Monday, November 10, 2008

Guest Blogger Frank S. Alexander: When Supply Exceeds Demand

Through most of our history the supply of land, and of housing in particular, has been just short of demand – with a constant stimulus for new construction yet pressure on prices widening affordability gaps. Communities throughout the country are now facing the reverse situation – the supply of properties suddenly exceeds the demand and fear seems to be the most common currency. In the face of fear perhaps the best response is to take a deep breath and learn from those who have faced this situation before.

The industrial cities of the rust belt and the core inner cities of many metropolitan areas have for decades now faced growing inventories of properties left vacant and abandoned. Unlike most other assets in our market economy, property is by definition unique – no two tracts of property are identical and it's value is always fixed in location. The consequence of this is that the costs of abandonment are never confined to the property itself, and instead spread to adjoining properties and neighborhoods like a contagion. Local governments see revenues decline and costs increase as more and more owners turn away from their properties.

When supply exceeds demand one possibility is to reduce supply by “banking” it. Over the past twenty-five years public land bank authorities have begun to acquire and control excess supplies of vacant, abandoned and tax delinquent properties. The most successful of these is in Genesee County (Flint), Michigan where the land bank moves quickly to acquire a thousand properties a year – demolishing some, stabilizing others, and, when possible, returning properties to the open market with a keen eye toward affordable housing. The Neighborhood Stabilization Grants (HR 3221) provide for the first time a key federal role in local government land banking of surplus properties. When supply exceeds demand in the property markets, the properties need to be converted from liabilities to assets and land banking can be a bridge to stable affordable housing.

Read more of Frank S. Alexander's work on land banking here.

Frank S. Alexander is a Law Professor at Emory University School of Law.

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