The Cost of Corruption

I put up a posting last week on how overall the housing market is likely to work out. Click here for the posting.

In it, Yale economist Robert Shiller shows the macro history of pricing for housing over a full century and the logical conclusion is that the market will return to its historical patterns.

In real estate though, it's the micro, the local, that concerns us here. There is a cliche that three most important factors in real estate are location, location and location. Cute, and true, but what makes one location more valuable than another? Why do some areas prosper while others of the same terrain, structure and similar demographics don't do as well?

Consider North Bay Village. We are beautifully located, surrounded by the bay, have our own police force, enviably low taxes, a very low crime rate, an A rated school and are located close to all the major points in Miami Dade. Why have our property values fallen harder than the rest of the county and why historically have our home values been lower than similar communities such as Miami Shores or Surfside?

All other factors being equal and considering the advantages North Bay Village has, there is one glaring difference. We have a reputation for tolerating corruption and poor governance stemming back to the 1950's. We occasionally show perverse pride in the number of arrests that have been made in our city and from our commission.

Even now, we have a sitting vice mayor who set up a commission for himself on city business. We have Rey Trujillo pushing deals to condemn public property for private use and who operates in a dual capacity as commissioner while sitting on the board of one of the city's biggest debtors, the Grand View Palace. North Bay Village has a reputation as a "pay to play" town. Maybe we are no worse than others but we certainly more obvious about it.

Corruption has real costs. When a place is understood as a corrupt place, businesses hesitate to invest as they now have an unpredictable cost burden. People don't buy at the same prices as they are concerned about the instability. These are not benign side deals. There's a good study at America.Gov about this cost.

We know that we dropped more than anywhere else in the county, save Homestead. It's not really a mystery. We have some oversupply of housing but what we really have is weak demand for the quality housing that exists here. And that low demand is for a big part the result of a sense that this is not a decent place to be. Our press coverage is terrible, our commission ignores the corruption of its own members, even our politics are threatening and dirty.

When the market finally settles down, and that house I wrote about last week is at its natural price of say $250,000, it will probably sell for 10 - 15 % less than the same house in a less corrupt city. When we tolerate this, it costs us in real dollars in our home values.

Many people have told me that they are so turned off by the politics in this city that they simply don't participate, but that's exactly the wrong thing. When the decent people who have the most to lose stay away, the thieves and their useful idiots run the city. They win, we lose. It's that simple.

Kevin Vericker
September 2, 2010