is consistent with the related trend of couples delaying marriage and other markers of establishing a household. Why this is taking place is, of course, the subject of considerable debate. Some are blaming the high cost of housing which is making it difficult to shift from the ‘singles’ apartment (perhaps shared with friends) to housing more suitable for raising a family. Others blame angst over the economic prospects of younger generations. My personal favorite is the rise of “pet parenting” as a surrogate for actual parenting. A growing number of young adults are viewing having a dog (or cat) as a substitute – at least temporarily – for having a child. [7] The result of all of these possibilities is both fewer children and children being born later in life.

What Is Next?

So that is the data, the mathematics, and the theory behind falling birth rates and population as fairly as I know how to present it. Hopefully I have been able to convey that while there are certainly potential problems that require our attention, this is not an immediate crisis that will inevitably lead to a dystopian future. The data, however, begs several questions:

What would be the impact on our economy, our society and our future if fertility rates stay low (or fall further), the age structure skews toward the elderly, and total population begins to fall significantly?
How will the impacts of population change be affected by other changes in our society and in our technology? And,
What can and should governments do if the net impact is perceived as negative or not as positive as we would like it to be?

I hope to address all of these questions in Part 2 of this blog topic – stay tuned!

Notes:

1. Matt Reynolds; “Elon Musk Is Totally Wrong About Population Collapse”; Wired; October 2022; https://www.wired.com/story/elon-musk-population-crisis/

2. Bess Levin; “Elon Musk Reportedly Asked a SpaceX Employee, on Multiple Occasions, to ‘Have His Babies’”; Vanity Fair; June 2024; https://www.vanityfair.com/news/story/elon-musk-reportedly-asked-a-spacex-employee-on-multiple-occasions-to-have-his-babies

3. United Nations, Department of Economic and Social Affairs; “World Population Prospects 2022”; https://population.un.org/wpp/Graphs/Probabilistic/POP/TOT/900

4. Kristal Sotamayor; “The One-Child Policy Legacy On Women And Relationships In China”; Public Broadcasting System; February 2020; https://www.pbs.org/independentlens/blog/the-one-child-policy-legacy-on-women-and-relationships-in-china/

5. Max Roser; “Fertility Rate”; Our World In Data; Revised March 2024; https://ourworldindata.org/fertility-rate

6. “Trends in Teen Pregnancy and Childbearing”; US Department of Health and Human Services, Office of Population Affairs; https://opa.hhs.gov/adolescent-health/reproductive-health-and-teen-pregnancy/trends-teen-pregnancy-and-childbearing

7. Mark Travers; “A Psychologist Explains The Appeal Of ‘Pet Parenting’ For Child-Free Couples”; Forbes; March 2024; https://www.forbes.com/sites/traversmark/2024/03/16/a-psychologist-explains-the-appeal-of-pet-parenting-for-child-free-couples/

Post 46: The Jetsons Are Coming

noreply@blogger.com (Doug Johnson) — Mon, 20 May 2024 16:31:00 +0000

I like speculating about the miracles (or horrors) of the distant future as much as the next guy. After all, who can resist painting a picture of what life will be like in 2050, or 2070, or even 2100? When it comes to my blog posts, however, I generally try to stay grounded in what is real, or at least likely to be real in the next couple of years. During my career I have witnessed predictions of “the next big thing” burst onto the scene only to fade into oblivion just a few years later.

Still, I have gone out on a limb from time to time to tout a technology that is more than a few years away from prime time. Things like autonomous vehicles, virtual/augmented reality, and the combination of artificial intelligence and robotics – all things that get a lot of press but have yet to reach mainstream adoption.

My timing may have been a couple of years off, but I stand by my predictions of those technologies being urban (and societal) game changers. After all, Waymo is providing over 50,000 paid trips per week in its autonomous robotaxis with virtually no serious accidents. Apple, Sony, Meta and many others are selling virtual reality headsets to gamers all over the world to immerse them in fictional but realistic worlds. And augmented reality glasses are being sold by Apple, Microsoft and Magic Leap to businesses who are looking for ways to increase productivity by layering information on top of the real world. And if you don’t think the AI/robotics combination is for real, check out the Amazon fulfillment centers where 750,000 robots are augmenting – and replacing – human workers. Ubiquity is still a ways off for all of these technologies, but their potential should be obvious to just about everyone.

The Archer Midnight eVTOL

This month I’m going out on a limb again to talk about a technology that has a great deal of promise, but which is probably 5 or 6 (or 10) years away from common usage. The technology is known as Electric Vertical Take-Off and Landing aircraft (or eVTOLs). Those who are less technically inclined sometimes refer to them as electric air taxis, because that is likely to be their first commercial use, but the potential goes beyond that to a variety of transportation needs.

