Saturday, December 31, 2005

What Was Good & Bad in 2005

Here's a list of the best and worst of 2005 that the Mid-Atlantic AAA put together, and they seem to think the $800 million for transportation out of the '05 General Assembly tops the list. But that seems like an inflated rank, given that a bunch of that cash went to pay off old debt.

I think the rise of toll-funded PPTA projects should be first on the Best list, and it's a trend that even the balkanized General Assembly will be able to support this year and beyond. The worst of 2005 - gas prices, says AAA. I would have put that on my 'Best' list, too.


At 8:35 AM, Blogger Ray Hyde said...

Surely higher gas prices will cause some reduction in the most flagrant forms of wastefulness. The example of 300 HP SUV's idling along at walking speed while their lone occupant daydreams of launching his land bruiser into the air while charging through the wilderness, as shown on TV, comes to mind. Aimless joyriding by teens is another.

So, some good can come from higher gas prices. But if higher gas prices are a good thing, notwithstanding the effects on the economy, why not push for higher gas taxes, or at least gas taxes pegged to the dollar instead of the gallon?

The J-M articles says that states can’t come up with the money to fund major transportation projects, so public-private partnerships loom on the horizon, the, according to the AAA press release.

I'm not convinced that public private partnerships are the way to go. If roads are already too expensive to build, how does adding profit on top of that cost save us money, particularly if the profit is being exported to, say, Australia?

The simplest and fairest way to reduce excess driving is to raise the price, and to do so uniformly. Toll roads raise the price for some, but the expense is going to fall on everyone anyway, just not as uniformly.

If it costs significantly more to drive, then people will eventually think more carefully about where they choose to live and work. I don't happen to believe relocations will make a significant reduction in the overall demand for travel (or congestion) because too many other variables are involved. But for those that choose to believe that, raising the price of driving is the easist and most equitable way to see to it that people pay for their own decisions.

We can't very well say that states can't come up with the money for road projects when they haven't tried to do so. Considering the amount of mony that Fairfax and Price William are pouring into their own roads, we can't very well claim that the citizens aren't willing to pay.

We have mostly gotten rid of tollroads, and congestion at the toll booths was only one reason. Public-Private partnerships for transportation sound to me like the private part shipping money out of the public part using our own transportation system.

At 1:40 PM, Blogger Toomanytaxes said...

Fairfax County's 2004 bond issue for transportation was the first major infusion of local taxpayer money into transportation in many years. There has been considerable criticism (which may or may not be warranted) of local Fairfax officials for not taking any significant transportation initiatives in a long time.

One could argue that, given the general disorder prevalent within VDOT, Fairfax County officials should have regularly attempted to fund some transportation projects locally. On the other hand, one could argue that, given Fairfax County's position as the major economic engine for the entire Commonwealth, Fairfax County should not spend extra tax dollars to do what the State should do.

I'd guess that both views have strong support in Fairfax County. One must also factor in the views of those who feel pouring more money into transportation without first rejecting rezoning requests that would further overwhelm existing facilities is simply a waste of taxpayer funds. They argue "Let's stop the bleeding before we begin the costly process of catch-up."

In order for any progress to occur, people espousing one view need to recognize the perspectives of others. Business as usual won't work. The big question is: Whether anyone within the Fairfax County delegation to the GA understands this diversity of opinion and will look for new solutions the move beyond "I win, you lose."

At 2:50 PM, Blogger Ray Hyde said...

Well said.

Winners aren't winners unless they can compensate the losers and still come out ahead.

When I mentioned Fairfax spending on roads, I was thinking of Braddock Road and FFX PKWY. As you noted those were funded long ago.

At 7:36 PM, Blogger Toomanytaxes said...

An agreement between a Virginia-based developer & Frederick County, MD suggests to me that there's plenty of room for developers to address the concerns of others, while still making a fair profit. A developer, when faced with Frederick County's adequate public facilities ordinance blocking the ability to construct 3133 homes, offered to pay $65 M to construct necessary facilities for the public schools. (That's more than $27,000 per home.) The school board endorsed the plan, which must still be presented to the county board.

