Absolute Rent And The Structuring Of Space By Governmental And Financial Institutions.pdf

David Harvey and Lata Chatterjee Johns Hopkins University Livingstone College, Rutgers University I n t h i s paper we sketch the answers t o two questions: (1) How do the macro and micro features o f housing markets r e l a t e t o each o t h e r i n theory and i n p r a c t i c e ? (2) How i s ab- s o l u t e r e n t r e a l i z e d i n t h e housing markets of l a r g e metropolitan areas? We
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  David Harvey and Lata Chatterjee Johns Hopkins University Livingstone College, Rutgers University In this paper we sketch the answers to two questions: (1) How do the macro and micro features of housing markets relate to each other in theory and in practice? (2) How is ab- solute rent realized in the housing markets of large metropolitan areas? Wecan afford the luxury of two questions because the same materials suffice to answer both. I. There is a considerable body of theory and a mass of empirical information on the macro- economic aspects of housing markets. The same can be said with respect to the micro-econo- mic model1 ng of housing choices -including locational choices through which residential differentiation of metropolitan areas is thought to be achieved. But there is little theory or information on the relationship between these two aspects of housing markets. What there is usually gets lost in the formalism of aggregation theory in which it is assumed that the relationship between national aggregates and local individual behaviours is a technical pro- blem that has a formal (usually mathematical) solution. kind. Webelieve that it is imperative to investigate human practice, for that practice will likely reveal what formal analysis seems helpless to resolve. Economies do not stop working because of the aggregation problem and there are innumerable procedures in practice which serve to link decisions made at the national level to decisions made at lower levels. Ela- borate devices exist to integrate the national and local aspects of economies. These de- vices are to a large degree embedded in the structure of governmental and financial institu- tions. In order, therefore, to understand the links between the national and the local, we have to examine in detail the structure of these institutions. The Macro and icro Feature8 of ousing Markets In the face of problems of this It is important to establish at the outset an appropriate methodological stance for such an investigation. Werequire a methodology capable of dealing with the relationship between the individual and society viewed as a totality of some sort. The methodology appropriate to this purpose has been generally neglected in the social sciences and much of our inabili- ty to deal with the aggregation problem must be traced to that eclecticism and methodologi- cal myopia of which Barnbrockl speaks, which insists that we have to understand phenomena through conventional filters of cause-and-effect, functionalism and the like. The relations which we need to understand are, however, contextual relations or, as Ollman and others have proposed, internal relations through which the social totality is structured and transformed by individuals or entities (such as corporations) simil taneously exhibiting both ''learning behaviours which sustain the social structure as a whole and instructing behaviours through which the social structure is itself transformed.* This conception of things is neither widely accepted nor even understood. But from it we gain an imnediate object for enquiry - iz, the processes of structuring and transformation together with the determinate structures that mediate these processes.3 We will now adopt such a methodological stance with respect to the housing market. Typical concerns of housing policy at the national level are: (1) (2) (3) the relationship between construction, economic growth, and new household formation the behaviour of the construction industry and the housing sector as a Keynesian re- the relationship between housing provision and the distribution of income (welfare) (population growth); gulator through which cyclical swings in the economy at large are ironed out; in society. 22  Since the 1930s, these concerns have generated aims that have, by and large, been success- fully met.4 Economic growth has been accompanied and to some degree accomplished by rapid suburbanization - process that has been facilitated by national housing policies. Much of the growth in GNP (both absolute and per capita) since the 1930s is wrapped up in the sub- urbanization process (taking into account the construction of highways and utilities, hous- ing, the effective demand generated by the automobile, etc.). Cyclical swings have been broadly contained since the 1930s and the construction industry appears to have functioned effectively as one of several major counter-cyclical tools. The evident social discontent of the 1930s has to some extent been successfully defused by a government policy that has created a large wedge of middle income people who are debt encumbered homeowners and who are unlikely to rock the boat because they are both debt-encumbered and reasonably well sat- isfied with their housing. The discontent of the 1960s exhibited by blacks and the poor provoked a similar political response to that of the 1930s in the housing sector a' re- sponse that has not been particularly successful in obtaining a decent house in a decent living environment for many of the poor and the black, although social instability of the 1960s appears to have been defused. At the national level, then, policies are designed to maintain an existing structure of society intact in its basic configurations, while facili- tating economic