Virtually all of the big names in aviation are pouring money into this suddenly trendy business venture including Boeing, Airbus, Embraer and several major airlines. But much of the innovation has come from smaller companies that seem to be pushing harder for actually getting eVTOL aircraft into production. Companies like Archer [1], Joby [2], Lilium [3] and Wisk [4] are currently getting the bulk of the headlines. Click Here to see an eVTOL in action.

The industry is so new that there isn’t even an agreed upon name for this new class of travel. Advanced Air Mobility (AAM) is probably the leading candidate, but Urban Air Mobility (UAM) is frequently used as well. For the moment, this technology is focused on relatively short, intra-urban trips. A few manufacturers with somewhat longer range capabilities, however, refer to the service they can provide as Regional Air Mobility (RAM). The divided terminology reflects an industry with lots of different players, each with their own vision for the service being provided and the aircraft being produced. Over the next few years, I expect there to be a considerable amount of consolidation but innovation in design is likely to continue.

The title of this blog post references the 1960s cartoon in which the family of George and Jane Jetson had a flying car, among a variety of other futuristic household devices. Although eVTOLs could in theory be used for personal transportation, that is not what I’m going to write about here. Flying cars are much further into the future and may never be widely adopted because of costs and safety issues. But an eVTOL-based air taxi service is both technically and financially feasible, assuming that things continue to progress as expected over the next several years.

Distinguishing an eVTOL From a Helicopter

It may seem like an eVTOL is a solution to a problem that has already been solved. After all, traditional helicopters offer vertical take-off and landing, and already function as air taxis in many major cities. There are, however, several differences in basic design that give eVTOLs a distinct advantage in urban settings.

Multiple motors - greater safety. Helicopters typically have one large rotor for lift and propulsion and a much smaller second rotor for stability. In contrast, eVTOLs typically have many motors for both lift and propulsion – generally 6 to 12 motors, but sometimes 20 or more. The advantage of this configuration is that it does away with the single-point-of-failure problem that has plagued helicopter travel. If an eVTOL motor fails, it can continue safely to its destination using the remaining motors. Multiple rotors (generally with half spinning in opposite directions) provide lift to the aircraft that is distributed across the airframe as well as perfectly counterbalanced, so that no tail rotor is required. The stability that is inherent in this design makes it both safer and easier to fly. Easy enough, in fact, that at least two companies (Wisk and eHang) are testing autonomous eVTOLs where the pilot is replaced by computers.

Electric power – less pollution and less noise. Air travel typically comes under attack from environmentalists because of its reliance on fossil fuels. As noted above, the “e” in eVTOL stands for electric which means there is no direct pollution emitted and total pollution should drop over time as the country’s power sources get greener and greener. It does entail the use of batteries for energy storage which have their own environmental issues, but even that is likely to be lessened over time as battery technology improves. More importantly, in my opinion, is that the combination of electric motors and multiple rotors results in noise levels that are 20 to 40 decibels lower than typical helicopters or piston airplanes. An eVTOL flying overhead is likely to be so quiet that it won’t be heard over the background noise of most cities. That low noise profile will make it easier to locate landing facilities, even near residential areas that are noise sensitive, and to operate during noise sensitive portions of the day (such as early mornings).

Fixed wings and tiltable rotors – greater efficiency. Helicopters rely upon the main rotor for lift at all times. The multiple rotors of an eVTOL provide lift for take-off and landing, but generally are designed to tilt forward to provide lateral propulsion to travel from point to point. Most eVTOLs also have a fixed wing to provide lift during the forward travel segment of each trip. This is a more energy efficient arrangement for the majority of the flight – something which is crucial for battery powered aircraft. Even with this added efficiency, eVTOLs have a much shorter range than a helicopter – in the neighborhood of 100 miles – because batteries are much less efficient at storing energy than fossil fuels. While this is a crucial limitation for many use cases, the urban air taxi role typically does not involve long distances which is why that has been the early focus for this technology.

Electric motors – cost savings. Helicopters are typically powered by what is known as a turboshaft engine. Although they are marvelous feats of engineering, they are expensive to buy, expensive to maintain, and expensive to operate. Electric motors, on the other hand, are much cheaper on all three fronts – even if you have eight of them. Consequently, an eVTOL is projected to be roughly two-thirds the cost to buy and operate compared with a similarly sized helicopter. That cost savings makes a huge difference in the cost per passenger mile which means in turn that the potential market for eVTOL-based air taxi service is substantially greater than the current market for helicopter-based service. A current industry goal for eVTOL taxi service from a downtown “vertiport” to the airport is to be able to match the cost of a luxury ride sharing service (e.g. Uber Black).

With all these advantages it might seem as though helicopters are destined for the trash heap. That isn’t likely to happen in the foreseeable future, however, because eVTOLs cannot match the range and payload of gas-powered helicopters. That means that most military uses, search and rescue operations, police patrols and many other use cases are still going to rely upon traditional helicopters. In the near term at least, eVTOLs are likely to focus on the air taxi role and similar short-trip uses such as sightseeing (e.g.tourism flights over the Grand Canyon).

