In the standard urban growth model, a circular city lies in a featureless agricultural plain. When the price of land at the edge of the city rises above the value of agricultural land, “land conversion” occurs. In the real world, we’re more likely to call it “development” and it is, of course, a lot more complicated. Simplification is valuable and gives us more general insights. But is greenfield development complicated in ways that are interesting and might change the results of urban economic models? Or that might change the ways we think or talk about development policy?
Witold Rybczynski’s 2007 book Last Harvest helps answer these questions. It tracks a specific cornfield in Londonderry, Pennsylvania, from the retirement of the last farmer to the moving boxes of the first resident.
With its zoomed-in lens, Last Harvest answers (or at least raises) lots of questions that are interesting but not especially important in the grand scheme: Why do expensive homes mix some top-line finishes with cheap, plasticky ones? Why do anti-development communities permit any subdivisions at all? What is ‘community sewerage,’ and how does it work? Exactly who thinks it’s attractive to have brick and vinyl cladding on the same house? What’s it like to buy a house from a national homebuilder? Does Chester County really produce forty percent of America’s mushrooms?
The Stack
Rybczynski does not use this term, but what he describes is part of what I call the “stack” of housing supply. One of the central facts of development is that it relies on a very long chain of industries and professions, each of which relies on every other part of the stack doing its job. If one part is left undone, nobody gets paid:
‘Without a water contract, we can’t get a permit for the water mains, and without a permit, the builders won’t buy any lots and start building their model homes,’ says Jason. ‘Everything is held up.’ (p. 223)
This is an institutional outcome – I won’t say a ‘choice’ – and is not, strictly, necessary:
Americans take this for granted, but there are other ways to build communities. Some countries depend on centralized planning, in which the public authorities decide where people should live, and what kind of housing they should live in… The cities of the developing world, by contrast, depend on the unplanned and unregulated efforts of millions of individuals who build their own homes in so-called squatter or informal settlements, which eventually turn into urban neighborhoods. (p. 273)
Rybczynski calls this a “business” or “market” approach. The first term is clearly more accurate. The developing world is more of an open spot market, with many isolated, uninsured transactions and a very large number of decision makers. The American approach relies on predictable, tessellating business models.
Unlike in a simplified model, each stage of the work is done by a specialist who has to worry about reputation and liability. Joe Duckworth is the lead developer in Last Harvest, but the subdivision is planned by Bob Heuser and the architectural choices are the subject of an endless series of negotiations between the Londonderry Planning Commission, Duckworth, a loftily-titled ‘town architect’ (basically, a consultant), and the formula-driven homebuilders.
The key source of tension in the book is that the township sought a neo-traditional development for the site, but would have preferred no development at all:
‘We’ve been doing conventional development and we hate it,’ [one public meeting attendee] says. ‘Why don’t we try something new, and if we don’t like it, we won’t do it anymore.’
‘Doing something new’ implies departures from the usual practice, and that creates problems throughout the stack. The drip irrigation sewage system is new to Chester County and takes longer to permit. The homebuilders stick to their standard marketing practices – advertising the interiors of homes – when the developer and township intended the exterior neighborhood to be the main draw.
Exurban new urbanism isn’t very urban and isn’t especially novel. But even its minor deviations put stress on several of the stack’s business models. So imagine the difficulty of trying to push through something really revolutionary!
The developer as a risk agglomerator
The business models in the stack are principally structured around the avoidance of risk. Even the largest, most liquid companies – the publicly traded “national” homebuilders – rarely buy a land parcel until they have a contract with a homebuyer. Their work is not riskless: they contract for parcel prices ahead of time, and a market decline can cut into their expected profits. But they can always walk away rather than take a substantial loss.
For most industries in the stack, participation is a simple fee-for-service. The businesses that provide site plans, utility connections, and lumber, for example, are all paid on delivery and expose themselves to very little risk.
The stack does as much as it can to offload risks to the farmer, the homebuyer, and various insurers. When the developer and farmer first strike a deal, it’s an option: the upside belongs to the developer, the downside to the farmer. The farmer is compensated, of course. But he cannot quickly receive the value of the site’s full potential. Rybczynski notes that conservation easements are attractive to farmers because they pay out immediately.
Years later, early homebuyers not only accept long-term market risk but also the risk that the site is not completed as (or when) planned.
In Last Harvest, the developer finally buys the land when the farmer refuses to renew the expiring option contract. The land has appreciated; both sides would like to capture those gains. Some of the increased site value comes from the general state of the market, but much is due to the developer’s work in shepherding a rezoning and development agreement through the township’s slow-moving approval processes. The final value depends primarily on how many homes can be built on the site, and township politics are mostly geared toward trying to reduce density.
For a few agonizing years, the developer owns the land. He pays for site improvements, strikes contracts with builders, and tries to time the market. The source of the risk, of course, is that an enormous amount of labor and capital must be sunk into the site before it becomes a habitable, valuable good. Until very late in the process, it’s possible for much of the investment to be lost to the vagaries of the market or the local government.
In a downturn, Rybczynski notes, about one in four developers go out of business. Even Robert Morris, the financier of the American Revolution, spent three and a half years in debtors prison (p. 47). Despite hitting the market at almost the worst possible moment (2007), the New Daleville subdivision survived.
Conclusion
So should all this detail – and I’ve only unpacked one aspect of the book – change the way we theorize housing construction? The importance of regulatory risk and the obvious risk aversion of all involved are clearly central to the internal mechanics of development. Slow permitting implies a disconnect between the price of land at the time a contract is written and the spot price that would prevail when the option is executed.
One paper (Mayer and Somerville 2000, JUE) incorporated this disconnect by modeling development as a two-stage process of land development and, subsequently, construction. They found that incorporating this complexity did not change the results appreciably.
The fragmented, interdependent ‘stack’ is likely more important to suburban reformers interested in changing what gets built. Incorporating accessory dwelling units, triplexes, or cottage courts into suburban development requires more than just regulatory reform. It also requires demonstrating to developers that no layer in the stack is going to fail them – and that everybody will ultimately get paid.