One must presume that the transaction still makes economic sense, even as the housing market is softening considerably. If this can be done in Maryland, why can't it work in Virginia? Faced with paltry contributions in Fairfax County, citizen groups, environmentalists, etc. tend to oppose any development and many related transportation projects. Why shouldn't they under the circumstances?

From the developer side, we hear stupid and false arguments that forcing development to reimburse the public infrastructure costs impairs both affordable housing and property rights. Why? Do Virginia's builders and their mouthpieces (the D.C. Board of Trade & the Fairfax Chamber of Commerce) really think that they are fooling the public with these lame arguments?

For years, AT&T fought bloody battle after bloody battle to preserve both the Bell System and the its telecom monopoly, at the cost of considerable alienation of customers and government officials. Then a wise executive, Charles Brown, decided that working a fair deal with the federal government made more sense than continuing his predecessors' course of no compromise. AT&T did quite well for many years thereafter, stumbling only after weak leadership took over. There might be some lessons in the AT&T story that are worth learning.

At 11:10 PM, Blogger Ray Hyde said...

Here is how a developer thinks. He knows his cost of construction, and except for extreme conditions it varies little from place to place. To that he adds the price of the land, then site preparation, then the regulatory fees, proffers advertising and other expenses. Then he adds 20% for profit.

Whatever number he comes up with, he compares to what other homes are selling for. If he thinks he can sell them, he's got a deal, otherwise he chooses another location, or offers less for the land.

The impact fees or proffers add to his profit. They don't affect his competitiveness, because every other builder is faced with the same problem. He could care less if the homes are affordable, only whether they will sell in the market. But if he can't get his 20% profit, he'll go away: eventually the demand for homes will be high enough for him to proceed.

Even in New York, the square foot price for construction of an apartment is not much different from the square foot price of a home anyplace else. The astronomical prices for living space there are primarily a result of scarcity caused by government interference. There are other issues, but even these are made possible by government regulations. A recent construction project for condos in New York paid record prices for "air rights" over a church, in order to guarantee their viewshed of Central Park.

Apparently, the scarcer open space is, the more valuable it is to the neighbors. Eventually it becomes so valuable people are actually willing to pay to keep it.

I believe that in Fauquier county they just raised the proffers to something like $30,000 per home, but here there is a sliding scale so apartments don't pay as much. In any case the money isn't coming out of the developers profits, but adding to it.

There is one other possibility. He can lower costs by making smaller and less expensive homes in order to reach a target market price. In that case the owners pay for the proffers, not the builder.

That might or might not be fair, depending on your point of view. If you take the view that I got here first and my infrastructure is (magically) paid for, then the new guy ought to pay for his own.

If you take the view that everyone's demand for infrastructure is equal, then timing isn't an issue and we should all pay equally.

But the idea that developers are profiting from this is just wrong. Here is why. Developers all have competitors. Their profit is more or less the same because if it is too high buyers will go elsewhere and if it is too low, either the builders will go elsewhere or go out of business.

The CEO of Toll Brothers will tell you that "environmental" regulations are the best thing that ever happened to his companies profits. "At the moment, Toll controls enough land for nearly 80,000 houses. Its competitors, which tend to build lower-priced houses on smaller lots, have even larger accumulations. K. Hovnanian has land for more than 100,000 houses. Pulte Homes holds 350,000 sites. Still others - Lennar, Centex Homes, D. R. Horton, KB Home - control hundreds of thousands as well. And all of them are in ferocious pursuit of more."

What will be the result of government interference? According to Bob Toll: "In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half." The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they're going to get only half as much. "And that average, million-dollar insane home in the burbs? It's going to be $4 million."

In other words, if you want to ensure that your children are living with you until they are 40, or that they inherit your mortgage, then keep pushing for builders to pay more of the public's costs.

What the heck, it's not going to hurt them any.



At 11:16 PM, Blogger Ray Hyde said...

