Houston

America's Four Great Growth Waves and the World Cities They Produced

Tory Gattis — Wed, 15 Apr 2009 00:34:44 -0400

There have been four great growth waves in American history. In each case, there was an attractive new frontier, which not only drew migrating waves of people seeking new opportunity, but also developed large new bases of industry, wealth, and power. These waves have also created top-tier world cities in their wake. The first three of these waves were:

The Boston, New York, Philadelphia, Baltimore, Washington DC corridor was America's original land of opportunity, industry, wealth, and power. New York was the big winner, and DC and Boston still do quite well.
The rise of the agricultural and industrial Midwest, including Chicago, Detroit, Pittsburgh, Cleveland, and St. Louis. The fall here has been a hard one as manufacturing moved abroad, but Chicago still stands as a world-class city produced during the region's heyday.
The great westward migration, mostly focused on California, but with ancillary growth in adjacent and west coast states. This migration started well before World War 2, but really took off after the war, and produced two top-tier mega-metros – Los Angeles and the San Francisco Bay Area - and several successful second-tiers like Seattle, San Diego, Las Vegas, and Phoenix.

These waves are not clearly distinct, but overlap each other. As one region matures and starts to level off, the next region starts its growth wave. And that's the situation now as California shows clear signs of having peaked: gigantic tech and housing crashes plus economic and domestic outmigration as tax, cost-of-living, housing, and regulatory burdens rise and a dysfunctional government teeters towards financial collapse.

The fourth wave is increasingly clear and follows the same California model of a single focus mega-state and an ancillary region: Texas and the new South.

Just as California had its pre-war growth surge, Texas had its first real growth waves with the 20th-century post-Spindletop oil boom. California had the dust bowl migration of the 30s, and Texas the oil boom migration of the 70s. But the real super-surge has become clearer in the new century as California hands off the baton to Texas. This growth wave really covers much of the South, but Texas is the 800lb gorilla vs. states like Georgia and North Carolina, just as California dominates over Washington, Nevada, and Arizona. Texas even looms over Florida, which certainly has experienced incredible population growth to become the fourth-largest state, but has had considerably less success with building industry, wealth, and power. Florida’s wealth – like that of Arizona – comes in part from people who built wealth elsewhere but moved or bought a second home there. Neither place is home to many Fortune 500 headquarters, an area where Texas has excelled.

California had its agriculture and oil barons before WW2, but the real story there was the post-war rise of the entertainment, defense, aerospace, biotech, trade and technology industries. In a similar way, Texas’ oil tycoons are just the tip of the coming surge of wealth and power in industries such as technology, health care, biotech, defense, trade, transportation, aerospace, finance, telecom, and alternative energy in addition to traditional oil and gas (in fact, Texas is the #1 wind power state).

The great cities emerging from this new wave are Atlanta, Dallas-Ft.Worth, and Houston. They dominate the census growth stats (Houston story), and all indications are that Houston will pass Philadelphia in the 2010 census to join Dallas-Ft.Worth in the top 5 metros along with New York, Los Angeles, and Chicago. DFW and Houston are even approaching the combined San Francisco Bay Area population of 6.1 million, and Texas passed California and New York for the #1 ranking in the Fortune 500 HQ rankings last year.

Want more evidence? Check out this impressive video on the DFW-Austin-San Antonio-Houston Texas Triangle with an overwhelming list of statistics that make the case. In the video, they refer to the region as the 18m-strong "Texaplex" – a play on the “Metroplex” nickname for Dallas-Ft. Worth. You can also see their Texaplex informational brochure here (pdf).

When you look at it in this historical context, it's clear Texas and the new South will be the focal point of America's growth for at least the next few decades. History also says at least one, and possibly more, truly top-tier world cities will emerge from this wave – and it could be argued that some have already. It's easy to get caught up in the day-to-day hubub and crisis-of-the-moment, but take a minute to stand back and see the big picture. Those living in or moving to Texas and the new South are part of a great historical wave that's just starting to really take off, the same as being in Chicago at the turn of the 19th-century or in California after WW2. Pretty cool, eh?

Tory Gattis is a Social Systems Architect, consultant and entrepreneur with a genuine love of his hometown Houston and its people. He covers a wide range of Houston topics at Houston Strategies - including transportation, transit, quality-of-life, city identity, and development and land-use regulations - and have published numerous Houston Chronicle op-eds on these topics.

Where are the Best Cities for Job Growth?

Joel Kotkin — Tue, 14 Apr 2009 00:08:29 -0400

Over the past five years, Michael Shires, associate professor in public policy at Pepperdine University, and I have been compiling a list of the best places to do business. The list, based on job growth in regions across the U.S. over the long, middle and short term, has changed over the years--but the employment landscape has never looked like this.

In past iterations, we saw many fast-growing economies--some adding jobs at annual rates of 3% to 5%. Meanwhile, some grew more slowly, and others actually lost jobs. This year, however, you can barely find a fast-growing economy anywhere in this vast, diverse country. In 2008, 2% growth made a city a veritable boom town, and anything approaching 1% growth is, oddly, better than merely respectable.

So this year perhaps we should call the rankings not the "best" places for jobs, but the "least worst." But the least worst economies in America today largely mirror those that topped the list last year, even if these regions have recently experienced less growth than in prior years. Our No.1-ranked big city, Austin, for example, enjoyed growth of 1% in 2008--less than a third of its average since 2003.

The study is based on job growth in 333 regions--called Metropolitan Statistical Areas by the Bureau of Labor Statistics, which provided the data--across the U.S. Our analysis looked not only at job growth in the last year but also at how employment figures have changed since 1996. This is because we are wary of overemphasizing recent data and strive to give a more complete picture of the potential a region has for job-seekers. (For the complete methodology, click here.)

The top of the complete ranking--which, for ease, we have broken down into the two smaller lists, of the best big and small cities for jobs--is dominated by one state: Texas. The Lone Star State may have lost a powerful advocate in Washington, but it's home to a remarkable eight of the top 20 cities on our list--including No. 1-ranked Odessa, a small city in the state's northwestern region. Further, the top five large metropolitan areas for job growth--Austin, Houston, San Antonio, Ft. Worth and Dallas--are all in Texas' "urban triangle."

The reasons for the state's relative success are varied. A healthy energy industry is certainly one cause. Many Texas high-fliers, including Odessa, Longview, Dallas and Houston, are home to energy companies that employ hordes of people--and usually at fairly high salaries for both blue- and white-collar workers. In some places, these spurts represent a huge reversal from the late 1990s. Take Odessa's remarkable 5.5% job growth in 2008, which followed a period of growth well under 1% from 1998 to 2002.

Of course, not all the nation's energy jobs are located in Texas, even if the state does play host to most of our major oil companies. The surge in energy prices in 2007 also boosted the performance of several other top-ranked locales such as Grand Junction, Colo., Houma-Bayou Cane-Thibodoux, La., Tulsa, Okla., Lafayette, La., and Bismarck, N.D.

Looking at the energy sector's hotbeds, however, doesn't tell the whole story. Another major factor behind a city's job offerings is how severely it experienced the housing crisis. There's a "zone of sanity" across the middle of the country, including Kansas City, Mo., that largely avoided the real estate bubble and the subsequent foreclosure crisis.

Still other factors correlating with job growth--as evidenced by Shires' and my current and past studies--are lower costs and taxes. For example, the area around Kennewick, Wash., is far less expensive than coastal communities in that same state, and residents and businesses there also enjoy cheap hydroelectric power. Compared with high-tech centers in California and the Northeast, such as San José and Boston, places like Austin offer both tax and housing-cost bargains, as do Fargo, N.D. and Durham-Chapel Hill, N.C.