Vertiports

Contrary to the world of the Jetsons, an eVTOL-based air taxi is not going to pick you up at your house. Air taxis will need special take-off and landing facilities similar to the heliports and helipads used by helicopters today. The industry currently refers to these facilities as “vertiports” although the distinction between a vertiport and a heliport is not entirely clear. The FAA has issued some provisional guidelines, but final regulations are still undefined and may be subject to frequent revisions once they are issued simply because the size, weight and re-charging needs differ substantially from manufacturer to manufacturer.

Since air taxis are not going to replicate the anywhere-to-anywhere service that ride sharing companies like Uber provide, it means that vertiports will need to be located where travel demand is high. Airports are an obvious location because they are a high-volume travel destination and because they are already equipped for handling aircraft take-offs and landings.

In fact, trips from a big city downtown to the nearest airport are likely to be the predominant trip type when eVTOL air taxis first start doing business. The appeal of an eVTOL trip will be particularly high in cities where the airport is poorly served by mass transit and traffic congestion makes driving to the airport a time-consuming task. Think of downtown Manhattan to JFK, LaGuardia, or Newark airports. Or downtown Dallas to DFW. Or San Jose to SFO. United Airlines has reportedly signed a $1 Billion deal with Archer Aviation to use their eVTOLs to shuttle passengers to their airport hubs starting with the Chicago Loop area to O’Hare airport. A trip that might otherwise take 45 minutes to an hour in an Uber is likely to be 8 to 10 minutes in an air taxi – assuming, of course, that you are near a vertiport.

Where will people traveling to the airport start their trip? Existing heliports near commercial centers are an obvious option although some of them might not be able to accommodate the modifications that eVTOL traffic might require. Office building rooftops are sometimes used for heliports and supposedly eVTOL companies are actively scouting these potential locations in major cities. Not every building, however, is going to have the necessary structural strength or the ability to dedicate part or all of the top floor to air taxi operations. Parking garages are another possibility since they have a large footprint and the top level is often underutilized. Unfortunately, a parking garage surrounded by tall buildings might have issues with safe approaches and departures, particularly if swirling winds are common.

In short, dense commercial and mixed-use areas will be the prime locations for vertiports but it will not necessarily be easy to find the ideal site. As air taxi travel becomes more popular, major commercial districts may build their own vertiport just to make sure that their tenants have access to the eVTOL transportation option.

Regional Air Mobility

Although the vast majority of the AAM industry is focused on relatively short trips within a metropolitan area, Lilium is developing an eVTOL aircraft with broader aspirations. Their product will have a range of at least 150 miles which means that short intercity trips are also a possibility. Think New York City to Philadelphia, or Washington, D.C. to Baltimore, or San Diego to Los Angeles. Click Here to see the Lilium prototype in action.

Again, the selling point is the time savings that will come from both higher speeds and the avoidance of congested streets and highways. Lilium’s website shows a hypothetical trip from New York to Philly that takes half the time of a trip by car or train at a cost that is competitive with both (roughly $200).

Battery technology is improving rapidly so it is not inconceivable that in a few years the range could expand to 200 or even 250 miles. That would open up a much larger number of urban pairs that could be served by eVTOL aircraft and potentially change the economics of short hop airline flights.

Obstacles

So far, I have painted a pretty rosy picture of the Advanced Air Mobility industry. The technology is largely proven, the economic potential seems legitimate, and venture capitalists and major aviation companies are jumping into the field with abandon. What could possibly go wrong?

Well, plenty. [5] To begin with, none of the eVTOL designs have been certified by the FAA for passenger service. Only a handful are actually doing full-scale test flights with their final motor, airframe, and control system designs. Doing computer simulations and remote control mockup flights are fine, but nothing replaces hours and hours of actual flight time with the final product. Most of the manufacturers will give optimistic assessments of where they stand in the certification process, but aviation history is littered with innovative aircraft that got bogged down chasing certification not just for years, but sometimes for decades. The more exotic the product, the greater the chances for delays, and eVTOLs are about as exotic as aircraft come.

Second, the public has to learn to trust this new approach to transportation enough to use it and to allow vertiports to be built in their cities. I rode in a Waymo autonomous taxi and thought it was both safe and exhilarating. But many of my friends said that they would never trust a computer to drive them around. How are people like that going to feel about a battery-powered air taxi that uses tiny motors with tiny propellers to zip around town? And how are the NIMBYs that oppose anything other than single family homes going to react to a vertiport in their neighborhood and eVTOLs flying over their kids’ schools?

