Driverless Cars Could Decimate Suburban Home Values

In the early 1900s, as vehicles grew commonplace, the age of the suburb was born. By the 1950s, the suburban lifestyle was equated to the American dream. The following decade’s civil rights movement showed the divisive and oftentimes racist patterns in lending and other real estate services. Such practices prevented minorities from moving to the suburbs. For the last fifty years, exclusionary zoning has been the weapon of choice of our suburban municipalities’ governments.

Now, we have entered a new age: With consolidation between real estate investors, and restrictive zoning still the law of the land in many of America’s suburbs, many urban and suburban areas are facing housing crunches. As autonomous vehicles and high-speed rail lines enter the scene, such restrictive zoning practices may ironically lead to their undoing, as well.

What Is a Suburb?

A suburb is an area that is located outside of a major city, but is not far enough away to be totally disconnected from the city in which they surround. The latter would be classified as a rural area. Suburbs offer a compromise between city and rural living. Residential areas in suburbs often have single-family homes or low-rise condominium residences on small parcels of land.

In most cases, suburbs are incorporated as municipalities. This legal break from their nearby major city affords them many benefits. First and foremost, suburbs can create their own municipal services. In practice, this affords suburbs the ability to maintain their own school departments, fire departments, police departments and perhaps most importantly, their own ordinances. The latter gives them the ability to implement strict exclusionary zoning rules, which by and large restrict development.

What Is Zoning?

Zoning is a simple concept: Restrict by law what can be built in a certain area for the benefit of everyone. For example, you do not want to build a coal mine next to an elementary school. Also, you do not want someone to build 500 connected wood framed homes, because a small fire in one could turn into a larger tragedy for the whole community. There are many other reasons why zoning is important, but the above two examples should get the point across.

When and Why Zoning Becomes Harmful

Zoning can cause serious problems for marginalized members of society. Perhaps most importantly, zoning laws often restrict new residential real estate developments. For example, say a man owns a 2,500 square foot home. He wants to chop it up into three units, and sell two of them off. After all, he does not have much money, and would like the company of new neighbors. If his property was zoned for a single-family dwelling only, he would be out of luck. Every day across America, countless homeowners are told that their real estate plans are non-conforming to their municipalities’ current zoning laws.

As noted, there may be legitimate concerns why the above homeowner’s plan is not warranted. His proposal for three units would likely produce three times as much traffic on the local roadways than his current single-family residence does. If everyone on the block converted their homes into multi-residential buildings, that could clog local streets. Plus, chopping up an old Victorian home may appear aesthetically unpleasing. Perhaps as the Town of Wayland, Massachusetts, a wealthy Boston suburb, so nicely put it,

Within existing residential neighborhoods, new multi-family housing is generally not recommended because of concerns that it would alter the single-family character of most of Wayland’s neighborhoods.”

In other words, we like how things are now. Let’s not change anything. Because as we all known, the vinyl-sided, paint-peeling, non-handicap accessible homes that line our suburbs are visually pleasing to everyone. That was a joke.

The Advantages of Suburban Living

While suburbs’ city council or town boards, often controlled by white and conservative homeowners, argue about modest zoning reforms, a new reality has set in: The appeal of city and suburban living during the COVID-19 pandemic has been greatly diminished.

As a real estate agent working in a well-off suburb in Massachusetts, I often ask clients why they are considering moving to the area. After all, if they were to just move a few miles further outside of Boston, they could stretch their dollar more, oftentimes significantly. There are four main reasons cited why people choose to live here:

1. The ease of access to jobs, usually in Boston
2. The schools
3. Safety
4. The community

In fact, we have worked with buyers closer to Boston and farther out west, and the same values seem to apply to buyers in each respective area. Consequently, this is how homebuyers justify moving to the suburb in which I work:

1. The ease of access to jobs, usually in Boston – The suburb is located about ten miles from the city center with easy highway and public transportation access.
2. The schools – Our public schools are often cited as some of the best in the state. We are near many prestigious private schools, as well.
3. Safety – We have a well-funded police department with little crime.
4. The community – We live in a somewhat diverse area, although we still lack representation by some minorities. However, many homeowners are upper-middle class white-collar professionals (doctors, technology workers, lawyers, etc.).