College towns also did well on our list, particularly those in states that are both less expensive and outside the Great Lakes. Although universities--and their endowments--are feeling the recession's pinch, they continue to attract students. In fact, colleges saw a bumper crop of applicants this year, as members of the huge millennial generation, encompassing those born after 1983, reach that stage of life. More recently, college towns have emerged as incubators for new companies and as attractive places for retirees.

Specifically, the college town winners include not only well-known places like Austin and Chapel Hill, but also less-hyped places like Athens, Ga., home of the University of Georgia; College Station, Texas, where 48,000-student Texas A&M University is located; Morgantown, W.Va., site of the University of West Virginia; and Fargo, the hub of North Dakota State University.

Democratic states are glaringly absent from the top of the list. You don't get to a traditionally blue state--in a departure from past years, Obama won North Carolina--until you get to Olympia, Wash., and Seattle, which ranked No. 6 among the large cities.

But political changes afoot could affect the trajectory of many of our fast-growing communities--and not always in positive ways. It's possible that the Obama administration's new energy policies, which may discourage domestic fossil fuel production,could put a considerable damper on the still-robust parts of Texas and elsewhere where coal, oil and natural gas industries are still cornerstones of economic success.

By contrast, the wind- and solar-power industries seem to be, as of now, relatively small job generators, and with energy prices low, endeavors in these areas are sustainable only with massive subsidies from Washington. But still, if these sectors grow in size and profitability, other locales that have not typically been seen as energy hubs over the past few decades may benefit--notably parts of California, although Texas and the Great Plains also seem positioned to profit from these developments.

Another critical concern for some communities is the potential for major cutbacks on big-ticket defense spending. This would be of particular interest to communities in places like Texas, Oklahoma and Georgia where new aircraft are currently assembled. Over the years, blue states like California have seen their defense industry shrivel as the once-potent Texas Congressional delegation and the two Bushes tilted toward Lone Star State contractors.

These days it's big-city mayors and big blue-state governors who are looking for financial support from Obama. Northeast boosters are convinced more money on mass transit, inter-city rail lines and scientific research will rev up their economies. Boston--No. 16 on the list of large cities and a leading medical and scientific research center--could be a beneficiary of the new federal spending.

The most obvious winner from the recent power shift should be Washington, D.C. The Obama-led stimulus, including the massive Treasury bailout, has transformed the town from merely the political capital into the de facto center of regular capital as well. Watch for D.C. and its environs to move up our list over the next year or two. Already the area boasts one of the few strong apartment markets among the big metropolitan areas in the country, which will only improve as job-seekers flock to the new Rome.

Yet Washington is an anomaly, because most of the places that stand to benefit from this unforgiving economy are ones that are affordable and therefore friendly to business, reinforcing a key trend of the last decade. It also helps regions to have ties to core industries like energy and agriculture, a sector that has remained relatively strong and will strengthen again when global demand for food increases.

Some areas have attracted new residents readily and continue to do so, albeit at a somewhat slower pace. Over time this migration could be good news for a handful of metropolitan areas like Salt Lake City, which ranks seventh among the big cities for job growth, and Raleigh-Cary, N.C., which was No. 1 among large cities last year and No. 8 this year. Over the last few years, these places have consistently appeared at the top of our rankings and are emerging as preferred sites for cutting-edge technology and manufacturing firms.

Below these winners are a cluster of other promising places that have already managed to withstand the current downturn in decent shape and seem certain to rebound along with the overall economy. These include the largely suburban area around Kansas City, Kan., perennial high-flyer Coeur d'Alene, Idaho, and Greeley, Colo.--in part due to their ability to attract workers and businesses from bigger metropolitan centers nearby--as well as Huntsville, Ala., which has a strong concentration of workers in the government and high-tech sectors.

In the end, most of the cities at the top of the lists--whether they are small, medium or large--have shown they have what it takes to survive in tough times. Less-stressed local governments will be able to construct needed infrastructure and attract new investors so that job growth can rise to the levels of past years. If better days are in the offing, these areas seem best positioned to be the next drivers of the economic expansion this nation sorely needs.

This article originally appeared at Forbes.

Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

Cash, Not Pretense: An Entrepreneur's Guide to the Credit Crisis.

Joel Kotkin — Thu, 19 Mar 2009 20:28:19 -0400

Compared with most businessmen, 41-year-old Charlie Wilson has some reason to like the economic downturn. President of Salvex, a Houston-based salvage firm he founded in 2002, Wilson has seen huge growth in the bankruptcy business over the past year. It is keeping his 10-person staff, and his 55 agents around the world, busy.

But the credit crunch still creates headaches for Wilson. With loans hard to secure, many would-be customers cannot bid on the merchandise in his inventory. "We are booming with more deals because people are defaulting," Wilson notes, "but the buyers are gun-shy because they can't get the money to pay."

So what do you do in these circumstances? Charlie Wilson is taking a back-to-basics approach. Rule No. 1: Stay away from people who rely on credit, not cash. This means private companies – including many outside the U.S. – are often better customers than larger, but now cash-strapped, public ones. "The further away I get from Wall Street, the better I feel," Wilson says.

Cheap is the new hip. Focus on cutting costs and streamlining operations. Don't spend money on unnecessary employees or hard infrastructure; use the Internet wherever possible. It helps, Wilson says, to be located in an affordable building and in a place, like Houston, where taxes, regulatory costs and rents are generally cheap. "I work out of a Class C building," he says, "and now everyone thinks it's sexy."

Expand your range of customers. Look for new customers who have cash resources and access to markets that are still growing. This has led Wilson to look outside the U.S, to places like India or China, where many companies still have cash and see the current crisis as a great opportunity for bargain hunting.

These three trends – the growing importance of cash, cost cutting and expanding one's customer base – are defining entrepreneurial response to the credit crash. All three trends can be seen in the strategies of entrepreneurs who are focusing on burgeoning, often cash-oriented immigrant markets.

Consider the success of La Gran Plaza, a massive Latino-themed shopping center on the outskirts of Ft. Worth, Texas. Not so long ago, La Gran Plaza was a failing suburban shopping center. Now it's thriving, but only after being regeared to service the cash economy of the local Latino community. Similar success can be seen elsewhere in the country, even in Southern California, which has been hard-hit by the recession but where ethnic malls and supermarkets continue to thrive.

Some urbanists, like scholar Richard Florida, maintain that the post-crash environment favors densely populated (and very expensive) cities like New York. But in fact, it may make more sense for entrepreneurs concerned with costs to work out of places like Houston, or even the Great Plains states, where local governments are more business-friendly. And everything, from housing to energy, tends to be less expensive.

Indeed, over the past few recessions, the basic pattern has been that cities come into the downturns late and stay in them longer. In the last decade, many big cities have become very dependent on Wall Street and asset inflation. In 2006, for instance, financial services accounted for a remarkable 35% of all of New York City's wages and salaries, compared with less than 20% 30 years earlier.

So it seems likely that the credit crisis will hit pretty hard in those places most addicted to credit – places like New York, San Francisco and Chicago. This occurred early 1980s, the early 1990s and will occur again now. It might even be worse this time around. The federal takeover of the banks will mean lower salaries and bonuses, which will make such places less attractive to ambitious young people. If you are limited to $250,000 a year, it's much easier to "get by" in Charlotte or Des Moines than it is in Manhattan.

The biggest hope for New York, Los Angeles and other big cities lies with immigrants and the fact that lower property prices could keep some talented individuals from migrating elsewhere. But the one expensive big city really well-positioned for the credit crunch may be Washington, D.C., since it "creates" its own credit. As key financial decision making shifts to the capital, we can expect to see some financial-industry titans (and their retainers) spending more time in, or even moving to, the capitol. Washington, it's time for your close-up.