Third, this is a technology that seems almost custom made for cost overruns. Sure, you can say that an eVTOL will cost two-thirds as much as a helicopter, but until you are actually selling them at that price it is all just speculation. Any untested technology is likely to encounter problems at some point in the development process and that can lead to both time delays and unexpected expenses. As far as I can tell, no one in the entire AAM industry is in full scale production or even anything close to that. Scaling up from hand-built prototypes to a production line product is both complicated and expensive.

Impact on Cities

Assuming that the AAM industry can overcome these obstacles and get a certified eVTOL into production, how much of an impact is it likely to have on cities? Probably not very much. It is tempting to think back on the Jetson cartoons where everyone had a flying car and conclude that eVTOLs are the solution to automotive congestion on our roads. Or you might be thinking of eVTOLs as “Ubers that fly” and assume that they will be just as commonplace and carry just as many passengers around the city. Both assumptions are wrong and the total impact on the urban transportation mix is likely to be almost unnoticeable for the foreseeable future.

First of all, this type of air taxi service is only going to be financially feasible in big cities where there is a lot of congestion. It is not going to reach mid-sized midwestern cities until the costs come down considerably. I live in midtown Kansas City and typically an Uber ride to the airport costs around $60 and takes about 40 minutes. Those numbers would have to go up considerably for an air taxi service to make sense. For most cities, eVTOLs are going to be an exotic rarity.

Secondly, even in big cities vertiports are not going to be common enough to support a large number of flights. New York City only has three public heliports, and while there are considerably more private helipads, few of them are likely to be interested in or capable of supporting regular air taxi flights for the general public. I’m sure more vertiports will get built but it won’t be a fast process. Without many vertiports accommodating many air taxi flights throughout the day, the trip totals are simply too small to really make any difference.

Thirdly, the cost of an eVTOL may turn out to be just two-thirds the cost of a helicopter, but that still means that the cost will be several million dollars apiece. Starting an eVTOL-based air taxi service won’t be like buying a used Camry and becoming an Uber driver. This is an industry that is going to be funded by serious capitalists with deep pockets. The roll-out is going to be cautious at a few cherry-picked locations until true demand is fully understood and profitability is a reality not just a projection. This again means that ridership volume will be too low to have an impact on the overall transportation pattern.

Finally, I’m highly skeptical of the estimates that riding an eVTOL to the airport will be about the same cost as a luxury Uber ride and two-thirds the cost of current helicopter air taxis. The reason I’m skeptical comes down to simple supply and demand. For at least the first five to ten years, supply is going to be severely constrained by limited eVTOL aircraft and limited vertiport capacity – and limited supply means high prices. That means this is going to be a transportation option for the affluent or for businessmen with generous expense accounts, which is too small a segment of the population to make any difference in the streets. Time is money for some people, but most of us will tough it out and slog through traffic.

At some point, eVTOL supply will be unconstrained and vertiports relatively common but even then I’m guessing that the share of total trips made by air taxis will struggle to get over even one- or two-tenths of one percent. In my opinion, the early adopters are likely to be major corporations replacing the helicopters they currently use for their executives with eVTOLs so they can look “cutting edge” and environmentally conscious. Air taxi service will pop up in the cities where traffic congestion is the worst and gradually spread to other locations.

As range increases with improvements to battery technology, short hop service between nearby cities will also become more common. The big advantage versus traditional aircraft will not be flying speed or cost, but the ability to go from downtown to downtown rather than from airport to airport. Still, an air taxi ride will be the exception, not the rule.

Summary

It will be interesting to watch the Advanced Air Mobility industry over the next several years as they wind their way through the FAA certification process and start providing rides to the public. My guess is that you might see a few pilot projects in two or three years, but I doubt that a fully certified, day-in-day-out eVTOL taxi service will be running in less than 4 or 5 years. I would not be surprised if regular service started first in other countries where the certification process is not as rigorous.

The bottom line, however, is that while this is a fascinating technology, it is not likely to be more than a niche player in the urban transportation mix. There are some interesting partnership possibilities – with commercial airlines at one end and ride share companies like Uber and Lyft at the other – that could help the industry get off the ground (sorry for the pun). It could be that someday your trip to another city will be a package deal that includes an Uber from your home to the nearest vertiport, an eVTOL air taxi to the airport, and a commercial flight to your destination. Whether prices ever come down enough to make that commonplace is the unknown. In my opinion, replicating the mobility of the Jetsons is a long way off.

Notes:

1. Archer Aviation; https://www.archer.com/usher/

2. Joby Aviation; https://www.jobyaviation.com/

3. Lilium GmbH; https://lilium.com/

4. Wisk Aero LLC; https://wisk.aero/

5. Robin Lineberger, et al; “Change is in the air”; Deloitte Insights, 2019; https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/di-the-elevated-future-of-mobility.pdf

Post 45: Learning from Insurance

noreply@blogger.com (Doug Johnson) — Wed, 01 May 2024 15:51:00 +0000

I should be, in my mind at least, the perfect customer for homeowner’s insurance. I live in a neighborhood that is quiet and stable. I haven’t made a claim against my current policy in decades. My home is well maintained and my finances are solid. I’m such an ideal customer my rates should be going down – right?