growth and capitalist accumulation, eliminating cyclical influences, and defusing social discontent. Housing provides a vital and effective tool for stabilizing and perpetuating the social structure of a market-based, capitalist system. How are these general programs and policies transmitted to the local level and ultimately to individuals making choices with respect to housfng services in different locations? The mechanisms are very complex and we can do no more than sketch-in some of the basic relations between financial and governmental institutions, through which policies are filtered and transmitted to the local level, State Savings and Loans, Federal Savings and Loans, mort- gage bankers, savings banks and commercial banks all operate in the housing market. The operations of State and Federal S&Ls are confined to housing and these institutions are de- signed to promote the thrift of the people Jocally to finance their own homes and the homes of their neighbors. 5 The rules and regulations vary but in general State S&Ls tend to be small scale, community based and depositor controlled, whereas the larger Federal S&Ls tend to be professionally managed.6 But Federal S&Ls are usually restricted to financial oper- ations within 100 miles of their head office. Import and export of funds for housing from one market to another cannot occur through these institutions unless depositors shift their funds. The Federal S&Ls are, for the most part, under the control and guidance of the Fed- eral Home Loan Bank Board which has tended in the past to regulate the flow of funds into the mortgage market in a counter-cyclical fashion with respect to the economy as a whole. FNMA and GNMA (the government institutions that buy up mortgages from the financial institu- tions to provide the latter with the liquidity for further investment in housing) on the oth- er hand, operate usually to dampen cycles in housing construction which means that two sets of governmental institutions tend to follow contradictory policies.7 Other institutions such as mortgage bankers, savings banks, and commerical banks also vary in the way they operate in the housing market. are confined to housing. of mortgage funds, whereas the other institutions are, to some degree or other, more re- stricted by Federal or State regulation. funds which dictates the flow into the housing market; housing finance is best regarded as a residual that is left over after basic corporate needs are met. that this generates is emphasized by State and Federal policies that put interest-rate ceil- ings on housing mortgages. rises (to, say, 10 per cent) then FHA or State interest ceilings of 8 per cent effectively dry up the flow of funds into housing (although a points system exists to offset this). This drying up may be offset by the release of more funds through FNMA GNMA or even through the Home Loan Bank Board. Depositors are likewise sensitive to interest rates and are like- ly to move their funds out of, for example, a savings bank (with, say, a 5 per cent interest rate ceiling) to higher-yielding investments. How do all of these financial and governmental complexities relate to the individual? In the typical micro-economic models of residential differentiation and housing markets , it S assumed that income is the relevant determinant of housing choice.8 In fact, it s the abil- ity to obtain credit and a mortgage that is, for most people, the immediate determinant. None of these institutions, however, In these institutions it is the competition for Mortgage bankers have complete freedom in the geographic transfer The counter-cyclical flow If there is a heavy demand for credit and the interest rate 23  This ability is income-related, of course, but the ability to obtain a mortgage under suit- able terms is also a function of the policies of financial and governmental institutions. Because servicing costs are constant no matter what the price of a house, financial institu- tions (particularly those geared to profit-making) prefer to finance the more expensive hous- ing. In Baltimore, for example, savings banks rarely finance transactions in the price range below $20,000. Mortgage bankers have not gone below $7,000 very often and have recently de- cided as a matter of policy to try and stay above the $15,000 mark. Different institutions have distinctive policies with respect to downpayments, credit-worthiness, and the like, while government policies (particularly those of the FHA) also intervene in these respects and play a major role in those sectors of the population with moderate to marginal incomes or slender resources for downpayment. There are also distinctive policies with respect to the nature of the housing stock which financial institutions are willing to finance (above and beyond the general operating rule, that appears to have held good for the last decade or so, that new means better and safer investment). There is also no question that dif- ferent institutions, both financial and government, exhibit strong neighborhood biases (both pro and con) over and beyond that inherent in the comnunity basis found in the State and some Federal S Ls. We wlll now describe some of the ways in which all of these factors coalesce in the Bal- timore housing market. Consider first of all the behaviour of the different institutions with respect to house sales in different price categories (Table 1). There is clearly a structured relationship that leads the comnercial' institutions to operate in the higher price ranges while the State S Ls, which tend not to be very strongly profit oriented, take up the housing in the lower price categories. The health of the housing market in this low- er price category appears to be attached entirely to the fate of the State S Ls and a per- petuation of their community-based