Beyond the beltway, the credit crunch will eventually benefit places with lower costs of living – including Houston. High rents, strong regulatory restraints and prestige spending make little sense in a cash-short environment. Now, fancy high-rise offices in elite areas are an albatross for even the strongest business.

The remade economy may hold some much-needed good news for hard-hit sun-belt markets. Some places, like Phoenix, may be poised for a comeback. "Phoenix is paying for being overbuilt, but [lower] prices will attract people back," explains local economist Elliot Pollack. "The fundamentals that drove the growth are still here with the return of lower costs – the ease of doing business, lower taxes and the attractiveness of the area."

But the real winners may be the people now leaving big companies to start new firms. Unburdened by bad habits developed in the bubble, they will be able to fit their business models in lean times. Many won't mind being in an un-fancy building or neighborhood. Whether they are forming new banks, energy companies or design firms, they will need to do it more efficiently – with less overhead, smarter use of the Web and less pretension.

"People are watching their companies go under. You get three vice-presidents who get laid off but know their business," Wilson says. "They start a new company somewhere cheap that is more efficient and streamlined. These are the companies that will survive and grow the next economy."

This article originally appeared at Forbes.

How Houston Will Weather The Recession

Joel Kotkin — Tue, 10 Mar 2009 00:08:21 -0400

In the past year or so, traveling the various geographies of this country has become increasingly depressing. From the baked Sun Belt suburbs to the green Valhallas of Oregon and the once luxurious precincts of Manhattan, it is hard to find much cheer--at least from entrepreneurs--about the prospects for the economy.

Until recently Texas, and particularly Houston, has been one of the last bastions of that great traditional American optimism--and for good reason. Over the past few years, Houston has outperformed every major metropolitan area on virtually every key economic indicator.

Last year, the region was rated among the major metropolitan areas as the best place for everything from earning a living to college grads to manufacturing, according to such publications as Forbes, Business Week and Kiplinger's.

But the city that could may soon not. Like a couple of bad storms, the recession is barreling in from east and west, shutting off credit to even the most successful businesses. Just last month, Hanley Wood's Builder ranked Houston the "healthiest" housing market in the nation. But when you get on the ground, things appear far less sanguine.

Particularly hard hit has been the once-vibrant inner city condominium market, which has been attracting a whole new generation of young professionals to urban living. Now some condominiums, suggests developer Tim Cisneros, are being abandoned by younger workers who have become the prime victims of a contracting economy. As seen in other regions, others are turning to rentals as potential buyers fail to qualify even at Houston's reasonable prices.

However, the biggest problem facing Houston today revolves around the energy industry, which represents to this region of well over 5 million what finance does to New York. Already lower energy prices, along with the global slowdown, have taken a dent in job growth. Just last week, the Texas Workforce commission reported a 0.7% employment increase for the area in 2008, compared with a robust 3.5% the year before.

Bill Gilmer, a veteran economist who covers energy for the Dallas branch of the Federal Reserve, reports that proposed new taxes and regulations plus falling prices have started to decimate the domestic oil and gas industry. Over the past year, he reports the number of rigs in operation across the country dropped from 2,000 to some 1,300.

The impact of this on Houston's energy economy, Gilmer suggests, will be severe, and it will drag the region and much of Texas down with it. "We are talking about a Texas recession now without question," he says. "I lived through the Jimmy Carter era before, and now it's déjà vu."

Of course, some high-end jobs in energy will remain, particularly for those who work on massive new projects overseas, like in Saudi Arabia. Instead, the biggest hits will affect the production sector, which until recently was a prodigious creator of high-wage blue-collar jobs. Over the coming years, the production downturn could devastate places like western Texas, the Dakotas, Louisiana, California's Kern County and anywhere else that produces American crude and gas.

Indeed, it may turn out to be one of the great ironies that the Obama administration, which campaigned earnestly against our "dependence on foreign oil," will in the end make us more so. Barring an unexpected shift toward nuclear power, it is hard to see how the country--given the administration's stance--will produce enough energy to meet its need in the near or even mid-term without turning increasingly to the Saudis and others overseas.

Of course, the Houston-centered domestic energy industry may not go quietly into the night. The D.C. correspondent for the Energy Compass, Bill Murray, expects a "battle royal" in Congress over climate change legislation this fall.

Houston Mayor Bill White, who is running for the Senate in 2010, also seems ready to fight the anti-oil and gas prejudices of key administration insiders. Natural gas, he suggests, "has to be a big part of the future if [we] have any chance at all to have electric power that is affordable and cleaner."

It is critical to point out that White is not some Neanderthal GOP "ditto head" but a former assistant energy secretary under Bill Clinton, a one-time chairman of the Texas Democratic Party and a widely popular figure in majority non-white Houston. He has a long record championing energy conservation and alternative fuels, but he says he cannot embrace an inquisitional approach to his city's signature industry.

"There's a difference," he said, with obvious reference to the Democrats in Washington, "between mandating one kind of technology and reality."

Yet even if the green Torquemadas have their way, White thinks Houstonians will find a way to keep their city ahead of the country's other urban sad sacks. Throughout the expansion of recent years, when other cities went on insane spending sprees, Houston has kept the cost of services low and focused on basic infrastructure. Critically, Houston is also among the few big cities that has streamlined its pensions for public employees.

Houston may also benefit from its historical experience dealing with near-depression conditions. When energy prices collapsed after 1983, the region went through a decade-long recession. The city went from being one of the country's busiest construction sites to being filled with empty "see-through" office buildings and expanses of foreclosed homes.

Under another Democratic mayor, the revered Bob Lanier, Houston gamely recovered, without much help from Washington. Lanier and other Houston leaders drove to diversify the economy--particularly in medical services, international trade and manufacturing--by investing in basic infrastructure and keeping costs low.

"We've already lived through one depression," says local real estate investor David Wolff, who also serves as chairman of the region's transit agency, Metro. "We have already learned humility, and we have learned how to prepare for the world when everything shifts under our feet."

So despite all the problems surrounding energy and the encroaching recession, Houstonians continue to be cautiously optimistic about their future.

They still excel at all the hallmarks of a progressive economy, such as improving both road and rail transport, reforming the school system and working to expand new industries, such as medical services, that have not yet been targeted by the Obamamians.

To be sure, Houston, which missed the Bush recession, is beginning to feel the pain during the new administration's watch. But Houstonians long have displayed remarkable grit and creativity in the face of tough times. Having survived catastrophic energy price declines, several huge hurricanes and endless humid summers, Houston is still among the best bets to survive these tough times and come out, in the end, a strong winner.

This article originally appeared at Forbes.

What Does “Age of Hope” Mean in the Mississippi Delta?

Mon, 23 Feb 2009 00:15:16 -0500

It was during the inaugural days that an article appeared in The Washington Post about the predominantly black Mississippi Delta going for Obama – no surprise! But juxtaposed in the same time period there appeared in a Kentucky newspaper the story of predominantly white Menifee County, my birthplace – deep in the heart of Appalachia – defying the red sea of Kentucky all around it and also going for Obama.

Quite a pairing of places. It caused the logical mind to go quickly to work. What did they have in common? The likely answer was a common thread of hope – in two places very different yet alike. Two places long left behind as programs have come and gone. Did this present them with their chance?

It is easy to say – as I said to a group of automotive middle managers hit hard both emotionally and in the pocketbook by the feared demise of the U.S. auto industry – buck up and get over it. The world has changed. It is time to read What Would Google Do? and reinvent yourselves and your industry. So, too, the business of moving people from point A to point B will always be with us – just how to do that will be left to inventive minds which should include all of us.

