The New Ghost Towns

Wed, Sep 8, 2010 - 2:53pm

When you think of ghost towns, you probably imagine a mining settlement abandoned once the resource was depleted, like Bannock, Montana or Kolmanskop, Namibia. You may think of tumbleweeds blowing down vacant streets, or sand dunes covering vacant shops.

However, towns can be abandoned for many reasons. Major transportation lines like a train or highway may bypass the community, as happened when US Route 66 was supplanted by the Interstate Highway System. Due to the diversion of two major rivers in Central Asia, the Aral Sea shrank to a fraction of its original size, and the once thriving seaport of Moynak in Uzbekistan is now 100 km from the water.

Jefferson, Texas, which I visited three years ago, went from the second most important port in the state to a tiny hamlet. In the 1870s, the main railroad line was routed to Texarkana, bypassing Jefferson. Then the Army Corps of Engineers blew up the natural log jam and lowered the water level in the Red River so that large steamboats could no longer navigate as far north as Jefferson. Trade was diverted elsewhere and the city rapidly declined.

Some ghost towns are located underwater. Ancient Chinese villages were submerged by the Three Gorges Dam, and 1.2 million people were displaced. Adaminaby in Australia was drowned by a dam five decades ago, but it’s now re-emerging from the lake due to a historic drought.

Conflicts can also cause abandonment of communities. Sjöstad in Sweden was never resettled after a Danish massacre in 1260. Belchite, Spain was bombed during WWII, and dictator Francisco Franco left the ruins as a memorial. Panama City was rebuilt a few miles away from its original site after it was sacked by Henry Morgan’s crew of pirates. The Syrian settlement of Quneitra is now a ghost town after it was destroyed by Israeli forces during the Yom Kippur War.

Just as a corporation may drive the founding of a town, its later failure or decision to relocate can kill the community. Henry Ford established Fordlândia in Brazil to produce tropical rubber, but the village was abandoned due to the collapse of the project. Leith Harbor on South Georgia Island was depopulated after whaling was outlawed in most countries. Even today, towns like Scottsdale in Australia fear their community will die if the remaining sawmill is shut down.

The forces of nature can also cause ghost towns. Jared Diamond discusses this phenomenon in his excellent book, Collapse: How Societies Choose to Fail or Succeed. The Vikings were forced to abandon their settlements in Greenland as they were unable to cope with the climate becoming substantially colder. Similarly, the Anasazi prospered during cool, damp years, but had to leave their cities due to repeated droughts. The Mayans also suffered from droughts and overuse of natural resources, but wars also contributed to the collapse of their advanced civilization.

In contrast, sometimes disasters caused by humans cause citizens to flee their homes. Due to radioactive contamination from the meltdown at the Chernobyl Nuclear Power Plant, residents had to abandon the city of Prypiat, Ukraine. In 1962, a trash fire in Centralia, Pennsylvania ignited the abundant underground coal seams, and they are still burning today. This hellish atmosphere of sinkholes, choking smoke and steaming, buckled roads inspired the popular Silent Hill video game.

Ghost towns can be created through grandiose schemes as well. California City is the third largest municipality in the state by size, but it’s unlikely you’ve ever heard of it. Although it spreads over 185 square miles, only 14,000 people live there. In 1958, a sociology professor named Nathan Mendelsohn purchased 82,000 acres of land about 100 miles from Los Angeles. California City has a huge network of unpaved streets etched into the desert to support the 52,000 planned homes that were never built. Instead of laughing children, the lots are filled with rattlesnakes and jackrabbits.

Sadly enough, this sleepy town became a trap for speculators in the most recent housing boom. The price of lots soared from $3,000 to $20,000 and then crashed back to earth as the bubble burst. Today, most of the land is used for camping or other recreation, not houses.

Bangkok’s skyline is marred by ghost towers unfinished after the Asian Financial Crisis of 1997-8. Hot money streamed into Thailand, strengthening the baht currency and pushing up asset prices. With GDP expanding and real estate appreciating so fast, banks weren’t picky about who they made loans to. When foreign investors decided to take their capital elsewhere, the Thai economy experienced a sudden, vicious contraction. Prices collapsed and builders declared bankruptcy, leaving rusty shells of skyscrapers. While some of the towers have been redeveloped, many are too dilapidated to be financially feasible to finish.

The next wave of ghost towns has already started due to the real estate bust. I’ve frequently discussed the massive amount of malinvestment in housing fueled by easy credit. This became a global phenomenon. Many consumers believed the propaganda that homes could only appreciate, so they applied for risky mortgages and dabbled in “flipping” properties. They lied about their income, and many banks and appraisers winked and went along with the scam. Others were pressured into loans they didn’t understand and quickly became insolvent.

At the same time, bankers didn't care about credit worthiness as they planned to package these loans into derivatives and sell them to the next fool. Rating agencies validated these toxic instruments as fiscally sound since their fees were paid by the lenders themselves. Many of these “too big to fail” banks ranging from Canada to Switzerland were bailed out of their reckless behavior by reluctant taxpayers.

While there have always been subdivisions that failed, and builders that went bankrupt, this global real estate bust will involve both residential and commercial property. Reykjavik, Iceland has ghost suburbs full of pristine vacant homes, as well as new malls with empty parking lots. Spain has its nearly deserted Ciudad Valdeluz in the middle of nowhere, with empty apartment complexes and only one lonely shop in the business district. The Ice Tower and the Placio de la Bahía that were cancelled in Panama City were supposed to have a mix of condominiums and businesses within the skyscrapers. In the US, the Florida swamps and Nevada deserts are littered with abandoned houses and empty strip malls. Dubai has a huge oversupply of commercial space, and foreigners are abandoning properties they can’t afford in droves when they lose their jobs fearing debtors’ prison.

Unfortunately, the situation will get worse before it improves. Some countries have housing bubbles that have yet to pop, like China, Australia, and South Africa. Other small countries like Uruguay and Slovenia are overheating as investors seek cheaper locales for retirement, amplified by real estate touts ripping off these wealthy foreigners. Even in nations that have already seen large declines like Ireland, prices continue to fall, and if Japan’s bubble is any indication, this slump could last two decades.

I hope none of my readers live in these new “ghost towns,” because it may be impossible for you to sell a house in a nearly vacant subdivision. Assuming this doesn’t apply to you, I would avoid any new development or building that isn’t finished, or doesn’t have most of the units occupied. Any financial hardship suffered by the owner means a lack of maintenance in the common areas.

In general, I would avoid all real estate investments unless you are assured of cash flow that exceeds the mortgage. An example of this might be apartments for students adjacent to a college. I don’t expect US residential real estate to turn around until late 2013 at the earliest, so now is not the time to bottom fish. If you anticipate needing to sell your house before then, do it as soon as possible, as the market will only deteriorate further from here.

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