Friday, July 25, 2008

Housing Woes

House sales continue to slump. The latest figures show a 33.2% drop in new home sales from June 2007. Media and financial pundits have filled the airwaves with complex reasons for the worst housing market since the Great Depression. There is one additional reason they missed – corruption.

Last month Baltimore Mayor Sheila Dixon had to explain receiving thousands of dollars in gifts while providing tax breaks and zoning changes to developer Ronald Lipscomb. She denies any prid-pro-quo and defends the gifts as stemming from a “personal relationship”. A grand jury has been convened to review the matter.

One of the reasons America’s housing bubble has burst is that thousands of houses in hundreds of subdivisions have been built based upon corruption, not market forces. Local governments require economic analysis and market projections to prove the financial viability of a subdivision before it is approved. Yet numerous reports rejected by local zoning officials as being made of “whole cloth” are later overturned by other officials. Why would local officials approve developments that will not make money?

Every house in a subdivision requires at least $1.50 in services for every $1.00 raised in property taxes. This means that residential growth will either bankrupt a community or require major tax increases. In addition, new houses balloon student-teacher ratios, crowd highways, and lengthen emergency response times, creating unacceptable risk and harm. So why would local officials approve developments that will hurt their communities?

These disconnects with reality happen through callous disregard for the community. Unfortunately, this callousness is usually bought and paid for by local developers. Recently, a zoning official retired and went to work for developers. “They are now paying him over the table instead of under the table,” mused an activist.

Rapid sprawl can usually mask this disregard for market forces. Questionable projects make money because so many people are buying anyway. However, when market conditions weaken, these shaky developments crumble like poorly constructed buildings in an earthquake. Pundits looking for reasons for the historic scope and depth of America’s housing slump should explore how the market was first undermined by low ethical standards.

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