What this translates to is a median single-family home price of $1.3m, and a median condominium price of almost $1m. Buyers almost always have to make some concessions to afford a home in the municipality in which I work. This usually means one bedroom less than is preferred, a dated kitchen, an unfinished basement, and so forth.

Of course, most of the homes where I work, late 19th century Victorians and 20th century Colonials, are no different than those built in more affordable areas farther away from Boston. In other words, the lion’s share of these homes are functionally obsolete with no en suite bathrooms, poor acoustics, no garages (or garages that are too small to fit todays vehicles), a closed-in floor plan, etc. To top it all off, many of these homes are built on small <10,000 square foot lots, big enough for just about nothing of consequence. Of course, the zoning ordinance is arbitrarily restrictive too (more on that later). In simple English, even though the suburb’s homes are quaint and old, there is a lot of demand and little supply.

How COVID-19 Changed Everything

Before COVID-19, home prices in rural areas surrounding Boston could not realistically compete with the suburbs. They were not that close to Beantown, and therefore they did not attract the white-collar employees and luxury businesses that such homeowner’s patron. This meant, and still means, that the farther out you get from the city, the less desirable the locality is to live. Therefore, these rural areas have lower home prices.

By now it should be clear that many homebuyer’s main desires are intertwined. Home prices are closely correlated to the makeup of the community and ultimately, how many high wage earners live there.

However, COVID-19 changed everything. As stay-at-home orders were implemented people were allowed to work from home, where they often wanted more space, both inside and out. As hub cities often include small homes and only modestly sized lots when compared to their more exurban counterparts, people left for the suburbs and rural areas.

Of course, COVID-19 is (hopefully) temporary. Many landlords think demand for studio apartments and huge homes on small lots will return to normal once things open back up. Perhaps it will for a little while, but I doubt it will last.

A Changing Workforce

We can now do just about anything and everything online. We can order groceries, see out doctors, video chat with relatives halfway around the globe, and even attend classes. In fact, many our country’s fastest growing industries can afford to hire a fully remote workforce, such as those in technology. And many of America’s declining industries are those in which the workers must work close to their business, such as manufacturing and retail.

If we return to the four main reasons cited by homebuyers above, we can realistically surmise where things might change. First of all, the longer the pandemic continues, the weight homebuyers put on being physically near their jobs will surely take a hit.

Additionally, many white-collar jobs that can be done online will soon be accessible to those in an ever-increasing geographical area, not just in high cost of living (HCOL) cities and their suburbs. Public schools are facing enrollment drops, as well as already-present pressure from school choice advocates. Demographics will change as an educated workforce considers buying further outside of HCOL areas. Of the four reasons, crime appears to be the least impacted.

The Value of a Desirable Location

The first cited reason and often the most important in the homebuying process, is ease of access to jobs. As noted, this means that being close to a major city where jobs are located is essential. Few people understand how important this is. It is the primary reason suburbs with nearby jobs retain their home values. Places with high unemployment rates, think mill towns or former manufacturing hubs like Flint, Michigan, have seen their home value stagnate or collapse.

Visualizing Home Buying Demand

Let’s look at one of the passenger train routes heading out of Boston, Massachusetts. Just for reference, Boston uses two types of rail lines, a light trolley and a heavier commuter train. The below example analyzes home prices in the suburbs with stops on one of the heavier commuter train routes.

According to Zillow.com, the average price of a home in Lexington, Massachusetts, a suburb about 15 minutes outside of Boston, is about $1.1m: Concord, about 30 minutes, is about $900k. Acton, about 35 minutes, is roughly $600k. Fitchburg, a little over an hour outside of Boston, is $250k.