non-profit orientation. Should these institutions coll- apse, or come to have a strong profit orientation (as seems to be happening), then the housing market in the below $15,000 price range will suffer irreparable damage, particular- ly if the mortgage bankers implement a policy of a $15,000 minimum. There is, clear1 , a highly structured re1 ationship between household characteristics (particularly income7 and the availability of mortgage funds (in appropriate price categories) 9 TABLE I DISTRIBUTION OF MORTGAGE ACTIVITY N DIFFERENT PRICE CATEGORIES BY TYPE OFINSTITUTION BALTIMORE CITY 1972* under 7,000- $1 0,000- $1 2,000- over $7,000 $9,999 $1 1,999 $1 4,999 $1 5,000 Private 39 16 13 7 7 State S Ls 42 33 21 21 20 Federal S&Ls 10 22 30 31 35 Mortgage Banks 7 24 29 23 12 Savings Banks - 3 5 15 19 Comnerci a1 Banks 1 1 2 3 7 Per cent of City's trans- 21 19 15 20 24 actions in category *Source: ship Development Program, Department of Housing and Comnuni ty Development, Baltimore City, 1973. Homeownership and the Baltimore Mortgage Market , Draft Report of the Home Owner- 24  This structured relationship has a geographical manifestation.10 To demonstrate this wehave divided the housing market in Baltimore City into 13 sub-markets which can be fur- ther aggregated to eight primary sub-market types (see Figure l). W have tabulated data concernfng the ffnancfng of housfng fn each of these sub-markets (see Table 2). W have also tabulated some informatlon on house prices and socio-economic composition in the sub- markets. It is plain that the housing market in Baltimore City is highly structured geo- graphically in terms of institutional involvement and FHA insured mortgage activity. The main features In this structuring are: (1) The inner city is dominated by cash and private transactions (with scarcely a ves- tige of fnstitutfonal or governmental involvement) accompanied by a low purchase price, low incorns and a high proportion of tenants and blacks; (2) The ethnic areas are dominated by small comnunity and neighborhood State S Ls which circulate money within the community and in some cases finance migration to, far example, the middle income sub-market of Northeast Baltimore; (3) Black residential areas are serviced mainly by mortgage bankers operating under FHA guarantees (a response to the social discontent of the 1960s). Comnunity-based State S Ls are absent and without a strong sense of comnunity will be difficult to bring into being. The Federal S Ls apparently are reluctant to become involved in financing black home owner- ship. (4) Mortgage bankers using the FHA guarantees (often of the no-downpayment sort) are the predominant source of finance in areas of high turnover and racial change. (5) The white middle class, largely brought into homeownership through the FHA programs of the 1930s. occupies a solid area of northeast and southwest Baltimore as well as much of Baltimore County (which surrounds much of the City). Federal S Ls here dominate with FHA guarantees supporting the market ifi traditional fashion. (6) The more affluent groups make greater use of savings banks and comnercial banks and rarely make use of FHA guarantees. This geographical structure forms a decision environment in the context of which in- dividual households make housing choices. These choices are likely, by and large, to con- form to the structure and to reinforce it. The structure itself is a product of history. Attempts to change the structure can in fact generate considerable social conflict. For example, middle-income buyers, disillusioned with the suburban dream, have to fight the in- stitutional policies of the lending industry and the FHA if they wish to renovate an inner- city neighborhood.11 Likewise, low-income blacks cannot be turned into debt encumbered homeowners painlessly. Bystruggles of this sort the structure can be transformed. In practice, therefore, we find that the geographic structure is continuously being transformed by the ebb and flow of market forces, the operations of speculators and realtors, the chang- ing potential for homeownership, the changing profitability of landlordism, the pressures emanating from comnuni ty action, the interventions and disruptions brought about by chang- ing governmental and institutional policies, and the like. mation of and within a structure that must be the focus for understanding residential dif- ferentiation and, as we will later show, provides the basis for understanding how absolute rent is realized in the housing market. W will examine two facets of this transformation process i Ba 1 f more very briefly . It is this process of transfor- il) The FHA in Baltimore City1* designed to facilitate homeownership by making institutional investment in housing risk-free. Until the 1960s these programs serviced the needs of middle-income buyers and were instru- mental in financing the suburbanization process. social objectives were initiated as the government attempted to create a debt-encumbered, socially stable class of homeowners amongst the poor and the black. A mix of old and new programs were applied for this purpose and these- together with administrative directives to end, for example, the discriminatory red-lining of low-income and black neighborhoods- led to the creation of FHA-insured black and low-income housing sub-markets during the 1960s. The main tool in Baltimore was the 221 (d) (2) program (D2s) which permits the financing of home purchase for moderate- or low-income people of housing below $18,000 with negligible or no downpayment. A map of FHA insured mortgages (Figure 2) indicates areas of high con- Since the 1930s the Federal Housing Administration has administered a variety of programs During the 1960s various programs with 25
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