Location Efficient Development and Mortgages

Taking Advantage of Consumer and Transportation Benefits at Accessible Locations

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TDM Encyclopedia

Victoria Transport Policy Institute

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Updated 22 July 2008

This chapter describes Location Efficient Development, which consists of residential and commercial development located and designed to maximize accessibility and overall affordability, and Location Efficient Mortgages, which recognize the cost savings to households that choose more accessible locations, allowing them additional borrowing ability.

 

 

Description

Location Efficient Development consists of residential and commercial development located and designed to maximize Accessibility and overall Affordability. This usually means that it is close to good transit service and public services, has good walking and cycling conditions and other features that reduce Automobile Dependency. It often involves urban infill, such as projects to redevelop inner-city neighborhoods or converting older industrial buildings to loft apartments. Location Efficient Development can also include efforts to cluster activities and services together into Commercial Centers, and to redevelop older downtowns. Residents and employees in such areas tend to drive less, rely more on alternative forms of transportation, and enjoy better transportation options than those who live or work in less accessible areas.

 

Per-household transportation expenditures tend to be lower for residents in such areas. Residents of cities with high levels of transit ridership tend to spend significantly less per capita on transportation than residents of more automobile-dependent cities (Litman, 2006), as illustrated below. Similarly, McCann (2000) found that households in more automobile-dependent communities on average spend more than 20% of household budgets on transportation (over $8,500 annually), while those in communities with more diverse transportation systems spend less than 17% (less than $5,500 annually), representing thousands of dollars in annual savings (McCann, 2000).

 

Figure 1          Percent Transport Expenditures (Litman, 2006)

The portion of total household expenditures devoted to transportation (automobiles and transit) tends to decline with increased per-capita transit ridership.

 

 

A detailed study comparing housing and transportation costs in a typical urban area found that although average household expenditures on housing are similar in different geographic locations, transportation expenditures are much higher in outer suburbs and exurban areas than in inner suburbs and cities (CTOD and CNT, 2006), as illustrated in Figure 2. According to this study, transportation costs average 19% of household expenditures overall, but range from about 10% in multi-modal communities up to about 25% in automobile dependent communities. To the degree that Smart Growth reduces household transportation costs it can increase overall affordability and offsets any increased housing costs, which can be considered comparable to additional household income.

 

Figure 2          Affordability Index (CTOD and CNT, 2006)

Transportation expenditures are much higher in outer suburbs and exurban areas than in inner suburbs and cities, reducing overall affordability.

 

 

As fuel prices have increased, so has the value of urban locations, while automobile-dependent locations tend to lose value (Cortright, 2008). A typical middle-income U.S. household spent about $2,000 annually for vehicle fuel in 2003, when gasoline prices averaged about $1.50 per gallon, and so would need to spend about $5,000 annually to maintain the same amount of mobility in 2008 when fuel prices reached about $4.00 per gallon. A more accessible location with lower vehicle travel requirements can save such households about $2,500 annually in fuel costs, making it cost effective to pay up to $700,000 in additional house purchase costs at 7% interest.

 

Various policy reforms can help increase Affordability while also reducing per capita automobile use and encouraging more efficient land use (Litman, 2006). Parking Management can reduce residential parking requirements, particularly in multi-modal, urban neighborhoods (Litman, 2004; CNU, 2008). Smart Growth Market Reforms include a variety of strategies that reduce development and utility costs for urban homes. Many features of Smart Growth and New Urbanism, such as small lot development, zero lot lines, mixed housing types and housing above commercial development can reduce housing costs and increase housing options. The city of Austin, Texas imposes a transportation user fee for roads which exempts residents that do not own an automobile, as described in the Case Study section.

 

Concurrency requirements imposed in some jurisdictions limit development based on the projected capacity of available infrastructure, including roadway capacity. For example, developers might be required to pay for roadway expansion if a project is projected to increase traffic so that local road Level-of-Service degrades from C to D. This tends to discourage infill development and encourage dispersed, automobile-dependent sprawl. Revised concurrency requirements take into account the reduced per capita traffic generation, shorter trips and improved travel options in urban areas, and so allow more infill development (Wallace, 2005).