In fact, if you draw a line out of many major cities that lie on public transportation lines, the further you go out, the more home prices tend to drop. Of course, some suburbs, through restrictive zoning practices, have managed to keep home prices up at the expense of new development, for now.

The average commute time in the United States is 26 minutes. As the chart above demonstrates, home values in suburbs within that distance tend to fluctuate based on factors other than distance to the major city; such as restrictive zoning, schools, safety and the overall demographics of its citizens. Once the total commute time increases past thirty minutes, home prices tend to rapidly drop regardless of other factors.

Compounding Problems Introduced by Driverless Cars and High-Speed Rail

Now that we have established the importance of location when buying a home, what happens if driverless cars and high-seed trains enter the scene? Approximating one in ten cars in the world will be self-driving by 2030, an estimate, many people, including myself, think is low, especially for the United States. Who will be the early adopters of this autonomous technology? People who make six figures aka white-collar professionals.

Autonomous vehicles (SAE Level 5 aka full vehicle autonomy) will disrupt our entire society. All groceries, packages and appliances will be delivered. Retail jobs will fall victim to increasing automation. High wage earners will be able to host video conferences on their way to and from work. Combined with an increase in white-collar professionals being able to work remotely, at least part of the time, the need to live near a major city will drop considerably.

To make matters worse for the suburbs, many of their local governments have insisted upon arbitrary zoning rules, such as minimum lot coverage, single-family lots, and mandatory garage parking. The latter of which may prove completely unnecessary in an era of shared self-driving cars.

In today’s society, simple supply and demand dictates that most new homes are built “maxed out” in terms of size, meaning you might have a home with a floor area ratio (FAR) of .50 or greater. This means that a 5,000 square foot single-family house may be built on a 10,000 square foot lot. These oversized homes, only attractive to the highest wage earners, will hardly be competitive against new builds with more space in rural areas. To top it all off, many suburbs, particularly those on the East Coast, have consistently underfunded their public areas and green space, little of which was saved in late 19th and early 20th century urban planning.

Now let’s consider the benefit of high-speed rail, which undoubtedly is a bit further away in time than autonomous vehicles. In fact, on many routes, such as those between Buffalo and New York City, high-speed rail has been found to be cost-prohibitive. But in Boston, by skipping stops the MBTA (Boston’s agency that oversees public transportation) is able to offer a ride between Boston and Worcester, in just over an hour, roughly 40% faster than the rush hour drive between the two cities. Various business and non-profit groups are already trying to convince young professionals to move to the less-dense and lower-cost Worcester than pay high prices in Boston.

It is not inconceivable that future advances to technology in both autonomous driving (Think the Boring Tunnel) and public transportation could cut travel times down considerably. Even a small savings in time would help rebuild the appeal of many depressed and cheaper rural areas.

City vs. Suburb vs. Rural Living

Even if autonomous driving cuts down on trip times and remote working opportunities become commonplace, what advantages do rural areas have over the suburbs? Let’s refer back to the four frequently cited reasons people buy a home and compare them to a rural environment, ignoring the ease of access to a major city.

In terms of education, rural schools are frequently ranked behind their suburban counterparts. But increasing school choice options, as well as the increase in research that ranks semi or fully online classes on par with in-person primary learning (as much as the naysayers would say otherwise) highlights the fallacy of these rankings. In fact, many of our nations tech leaders are investing in online education. There is also the unfortunate truth that thousands of suburbs with poor finances have inadequate school systems. Will Gen Z homebuyers really hold onto the fallacy that in-person schooling is substantially better than that of online?

I strongly believe that in the coming years further investment in educational research and development will rapidly yield improved academic options for our nation’s future students. Hopefully, such options could be implemented for all students, regardless of a city, suburban or rural learning environment. After all, every student deserves the right to a quality education.

Let’s address safety. Rural areas are safer than their city counterparts. When accounting for future safety advances in autonomous driving, they will be safer than suburbs, too. That was easy.

