History is cyclical, not linear. Most people don’t truly understand that. It’s especially true in real estate. If you base the purchase of a home or investment property on what’s been desirable for the past thirty or forty years you may be unpleasantly surprised at the results moving forward. On the other hand, if you grasp the longer demographic and economic cycles you can take advantage of the ebbs and flows that are evident from the historical record. A goodly amount of luck doesn’t hurt either.
For example, my mother was born in Boerum Hill Brooklyn. When my grandparents lived there in the 1930’s and 40’s Boerum Hill was a vibrant immigrant neighborhood occupied by Sicilians, Jews, Greeks, and Irish. From all the stories I heard from the old people in my family it was a great community to weather the duel storms of the Great Depression and World War II. People didn’t have much, but they all looked after each other.
By 1970 Boerum Hill had been completely abandoned and left in ruin in the rush to suburbia. My grandmother’s younger brothers physically helped build Levittown on Long Island as carpenters and masons when they returned home from the war. White people got federally subsidized tract homes, new schools, and endless ribbons of fresh highways in the suburbs. The building stock back in Brooklyn was left to rot and was occupied by the portion of society that was intentionally and systematically excluded from the post war economic bonanza. As my elderly relatives would say, “The old neighborhood got very dark.” Blacks rented unwanted buildings from absentee slumlords or got herded into crappy public housing projects. The city of New York as a whole had been hollowed out by the nearly complete loss of its middle class. The quality of the public schools went into free fall. The infrastructure of the city was in a horrendous state of disrepair. The city wobbled on the brink of bankruptcy. There were devastating race riots. Crime was out of control.
Today Boerum Hill is a million dollar neighborhood occupied by bright educated young people, families, well heeled empty nesters, and the inevitable hipsters. They enjoy a high quality of life, access to good jobs, and culture – and they pay extra for the privilege. New York City is flush with cash and has never been in better physical condition.
No one in 1940 could have imagined how far down the old Brooklyn neighborhood would sink by 1970. And no one in 1970 could have predicted the spectacular gentrification of 2015. For those people who purchased property in the area in 1940 it must have seemed like a smart move compared to buying a fallow potato field way out on Long Island or New Jersey. But it was all downhill for decades and they probably never lived to see Boerum Hill recover. For those who bought property in Boerum Hill in the early 1990’s it must have felt like a huge risk. But all those cheap run down old buildings proved to be a massive gravy train that just kept rolling in. That’s the cycle of history at work.
Meanwhile back in Levittown, things aren’t as good as they used to be. For many Millennials the cul-de-sacs and strip malls of aging post war suburbia have no magic. The majority of these towns are composed of modest homes in quiet subdivisions. That’s not the problem. The trouble comes with the sad public realm of endless highways, parking lots, Quiki-Marts, chain restaurants, big box retailers, and car dealerships. “There’s no there there”, to quote Gertrude Stein.
Aside from shifting generational preferences there are other complications. Maintaining all the spread out infrastructure from the paltry tax base just isn’t adding up. The Jiffy Lube and Applebee’s don’t bring in enough revenue to cover the ongoing cost of the associated highway, water, and sewer systems. Municipal governments in aging suburbs are also burdened with an accumulation of pension and health care obligations for legacy public workers. Current teachers, fire fighters, cops, and maintenance crews are competing for scarce funds with their retired counterparts. At a certain point the red ink is going to overwhelm these towns.
By the 1950’s my family had migrated first to Hialeah in the new suburbs of Miami, Florida. Then on to the San Fernando Valley in Los Angeles where I was born in 1967. This movement was absolutely in keeping with the national trend. Just a few years earlier in 1962 California had surpassed New York as the most populous state in the country. Americans were rapidly suburbanizing while also marching relentlessly out of the Northeast and Midwest toward the sparsely populated Southeast and West. New post war public investments in highways, land reclamation, and aqueducts were transforming worthless desert wastelands and swamps into prosperous new cities. Jobs in new industries like electronics and aerospace appeared in the Sunbelt as well.
As I grew up in the 1970’s and 80’s the trend was for people to continue to push out to the far edges in search of the American Dream at a reasonable price. Keep in mind, the population of California rose from 19 million in 1967 to 39 million today. And all those new people wanted a ranch house and a pool. People would hit the highway and keep driving until they found the house they wanted at a price they could manage. Businesses migrated outward to new suburban office parks and shopping centers. Commuters didn’t drive from suburbs to downtown as much as they drove from one suburb to another. People drove over mountain ranges and across deserts in search of the right mix of house and affordability. And then, somewhere along the line, something else started to happen.
People in large Sunbelt cities like Los Angeles began to hit a point of diminishing returns where the affordable fringe locations were not only far inferior to the coastal neighborhoods of previous generations, but the prices were still relatively high given the long commutes and multiple compromises. By the time you found a house you could afford you were just too far from the things that made life in LA worthwhile.
