PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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The Main Line
Like all cities, Philadelphia is filling in and choking up with subdivisions and development, in all directions from the center. The last place to fill up is the Welsh Barony, a tip of which can be said to extend all the way in town to the Art Museum.

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America's First Great Depression (1837)

Right Angle Club: 2014
New topic 2013-11-19 20:22:11 description

Philadelphia's Real Estate Gridlock

IT was spoken hurredly, and I don't remember who said it. But the gist was that Philadelphia had been the richest city in the world in 1900. In the World, mind you. I can scarcely believe that, but the way it stuck with me shows it had some substance. Rather than comparing Philadelphia with London, New York City, or Paris, I must now compare that exuberance with the dirty, dejected, defeated old wreck of a Philadelphia I first encountered in 1948. Baltimore, Newark and a dozen old American cities sort of crumbled into dust after 1929, but Philadelphia briefly seemed to be picking up in 1948. Richardson Dilworth was getting ready to run for Mayor, and the town's newspapers even enjoyed the idea of a Philadelphia revival. But then the Pennsylvania Railroad collapsed, and after that we just struggled along, neither dying nor recovering. Some of both, perhaps, but more dying than recovering, and making it credible to believe that Philadelphia just never did recover from the 1929 crash. Just think of that; from top to bottom in thirty years. There just had to be some better explanation than bad management of one railroad.

Until recently, I had accepted the general wisdom that stock market crashes are followed by depressions. Perhaps I am a little slow, but there never seemed to be any question of that analysis, since all major crashes really were followed by recessions, going back to 1792 when Philadelphia had the first American version, and the first financier villain, someone named William Duer. Or maybe it was Robert Morris. Or maybe it was Thomas Mifflin, but in any event it was someone very rich who did something very reprehensible which toppled the stock market and plunged the rest of us poor victims into protracted suffering. In other scenes of carnage, it had been John Bull, or William Whitney, or Nicholas Biddle. Or J.P. Morgan, that monster. In the 2007 crash it wasn't so much one villain as one company, Goldman Sachs, or maybe Lehman Brothers. Since the recent crash was so recent, and news coverage so rapid, it might be easier to trace out who the villain was. But there was no one real villain, and even if we found one, it was hard to see why a few days of choked markets would still be causing unemployment seven years later. No one seemed to know, or at least no one wanted to tell me, why stock market crashes cause depressions. They are certainly followed by depressions.

And then suddenly I realized, or maybe someone just broke the news to me, that I had it all backward. Market crashes don't cause depressions, depressions cause market crashes. First, the markets get overheated, everyone gets uneasy, but everyone is making the most money in his life. Suddenly, someone sells out, like shouting "fire" in a crowded theater, and everyone tries to get out the door at the same time. The catastrophe makes everyone see that stocks or real estate, bonds or tulip bulbs, had become ridiculously overpriced, so nobody will buy them at any price. But let's not get down into the weeds of market technicality; prices got disconnected from real values. We overproduced something, or even everything, and things wouldn't improve until somebody needed something he had stopped needing, several years earlier. Maybe there were villains, there are always plenty of villains. But we wanted somebody to blame, because otherwise everybody has to take some blame. We needed, in short, a scapegoat.

So let's ask the question again: what caused the great depression of the thirties? And the best answer to come back was, the First World War. Philadelphia was the arsenal of democracy, the maker of ships and gunpowder and uniforms. The great transatlantic ocean port, the embarkation point. If we weren't sending troops we were sending tanks and airplanes. The duPonts were sending gunpowder to France, a way of paying back Beaumarchais for sending gunpowder from France to the Battle of Trenton. After their wars were over, one Frenchman went back to making wristwatches and writing plays, and the other munition maker swore off gunpowder and concentrated on nylon stockings. That's far too simple. Philadelphia had expanded and expanded to exploit its wartime advantages. When the war was over the boom was over, but the roaring Twenties roared. They built mansions, clear out to Paoli and beyond. Movies were written about our heros, who left their jewelry in the vaults of the Girard Bank after the opera while they went back to the horse country at four in the morning. It seems a virtual certainty that no one who acted like that, knew what every MBA from Temple now knows: real estate is just about the only link for ordinary people between interest rates and consumption. All assets contribute somewhat to the "Wealth Effect", but real estate is usually the only channel the average person can find, as a way to translate major assets into consumer goods. And since a stock market crash will lower interest rates, the ensuing low cost of mortgages stimulates a real estate boom. Office buildings in the city, mansions in the horse country. But then the city loses its postwar boom, and soon loses a million or more population. Result: empty office buildings, empty mansions. Along Spruce and Pine Streets, people moved out of the grand houses and into the servants' houses in the back alleys. Easier to heat.