Nope. In fact, over the past two years the amount I pay for insurance on my home has gone up by a total of 26.3%. That is roughly double the rate of inflation based on the Consumer Price Index. Clearly, I’m getting ripped off – right?

Nope. I probably should be thanking my lucky stars that I’m not paying more. In many locations across the county homeowners are being hit by percentage increases in the high double digit and even triple digit range. Property insurance has gone a little crazy in recent years. The traditional measure of insurance industry health is known as the combined ratio (insurance payouts plus expenses divided by premiums times 100) and it has been well above historical averages (bad) for the past several quarters. Insurance giant State Farm announced that its property and casualty section had a net underwriting loss of $14.1 Billion in 2023 on top of a 2022 loss of $13.2 Billion, and many other companies are struggling as well.

The aftermath of the 2023 Maui wildfires.

It would be fun to posit that the rate increases are the result of some nefarious conspiracy or to curse the greedy capitalists that run insurance companies, but alas that is not the case. Insurance rates are rising for a variety of complex reasons, but it boils down to policy payouts being much higher than expected. Rates are not rising because of random chance or bad luck, they are rising because the world is changing. Understanding why this is happening is an opportunity to learn how to build buildings better and how to build cities better.

The Midwest Is Not Property Insurance Heaven

Insurance rates are based upon the likelihood of claims being made upon a given insurance policy and on the likely size of those payouts. Insurance companies have been writing property coverage policies for a long time and they have amassed a great deal of data which they mine constantly for ways to fine tune their rates and costs. Unfortunately, the risks that property owners face are not constant which means that rates change as risks change. It is also important to understand that the big drivers of insurance cost are not the occasional house fire caused by a careless smoker or the random break-in by local hoodlums, but rather the major weather events that can affect thousands of property owners across a broad swath of the country.

I have lived in the midwest all my life and have always thought of it as a relatively safe place. Oh sure we have the occasional tornado, but at least we don’t have to worry about hurricanes which cause far more damage. Unfortunately, it turns out that the midwest offers a smorgasbord of disaster opportunities which might be less damaging than a hurricane but which can still add up to big bucks. The list includes not only tornadoes, but also thunderstorms, hail storms, derechos, ice storms and heat waves/droughts. It turns out that 2023 was a banner year for disasters that exceeded a billion dollars in damage and, as the accompanying map illustrates, the vast majority were located in the midwest and great plains.

Source: NOAA

Although tornadoes get the publicity, hail and high winds account for the bulk of insurance claims in the midwest. As with most natural disasters, the amount of restoration and repair that needs to be done after the storm has passed will overwhelm local contractors. As a result, out-of-town contractors often follow storms across the country looking for work that local companies can’t handle and charging excessive rates because no one has an incentive to get multiple bids, let alone use the lowest bidder. Even relatively normal storms can generate high insurance payouts.

It should be no surprise then that midwestern states figure prominently in the list of locations with high insurance rates. In 2021, Bankrate conducted a state-by-state survey of insurance costs for a standardized policy with $250,000 of coverage. The State of Oklahoma was at the top of the list with an average cost that was 168% more than the national average. The rest of the top 10 included Nebraska, Kansas, Arkansas, New Mexico, South Dakota, Texas, North Dakota, Kentucky and Montana. [1] More recent data indicates that Florida, Louisiana and Mississippi may have pushed their way to the top of the list.

Climate Change

The vast majority of people accept that the earth has been warming at a fairly dramatic rate for at least the past 50 years. I’m not going to get into why it is warming or what we should do about it because that isn’t relevant to this post. What is relevant is that a warming atmosphere causes faster evaporation and can hold higher volumes of water vapor. When warm, moist air meets a cold front, the result is typically a storm, and when the air is very warm and very moist the result is a severe storm.

Of course, there have always been thunderstorms, tornadoes and hurricanes but the evidence suggests that the severity of weather events is increasing which means that damage claims are increasing as well. This chart shows the number of natural disaster events that caused at least a billion dollars of damage. As touched on above, 2023 set a record with 28 such events, but the growth over the past 40 years is what is probably keeping insurance executives up at night and is certainly one of the factors behind rising insurance rates. This statistic may be a bit misleading because although it is CPI adjusted, there is evidence that construction and replacement costs have been rising faster than the general rate of inflation. Total damages were actually relatively modest in 2023 considering the number of events, but damage totals are trending upward as well. [2]

Source: NOAA

Rain storms are common and generally beneficial, particularly for agriculturally oriented midwestern states. Problems occur when rain falls at a very high rate in a short period of time. When that happens, virtually any location can have flood damage because the normal facilities and topography that drain away excess water get overwhelmed. If the prevailing climate theory is correct, then extreme rain events should be getting more common. That seems to be the case (see the accompanying chart) but weather events are influenced by a wide variety of factors so there is a considerable degree of variability.