Migration leaped out of California entirely and bounced to smaller Sunbelt cities such as Phoenix, Las Vegas, Albuquerque, and Denver. These destinations were LA-lite. The same principle was at work. People liked the older 1950’s version of Los Angeles that offered cheap land, traffic free roads, safety, and open space. But by the 1980’s that was already a distant memory. So they packed up and found their suburban bliss on a brand new cul-de-sac in Flagstaff or Reno. At the time I also noticed increasing “market segmentation” since the people who moved to Santa Fe or Aspen were quite different from the folks who moved to Fort Collins or Provo. Predictably, businesses migrated selectively along with the population.
The same dynamic happened as people seeking a more “San Francisco” environment migrated to Oregon and Washington State. 70% of the people who relocated to Portland and Seattle in recent decades were from California. Nevada continued to attract people looking for an affordable tax haven just across the border. Increasingly this left California a land of prosperous coastal “haves” and inland “have-nots”. Wealth concentrated near the ocean and poverty persisted in the Central Valley. The broad middle class evaporated.
The same dynamics were at work on the east coast. I lived in New Jersey for a good portion of my childhood. If you rummage through social media sites looking up people from my old high school half of them will turn up in Georgia, North Carolina, and Florida. They wanted the same comfortable suburban home they grew up in. They just didn’t want the New Jersey price tag, property taxes, traffic, or car insurance rates. And they could live without the snow. Whatever industry didn’t leave for Latin America or Asia was moved south away from labor unions toward “Right to Work” states.
And finally there’s Texas – the grand daddy of all the Sunbelt empires. Texas has became the new California. Abundant cheap land, endless wide new highways, low taxes, a hands-off government, a booming economy, and the constant reassuring hum of air conditioning compressors. Growth, growth, growth, growth, growth. At the moment this seems like a great place to invest in real estate. And it may very well be. At least for the next little while.
So here’s my interpretation of what the future may bring. I have no scientific research to back this up. It’s just a hunch. And I most likely won’t live long enough to know if I’m right or wrong since the pendulum of history swings so slowly and I’m already a bit long in the tooth. But here goes.
The Sunbelt is currently at its peak. Phoenix, Las Vegas, Atlanta, Orlando, Houston, and all the other spread out post war metroplexes are at full flower. But we know how this ends. The infrastructure will age. The tax base won’t keep up with maintenance. There are already problems with water. Most state departments of transportation are functionally insolvent. Some of the most dynamic regional economies are built on industries that have short life cycles and stiff global competition. It’s easy for people to move to a generic Sunbelt city, but it’s just as easy to move away when the bloom is off the rose. Fuel is cheap and abundant at the moment, but that won’t always be the case. And all the shiny educated dynamic young people that were lured into town to goose the local economy will eventually grow old and crotchety.
The vast majority of post war construction is cheap and disposable. The newer the building the more “innovative” the materials. The average plastic and particleboard tract house or Krispy Kreme outlet has a life expectancy of a Labrador Retriever. These buildings turn to compost when exposed to direct sunlight and moisture. In retrospect a 1970’s injection molded Malibu Barbie Dream House was more durable. There won’t be much left of Henderson, Nevada once the water supply is cut off, the last refrigerated tractor trailer full of Lean Cuisine breaks down on the side of the road, and the Social Security checks fail to materialize. Everything built in the last sixty years was designed around cheap motoring. Not only are these towns not easily retrofitted, but they aren’t worthy of being saved. No one will ever covet their great grandmother’s fiberglass shower stall or polystyrene foam Tuscan columns.
On the other hand, this is what Buffalo, New York looks like after sixty years of absolute neglect and abandonment. It has good bones. Buffalo will never run out of fresh water, endless fertile nearby farmland, or cheap clean electricity from the hydro stations at Niagara. It’s also in a good neighborhood. (Canada is across the street dude. They’re like, super nice and chill.) Long after commercial aviation becomes prohibitively expensive and the interstate highways get funky there will still be shipping on the Great Lakes and inland river systems. Water transport has always been the most viable and economical way to move large loads of heavy things for pennies on the dollar. You might not take a canal boat from Chicago to Branson, Missouri for a weekend of golf and country music, but a good old fashioned train might get you to Boston or Washington overnight without any trouble.
The entire Midwest has emptied out. The population fell by half in the last few generations. High quality real estate is currently on offer at fire sale prices. Every bad thing that could possibly happen to a place has already occurred and the region is ripe for reinvention. There’s just enough residual knowledge and equipment left behind that fine grained local productive industry and agriculture can take root again. We won’t be seeing the Detroit or Cleveland of 1950 ever again. That era of massive auto plants and steel mills is over. But these places have the qualities that will be in demand in coming decades. At least that’s my best guess at which way the pendulum will be swinging.