I'm sure by now that you are aware that we have been in a significant Real Estate downturn for the last year or two. One analyst has said that he expects U.S. home values to decrease by as much as $7 Billion in the next 18 months. Some of the hardest hit areas in the country are in the state of California, specifically Stockton and Modesto. Home foreclosures could hit as much as two-thirds of the properties in Stockton. 90% of the homes for sale in Los Angeles are short-sales-being sold for less than is owned on the property.

Let me throw in another piece of information that may at first seem unrelated, or perhaps related in another way. Goldman Sachs released a study a few days ago that predicted that oil will be priced at $200 per barrel in the next two years. This sent prices for oil up to $123 dollars on Wednesday. We should expect to be paying $7, $8, or even $10 per gallon in 2010 according to this study.

I'm going to be mentioning Modesto a lot in this essay. I live in San Jose, which is the self-proclaimed Heart of Silicon Valley. Modesto, about 90 miles away, has been a bedroom community for Silicon Valley for a couple of decades now. I have known people who have commuted between Modesto and Scotts Valley, 110 miles apart, just because they could afford a home in Modesto. Keep in mind that in this part of California, a 110 mile commute takes about 3 hours each way, more in rush hour.

Since I was a child Modesto had filled two roles-It was the bedroom community for Silicon Valley, and it was an agricultural community. The population of Modesto has grown from 194,506 in 1970 to 446,997 in 2000. In short, it grew about 230% in that time. I'm sure if we had more recent information you would find that Modesto had grown even more between 2000 and 2005.

In the 20th Century, the single biggest change in our society was brought about by the introduction of the relatively inexpensive automobile. Fueled by cheap gas, it allowed its owner to go almost anywhere they wished to go (within reason), pretty much anytime they wished to go. People were no longer restricted by how far they could walk, or what time the train was leaving. In addition, a car could be much faster than virtually any previous form of travel.

This resulted in many changes to our society. The one I am most interested in as far as this essay is concerned is our living habits. Before the car, you lived close to where you worked. Either you worked on the farm where you lived, or you lived in the town or city where you worked. You either walked to your worksite, or you rode a horse or took a train of some kind the short distance to your workplace. The idea of living in one town and working in another was unheard of, even for the rich. It was simply too expensive and too time consuming to do this.

With the introduction of the Model T by Henry Ford's car company, this all changed. It started to be possible to live further from your workplace and commute. Suburbs started to form. This trend accelerated in the post World War II era, and continued on until very recently.

Some of you may be asking why I would talk about this trend in the past tense. The reason is because I believe it is over. The new trend will be the reversal of the past 80 years of suburbanization.

The popping of the Real-Estate Bubble about 2 years ago is simply the first shot. People ran up the cost of homes they could not afford, and when they could no longer pay back the money, the banks started to foreclose on the assumption that they could sell these properties to someone else and make their money back. In some circumstances they are tragically wrong. The smart banks are going to negotiate with the borrowers and write-off their losses. The stupid banks are going to foreclose on the assumption they will find buyers, and then find themselves stuck with many homes that they will never be able to sell.

You may be thinking that I must be wrong. People have to live someplace, right? Those homes will be sold to someone at some price, even if it is a loss, and probably most will be sold eventually for more than they did originally, right?

Not when gasoline is $8 per gallon. We are running out of oil. No amount of hope or denial is going to change that. Gasoline prices are going to ratchet up from this point out. There will be times when it is a bit cheaper, but the trend is going to be. This is unavoidable. This will have a direct effect on where we choose to live.

We should not be asking ourselves what we can do to bring down the cost of gasoline. We need to be asking ourselves what we can do to bring down transportation costs. Hybrid and electric cars may not be a solution for many people. In the near future it may cost as much to fuel up a Prius as it currently costs to fuel up a large SUV. As demand for rechargeable batteries increases, the cost is likely to increase as well. This will increase the cost of hybrid and electric vehicles. The most obvious way of bringing down the costs of commuting is not to commute very far. Living close to where you work is an easy way spending less of your paycheck on transportation.

This is an ominous thing for cities like Modesto. Modesto has very little industry outside of building homes and shrinking agriculture. Most of the jobs there are services provided to people who live there. Over time, the combined cost of commuting plus the smaller mortgage payment in the bedroom city will begin to approach, and eventually surpass the cost of the larger mortgage payment closer to the workplace. For example, a person commuting in a Honda Accord, getting 31MPG Highway commuting between Modesto and San Jose is going to be paying $465 a month for gas at $4 a gallon. When the cost hits $8 a gallon, it will go up to $930. Commuting in a Jeep Grand Cherokee getting 20 MPG brings those costs to $720 and $1440 respectively. The amount that you are paying in gas at $8 per gallon can make up the difference in your monthly mortgage payment between a $300,000 loan and a $455,000 loan for the Honda driver, or a $540,000 loan for that Jeep driver. That makes up for the difference right now between living in Modesto and San Jose, easy.

Cities that are closer to Silicon Valley than Modesto will face this issue a little later, but not a lot. Tracy and Salinas at about 60 miles away from San Jose and Gilroy at about 30 miles away may have a little bit more time than Modesto, but they will have to face a declining population of commuters eventually.

The big question for leadership in these areas is how they will face this issue. You can ignore it and allow significant parts of a city to become a ghost town. You can look to create another industry. This could involve adding Indian Gaming Casinos, and living with a greater crime rate, or adding an amusement park, and living with more noise. It could involve something else entirely. It could involve the city declaring imminent domain on abandoned tracts, bulldozing the properties, and putting in parks to improve property values nearby. You could even allow people to buy vacant properties next to their own and combine the lots, and build a nicer home on the combined property. This might be a good idea in certain areas of a city. Some of these combined properties might even be returned to agriculture as large gardens or small farms.

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