The answer would seem implicit. As a market good, real estate development should reflect the will of the dollar. If the prevailing condition of sprawl has spread out across the land, it’s only because the dollar felt like stretching out.
Yet as economists such as Harvard’s Ed Glaeser have noted, real estate development for the past sixty-plus years has not always acted as a market good, but rather taken cues from federal intervention. Federal subsidies such as the home mortgage interest tax deduction have encouraged homeownership at the periphery of the metropolitan edge, favorably sanctioning sprawl.
Further impacting the shape of urban form are restrictions on the financing of commercial space attached and/or adjacent to residential property. Specifically FHA, Fannie Mae, Freddie Mac, and various HUD programs such as 202, 220 and 221(d)4 all limit non-residential to a small percentage of the net rentable space or imputed rent of a given project. Hence, mixed commercial-residential districts, the type of walkable, Main St.-style communities that were the primary form of development in the pre-WWII period - and that weathered the Great Recession better than their exurban counterparts – have essentially become impossible to build.
This affects suburbs and cities alike.
In the suburbs, retrofitting strategies meant to increase density and encourage infill development are impeded, and tax coffers suffer as a result from having to rely on the old paradigm of horizontal growth equating economic growth. In cities, outside of ultra-dense, ritzy neighborhoods like New York's Upper East Side that can handle increased high-rise development (which exceed the gross floor area requirement of the restrictions), the cap on commercial space severely restricts the type of product developers can offer. It leads to a perversion of form, such as the “dingbat” apartment complexes in Los Angeles, or “four-plus-ones” in Chicago, where the literal shape of the building contorts to financing standards.
Increasingly, federal officials are realizing the deleterious effects of these. The 2009 report from HUD, “Great Places to Call Home: A Representative Portfolio of HUD’s Section 202 Program” states “Restrictions on commercial space had the effect of eliminating commercial activities altogether.” More recently, the Los Angeles Times noted that in an effort to bolster market activity for condominiums, FHA may look towards relaxing some of the rules that currently hamper such financing, including evaluating nonresidential space use.
At a time when the moribund housing market is showing signs of sustained recovery, and as Brookings Institute’s Chris Leinberger has writtenof “the convergence of the two largest generations in American history, the baby boomers and the millennials," who together are driving the "pent-up demand for walkable, centrally located neighborhoods," it is heartening to see FHA begin to realize the economic potential currently locked behind artificially-designed restrictions. To remove obstacles to investment in these economic times, the government should heed market demand and allow a mix of commercial and housing development to act as a catalyst for economic growth.