 

Location Efficient Mortgages (LEMs) means that lenders recognize these potential savings of a more accessible housing location when assessing a household’s borrowing ability. It considers transportation and housing costs together, so vehicle cost savings are treated as additional income that can be spent on a mortgage. This gives homebuyers an added incentive to choose location efficient residences, and tends to encourage more infill development as opposed to more automobile-dependent development at the urban periphery (Hare, 1995; Goldstein, 1996; Hoeveler, 1997; Russo, 2001). Location Efficient Development and Mortgages tend to benefit lower-income households by providing financial savings and improving affordable transport and housing options.

 

Consumer expenditures on motor vehicles provide little durable economic value (McCann, 2000). $10,000 spent on motor vehicles provides just $910 in long-term equity, compared with $4,730 for the same investment in housing. This suggests that shifting consumer expenditures from motor vehicles to other investments, such as housing, education or savings, tends to increase household wealth.

 

Smart Growth and Housing Affordability

Smart Growth policies such as urban growth boundaries and development fees can increase development costs, reduce housing Affordability, creating social problems and increasing vehicle traffic if it causes employees to live far from where they work (QuantEcon, 2002). However, these impacts are often exaggerated by critics of Smart Growth: a reduction in the supply of greenfield land available for development is only one of many factors that affect housing affordability (Land Use Evaluation; Nelson, et al, 2002). Other factors include:

·       Land devoted to lawns and gardens

·       Building type (single versus multi-story)

·       Housing size

·       Land devoted to parking and roads

·       Amount of public space (parks)

 

 

For example, if land prices increase households may choose smaller lawns and gardens, shift from a single-story to a multi-story home, reducing the amount of land devoted to driveways and parking, and use shared greenspace (for example, choosing a home near public parks).

 

Although some consumers have very strong housing preferences (it may be difficult to persuade some people to live in an urban apartment), consumers often have a wide range of options at the margin. For example, some households may prefer a single-family home with a large garden, but would be willing to accept a smaller garden or attached home in exchange for other amenities such as a desirable location, lower tax and utility rates, nearby parks and attractive neighborhood design. Tax rates, utility costs, transportation costs and the quality of public services, walking and cycling conditions, transit service quality, and parking costs may all affect such decisions.

 

It is therefore wrong to assume that a reduction in housing parcel size reduces consumer benefits if it results in part from positive incentives (e.g., cost savings to those who use less land or reduce their vehicle mileage) and consumers have viable choices. In such conditions, the consumers who place a higher value on space and mobility will continue with their current land use patterns, but those who place relatively less value on these goods have a new opportunity to capture benefits.

 

 

How it is Implemented

Location Efficient Development is implemented by developers, usually with support and encouragement from local governments. It is often implemented as part of Smart Growth and New Urbanist planning (Arigoni, 2001). Transit Oriented Development can be a catalyst for Location Efficient Development (CTOD, 2006).

 

Location Efficient Mortgages are implemented by residential mortgage lenders, often with the support and encouragement of government agencies such as Fannie Mae and the Canadian Mortgage and Housing Corporation. Lenders use a model to determine which locations have lower transportation costs, and therefore can qualify for higher mortgage payments. The following factors can be considered in such models:

1.     Proximity to high quality Transit Service (such as a rail transit station, or a bus line with frequent service).

2.     Transit Station Improvements.

3.     Walking and Cycling conditions.

4.     Number of public services within convenient walking distance (schools, shops, parks, medical services, pharmacy, etc.).

5.     Carshare services within convenient walking distance.

6.     Parking Management (unbundled parking, so residents who do not own an automobile are not forced to pay for parking).

 

The following criteria can be used to evaluate Location Efficient Development:

·       Is it located in an urban area within a half-mile of quality public transit?