But the auto industry is not alone. Neither are Menifee County and the Mississippi Delta. We do not yet know how to grow legs under this thing called “Obama hope” for communities like those of the Delta or Menifee County. Maybe it’s easier if you’re a college student in California, Manhattan or Chicago to take pride in the greater articulateness and ‘vision’ of our new President.

Beyond “hope”, an intrinsically ephemeral thing, what are we doing for places like the Delta and Menifee County? It is clear the world has changed. October taught us that, yes indeed, we are globally interdependent. Expertise doesn’t lie in the likes of Greenspan and CEOs and senators and representatives. Finally, government has a role to play – we humbly acknowledge after years of bashing it.

So, what makes Obama so different and what can he do to live up to his reputation? He gave hope perhaps because he is so different, with an exotic name and so deliciously diverse ethnically that he appears to be out of central casting. Like Superman or Spiderman, he has an edge because he is not exactly like the rest of us.

We wait and see. There is a major debate over whether places like the Delta or Menifee County can be saved…or should be saved. President Obama can be counted on to focus on other places – like San Francisco, Manhattan and, of course, Chicago – where his most intense supporters live and where the media clusters.

The Delta and Menifee may have voted for him, but are they on the Presidential view screen? These places are not on the beaten path of interstate highways. They are not part of so-called “metro” or “hot” spots. They are small places with small towns. They are places of strong religious values. They won’t attract the creative class seeking nightclubs and outdoor cafes.

Yet these places do have their positive attributes – Menifee lies near a lake and people looking for affordable second homes. The land is of great beauty and there are people there who know – as Wendell Berry speaks in reverence – every nook and cranny of every precious inch. So too it is with the Delta, a place full of history, folklore and the richest American musical traditions.

There is some palpable evidence that these kinds of places may be more attractive than we may have thought prior to the October financial collapse. If you can’t live well in New York for under $500,000 a year, perhaps smaller, more nurturing places can provide a higher quality of life for far less money.

Perhaps it will take more than government “programs” and outsiders coming in as saviors. Perhaps it will take the people of those regions coming together in some way to tout their regional rural attributes – perhaps their local culture and microentrepreneurship – with some obviously needed but as yet undefined help from “higher-ups.”

Will local folks be willing to step up to that challenge? Let’s listen to Mayor Will Cox of Madisonville, Ky. and his “on-the-street reassurance” of his constituents through Facebook and his iPhone during the catastrophic Kentucky ice storm of ‘09. He didn’t fan flames of anger but rather was honest and straightforward and ultimately soothing. At the end of the day he got the power back on. “Obama hope” will not stoke the fire or feed the kids, but perhaps it can inspire us to do more for ourselves.

I await spring with a little more enthusiasm this year. My father hails from Menifee County. He says to plant your corn when the tree buds are the size of squirrel ears. He is a plain old man and loves that place. We are a patchwork country with many differences, but we’re more alike than we think. Just ask the folks in the Delta and Menifee County, poor whites and blacks who opted for the same President. It’s time to grow legs under hope and act with some new thinking.

Sylvia L. Lovely is the Executive Director/CEO of the Kentucky League of Cities and the founder and president of the NewCities Institute. She currently serves as chair of the Morehead State University Board of Regents. Please send your comments to slovely@klc.org and visit her blog at sylvia.newcities.org.

Photo courtesy of Russell and Sydney Poore

Housing Price Bubble: Learning from California

Wendell Cox — Wed, 11 Feb 2009 01:15:20 -0500

In a letter to The Wall Street Journal (February 6) defending California’s greenhouse gas (GHG) emissions policies, Governor Arnold Shwarzenegger’s Senior Economic Advisor David Crane noted that California’s high unemployment is the result of “a bust of the housing bubble fueled by easy money.” He is, at best, half right.

The “bust of the housing bubble” occurred not only because of “easy money,” but also because of the very policies California has implemented for decades and is extending in its battle against GHG emissions.

The nation has never had a housing bubble like occurred in California. The Median Multiple (median house price divided by median household income) in California’s coastal metropolitan areas had doubled and nearly tripled over a decade. Housing costs relative to incomes reached levels twice as high as those experienced in the early 1990s housing bubble, which was bad enough.

This is all the more remarkable because even before the bubble the Median Multiple in the Los Angeles, San Francisco, San Diego and San Jose metropolitan areas was already elevated at 1.5 times the historic norm.

“Easy money,” by itself, does not explain what caused the unprecedented housing bubble in California. If “easy money” were the sole cause, then similar house price escalation relative to incomes would have occurred throughout the country.

Take, for example, Atlanta, Dallas-Fort Worth and Houston. These are the three fastest growing metropolitan areas in the developed world with more than 5,000,000 population. Since 2000, these metropolitan areas have grown from three to 15 times as fast as Los Angeles, San Francisco, San Diego and San Jose. While 1,800,000 people have moved out of the four coastal California metropolitan areas to other parts of the country, 700,000 have moved to Atlanta, Dallas-Fort Worth and Houston from other parts of the country. This is where the demand would have been expected to produce the bubble. But it did not. House prices remained at or near historic norms and average house prices rose one-tenth that of the California coastal metropolitan areas.

These three metropolitan areas were not alone. Throughout much of the nation, in metropolitan areas growing both faster and slower in population than coastal California, house prices simply did not explode relative to household incomes.

In touting “smart land use” as a strategy for greenhouse gas emissions, Crane misses the other half of the equation. Indeed, it is so-called “smart land use” (“smart growth”) that intensified the housing bubble in California. “Smart land use” involves planners telling the market where development will and will not occur. In the process it ignores the price signals of the market. Owners of land on which development is permitted naturally and rationally raise their asking prices, while owners of land not so favored can expect little more than agricultural value when they sell. The result is that the land element of housing prices exploded, fueling the unprecedented bubble. Restrictions on supply naturally lead to higher prices, whether in gasoline, housing or anything else.

California has placed restrictions on development with a vengeance. For nearly four decades, California has woven a tangled web of land use restrictions that have made the state unaffordable. When the demand rose in response to the “easy money” the land use planning systems were unable to respond and a rapid escalation in housing prices followed. The same thing occurred in other areas with excessive land use regulation, such as Las Vegas, Phoenix, Seattle, Portland, New York, Washington and Miami, though the house price escalation was not so extreme as in coastal California.

On the other hand, where land use still allowed a free interplay of buyers and seller (consistent with rational environmental requirements), the housing bubble was largely avoided. Average house prices in Atlanta, Dallas-Fort Worth and Houston rose only one-tenth that of Los Angeles, San Francisco, San Diego and San Jose.

When the bubble burst, the far higher house prices naturally tumbled more than in other areas. The price was paid well beyond California and the other “smart land use” markets around the nation. From Washington to Wall Street to Vladimir Putin and Chinese Premier Wen at Davos, everyone knows that the international finance crisis was precipitated by the US mortgage meltdown.

It all might not have occurred if there had been no “smart land use” markets with their exorbitant and concentrated losses. Overall, the “smart land use” markets represent little more than 30 percent of the nation’s owned housing stock, yet produce more than 85 percent of the housing bubble values at their peak. California style “smart land use” intensified the overall mortgage losses by more than five times. If the losses had been more modest, there might not have been anything like the current mortgage meltdown. With more modest losses, the world financial system might have been able to handle the damage without catastrophe, just as it did with the “dot-com” bubble earlier in the decade. The many households that have lost much of their life savings or retirement income would not be facing the future with fear. And even personally frugal taxpayers of the world would not be the principal stockholders in failing banks.

