How Does Sustainability Impact Mortgage Defaults?

A new University of Arizona report on the effect of sustainability on mortgage default rates has been making the rounds of planning websites and blogs. The study was sponsored by Fannie Mae, so naturally it is concerned with improving the ability to predict mortgage defaults. The report concludes that sustainability features “may be used to improve the prediction of mortgage default”.

To its great credit, the report does not conclude that the presence or absence of the sustainability features have causative power over default rates. This tends to get lost in translation: while the report states that “properties with certain sustainability factors are a better risk than previously thought”, The Atlantic Cities makes the more nebulous statement that “every additional minute of commute time raises the risk of default 3.7 percent”, and on Twitter this is reduced to “proximity to a freeway/commute time increases default risk”.

Not quite. There is a subtle but important difference between saying sustainability factors “may be used to improve the prediction of mortgage default” and saying that lack of sustainability factors “increases default risk”. The fact that a variable has predictive power does not mean it has causative power, because it may just be a proxy for something else. The former suggests that someone underwriting mortgages should include sustainability factors in their model – something Fannie Mae might want to do. The latter suggests that we could improve society by building more mixed-use development  near transit and tearing down freeways – something The Atlantic Cities might want to do.

The question, therefore, is if sustainability factors have causative power over mortgage default rates. Since many people would consider the sustainability factors to be desirable neighborhood attributes, the obvious possibility here is that people with more choice self-select for those neighborhoods, while people with less choice are forced to accept longer commutes, less mixed-use, and more proximity to freeways. This is something that could be revealed through borrower characteristics. What does the report have to say about those?

“Relevant variables include borrower character, experience, financial strength, and credit history. Unfortunately, data on these issues were not available for this study.

It is unlikely that the omission of borrower characteristics as controls weakened the results. In linear regression, omitted orthogonal variables that are determinants of the dependent variable do not bias the parameter estimates… there is no reason to think that borrower characteristics would be correlated with the sustainability variables…”

In plain English, this means that the report did not include borrower characteristics, but that the authors do not see this an issue, because they do not expect any relationship between borrower characteristics and sustainability factors.

That assumption seems questionable to me. It is entirely plausible that disadvantaged borrowers – people in worse financial condition or with bad credit, not to mention groups that face housing discrimination – would end up in less desirable neighborhoods. In fact, there is a long history of this happening. None of this is intended to question the desirability of and the multitude of benefits that come from mixed uses and transit accessibility. But I don’t see how you can conclude from this report that building more TOD would have a meaningful impact on mortgage defaults.

So A Civil Engineer Walks Into a Bike Shop…

Until yesterday, I didn’t have a bike. I had barely even ridden one in nearly 10 years. That’s kind of a cardinal sin if you want to write about urban transportation issues, like saying you’re a track engineer and not knowing what 115 RE means. But with the prospect of yet another CicLAvia slipping by – on LA’s premier boulevard through downtown and Koreatown, no less – I finally got the motivation to get a set of wheels.

A quick explanation is in order. Before moving to LA, I lived in Boston’s North End for 8 years. Despite what you might think, the North End is terrible for biking. The narrow width of the main streets means they’re usually totally jammed with pedestrians and/or cars. So a bike’s speed is irrelevant, and there’s nowhere to lock it up at your destination. The prospect of carrying a bike up and down the spiral stairs to your fourth-floor walkup, where it will take up too much space anyway, is a big deterrent. And anyway, the North End is so walkable that you don’t need a bike anyway. You’re so close to all four of Boston’s rapid transit lines (Silver Line – doesn’t count, never will) that anywhere worth going is easily accessible by walking and rapid transit. I had a bike, and it hung on the wall unused – for 8 years, until, like an idiot, I sold it before I moved to LA, a city where the utility of a bike for traveling mid-range distances quickly reveals itself.

Quick first thoughts:

• You can’t design good bike infrastructure without riding the road to see how it feels. If the people writing bike plans had to actually ride those routes, we’d have waaaaay less sharrows.
• I’m glad I didn’t miss another CicLAvia.
• Biking is yet another way that LA’s undense density is a sneaky strength. Space to keep your bike at your apartment, space to lock it up where you’re going, and a solid variety of attractions on the way.
• Likewise, there’s a nearly endless supply of boulevards that will work for CicLAvia events. How many cities can say that?
• Idaho Stop? I see no problem with that.
• The Westside has a wonderful offset grid of neighborhood streets. There’s no bike lane on Fairfax, so on our way back to Palms, we took Orange Grove, Hayworth, and Hi Point. Enough offset in the grid to deter speeding cut-through traffic, but enough connectivity to make them viable for bikes. This is what we need to be requiring in new developments.

