Gentrification

For the last year or so I’ve been thinking heavily about the phenomenon of gentrification in Los Angeles. Since I bought a condo in an ‘area in transition’ gentrification is major concern for me. Personally, I want the gentrification of the Fashion District to occur rapidly so that the value of my property increases faster than the rate of inflation (property ownership is an inflation hedge in finance). Gentrification raises property values based upon an improvement in the neighborhood’s quality of life; think of the difference between Silverlake and Pico-Union. In the 1990’s both neighborhoods had similar rates of crime, gang violence and property ownership. But 20 years later, Silverlake is considered a desirable neighborhood, while Pico-Union is, well, still gang infested territory. In 20 years the difference between the two neighborhoods is stark. Silverlake gentrified while Pico-Union did not.

 

I don’t know why Silverlake gentrified while Pico-Union did not, all that needs to be known is that one area gentrified while the other did not. The quality of life difference between the two is stunning. If you were lucky enough to buy in Silverlake in the 1990’s the property that you purchased for $100,000 could be worth over $500,000 now. From 1/5/2001 to today the DOW Jones Industrial average is up 71.54%, if you bought in Silverlake the money you put into your property would be up over 500%. This is a HUGE wealth benefit to anyone who purchased cheap in an area that Gentrified.  As you can anticipate, I hope this happens to me. I also hope it happens to other people as well, but, gentrification can be a double edged sword.

 

President Bush once spoke about creating an ‘Ownership Society’ in America, many of the topics he touched on was property ownership. His reasoning (which is sound) is that people who own property tend to be invested in their neighborhoods, thus they take an active interest in the schools, parks, more generally owners improve the quality of life in their neighborhood. As bad elements are priced out of the market that is in the process of gentrifying, many poor long time renters will see their rents increase and they could find themselves pushed out of the market as well. At this point, it should be worth noting that, in the long run, renting is much less economically beneficial than owning property (no equity is being earned by rent, since property is an inflation hedge as long as there is no rent control rent should be keeping pace with property values so you do not get the long term benefit of a long time low rent). As a matter of public policy, the CRA was placed to help low income borrowers buy property. As in my previous post, housing discrimination was once thought to be the root cause and barrier of minorities entering the middle class. The CRA addressed that issue (editorial side: many conservatives wrong blamed Fannie, Freddie and their low income borrower initiatives for our current mortgage crisis; this article completely disassembles that argument http://www.ritholtz.com/blog/2011/11/fannie-freddie-and-the-foreclosure-crisis/ ).

 

A public policy which promotes ownership and conversion of apartment buildings into multi-unit buildings (ie. Condos) with financing options for the people already living there is absolutely required. How that can be obtained without infringing on the rights of the apartment building owner is an open question. I don’t even know if it can be done. I have some thoughts on this issue, however, I imagine that no investor would something so risky (perhaps I will explain my idea in a future post).

 

The flip side to gentrification is the NIMBY movement (not-in-my-back-yard). My favorite story of the year is an activist home owner in Holby Hills who is suing Metro over an Environmental Impact Report regarding a bike lane. A FUCKING BIKE LANE. NIMBY-ism is a huge problem in older established neighborhoods that have no increasing housing stock to oppose any development they feel threatens their property. People have a legal right to due process for  any property taking, but sometimes I think there should be a streamlined process for beneficial development that does not involve the seizing of actual property (the Metro is using an old right of way to construct the light rail to Santa Monica).

Neighborhoods ebb and flow, gentrification is simply part of the process in which cities grow, destroy themselves and rebuild. I can only hope that I can invest in the growth part of that equation and avoid the destruction part.