California needs to wake up and face the reality. The intensity of the housing bubble was of its own making. More “smart land use” is just what California does not need. This is the lesson the rest of the nation needs to learn rather than repeat.

Sources:
David Crane letter to the editor: http://online.wsj.com/article/SB123381050690451313.html
Domestic migration data: http://www.demographia.com/db-metmic2004.pdf
Analysis of the housing bubble: http://www.heritage.org/Research/Economy/wm1906.cfm
House price losses by peak Median Multiple: http://www.demographia.com/db-usahs2008y.pdf
Las Vegas Land Market Analysis: http://www.demographia.com/db-lvland.pdf
Phoenix Land Market Analysis: http://www.demographia.com/db-phxland.pdf

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

In Ethnic Enclaves, The U.S. Economy Thrives

Joel Kotkin — Fri, 21 Nov 2008 00:01:38 -0500

Dr. Alethea Hsu has a strange-seeming prescription for terrible times: She is opening a new shopping center on Saturday. In addition, more amazingly, the 114,000 square foot Irvine, Calif., retail complex, the third for the Taiwan native's Diamond Development Group, is just about fully leased.

How can this be in the midst of a consumer crack-up, with credit card defaults and big players like General Growth struggling for their existence? The answer is simple: Hsu's mostly Asian customers – Korean, Chinese, Taiwanese, Japanese – still have cash. "These are people who have savings and money to spend," she explains. "Asians in Orange County are mostly professionals and don't have the subprime business."

To Hsu, culture explains the growing divergence between ethnic markets and that of the general population. Asians, she notes, whether in their native lands or here in California, tend to be big savers. In tough times, they still have the cash to buy goods, while others stay home or go way down-market.

Nor is the Diamond Development Group's experience an isolated case. Throughout the country, ethnic-based businesses continue to expand, even as mainstream centers suffer or go out of business. The key difference, notes Houston real estate investor Andrew Segal, lies in the immigrants' greater reliance on cash. "When cash is king," observers Segal, president of Boxer Properties, "immigrants rule."

This is true not just of well-heeled Asians or Middle Easterners, but also for Hispanics, who generally have lower incomes, notes Segal's partner, Latino retail specialist Jose de Jesus Legaspi. For example, the recession has barely taken hold at La Gran Plaza, the recently opened 1.1 million square foot retail center in Ft. Worth, Texas, where Legaspi serves as part owner and operating partner.

The center, reconstructed from a failing old mainstream mall purchased in 2005, is now roughly 90% occupied. "We are doing so well that we are expanding the mercado," Legaspi says, referring to the thriving centers dominated by very small businesses run from attached stalls that are a popular feature of many Latino-themed centers. "It's all cash economy. They pay their bills with cash. The banks and credit card companies are not involved. It's true capitalism, and it works."

Latino shoppers, he suggests, also have been less impacted by the stock market collapse than other consumers. After all, relatively few, particularly immigrants, have large investments on Wall Street. In addition, even if they have lost their jobs, particularly in construction, Legaspi adds, they tend to pick up other employment, even at lower wages, often in the underground economy. "They get paid in cash, and they pay in cash."

Another key advantage lies in close connections many ethnic merchants have to economies such as Korea, China, Taiwan and India, where enormous amounts of cash have accumulated in recent years. "Many of these merchants have family and other ties to the international economy," observes Thomas Tseng, a principal at New American Dimensions, a multicultural marketing group in Los Angeles.

The media focuses on huge surpluses spent by major corporations or sovereign wealth funds, but a substantial amount of the money being made in places like China or India also accumulates into family networks. They often funnel this cash to relatives' enterprises in North America, where many also retain second homes and often educate their children.

This combination of cash-spending customers and well-endowed investors explains why in many places, the immigrant market remains one of the few still aggressively expanding. Even in thriving Houston, notes architect Tim Cisneros, the credit crunch has stopped many projects by clients from the mainstream real estate development community. In contrast, Cisneros' Chinese, Indian and other Asian clients continue to build and expand.

"I am doing an Asian-Mexican sushi chain that isn't hurt by the credit crunch since they are doing this out of the checkbook," Cisneros told me. "And the Indian reception hall I am building is doing well. The action is from these developing companies much more than the old Anglo groups."

If the immigrant markets helping Cisneros through the credit crush represent one of the few bright spots in the present, they also will likely become even more important in the future – even if immigration slows down dramatically. By 2000, one in five American children already were the progeny of immigrants, mostly Asian or Latino; by 2015, they will make up as much as one-third of American kids.

Given these underlying trends, look for developers like Dr. Hsu to keep prescribing more of what she calls "multicultural shopping centers," focused both on immigrants and their children. As long as these newcomers, both affluent and working class, continue to save, covet cash and work hard, they are likely to continue thriving through the recession and beyond.

"We are leased up, and we think the supply [of shopping] is not enough," Hsu says. "We are ready to go Saturday and feel great trust in the future." At a time when most mainstream American retailers are hiding under their desks, such sentiments are not only welcome; they may also indicate who might be leading the retail recovery when it finally comes.

This article originally appeared at Forbes.com.

The Opportunity City weathers all storms

Tory Gattis — Sat, 25 Oct 2008 01:00:15 -0400

In the dark early-morning hours of September 13th, Hurricane Ike scored a direct hit on the Houston region with 110mph winds, a 13ft storm surge, and a gigantic eye 80 miles across. While Texas gets its fair share of Gulf hurricanes, this was the first direct hit on Houston since Alicia in 1983, 25 years ago.

Before the strike, nearly a million people along the coastal areas were ordered to evacuate (out of six million in the metro). The evacuation went far smoother than the infamous Rita evacuation three years earlier, which gridlocked roads, left thousands of vehicles stranded without fuel, and ultimately directly or indirectly killed about 100 people. This time, only coastal areas at risk from storm surge were evacuated, while the vast bulk of the urban area more than 50 miles inland was encouraged to “shelter in place.” It made all the difference. Those who stayed were able to evaluate and react to any damage overnight, then choose to stay or leave as they awaited power to return, comfortably knowing the state of their home. Those who left before the storm were, of course, restless to know their home’s condition, but faced challenges returning due to a regional gas shortage as well as the outage of most traffic signals.

Coastal areas around Galveston, Bolivar, and Clear Lake suffered substantial surge damage, flooding buildings and tossing boats up on land, but the primary problems in Houston revolved around down trees and the power outages they caused. Nearly 2 million homes were without power in the storm’s aftermath, and most stayed without power for one to two weeks, even with thousands of repair crews coming in from all over the country. It’s hard to really understand how fundamental electricity is to modern living until you go a while without air conditioning, cooking, hot water, refrigeration, lights, TV, or the internet (followed by horrendous rush hours without traffic signals the following week as people returned to work).

Houston was greatly blessed to get our first cool front of autumn just two days after the storm – several weeks earlier than usual – bringing relief to millions without air conditioning across the region. The trauma of that experience has sparked a regional debate on the merits of burying our power lines, which increases reliability and has better aesthetics, but can cost an order of magnitude more while being harder to diagnose for repair and susceptible to flooding, a common problem in tropical Houston.