Most of all, though, it was nice to just rediscover how much fun it is to bike, to traverse distance in the city like that. It’s a little like finding yourself on a desert road, where the strengths of a car are apparent, and having fun driving. Now that I finally have a bike, watch out: Imma be cruising the streets of LA making up lost time.

No Need for TOD Radii

A few weeks ago, Matthew Yglesias was in Somerville, blogging about how you can get a lot of density out of low-rise development. That’s an important point, and low-rise density is one of LA’s greatest strengths, something I’ll be posting on extensively here. But today, I want to talk about a reply that Aaron Naparstek tweeted:

That doesn’t seem right to me, because it’s not like you need a car to get around Inman. The residential density resulting from historic patterns of development in Somerville is not correlated to proximity to rail stops, yet everyone seems to agree that it works pretty well.

Now, along comes ACCESS and publishes an article questioning the validity of half-mile radii for TOD at transit stop. Check out Figure 1. It shows that once you go past 0.5 miles, the increase in transit ridership holds up remarkably well as distance increases. A 100-resident  development will generate about 25 riders at 0.5 miles out. Move it twice as far and it still generates about 18 riders. Employment generates even more ridership and ridership holds up even better – at 100-job development at 0.5 miles will generate about 40 riders, and at 1.0 miles about 35 riders.

Not surprisingly, Figure 1 looks suspiciously like a demand curve: amount of transit demanded versus the cost (in distance) of transit. Demand is not a fixed quantity. Some people will pay more to walk less, but others will walk more to pay less. Housing and commercial space that is located closest to the transit stop is going to be the most expensive. Of course, that’s partly because it’s close, but it’s also because there’s less of it. Within 0.5 mile of a station, there’s 500 acres of land. But between 0.5 and 1.0 miles, there’s 1,500 acres of land. Given the same intensity of development, the 0.5 to 1.0 mile zone will probably generate more ridership.

In other words, if you upzone a fixed radii around your transit station, you miss the opportunity to provide housing and business opportunities for people willing to walk  or bike further. In fact, you may be missing out on a majority of the ridership potential, and failing to allow development that would really help lower and middle income residents. This is a lesson that Los Angeles should keep in mind as it looks at changing the zoning around Expo Line stations.

Transit Service During Rail Maintenance

80 minutes from Vermont/Santa Monica to Culver City. That’s what it took me recently, due to the Red Line running 20 minute (nominal) headways for track maintenance. 80 minutes to go 11 miles… yea, file that under “begging your riders to drive”. Maintenance is necessary. But dude, get out your Jarrett Walker and read the seven elements of transportation services:

• #3. It’s a good use of my time.

Maintenance is no excuse to provide poor service to your passengers. Next time I need to make that trip, I’m gonna check and see if the Red Line construction is still ongoing, and if it is, I’m gonna drive. I can afford it and I’m pretty sure that my marginal greenhouse gas emissions are irrelevant. And guess what? Most people think the same thing. So, the challenge is, when we do necessary work on a rail line, how do we maintain a high level of service for passengers?

Now, one option would be to just close the line and run buses instead. Sometimes, the road infrastructure isn’t set up to replace a rail service. In the case of the Red Line, things aren’t that bad. You could run a route Lankershim-the 101-Highland-Hollywood-Vermont-Wilshire and work your way to Union Station. Problem there might be that traffic lights make the trip take longer. If you run the buses on something like a 5 minute headway, but it takes longer, is that better than a 20 minute headway with a  shorter trip?

However, if we remember to view the transit system as a whole, there are things we could do on the bus side of things that would complement the 20 minute headways on the rail system. The most logical things would be bumping up the frequency on the Rapid 780 and the Rapid 754, which are running on… well, they’re not even running at that time of night (after about 8:30 pm). The local equivalents, the 204 and the 217, are running on 30+ minute headways. These routes parallel part of the Red Line, but they also provide transfers to the Expo Line. The challenge, of course, is getting passengers to think about taking these routes instead of the rail lines.

Unfortunately, there aren’t any routes that would supplement the Red Line and connect to the Blue Line. I believe the Blue Line was running on 30 minute headways to Long Beach (with more service to Willow), also due to construction. An untimed transfer between a 20 minute headway service and a 30 minute headway service is particularly brutal. When there is work on multiple rail lines, Metro should make efforts to provide timed transfers at 7^th/Metro.