That leaves the community aspect: This is where cities tend to win. Let’s take a look at Iowa, a state that is 85.5% white, non-Hispanic. Des Moines, the state’s capitol, is 85% white, non-Hispanic, very similar to the statewide average. Its average home sale price is $155k. Adair County, with towns located roughly 30 minutes to an hour outside of Des Moines, is 95% white, non-Hispanic, and has an average home sale price of $109k. For National Association of Realtors ethical reasons which I abide by, I cannot delve further into these statistics. However, I strongly believe that advances in technology (virtual reality, supply chain advances etc.) and our quick adoption of them, will greatly diminish the demographical and community appeal of cities and suburbs.

Additionally, as noted above, many suburban localities have done a poor job of creating and maintaining public land. This is an area where rural communities, with modern planning, can outperform in terms of open space, walking/jogging trails etc.

Also, worth noting is that fact that many cities and their suburbs are located near bodies of water, mostly for logistical reasons. Climate change could bring natural disasters to many of these areas, as we have already seen. This will surely stretch already-depleted disaster relief funding.

The Advantages of Rural Living

Rural land has significant advantages over its suburban counterpart. Perhaps most importantly, rural homes have land. Enough land so that you can avoid fights with your neighbors over the placement of yard waste.

Restrictive zoning, often with a primary focus on keeping aesthetics up, is far less of an issue when one’s home can be placed far enough away from the street to be invisible. Rural homes can also be located closer to natural attractions, such as lakes for swimming and boating, and mountains for skiing and snowboarding. Also, worth considering: Rural homes located in unincorporated areas generally avoid additional city and county income taxes, parking fines and high property taxes, where imposed.

The Decline of the Suburb – My Predictions for 2030, 2050, and Beyond

So, when will this shift happen? Are suburbs doomed or will the decline be slow, just like the flock from the mill towns that dotted the countryside of New England a century ago. I strongly believe that the coming advances in technology, with a focus on autonomous driving, will determine how fast the break takes place.

Suburbs will be mostly helpless to change the desires of homebuyers, with years of restrictive zoning already having caused overbuilding of single-family homes and townhouses. Historic boards will become obsolete. Some areas that focus more so on the community, such as those with 55+ neighborhoods, cooperatives and transit-oriented complexes, will probably fare better.

If we are to see one in ten cars self-driving by 2030, I think the shifts will by then already be evident. I believe the first wave of suburban flight will occur in the higher price ranges, when wealthy professionals no longer feel the need to commute into cities. This in turn will hurt vacant and underutilized plots of land in the suburbs, which currently hold value simply because a multi-million-dollar estate can be built on them.

Consequently, homebuilding in the suburbs will decline, followed by a shift to building planned communities in rural areas, with an emphasis on 21st century needs. Companies like Atmos, which hope to help streamline the currently time-consuming homebuilding process for buyers, could do well.

Advances in public transportation, perhaps the most important being high-speed rail, will receive a renewed push by now financially weakened cities. As expected, this will only diminish the almost non-existent appeals of the suburb. Once-rural areas will by then be a stone’s throw away from their nearest hub city.

As we pass 2050, the process will rapidly continue. The suburb’s hundred plus years of poor urban planning will be clear to all. Concerns over the global environmental crises (see Boltholes – A Billionaire’s Doomsday Escape), including the millions of contaminated sites and homes in the now old suburbs (think the next lead paint, asbestos crisis etc.), will only strengthen the appeal of newly designed rural communities.

Closing Thoughts

When our president talks about the end of the suburb, he is not wrong. I do not see the appeal of the white picket fenced, three-bedroom ranch style home on 10,000 square feet of land lasting all that much longer. However, such a change is not necessarily a bad thing.

In America’s suburbs, today’s housing stock was built for the 20th century worker. The future, whether we like it or not, is online: A world that is connected through machines more than ever before. The suburb of yesterday is on its final act, but the community of tomorrow is about to begin.