The mayor’s repeated theme both before and after the storm was “Neighbors helping neighbors,” and Houston rose to the challenge. Immediately after the storm passed, people checked on each other and assisted with debris cleanup, piling it in neat mounds in front of each house (estimates are the city is hauling off enough tree debris to fill four Astrodomes – the mayor is even holding a contest for creative uses for the debris). Many people fired up BBQ grills and cooked meat from thawing freezers, feeding all comers. People lacking lights and TV instead chatted in their yards with their neighbors and looked up at a star-filled sky made brilliant by the lack of city lights. Many mentioned that camaraderie as one of the silver linings from the storm. Despite looting fears, crime actually dropped dramatically after the storm (helped by a temporary night curfew). Even the venerable New York Times ran a story on Houston’s strong spirit after the storm. Here’s just one example of a touching story I heard about one of the many local churches that stepped up to help:

…one church's senior pastor who received a phone call from someone he didn't know living back east. The caller said they could not find their elderly parents and were desperate to find out if they were ok. So this pastor got in his car late that night, with a load of food, water and ice and drove across town to find the parents. He drove up to the house and knocked on the door. They were fine, but without electricity or phone, so he called their kids on his cell phone and said, "Here, someone wants to talk to you." After the call the parents said they didn't need anything but across the street there was someone who really looked like he did. So the pastor gave all of his food, water and ice to the neighbor. The next day he came back with more food and water only to find that the neighbor had distributed what he received the night before to his neighbors. The church volunteers returned each day until the electricity came back.

Area leaders also stepped up, with The Economist saying, “Credit should go to city officials like Mr. White (city mayor) and Mr. Emmett (county leader), who exuded competence and calm.” Harris County Commissioner Ed Emmett received widespread plaudits for pulling an all-nighter to untangle complex recovery logistics directing hundreds of supply trucks. Mayor White admitted to using “harsh language inappropriate for Sunday school” to cut through bureaucracy and get emergency supplies moving, raising his already-high local approval ratings.

City and county leaders can also be credited with some good “lessons learned” from previous disasters. In addition to better evacuations since Rita, aggressive drainage infrastructure investments since Tropical Storm Allison’s massive floods in 2001 resulted in greatly reduced street flooding across the city even with 10 to 20 inches of rain over two mornings. During Alicia in 1983, blown gravel from downtown skyscraper roofs blew out thousands of windows. Since then, gravel roofs have been banned, and less than half of one-percent of downtown’s windows blew out during Ike.

Today, in the city (not the coast), the main remaining signs of Ike are shredded commercial signs and plywood replacements for some office tower windows. Damage estimates are about $8.5 billion for the four million people of Harris County, substantially more than either Alicia or Allison, but manageable vs. the $125 billion value of residential structures in the county. The total for Texas may exceed $50 billion. Surprisingly, energy infrastructure held up very well, with minimal damage to refineries and offshore oil rigs. The combined downtime from Gustav and Ike created fuel shortages in the southeastern U.S. fed by pipelines from Houston, but they were alleviated relatively quickly as capacity came back on line.

As Houston recovers from Ike, it continues to face three additional “storms,” with the housing and credit crunch as well as oil prices dropping from $140 to less than $70 per barrel. Despite these strong storms – in many ways stronger than Ike – Houston continues to hold up well. Conservative oil companies still require new projects to break even at prices substantially below $70, so they are still growing and hiring. Houston’s port, space, and health care industries (the Texas Medical Center is the world’s largest medical complex) are also somewhat insulated from the nation’s economic woes. In part because Houston lacks the restrictive controls on home building found in many cities, the city never really had a housing bubble. Overall homes continue to appreciate modestly as opposed to sharp drops in much of the rest of the country.

Of course, we are still part of the Union and the world economy, so we’re slowing down too. But Houston and Texas continue to outpace the national economy; Texas is unlikely to join the lengthening line asking for a federal bailout. Every day I see a steady stream of out-of-state license plates as people overcome any fear of hurricanes (are they really any worse than earthquakes in the West or blizzards in the North?) and continue to migrate to our resilient Opportunity City.

Which Cities Will the High Cost of Energy Hurt (and Help) the Most?

Joel Kotkin and Michael Shires — Sun, 20 Jul 2008 23:45:01 -0400

A high cost energy future will profoundly impact the cost of doing business and create new opportunities, but not necessarily in the way most people expect.

By Joel Kotkin and Michael Shires

The New York Times, the Atlantic Monthly and the rest of the establishment press have their answer: big cities like New York, Chicago, and San Francisco will win out. Our assessment is: not so fast. There’s a lot about the unfolding energy economy that is more complex than commonly believed, and could have consequences that are somewhat unanticipated.

On the plus side there are some undoubted winners -- those areas that produce energy and those with energy expertise. What’s working for Moscow, St. Petersburg, Calgary, Edmonton, and Dubai is also working for the U.S. energy regions as well. Not surprisingly, many are located deep in the heart of Texas. This includes not only big cities like energy mega-capital Houston but a host of smaller ones, like high-flyers Midland, Odessa and Longview.

But it’s not just Texas cities that are winning. A host of other places have strong ties to energy production and exploration -- Salt Lake City, Denver, and the North Dakota cities of Bismarck, Fargo, and Grand Forks. And it’s not just oil: The U.S. Great Plains have also been described as “the Saudi Arabia of wind.” If the right incentives are put in place, a wind-belt from west Texas to the Canadian border could be produce new jobs, both in building mills and also for the industries -- manufacturers, computer-related companies -- that will harness the relatively cheap energy.

Alternative renewal energy producers in biofuels, thermal, and hydro-electric will also become big business. The Sierra Nevada cities like Reno could benefit from thermal; the Pacific Northwest’s hydro-power gives places like Portland, Seattle, and a host of smaller communities -- Wenatchee, Bend, Olympia -- a great competitive advantage in terms of dependable, low cost and low carbon energy.

How about the big cities and metros that consume less energy? It seems logical that San Francisco, D.C., Los Angeles, Boston, Chicago, and New York should have an advantage over other cities and their suburban hinterlands; these cities, especially New York, have higher than average transit use. San Francisco and Los Angeles enjoy milder climates requiring less air conditioning and heating.

But these advantages are somewhat mitigated by the fact that these same cities often pay far more for energy than their rivals. Electricity in New York, notes an upcoming study by the New York-based Center for an Urban Future, costs twice the national average. California cities also suffer much higher prices -- almost 50 percent higher than their counterparts in the Midwest. So even if you use considerably less energy, you might end up paying more. Being a big, dense city clearly has advantages, but they too often are squandered by aging infrastructure, lack of new plants and high business costs.

One other problem for big Northern cities: colder regions will feel the ripple in local economies as the impact of high heating bills is felt next winter. A cold winter will push northeastern city-dwellers to join the chorus of complaints now voiced by drivers in auto-heavy Sunbelt states like Florida and California.

Nor is it certain suburban areas will do so much worse in tough energy times. Studies of commuting patterns in Chicago and Los Angeles show that many suburbs thirty miles or more from their downtowns -- places like Naperville, Illinois and Thousand Oaks or Irvine, California -- have shorter commutes than most inner-ring urbanites. This is a result of the movement of jobs to “nodes” on the periphery over the past 30 years.

Another kind of area that will do well are those that have well-developed telecommuter economies. In Los Angeles, notes California State University at Los Angeles geographer Ali Modarres, telecommuters are concentrated not only in places like Santa Monica, but also in sections of the San Fernando Valley (which has most of the region’s entertainment workers) as well as further out inu highly educated communities like Thousand Oaks and Irvine. In the long run, the best and most energy efficient commute is none at all.

So who are the losers? Certainly some of the distant outer suburbs, like the high desert communities far east of Los Angeles, which lack jobs for their residents, and suffer longer than average commutes. Also hurt will be poorer inner city areas where workers have to commute, by transit or car, over great distances. Sadly, it’s many of the communities that have already suffered the most. The changeover to lower mileage vehicles will be particularly tough on those communities that produce SUVs and trucks -- places like Flint, Michigan; Ft. Wayne Indiana; and Janesville, Wisconsin.