An Affordable Housing Parable

Housing and development are such emotional issues that it’s often hard to have a reasonable discussion. So let’s talk about something we all like instead: riding bikes.

Suppose that everybody who wants to ride a bike already owns one. For whatever reason, the city has enacted rules that make the production of new bikes very difficult, but since all would-be riders already have a bike no one notices. Now, suppose the city becomes such a great place to bike that more and more people decide they want to ride. At first, the new riders can get cheap bikes, from existing riders fixing up and selling old bikes and the limited supply of new bikes. However, as more and more people decide they want to ride, the price of a bike will start to rise quickly.

The rapid increase in the cost of bikes leads to a public outcry – low-income people can no longer afford a bike. And so affordable biking advocates organize and insist that (a) a bike that was affordable at the time of previous sale cannot be sold now for more than the previous purchase price plus inflation and (b) a portion of the new bikes that are produced must be reserved for low-income people. Also, whenever someone proposes to produce new bikes, they insist on reducing the number and quality of bikes produced, because producing large numbers of high-quality bikes will drive up the price of all bikes.

Despite the enactment of these policies, things keep getting worse. The number of cheap bikes reserved by the policies is not enough to meet demand, so low-income people are forced to enter a lottery to win one of those bikes. People who win a cheap bike are extremely reluctant to ever give it up, even if it’s not the best bike for them. Low-income people who do not win cheap bikes must either pay market prices for one of the expensive bikes or move to another city where bikes are in greater supply. Worse still, because some bikes are reserved for the cheap bike lottery, the prices for the bikes not in the lottery are driven up more. So everyone who does not win the cheap bike lottery, from the poor to the wealthy, pays more for bikes. In addition, the high prices commanded by bikes results in every available bike being pressed into use – even unsafe rust heaps that would normally be taken off the market and recycled.

The response of the biking advocates is to reserve an even greater number of bikes for the lottery, which because of the further price increases now extends to middle-income people, require an even greater number of new bikes to be reserved for low-income people, and fiercely oppose the recycling of old bikes. The end game is obvious: eventually, all bikes will either be in the lottery or so expensive that only the very wealthy can afford them.

Now that probably sounds like a pretty insane system for trying to manage the increase in demand for bikes. Well, yeah. But it’s how the demand for housing is managed in just about every major American city. And if the solution in the bike allegory is painfully obvious – build more bikes – the solution to unaffordable housing in American cities is equally obvious – build more houses.

Look at any major, prosperous US city, and you will see all of the perverse outcomes of the bike metaphor in action:

• People hanging on to cheap housing regardless of whether it suits their need, and bizarre acts of fraud to procure the same.
• Low-income people forced to pay an exorbitant amount of their earnings for housing.
• Low-income people moving to places with cheaper housing (i.e. Texas, Phoenix, and Las Vegas).
• Every leaky, nasty, vermin-infested basement room turned into apartments. (We generally don’t have basements in LA, but ask your friends in New York and Boston about that.)
• Public opposition to the construction of new housing.
• Affordable housing lottery end-game, where people with six-figure incomes now qualify for the reserved units.

Affordable housing advocates began organizing on a small scale, and the policies they developed were logical from the perspective of defending oneself against change. However, from a macroeconomic perspective, these policies were probably doomed to fail from the start. There is not a single US city where housing has grown more affordable as a result of these policies being enacted. More stringent versions of these policies are also doomed to fail from the same inherent contradictions. It is time to admit that our affordable housing policy does not work and try something else.

Every problem in the bike metaphor could be largely resolved by allowing the production of more bikes, and I think most of our housing problems could be largely resolved by allowing the production of more housing. It would be hard for any policy to not be an improvement over current outcomes.

Of course, allowing more bicycle or housing production by the private sector isn’t the only possible solution. Other equilibriums would include:

• Reduce the quality of biking in the city by making infrastructure worse. That will reduce the desire to bike and therefore reduce bike prices. Again, this sounds ridiculous when posed as a solution for demand for biking, but it is not uncommon to see people argue against infrastructure improvements in their neighborhoods for this reason. The opposite extreme exists in places like Detroit, where the infrastructure and economy are so bad that despite the destruction of housing units, the city remains very affordable.
• Have the prices of all housing units set by the government, and have a lottery for all units. Anyone who doesn’t win a unit has to leave the city. This is the equilibrium that current policy is trending towards.
• Start a government housing construction program to increase supply. Personally I see no reason to do this if the private sector is willing to build housing. We don’t need the government to start producing bikes to meet the demand for cycling; existing bike manufacturers would be happy to increase output.