Still, the overall trend line is clearly sloping upward and the end result has been that stormwater engineers have sharply revised what is considered to be a 50-year, 100-year or 500-year storm. When Hurricane Harvey dumped 4 feet of rain on Houston in 2017, that was estimated to be a 500-year storm. Eight of ten homeowners who experienced flooding did not have flood insurance, largely because their homes were outside the official floodplain limits. Those limits, however, are based on rainfall intensities that are badly out of date. Recent estimates put the likelihood of what used to be a 100-year event in Houston at something closer to a 25-year event. [3] Storm sewer systems in many parts of the country that were originally designed to contain a 20-year storm may now only handle a 5-year or 10-year storm because of increasing rain intensities.

One advantage that the midwest has is that we don’t need to worry about hurricanes or the storm surge that accompanies them. A recent listing of the most expensive U.S. natural disasters shows that the top eight are all hurricanes (and 6 of those occurred within the past 12 years). [4] Again, there is a great degree of variability but there is evidence of increasing frequency and severity. What is more crucial, however, is that rising sea levels combined with sinking land elevations (due largely to ground water withdrawals) are increasing the amount of damage done by each storm. It may be that in the future the areas which are most prone to hurricanes (e.g. southern Florida and parts of Louisiana and the Carolinas) will be almost uninsurable by the private market, or will at least have insurance costs that are so high that only the wealthy will be able to afford those locations.

Where We Choose To Live

Rising insurance rates are not all about changing weather patterns, however. People are often their own worst enemy because they choose to live in disaster prone locations. Despite the damage potential of hurricanes, almost 40 percent of the U.S. population live in coastal counties. Beachfront housing has always been popular, but now it is more densely developed than ever before and the buildings being built are more elaborate and expensive than ever before. Thus, hurricane damages are often greater not because the storm is more severe but because the value of property in the path of the storm has increased dramatically.

A study in North Carolina estimated that 75,000 acres of floodplain land was zoned for urban development. It also found that for every residence in the floodplain that was removed through buy-out programs, 10 new residences were built. [5] Floodplain regulations are certainly not perfect, but they are a reasonable attempt to steer development away from locations that are likely to be damaged by future floods. Unfortunately, they are ignored or circumvented in far too many communities.

High profile wildfires have brought us the term “Wildland-Urban Interface” (WUI). It is defined as the zone of transition between unoccupied areas and human development, and it is particularly susceptible to wildfires in areas that are heavily wooded. In the U.S., just over 9 percent of the land area in the contiguous 48 states is in the WUI but that area contains 44 million homes (or roughly a third of all housing). To make things worse, that amount has been growing rapidly both in total population as well as total property value. Why are we surprised when wildfires take lives, destroy homes and cause billions of dollars in damage?

Ironically, the more people that move into the Wildland-Urban Interface, the more resistance there can be to fire prevention activities. The controlled burning of understory brush and dead trees that could reduce the severity of a wildfire is often opposed because of perceived dangers and a perceived loss of scenic value. Finally, the insertion of infrastructure to support development sometimes creates lightly supervised and poorly maintained parcels of land that can become ignition points. Last year’s Maui wildfire that destroyed Lahaina is now being blamed on a long-ignored electrical easement that was overgrown with brush and tall grasses – the perfect location for a fire sparked by a downed power line to smolder unnoticed.

The Inability to Price Risk

As risks rise, insurance companies want rates to rise as well, and for much of the country that is what has happened. Property insurance, however, is regulated by each state and there are some states which have not allowed insurance rates to match the changing risk profile, or where risks are changing so rapidly that insurance companies have not been able to keep up. Florida, California and Louisiana are the most commonly cited examples of this condition and in all of them the private insurance market is showing signs of failure.

Louisiana, for example, is particularly susceptible to hurricane damage because much of its coastline contains very low-lying land. Roughly half of New Orleans, in fact, is below sea level. Hurricane Katrina in 2005 caused an enormous amount of damage but that was followed by a period of relative calm that lasted for roughly 15 years. Development along the coast expanded and insurance rates moderated. Then in 2020 and 2021, four hurricanes hit the state (Laura, Delta, Zeta and Ida) and problems mushroomed. Although none were as severe as Katrina, the four storms combined to cause over $76 Billion in damages. Local and regional insurance companies were particularly hard hit. Eleven insurance companies serving Louisiana became financially insolvent between July of 2021 and September of 2022, and others simply stopped serving the state because of the high risk. [6]

Louisiana Citizens Property Insurance Corporation is the state’s “insurer of last resort” and as private insurers went bankrupt or left the state, Louisiana Citizens gained thousands of property insurance policies. In fact, the number of homeowners insured by Louisiana Citizens nearly tripled since Hurricane Laura in 2020. In January of 2023, a 63 percent rate increase was implemented and the legislature recently allocated $45 Million to the “Insure Louisiana Incentive Program” designed to stabilize the market and encourage new insurance companies to enter the state. Typical rates for homeowner’s insurance are already nearly 40 percent above the national average and additional increases are likely.