But there are also some auto centers that are likely to do better. Just follow where low-mileage vehicles, particularly those built by Toyota, Honda, Nissan, and the Korean makers, are either being built or planned. This is mostly a southern play -- Tupelo, Mississippi; Nashville, Tennessee; and Georgetown, Kentucky, site of the largest Toyota plant outside Japan.

Economic change has always impacted America’s communities. But with the current energy price surge, we may find that “creative destruction” may be sweeping through many communities even faster than we anticipated.

Cities and Oil Prices: The Winners and The Losers

For most places, it’s hard to tell what the long-term effect of the high cost of energy might be. But there are some fairly safe bets.

Two kinds of areas tend to perform best in a harsh energy environment. One is the energy-producing cities, whose place at the top of this list should come as no surprise. Another, though it may take a bit longer to emerge, may be those cities that are sites for production of fuel-efficient vehicles. These tend to be located in parts of the country -- Texas, the Southeast, and the Great Plains -- that have lower energy costs and more favorable business climates.

Winners:

Houston: This is one town where $150 a barrel gasoline is viewed more as an opportunity than an atrocity. Not that Houstonians don’t drive -- like other Texans, they tend toward the profligate in energy use. But prices are not terribly high by national standards and, more to the point, energy is producing lots of high wage jobs here for both blue- and white-collar workers. As headquarters to sixteen large energy firms -- far more than New York, Dallas, and Los Angeles combined -- Houston, which ranks No. 4 on our list of the best large cities to do business, provides an irresistible lure to hundreds of smaller firms specializing in everything from shipping and distribution of energy, to trading, exploration and geological modeling.
Midland-Odessa, Texas: Houston is no longer the oil production center it once was, but the twin cities of Midland (No. 1 on our Best Cities list overall and among small cities) and Odessa (No. 4 on the list of small cities) certainly are. The two cities, only 20 miles apart in the energy rich Permian Basin, experienced hard times when energy prices dropped. Office buildings went empty, and people fled. But now the big problem is finding enough labor to keep the rigs going. Boomtimes are back -- and only a dramatic change in the energy markets will slow them down.
Bismarck, North Dakota: No. 30 on our Best Cities list of small cities, Bismarck may be in the early stages of a big time expansion. It’s the closest “big” city to the rapidly developing Bakken range -- rich with oil and shale deposits -- and already enjoys the advantages of being the capitol of a state that boasts a $1 billion surplus. North Dakota’s biofuels, wind, and coal industries also make the city a natural focal point for Great Plains energy. As in Midland-Odessa, the biggest constraint may well prove to be the availability of labor.
The Mid-south Autobelt: The shift to smaller cars may seem dismal in Detroit, but it’s pure joy to much of the mid-South. Foreign companies specializing in energy efficient vehicles -- Volkswagen, Kia, Honda, Nissan -- are concentrated in a belt running from Nashville (No. 18 on the large metro list) and Chattanooga (No. 59 on midsize list) in Tennessee to Huntsville, Alabama (No. 5 on the midsize list). Local universities in the area are also getting into the act, with several cooperating in an automotive research alliance.

Our list of losers is all too familiar. Basically, these are areas dominated by America’s weak automakers and are particularly wedded to the SUVs and trucks that are losing market share at an astonishing rate. Most fall in states that are strong union bastions, have relatively high energy prices, and get much of their energy from coal, a fuel that’s even less popular with environmentalists than oil is.

Losers:

Detroit: The center of the American auto industry ranks dead last, No. 66, on our big city list. The Motor City’s legacy as headquarters town for the former Big Three is now its biggest headache. It’s not just factory workers being hurt here; Detroit is where much of the technical, manufacturing, and design talent base of the U.S. auto industry resides. It’s also where ad agencies, law firms, and other high-end business service providers to the industry cluster. All have taken big hits over the last few years, which has led to increased out-migration, high rates of foreclosure and a deteriorating fiscal situation.
Flint, Michigan: No. 171 on the small city list, just two from the bottom, Flint seems to make more and more of what Americans don’t want. In 2006, it made more than 170,000 pickup trucks; it’s doubtful it will see that level of production for a long time to come. And this is a place that was hurting even before gas prices went up. Over 40 percent of all manufacturing jobs disappeared between 2002 and 2007.
Ft. Wayne, Indiana: Compared to Flint or Detroit, Ft. Wayne (No. 85 on the mid-sized list) is not doing too badly. Between 2002 and 2007 manufacturing employment dropped only 2.5 percent. The big problem is the future of the industrial sector. Ft. Wayne made 200,000 pickup trucks in 2006. It’s hard to see many of these jobs surviving if energy prices stay high.
Janesville, Wisconsin: No. 92 on the small list, the Janesville plant manufactures GMC Yukon, the Yukon XL, the Chevy Tahoe, and the Suburban. Although more than 200,000 SUVs were produced at this plant in 2006, the plant will close by the end of 2010. The largest private employer in Janesville is Mercy Health Systems. Being in Wisconsin helps -- the state is in better shape than Midwest neighbors such as Michigan and Ohio.

Joel Kotkin is a presidential fellow at Chapman University and executive editor of Newgeography.com.

Michael Shires, Ph.D. is a professor at Pepperdine University School of Public Policy.

Houston, New York Has a Problem

Thu, 17 Jul 2008 00:32:20 -0400

The Southern city welcomes the middle class; heavily regulated and expensive Gotham drives it away.

New Yorkers are rightly proud of their city's renaissance over the last two decades, but when it comes to growth, Gotham pales beside Houston. Between 2000 and 2007, the New York region grew by just 2.7%, while greater Houston — the country's sixth-largest metropolitan area — grew by 19.4%, expanding to 5.6 million people from 4.7 million.

To East Coast urbanites, Houston's appeal must be mysterious: The city isn't all that economically productive — earnings per employee in Manhattan are almost double those in Houston — and its climate is unpleasant, with stultifying humidity and more days with temperatures exceeding 90 degrees than any other large American city. Since these two major factors in urban growth don't explain Houston's success, what does?

Houston's great advantage, it turns out, is its ability to provide affordable living for middle-income Americans, something that is increasingly hard to achieve in the Big Apple. That Houston is a middle-class city is mirrored in the nature of its economy. Both greater Houston and Manhattan have about 2 million employees.

In Manhattan, almost 600,000 of them work in the idea-intensive sectors of finance, insurance, and professional services; only 2% are in manufacturing, and fewer than that in construction. Finance increasingly drives New York City's economy as a whole. By contrast, Houston is a manufacturing powerhouse that makes machinery, food products, and electronics, with a retail sector twice the size of Manhattan's and lots of middle-class jobs.

Housing prices are the most important part of Houston's recipe for middle-class affordability. In Gotham, the extraordinarily high housing costs aren't a problem for the hyper-rich. With enough money, you can live in a spacious aerie overlooking Central Park, shop at Barney's, eat at Le Bernardin, and send your children to Brearley or Dalton.

The abundance of poorer immigrant New Yorkers, in turn, tells us that for people simply seeking a lifestyle that beats rural Brazil, the city's many entry level service-sector jobs, wide array of social services, and extensive public transportation can offset high apartment prices.

But what if, like most Americans, you are neither a partner at Goldman Sachs nor a penniless immigrant? Consider an average American family with skills that put them in the middle of the U.S. income distribution — nurses, sales representatives, retail managers — and aspirations to a middle-class lifestyle. What kind of life will such people lead in Houston and New York City, respectively?

For starters, they'll probably earn less in Houston, though not as much less as you might think. In the 2000 U.S. Census, the typical registered nurse made $50,000 in New York and $40,000 in Houston. A retail manager earned $28,000 in New York and $27,800 in Houston. Let's be generous to New York and assume that our middle-income family would earn $70,000 there but just $60,000 in Houston.