·       Does it include, or is it located near, commonly-used public services such as grocery stores, video stores and public schools.

·       Will it reduce dependency on automobiles?

·       Does it have a minimum density of 20 units per acre?

·       Does it have at least 20 units?

·       Is it reflect good design features?

·       Is it being developed with substantial community input?

·       Does it include a significant portion of affordable housing units?

 

 

Travel Impacts

Per capita automobile travel is often 20-50% lower in Location Efficient Developments than in automobile-dependent, urban fringe locations. Table 1 summarizes the projected VMT reduction impacts of various Location-Efficient, infill developments.

 

Table 1            Infill VMT Reductions (CCAP, 2003)

Location

Description

VMT Reduction

Atlanta

138-acre brownfield, mixed-use project.

15-52%

Baltimore

400 housing units and 800 jobs on waterfront infill project.

55%

Dallas

400 housing units and 1,500 jobs located 0.1 miles from Dallas Area Rapid Transit (DART) station.

 

38%

Montgomery County

Infill site near major transit center

42%

San Diego

Infill development project

52%

West Palm Beach

Auto-dependent infill project

39%

 

 

Actual travel impacts may vary depending on household preferences and demographics, neighborhood conditions, and travel choices (Land Use Impacts on Transport). Travel reductions are greatest if Location Efficient Housing attracts residents who would otherwise choose more automobile-dependent lifestyles.

 

Table 2            Travel Impact Summary

Objective

Rating

Comments

Reduces total traffic.

3

Reduces per capita driving.

Reduces peak period traffic.

2

 

Shifts peak to off-peak periods.

0

 

Shifts automobile travel to alternative modes.

3

Encourages use of alternative modes.

Improves access, reduces the need for travel.

3

Encourages more accessible residential locations.

Increased ridesharing.

1

 

Increased public transit.

3

Supports transit use.

Increased cycling.

2

Supports cycling.

Increased walking.

3

Supports walking.

Increased Telework.

0

 

Reduced freight traffic.

0

 

Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.

 

 

Benefits And Costs

Location Efficient Development and mortgages can provide several benefits:

 

·       Consumers benefit from improved housing and transportation Options and Affordability. Non-drivers in particular benefit from having housing options designed for maximum accessibility, and financial savings from reduced transportation and parking costs.

 

·       Developers can benefit from having more design flexibility, including more opportunities for infill development, reduced parking costs, and because LEMs increase the amount a household can spend on housing. It creates new markets and financing options.

 

·       Urban neighborhoods can benefit from more opportunities for middle-class infill development, fewer motor vehicles, and less vehicle traffic. It tends to increase community Livability.

 

·       By reducing per capita vehicle ownership use, Location Efficient Development can reduce regional traffic congestion, road and parking facility costs, traffic crashes, pollution and sprawl.

 

·       Location efficient development can provide substantial energy savings and pollution emission reductions. According to one study, Location Efficient Development could reduce total U.S. energy consumption by about 10% after a decade (Burer, Goldstein and Holtzclaw (2004).

 

·       Regional economies tend to benefit when consumers shift their transportation expenditures from vehicles and fuel to transit services or general consumer goods (TDM and Economic Development).

 

 

There may be costs associated with higher population density in urban neighborhoods (see discussion in the Land Use Impacts on Transport chapter, and in Litman, 2000). Some households that choose location efficient housing that has limited parking may eventually purchase additional motor vehicles, if their needs change or they become wealthier, thus increasing local traffic and parking problems. This may require Parking Management. Some location efficient housing includes resident covenants that restrict vehicle ownership. Urban infill may also cause displacement of lower-income households (“gentrification”).

 

There may be transition costs to mortgage institutions and local planning agencies for changing their practices. Research of federally insured mortgages in the Chicago region by Blackman and Krupnick (2001) found no reduction in default in more accessible locations, suggesting that Location Efficient Mortgages may increase default costs to lenders.

 

Table 3            Benefit Summary

Objective

Rating

Comments

Congestion Reduction

2

Reduces per-household automobile travel in higher-density areas.