The usual economic argument against reducing control on private development is that new construction causes all prices to rise, but that doesn’t make sense. There are only so many people on the planet, and not all of them want to live in Los Angeles. If we keep building houses, at some point, they will become more affordable. Fortunately for us, the private sector is willing to build housing, just like it is willing to build bikes. All the government has to do is get out of the way.

Nobody Can Predict the GHG Impact of Development, and It Doesn’t Matter

One of the reasons frequently cited for promoting denser development is the need to reduce greenhouse gas (GHG) emissions. In places like California and Massachusetts, projects may be required to assess their impact on GHG emissions. For example, California SB 375 requires regional planning agencies like the Southern California Association of Governments (SCAG) and the Association of Bay Area Governments (ABAG) to come up with 30-year plans, and they are required to show that those plans reduce GHG emissions. Coincidentally, not long after I started drafting this piece, Juan Matute published an article on SB 375, which I would encourage you to read.

On this sudden importance of this issue, I actually think none other than Randall O’Toole is spot on. Planners long ago decided that we should be building denser development, and GHG is just another thing to add to the list of justifications. If it were demonstrated that dense development increased GHG emissions, I would not be surprised if GHG quietly disappeared from the discussion, or if it was decided that the other benefits of density outweigh GHG impacts. (The difference between me and O’Toole, which will be seen as I develop this blog, is that O’Toole thinks we should lock in suboptimal low-density market outcomes for all eternity through deed covenants, while I think density will happen on its own without planners, if we allow it.)

Intuitively, it would seem to me that higher density development should have less GHG impact. O’Toole and company say this is not so. Objectively, I don’t know who’s right, and it seems to me that both sides have a vested interest in a predetermined outcome – that is, they are not interested in finding out what type of development has the lowest GHG impact, they are interested in proving that their preferred type of development has lower GHG impact. The one thing we can say for sure is that any type of development in a pleasant climate like Los Angeles will use less energy than any type of development in the increasingly hellish climates of places like Washington DC and New York, simply because of heating and cooling demands.

Fortunately for my point of view regarding development, the truth is that nobody can predict the GHG impact of development, and it doesn’t matter. There are two reasons why: the peculiar nature of carbon dioxide as a pollutant, and the portability of pollution.

By peculiar nature of GHG emissions, I mean that they are not an unintended consequence of energy production but the very essence of energy production using fossil fuels. Nobody wants the SO₂ from burning dirty coal. But you can’t get the energy out of coal without creating CO₂. So, if California reduces its energy use from GHG-emitting sources, it makes those sources cheaper in other places, including the developing world, and the incentive for those places to use those sources of energy increases. Reducing SO₂ emissions doesn’t create an incentive for someone else to emit SO₂. CO₂ is different.

By portability of pollution, I mean the ability to move the source to a less restrictive jurisdiction. For example, sewage is basically non-portable. You can’t move your entire city to a less restrictive jurisdiction and it would be pretty hard to ship your sewage to somewhere else. You treat it, and it the result is a net positive for local water resources and the planet. Power generation has some portability. You can’t move your coal power plant from Los Angeles to China but you can move it to the Navajo Reservation and ship the power back to LA. You can also increase use of less polluting fuels, like natural gas, in the restrictive jurisdiction, and ship the more polluting fuels, like coal, to places like China – something the US energy industry is doing right now. In this case there is definitely a net positive for your city – LA’s air is much cleaner since we don’t have any coal-fired plants – but there may be a negative impact for another region, and the impact on the planet is unclear. GHG is the ultimate portable pollution. If planet-wide GHG emissions do not go down, there is no net positive for anybody – not locally, not regionally, not anywhere. It doesn’t matter for California’s climate if GHG is emitted in Los Angeles or Page or Linfen.

There are some important takeaways here:

• If California reduces its consumption of GHG-producing energy, that will drive the cost of that energy down, which will increase its use in other places.
• Restrictions on development in California help encourage more development in places that emit more GHG like Texas. That is, somewhat counterintuitively, local restrictions on GHG-emitting development may increase global emissions. Matute makes the same argument on an intra-California basis, using Berkeley and Barstow.
• Since there is no local benefit to California of reducing GHG, the merit of trying to do so is questionable in the absence of national and global solutions.