If our Houston family's income is lower, however, its housing costs are much lower. In 2006, residents of Harris County, the 4-million-person area that includes Houston, told the census that the average owner-occupied housing unit was worth $126,000. Residents valued about 80% of the homes in the county at less than $200,000. The National Association of Realtors gives $150,000 as the median price of recent Houston home sales; though NAR figures don't always accurately reflect average home prices, they do capture the prices of newer, often higher-quality, housing.

In Houston, you'll find a lot of nice places listing for $175,000, and they'll probably sell for about 10% less, or $160,000. These are relatively new houses, often with four or more bedrooms. Some have more than 3,000 square feet of living space, swimming pools, and plenty of mahogany and leaded glass. Almost all seem to be in pleasant neighborhoods — a few are even in gated communities. The lots tend to be modest, about one-fifth of an acre, but that still leaves plenty of room for the kids to play. For a family that has about $35,000 available for a down payment, basic housing costs — that is, mortgage payments — would be about $9,200 a year.

The average home price in New York City is dramatically higher. In 2006, the census put it at $496,000, and $787,900 in Manhattan — way out of reach for a family earning $70,000 a year. There are cheaper options: a perfectly pleasant Staten Island home with three bedrooms and two baths for $340,000, for instance. These houses don't have the amenities you would find in new Houston houses, but they offer 2,000 square feet of living space. Alternatively, the family might purchase a condominium, with two or three bedrooms, in Queens — say, in Howard Beach or Far Rockaway. Even for the Staten Island option, a family making the same $35,000 down payment would face basic housing costs of about $24,000 a year.

You thus get much more house in Houston and pay a lot less for it. Small wonder Houston looks so good to middle-class Americans.

It looks even better once you take taxes into account. Federal taxes are roughly equal for the two families: about $7,000 per year. But under the Texas constitution, to enact a state income tax requires approval by statewide referendum — and two-thirds of the revenues generated by such a tax, if passed, must go toward reducing other taxes. As a result, Texas doesn't have any state income taxes. Nor, for that matter, does it have any city income taxes.

Houston residents do have to pay property taxes, which come to about $4,800 for a $160,000 home. In New York City, not only would a middle-class family have to pay local property taxes, probably about $3,400; they would also have to pay state and city income taxes — adding another $4,000 or so to their tax burden, depending on deductions and other factors. State and local levies thus add about $2,600 to the cost of living in New York.

Ah, but doesn't it cost a lot more to get around sprawling Houston? The Houstonians must have two cars: the poor public-transit system leaves them no other choice. American families earning $60,000 typically spend about $8,500 a year on transportation — and sure enough, in Houston, that's sufficient (barely) to cover gas, insurance, and payments on two relatively inexpensive cars.

The New Yorkers could save a lot by giving up on cars altogether and relying solely on Gotham's extensive network of buses and subways, but on Staten Island or in outer Queens, that would mean a significant lifestyle cost. Family members would have to walk to the grocery store and rely on taxis for other trips. A more reasonable approach would be to have one car for local trips and use public transit to get to work. With a public-transit bill of $80 per month, a fair guess is that the New York family will end up spending about $3,000 less per year than the Houstonians on getting around.

Just as with housing, however, there's a significant difference in the quality of transportation in Houston and New York. In Houston, the middle-class breadwinner likely will drive an air-conditioned car from an air-conditioned home to an air-conditioned workplace, and take 27.4 minutes to do it, on average. Commuting via New York public transit is more complicated. If you live in Queens, the average commute to midtown Manhattan (if that's where you work) is 42 minutes, and longer if you're coming from Far Rockaway.

From Staten Island, the average commute is 44 minutes — and often something of a triathlon, with bus, ferry, and subway stages. Our middle-class New York commuter thus spends at least 120 more hours in transit per year than does his Houston counterpart. And except perhaps for the ones spent on the ferry, none of those hours is as agreeable as sitting in an air-conditioned car listening to the radio.

Will rising oil prices eat away Houston's cost advantages? While there's no question that more expensive crude favors dense New York, the impact of paying more at the pump is likely to be modest. If the Houston residents buy 500 more gallons of gas per year than the New Yorkers, and if the price of gas jumps by $3 a gallon, then the price of Houston living will increase by $1,500. This is a real cost, but it doesn't come close to evening the playing field.

Further, the Houston family could always drive a 50-miles-to-the-gallon hybrid, which would let them buy only 400 gallons of gas to drive 20,000 miles. Big-city boosters may like to think that rising gas prices will end suburban sprawl, but a far more likely response to expensive oil is a large switch to more fuel-efficient cars.

After housing, taxes, and transportation, the New Yorkers have $26,000 left. The Houston family has $30,500, and those dollars go a lot further than they would in New York. The American Chamber of Commerce produces local price indexes for various areas, including Houston and Queens (though not Staten Island). The overall price index for Queens is 150, which means that it costs 50% more to live there than it does in the average American locale. The price index for Houston is 88.

If we exclude the areas that our two families have already paid for (housing and transportation) and average the remaining categories in the index (food, utilities, health, and miscellaneous), Queens is 24% more expensive than the average American area and Houston is 6% less expensive. Thus — again, after housing, taxes, and transportation — the Queens residents' real remainder is a little less than $21,000; the Houston family's is $32,200. The Houston family is effectively 53% richer and solidly in the middle class, with plenty of money for going out to dinner at Applebee's or taking vacations to San Antonio. The family on Staten Island or in Queens is straining constantly to make ends meet.

If the key factor making Houston a middle-class magnet is its plentiful and inexpensive housing, that raises the question: why is it so cheap? The low cost of homes reflects the low cost of supplying homes in Texas. Building an "economy" 2,000-square-foot house in Houston costs about $120,000, and a slightly larger "standard" one about $150,000.

Why is it so much more expensive in New York? For one, supplying housing in New York City costs much, much more — for a 1,500-square-foot apartment, the construction cost alone is more than $500,000. Also, part of the reason is geographic: an old port on a narrow island can't grow outward, as Houston has, and the costs of building up — New York's fate, especially in Manhattan — will always be higher than those of building out. And the unavoidable fact is that New York makes it harder to build housing than Chicago does — and a lot harder than Houston does.

The permitting process in Manhattan is an arduous, unpredictable, multiyear odyssey involving a dizzying array of regulations, environmental, and other hosts of agencies. A further obstacle: rent control. When other municipalities dropped rent control after World War II, New York clung to it, despite the fact that artificially reduced rents discourage people from building new housing.

Houston, by contrast, has always been gung ho about development. Houston's builders have managed — better than in any other American city — to make the case to the public that restrictions on development will make the city less affordable to the less successful.

Of course, Houston's development isn't costless. Like most growing places, it must struggle with water issues, sanitation, and congestion. For environmentalists who worry about carbon dioxide emissions and global warming, Houston's rapid growth is particularly worrisome, since Houstonians are among the biggest carbon emitters in the country — all those humid 90-degree days mean a lot of electricity to cool off, and all that driving gobbles plenty of gas.

But Houston's success shows that a relatively deregulated free-market city, with a powerful urban growth machine, can do a much better job of taking care of middle-income Americans than the more "progressive" big governments of the Northeast and the West Coast.

The right response to Houston's growth is not to stymie it through regulation that would make the city less affordable. It's for other areas, New York included, to cut construction costs and start beating the Sunbelt at its own game.

This article appeared first at the New York Sun.

Mr. Glaeser, a professor of economics at Harvard University, is a senior fellow at the Manhattan Institute. This article is adapted from the forthcoming issue of City Journal.