U.S. Suburban Foreclosures Linked to Gas Prices, Unemployment, Infrastructure Problems

Some of the most drastic markdowns and short sales in United States real estate can be found in suburban neighborhoods. Stockton and Elk Grove California, both mostly suburban communities, together have the highest foreclosure rates in the country. Many analysts have  been predicting for over a year now that suburbs will become the next slum neighborhoods, while urban areas will re-gentrify and become desirable again.

The speculation about the rise of the new suburban slum peaked last summer when gasoline prices in the U.S. hit $4.50 a gallon, but even though the price of gas has fallen (for now), the exodus from America’s outlying neighborhoods has only intensified. Even with gas hovering around $2 a gallon, suburban foreclosures continue to soar. One California county saw a 238% increase in foreclosures in 2008 0ver the 2007 figures.

A family of bobcats made the news recently when it took up residence in a foreclosed Lake Elsinore, California suburban home.

Several economic issues currently before the U.S. Congress will have a dramatic impact on the future of suburban areas. Foreign investors would be wise to watch how the U.S. handles these issues and gauge their impact on the viability of suburban life before jumping at what appears to be a great price on a foreclosed suburban home. Here are just a few of the issues that could change the picture dramatically for the better or the worse:

New Fuel-Efficient Cars and The Auto Industry Last week Chrysler CEO Bob Nardelli announced that large trucks and SUVs will continue to be the focus of the Chrysler brand, even though for now, Chrysler has shut down most of the factories that built these cars and even though Chrysler still can’t clear the 2008 models off its lots. At one point, Chrysler was even running a “buy one get one free” deal to get rid of these turkeys, to no avail. Yet even with all that, and even with a February 17th federal deadline staring it in the face, Chrysler is sticking with the same old ideas that didn’t work the last 20 times–and doing it with attitude no less. The problem is, Chrysler knows that Americans will buy big cars as long as gas is cheap. But oil is running out and those of us who don’t run auto companies know this, too. The viability of the suburbs is completely dependent on cheap transportation to and around them. If that cheap transport doesn’t materialize (and right now, it looks pretty shaky) that gorgeous new home you just picked up for pennies on the dollar may end up next to the neighborhood crack dealership or meth lab.

Infrastructure Projects One of the biggest criticisms of the current $819 stimulus bill before the U.S. Congress is that infrastructure projects, which were initially going to be a major part of the bill, are now only a minor part of it. Ironically this comes to light in the very same week that one million Americans are out of electricity again because of a winter storm. It was not a Hurrican Katrina type storm. It was just an ordinary January blow. Losing power for a week or more has become a normal part of American life. The electrical grid that lights huge parts of the U.S. has not been updated or even had decent normal maintenance for over 50 years. Estimates on what it would cost to just bring the grid up to current standards run between two and two and a half trillion dollars. No plans are being made to spend even a fraction of that anytime in the near or distant future. Roads and bridges aren’t in much better shape. Suburban neighborhoods are highly electrified places that make their pitch on luxury and convenience. If you can’t get to them and there’s no electric when you do, that kind of runs down the property value.

The Coming Wave of Commercial Defaults This one is way off the radar and its hard to understand why. It’s happening right before the country’s very eyes, but you still have to comb through arcane business publications to see serious discussions of it. As this is being written, lots of big box stores, mall stores, anchor stores at large malls, restaurant chains, and other kinds of businesses normally found in suburban sprawl areas are going belly up. Most of these businesses were severely over-leveraged and over-extended when the crash hit. Now they are beginning to default on a massive scale. Just this week, Starbuck (that avatar of the good yuppie life) announced it will close 300 more stores and lay off 1600 more employees. Suburban communities have no corner markets that sell groceries. Residents have to hop in the SUV or minivan and drive for miles to one of the suburban ’strips’ lined with huge big box stores. If no big box stores are there, or if the few that remain are surrounded by scary vacant behemoths occupied by squatters, suddenly we’re not in Kansas anymore, we’re in Mad Max territory.

Death and Taxes Cities are in trouble, and one way cities try to get out of trouble is to eat their young by hiking property taxes to the point that no one can pay them. Many members of Congress are really upset by plans to funnel federal stimulus money to help out states and cities, but if nothing happens, then property values will continue to suffer and buyers will balk, waiting for the floor. Meanwhile, no one wants to make a commitment to a tax bill that goes up a thousand or so dollars every other year to compensate for the downward spiral.

Unemployment Many people who live in the suburbs work in huge corporate complexes that are located in outlying areas, not inside the city proper.  However, as the economic downturn leads to more and more layoffs, many of these outlying corporate centers are also being shut down or sold off. If you have to work in the city, and gas is over $4 a gallon, and you can’t get an auto loan, the suburbs don’t look like a good option. If you don’t have a job at all, living 30 miles out in a community with no bus service doesn’t look so good either.

Foreign investors would be wise to carefully watch how the U.S. government decides to handle these issues over the coming weeks, or even if the U.S. government plans to handle them at all. The decisions made this week and next could drastically impact the viability of suburban neighborhoods for years to come.

For more general tips on investing in real estate in America, take a look at our article United States Real Estate Prospects for 2009.