Road & Parking Savings

3

Reduces per-household automobile travel.

Consumer Savings

3

Increases housing affordability. Reduces vehicle and parking costs.

Transport Choice

3

Improves consumer housing and transport choices.

Road Safety

2

Reduces per-household automobile travel.

Environmental Protection

3

Reduces per-household automobile ownership and use, and reduces sprawl.

Efficient Land Use

3

Encourages higher-density location choice.

Community Livability

3

Encourages urban infill by middle-class families, reduced car ownership and use.

Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.

 

 

Equity Impacts

Location efficient housing and mortgages tend to increase equity by allowing households that own fewer than average automobiles to avoid paying for parking they don’t use, and by increasing housing options for lower-income households and non-drivers (CNU, 2008). Residential parking requirements reflect suburban, middle-class car ownership rates that are excessive for many households, particularly those with lower incomes. This is both unfair and regressive. Location Efficient Development is optional, so consumers will only choose it if they consider themselves better off overall.

 

Table 4            Equity Summary

Criteria

Rating

Comments

Treats everybody equally.

2

Fairer treatment of urban homebuyers.

Individuals bear the costs they impose.

3

Allows reduction in parking subsidies.

Progressive with respect to income.

3

Significantly benefits lower-income households.

Benefits transportation disadvantaged.

3

Significantly benefits non-driving households.

Improves basic mobility.

2

Improves access to shops, schools, employment, etc., particularly for non-drivers.

Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.

 

 

Applications

Location Efficient Development is most appropriate in urban neighborhoods that have good access (services and activities are easily available by walking and transit). It can be implemented by regional or local governments, or by non-profit organizations or individual businesses.

 

Table 5            Application Summary

Geographic

Rating

Organization

Rating

Large urban region.

3

Federal government.

2

High-density, urban.

3

State/provincial government.

2

Medium-density, urban/suburban.

2

Regional government.

3

Town.

3

Municipal/local government.

3

Low-density, rural.

1

Business Associations/TMA.

2

Commercial center.

3

Individual business.

2

Residential neighborhood.

3

Developer.

3

Resort/recreation area.

3

Neighborhood association.

3

 

 

Campus.

3

Ratings range from 0 (not appropriate) to 3 (very appropriate).

 

 

Category

Institutional Reform and Land Use Management

 

 

Relationships With Other TDM Strategies

LEM is most effective as part of comprehensive Smart Growth, New Urbanist, Transit Oriented Development and Access Management efforts to encourage multi-modal, mixed-use, infill development. Smart Growth Policy Reforms are often important for implementation. It supports and is supported by Pedestrian and Cycling Improvements, Transit Improvements, Parking Management and Carsharing. Carfree Development is generally location efficient. In some situations it may be helpful to Address Security Concerns to encourage more Location Efficient Development in existing urban neighborhoods.

 

 

Stakeholders

Developers, planners, local officials, local businesses and residents of existing urban neighborhoods can all be involved in implementing Location Efficient Development. LEM requires changes in practices by lenders (banks and other mortgage lenders), the real estate industry, and local governments, particularly by making parking requirements more flexible.

 

 

Barriers To Implementation

Location Efficient Development and Mortgages require overcoming various types of resistance in the mortgage, real estate and local planning institutions. Pilot projects, case studies, and professional education workshops may be helpful in propagating these concepts.

 

 

Best Practices

Here are some specific recommendations for implementing Location Efficient Development and Mortgages (Arigoni, 2001).

 

·       Location Efficient Development should include a variety of land use and transportation features that improve access and mobility options, including pedestrian and cycling improvements, transit improvements, and mixed land use.

 

·       Location Efficient Development should include a range of housing types and prices, so that people in various lifecycle stages and income classes can choose such housing.

 

·       Parking requirements should be reduced or eliminated for location efficient housing. Rather than including parking with housing, parking should be rented separately, so households only pay for the amount of parking they actually use.

 

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