In California the primary risk issue isn’t hurricanes but wildfires – particularly the kind that happen in the Wildland-Urban Interface (which California has a lot of). The Insurance Information Institute estimates that in 2023 California had nearly 1.3 million homes at risk from extreme wildfires – far and away the most in the country and more than the next nine states combined. [7]

The California insurance crisis reached new highs in March when State Farm announced that it wouldn’t renew 72,000 homeowner policies, joining Allstate, Farmers and several other insurance companies in either not writing new policies, limiting new policies, or tightening underwriting standards. These actions are forcing thousands of homeowners to California’s insurer of last resort, known as the California FAIR Plan (Fair Access to Insurance Requirements). The number of customers the organization insures now tops 350,000 dwelling and commercial policies with $320 Billion of exposure. The number of customers has doubled since 2019 making the FAIR Plan one of the top five insurers in the state. [8]

Outdated regulations, many of which date back to Proposition 103 which was passed by voters in 1988, are also cited by many insurance companies that are limiting their coverage in California. Those regulations, and subsequent additions, make it difficult to get adequate rate hikes approved in a timely manner according to the insurance industry. A package of reforms is under discussion, including allowing both catastrophe modeling of future disasters and the rising cost of reinsurance to be included in rate hike decisions, but there is opposition from consumer advocates.

The problems in Louisiana and California, however, pale in comparison with the situation in Florida. Since 2019, the average annual home insurance premium has risen from less than $2,000 to roughly $6,000, an amount that is three times the national average. [9] Farmers Insurance, Bankers Insurance, and Lexington Insurance (AIG) have withdrawn from the state and Progressive Insurance announced that it was not renewing 100,000 policies.

Moreover, Florida relies on about 50 small insurance companies to cover close to 70 percent of policyholders. Many of these insurance companies are rated by just one rating agency – Demotech Inc. – which has been accused of lax standards. These smaller insurance companies became prominent as national companies either withdrew or scaled back. Many of them have limited financial resources and insurance experience, so major ratings companies would not rate them. Enter Demotech which was credited with “salvaging the homeowner’s insurance market” in Florida. Nearly all mortgage lenders require homeowners to have insurance through a company approved by Fannie Mae or Freddie Mac, which in turn rely upon high marks from rating agencies. Unfortunately, close to 19 percent of insurers that Demotech rated “A” and above went insolvent between 2009 and 2022. [10] Where does this leave the Florida insurance market when the next disaster strikes? Who knows.

To supplement the private market, Florida has its own version of the FAIR Plan known as Citizens Property Insurance. Citizens is now the largest insurer in the state and Governor Ron DeSantis recently suggested that it has “not been solvent” and might not be able to pay all claims from a major hurricane. That assessment was disputed by others, but it was enough to prompt talk of a Federal investigation. The concern with all state run insurers of last resort is that if the private insurance market is unable to effectively price risk, why assume that a state agency is going to do a better job? State insurance plans may simply be a ticking time bomb that will explode after the next major disaster.

What Can We Learn?

The past few years have been a struggle for property insurers and the future doesn’t look much better. Natural disasters are becoming more numerous and volatile, people continue to build in hazard prone locations, construction costs continue to climb, property owners are more litigious, and state regulators are under political pressure to keep rate hikes down. The pace of rate increases might moderate, but insurance costs are not going to come down so we need to adjust to a “new normal” where insurance is a significant line item in the household budget. Although it may be cathartic to vent about the high cost of insurance, it is probably more productive to learn from what is happening and adjust our actions going forward.

Insurance payouts will likely mutate. Let’s say your 12-year old roof suffers moderate damage during a hail storm. Currently, your insurance company is likely to pay for a completely new roof, minus any deductible. In the future, not only is your deductible likely to be larger, you are likely to get a settlement that reflects the depreciated value of your roof. Sharing the risk with the homeowner will allow insurance companies to reduce rates and give the homeowner an incentive to seek out a low cost repair as opposed to a full re-roof. It means, however, that homeowners need to have access to cash to cover a bigger share of unexpected disaster expenses.

Insurance rates must reflect risk. This might seem so obvious as to be pointless, but unfortunately it is not. When insurance companies are pulling out of a state or limiting renewals, or when a large number of property owners are being forced into state-run insurance-of-last-resort programs, it means that the private insurance market either cannot determine how to price risk at certain locations or that the state insurance regulators will not let them charge an amount sufficient to cover the risk. Either situation should be a huge red flag.