A friend of mine, whose occupation is locating real estate for businesses, tells me the startling news that land around Philadelphia is too expensive for factories. It seemed hardly credible that real estate could seem so hard to sell, with "For Sale" signs lining the curbs, and yet seem too overpriced for a company to locate here. Suburban Philadelphia house prices were depressed during the Depression so that a seven bedroom Main Line house couldn't find a buyer, but the land was still too expensive for a factory; and anyway the zoning wouldn't permit a business. Our suburban and exurban land got chopped up into residential real estate, streets were built, sewer lines were extended for miles, trees and ornamentals were planted. Schools and shopping centers were built, maybe some museums and hospitals. But none of that was attractive for a business, and you can't attract an executive to residential real estate without a place to go to work. The features attractive to his wife, were not enough to attract him and his business. He wants cheap open land to build factories and vast parking spaces for employees. He doesn't want to get fifty miles away from the port that made Philadelphia prosperous. And he particularly doesn't want to spend his time going to protest meetings about smoke and pollution, or go to court to defend his ownership of what someone else polluted, a century earlier. He particularly doesn't want to go to Planned Parenthood meetings with his wife, in order to be hassled about carbon fuels or greenhouse gases in China. Sorry, he's going to build his new plant in North Carolina. And the residential real estate couldn't be made cheap enough for that purpose without tearing down the house, and the schools, and maybe the shopping center. Once the land becomes dedicated, you have to choose: either a nice suburb, or a place favorable for a business.

A former President of a Federal Reserve Bank located a thousand miles from Philadelphia was recently here for a conference, and at loose ends for someone to chat with. To my astonishment, he exploded with rage when he contemplated Mr. Obama's refusal to sign permission to build a pipeline from Canada to the Gulf of Mexico. To him, it was obvious that the main thing holding back the American economy was a refusal of American businesses to invest in new plants and equipment. The banks were stuffed with money, but business refused to borrow it. The Federal Reserve was powerless to stimulate an economy that didn't want to expand, forever pointing to uncertainties of expanding in the face of a regulatory authority which seemed determined to thwart them, to browbeat and humiliate them in front of TV. It isn't personal, it is serious; because the quarrel is ultimately about important economics. A dollar in 1913 when the Federal Reserve was created, is now worth a penny, and there is every indication of administration eagerness to see the present dollar only worth a penny, far sooner than a century from now. The man speaking was obviously sincere and deeply upset, and what seemed to bother him most was the perception that "the environmentalists" are equally sincere, and thus equally unready to give an inch. The economist regarded the argument of the environmentalists as irrelevant to what was really important, just as surely as the environmentalists were heedless of any legitimacy in the arguments for savaging wildlife. Neither side saw this in terms of city versus suburbs, or agriculture versus commuters. Neither seemed to acknowledge that a city based on concentric rings had to break the ring pattern in order to maintain harmonious balance between living well and making a living. That is, until the two sides recognize they are talking about the same problem on some level, it will be a dialogue of the deaf, offering no possible resolution except war to the death. It's become a religious conflict, with both sides heedless of things vital to the other side.

They say the main function of real estate brokers is to maintain high prices for property values. But in the long run, if a region isn't prosperous, its residential property will lose value, not gain it.

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