None of this to say that climate change is not real or that we don’t need to address it. It is the most serious environmental problem we have ever faced. The analysis is remarkably simple: either we will find renewable sources of energy that are cost-competitive with fossil fuels, or we will not and we will suffer the consequences. In the absence of cost-competitive renewables, marginal changes to GHG emissions are irrelevant, especially given that we are already past 400ppm CO₂. If we do not get cheap renewable energy, all of the world’s fossil fuels will eventually be burned, and on a timescale short enough that its actual length is irrelevant.

What this does mean is that, as Noah Smith says, we should focus our efforts on bringing down the cost of renewable energy like solar and wind. If California’s AB 32 results in more efficient industry and cheaper renewable energy, the state will have done the world a huge favor. It wouldn’t be the first time that’s happened (catalytic converters have improved countless lives), and the state’s renewable energy capacity is growing quickly. We’ve got no shortage of sun and wind here in SoCal; all we’ve got to do is put them to use. On the other hand, if AB 32 just results in industries moving to other places, it will hurt California’s economy and accomplish nothing. The outcome remains to be seen. Hey, give us credit for trying.

When it comes to development, it means we should promote development that’s efficient. Coincidentally, that’s going to be one of my main points on this blog. I was going to elaborate on how we get efficient development, but that proved to be a topic worthy of its own post.

73 Tollway – Y U No Have Cars?

There’s been some discussion lately (or at least, when I meant to start this blog) on the underperformance of the Orange County Toll Roads. These roads were constructed in the early 1990s, in an ingenious scheme to create a system whereby the revenues from highways accrue to bondholders all over the world rather than the taxpayers of the county. Let’s leave the questionable wisdom of privately operated roads for another post, and return to the problem facing roads like the 73 tollway – not enough cars to service the debt through toll collections.

The LA Times focuses on the high cost of driving the roads, and the competition from the improvement of alternate free routes, for example the 405 and the 5, which provide an alternate to the 73. This leads to discussion about what toll rate produces the optimum revenue – would revenue be increased by lowering the toll to draw more traffic? Or would revenue be increased by raising the toll, reducing traffic and maintenance costs but collecting more money from fewer drivers? Another issue brought up is that the roads were overbuilt at 6-8 lanes, when 4 lanes would have sufficed at the outset and resulted in lower bond payments.

Cap’n Transit surveys the situation and says that, in addition to the folly of improving competing freeways, the lack of cars on the 73 suggests that we shouldn’t always view HOT lanes as greenfield construction, or as additions to existing highways. That’s certainly true; you could make a great case for turning an existing lane into an HOT lane on the 10 freeway between Downtown LA and Santa Monica. And in fact, maybe I will make that case in a future post.

But there’s something else going on in the case of the 73. The authority that built the highway was created in 1986, and the 73 was completed in 1996. At the same time, the following conservation areas were established, on lands that directly abut the 73:

• Crystal Cove State Park: 3,936 acres (1979)
• Laguna Coast Wilderness Park: 9,488 acres (1993)
• Aliso and Wood Park: 3,926 acres (1990)
• Bommer Canyon: 16,000 acres (1982)

That’s a total of about 33,000 acres of land that was set aside and precluded from development, either not long before the 73 was built or during planning and construction. Now, maybe that part of the San Joaquin Hills is so unique and precious that all of that land had to be preserved. Certainly, between Malibu and Camp Pendleton, the PV Peninsula and the San Joaquin Hills are the only places where mountains cascade right down to the Pacific. The views are incredible. I’m not here to argue about that.

But I am here to argue that it doesn’t make sense to build a highway, and then prevent development on the land around the highway – development that might justify the highway’s existence. It’s not just that the 73 competes with free facilities like the 5 and the 405. The 73 is a vastly inferior facility if you are trying to get to the major development centers in southern Orange County, like Irvine.

Transit advocates have been quick to point out the underperformance of these roads as an argument against building new highways, but the same principle applies to transit. Between 1904 and 1920, several subway lines were constructed between Manhattan and the Bronx. As a result, the population of the Bronx increased from 200,000 in 1900 to 1,200,000 in 1920. But imagine what would have happened if large swaths of the rural Bronx had been declared conservation areas in 1905. There’d be no one riding the subways, and they’d look like a terrible investment. Regardless of what type of transpo you build, you need to allow land uses around the infrastructure to grow. Otherwise, what’s the point?