"Most people are already familiar with the very large tax breaks for home buyers, in the form of the mortgage interest tax deduction, that is not available to people who rent or to people who borrow for purposes other than home purchase. However, it may be that a much larger implicit subsidy to home-owners is the government restrictions on new home supply. By restricting supply, the government is keeping prices up for current home-owners and restricting new entrants who might compete with our homes in the resale market. "

From the Coyote Blog, referenced at

At 11:26 AM, Blogger Toomanytaxes said...

Ray Hyde: Your explanation of developer behavior sounds quite logical, but I'm struggling with it. If the payment of higher proffers or the imposition of impact fees would necessarily permit a developer to increase its margins, I would expect some larger ones to have broken ranks by now to support those fees.

I know some developers and builders who support those fees (some because they believe the current system promotes corruption in government), but no big companies have gone public with such a position. Take the Board of Trade for example, which has members operating in both VA & MD. MD has all sorts of fees and APF restrictions that are grudginly accepted by the membership. But, in VA, each year the BoT's legislative program opposes any impact fees or APF restrictions as if their enactment would destroy businesses. The logic fails -- at least to those of us who do not live by campaign contributions.

I suspect that, in good times, builders and developers can not only pass through the costs of proffers/impact fees, but also mark them up! In a market where 37%+ of new buyers pay interest-only mortgages, it would be hard not to pass along all of these costs and boost profits. But in a tighter market, one might need to absorb much more of these costs. The Post reports that builders are offering all sorts of incentives, while not raising prices, to sell SF & condos.

Also, in Metro D.C., builders in the VA portion of the market probably get a windfall from the MD fees and restrictions. While these costs are not incurred in VA, VA prices probably reflect the ability of MD builders to pass along impact fee costs.

I think that, in tougher market conditions, developers and builders will eat the higher costs or stop building. Moreover, the high-times in NoVA exist largely because of high federal spending on contracts. It is very unlikely that whoever replaces Bush in 2009 will continue the wild spending. A Democrat would cut back on defense and homeland security spending to shift it to social programs. Republicans, such as McCain or Romney, would likely cut back spending, simply to reduce the cost of government. In any event, NoVA house prices will head south before the end of the decade. Also, many NoVA builders are betting the farm on condos & high-end ones to boot. What if they don't sell? While we aren't likely to see as big of a crash as in some areas (Florida & California, for example), NoVA housing costs will not continue on the same path forever.

Another key factor is the cost of doing business. Sooner or later, business owners will begin to move or not come to NoVA because of high costs. But for defense, homeland security or other federal government reason, why would anyone come to this over-crowded, over-priced area? It might be in the best interests of the Commonwealth to construct lower-cost infrastructure well away from the metro areas to attract businesses that want to escape high-cost areas. See today's Post article.

I do agree with you that the federal tax deduction for home mortgage interest is a huge benefit for homeowners.

At 9:32 PM, Blogger Ray Hyde said...

I don't think it increases the margins. 20% is 20%. It increases the basis. He is not going to reduce the margin because he can't afford to and stay in a business that is used as the economy's whipping boy, and bounces up and down with the interest rates.

If he finds he can't sell for the number that comes up, he goes elsewhere, or waits for the market to turn, that's what the 20% is for.

Figure, I've been in the stock market for 35 years and averaged 9.5%, for doing nothing except basically having patience. My ups and downs pale compare to the housing market.

Unlike a builder, I don't have to go to public hearings about my activities, don't pay real estate tax on my capital, don't pay property tax on my equipment, and don't pay fees to the community just for being in business. I don't have to deal with labor of questionable nationality, don't have to worry about Canadian lumber quotas, or a shortage of cement, don't have to contend with and delay my work waiting for inspectors, let alone deal with the aggravation of actually building something with all the thousands of things that go wrong.

All things considered, 20% wouldn't be enough to get me to do it.

A builder acquaintance once put it bluntly, "Hey, I'm a businessman. If you get your children to stop fornicating, I'll stop building houses."


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