Insurance rates will eventually affect migration patterns. Consider this: a $100/month increase in insurance costs is equivalent to a $17,000 loss in home value. A $100/month increase might seem like a lot, but it is on the low side of what is happening in many high-risk locations and for most households it comes directly out of monthly cash flow. Low- and moderate-income households will feel the pain first, but when they leave town labor rates will rise which will spread the pain all around. At some point, property values and local economic output will fall and that will be a major reversal for areas which have largely been economic hot spots. Migrants might not move very far – perhaps just 100 or 200 miles – but that will be enough to rock local real estate markets.

Community resiliency will be a hot topic. There are a variety of things that can be done to help your community bounce back from a natural disaster, but having good insurance coverage be commonplace is one of the most important. If property owners can’t rebuild because they were underinsured or uninsured, the entire community takes an economic hit. Disposable income suffers, property tax revenue suffers, and financial resources are sucked away from the long-term drivers of economic growth. Communities need to acknowledge the risks they face, advise property owners on how to minimize that risk, and work cooperatively to make whatever physical changes might lower community risk.

Building codes need to address local risk factors. Building structures that can withstand most natural disasters is not rocket science. Florida can build homes that stand up to hurricane winds, California can build homes (and home sites) that lessen fire damage, and midwestern states can build roofs that are hail and wind resistant. Adopting codes that require those steps is often unpopular in the short run because they increase the cost of construction, but they might save the community from economic ruin in the long run.

Engineering will not save us. Instead of changing where and how we build cities, people often turn to engineered structures to protect them from the next natural disaster. Such systems can often accomplish a great deal, but they are expensive and prone to eventual failure. This is particularly true given that natural disasters may be getting more severe and given our human tendency to under-invest in infrastructure maintenance. Levees get breached, sea walls eventually crumble, and drainage pumps inevitably fail. Engineered solutions should be considered a short-term band-aid not a long-term plan.

No one likes to buy homeowner’s insurance because it represents a lot of money for something you hope you never need to use. A home, however, is many households' largest investment and a paid off mortgage is a key part of many retirement plans. Risking all of that by not having insurance is silly, but rapidly rising insurance costs are forcing people into tough choices. Insurance costs might end up being the canary in the coal mine that makes us rethink where we live and how we build.

Notes:

Special thanks to State Farm insurance agent Paul Johnson and Lockton Insurance risk analyst Scott Johnson for their insights into the insurance market.

1. Mark Rosanes; “Revealed – The most and least expensive US states for home insurance;” November, 2021; Insurance News; https://www.insurancebusinessmag.com/us/news/breaking-news/revealed--the-most-and-least-expensive-us-states-for-home-insurance-316233.aspx#:~:text=However%2C%20the%20rates%20and%20coverage,cost%20of%20an%20insurance%20policy.

2. Adam Smith; “2023: A historic year of U.S. billion-dollar weather and climate disasters;” National Oceanic and Atmospheric Administration; January 2024; https://www.climate.gov/news-features/blogs/beyond-data/2023-historic-year-us-billion-dollar-weather-and-climate-disasters

3. Alice Hill; “Climate Change and U.S. Property Insurance: A Stormy Mix;” Council on Foreign Relations; August 2023; https://www.cfr.org/article/climate-change-and-us-property-insurance-stormy-mix

4. Nikhil Batra; “Top 10 Worst Natural Disasters in the US History;” Jagranjosh.com; December 2023; https://www.jagranjosh.com/general-knowledge/costliest-and-worst-natural-disasters-in-the-united-states-1703159112-1

5. Miyuki Hino, et al.; “Growing Safely or Building Risk?”; Journal of the American Planning Association; February 2023; https://www.tandfonline.com/doi/full/10.1080/01944363.2022.2141821

6. Cate Deventer; “Louisiana’s incentives may encourage home insurers to return to the state;” Bankrate; December 2023; https://www.bankrate.com/insurance/homeowners-insurance/louisiana-home-insurance-market-struggles/

7. Insurance Information Institute; “Facts + Statistics: Wildfires;” https://www.iii.org/fact-statistic/facts-statistics-wildfires

8. Matthew Robinson; “California Residents Issued Dire Warning About Insurance Rate Rises;” Newsweek; April 2024; https://www.newsweek.com/california-insurance-crisis-residents-warned-rate-rises-fair-plan-1894533

9. Andrew Dorn; “Some Floridians are seeing 6-figure home insurance prices;” NewsNation; October 2023; https://www.newsnationnow.com/business/your-money/florida-home-insurance-prices/

10. Lawrence Mower; “Florida insurance market full of ‘low quality’ companies, study finds;” Tampa Bay Times; April 2024; https://www.tampabay.com/news/florida-politics/2024/04/12/florida-insurance-crisis-companies-ratings-desantis/