Leading experts weigh in on current policy issues and challenges

Down Payment on Detroit: Charting the Next Steps in the Detroit Housing Recovery

As Detroit continues a journey toward economic recovery, the housing market in many parts of the city remains a serious challenge. In particular, mortgage activity is stuck at historically low levels, even as jobs and investment continue to grow throughout the city and the region. What steps—policies, programs, and products—should we take to stabilize and improve the homebuying market while ensuring affordable options for homeowners and renters alike?   

The Urban Institute is talking with...
Erika C. Poethig Erika C. Poethig
Laurie Goodman Laurie Goodman
Dekonti Mends Cole Dekonti Mends Cole
Timothy Thorland Timothy Thorland
Janis Bowdler Janis Bowdler
Tim Bowler Tim Bowler
Don Baylor
Moderated by:
Don Baylor
Senior Associate
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Welcome to our policy debate on housing market challenges facing the city of Detroit.   As Detroit continues its economic recovery, several factors limit homebuying and mortgage financing in numerous neighborhoods. At the same time, affordable rental options are another set of issues worth addressing.

In addition to this online conversation exploring potential solutions, Urban is launching a series of products related to the Detroit housing market—including a quarterly Detroit Housing Tracker and a blog on the Rehabbed & Ready program—as part of our collaboration with JP Morgan Chase.   We are fortunate to have a wide range of experts and stakeholders contributing to this dialogue. 

We will begin the conversation with two questions:

What are the primary challenges facing the Detroit housing market?  Also, what are some applicable lessons or initiatives from other cities facing distressed housing markets?             

Thanks Don.  I am excited about the portfolio of products that we are launching  about Detroit.  Detroit is such a dynamic place right now.   Every time I go -- and this year it has been quite a lot -- something has changed:   a new program to address the housing market challenges has been developed, new track has been laid for the M-1 rail along Woodward, a new restaurant has been opened.  The energy is contagious.  

As our new Detroit Housing Tracker demonstrates, there are some positive signs of recovery:  sales prices are beginning to recover and the number of underwater loans are in decline. 

And yet, Detroit is grappling with some serious challenges -- more than 80,000 vacant homes drag down surrounding property values and create the conditions for crime;  distressed sales complicate the appraisal of properties, which makes getting a mortgage difficult for many potential homeowners; and, many of the available properties require significant rehab that goes well above the loan to value ratios most mortgage products offer.  

Other cities face these challenges, but no other city in the U.S. has to tackle these issues at this scale.  

Don, thanks for hosting this. I welcome the opportunity to participate.

I am very excited about the potential of some of the programs that have been implemented in Detroit. The Rehab and Ready program that we blogged about is an important step to address the issue that, in a market with mostly distressed sales, appraisals are lower than what it costs to buy a home, rehab it and bring it up to code.  It also addresses the issue that rehab work is difficult to finance, and few potential buyers have the time and know how. A number of other lending programs are also in place to address the absence of financing for rehab, including Detroit’s 0% Home Repair Loans Program, the Detroit Neighborhood initiative and the Liberty Bank Detroit Home Restoration program. (These and a number of other lending programs are listed on page 4 of our Detroit Tracker). While all these programs are small in scale, they offer a very good start.

A number of other cities have experienced sharp population loss when manufacturing declined, leading to severe issues in the housing market. Two cities in upstate NY implemented innovative programs: Syracuse put into place a Home Equity Protection Program to encourage existing homeowners to stay in the city. Rochester did a version of the Rehab and Ready program, in which the operation and infrastructure necessary to purchase and rehab hundreds of homes was centralized, with financing provide by loans pools capitalized by participating lenders and a loss reserve provided by the city. And other cities, most notably Cleveland Housing Network’s successful Lease Purchase Program and some of Chicago’s acquisition rehab and financing programs contain lessons potentially applicable to Detroit. In most cases, the key to eventual success has been a combination of public, private and philanthropic capital.

As Erika mentioned the scale of the problem in Detroit is much larger than ever experienced by any other US city, and a number of different programs, working in combination, will be necessary to eventually reinvigorate Detroit’s housing market.    

Yes Don, thanks for hosting. Laurie and Erika have set a good context. Working here on the ground in Detroit I’d like to reinforce a couple of points. The specific challenges in Detroit’s housing market are certainly not uncommon circumstances in cities all across the country. Whether it be vacancy, abandonment, low valuations, aged housing stock, constrained resources, lack of mortgage product, lack of access to capital, high property tax, high insurance premiums or the like, what makes it nearly catastrophic is the unique combination of scale and acuteness. The Detroit market is dealing with all of these issues simultaneously. Successful housing markets thrive on volume and competition. The competent buyer in Detroit’s current for-sale market, for instance, is a limited subset of the population: Someone who has the knowledge, wherewithal and capital to overcome multiple negative circumstances. The compensating factor to overcome this – and consequently drive volume – is combining the collective influence of the public, private, non-profit and philanthropic sectors. This is happening and the momentum and scale are growing. It is anticipated that the list (like the programs listed on page 4 of the Detroit Tracker) will continue to grow. In some of Detroit’s stronger neighborhoods we’ve seen a dramatic decline in the impact of these negative influencers, in large part due to the effective implementation of incentive programs. Ultimately, the goal is to eliminate the need for broad based incentive programs by promoting a normalization of the market.

Thank you for previous comments.   And, special thanks to Tim for adding some local flavor and highlighting the catalytic effect of public-private-nonprofit-philanthropic efforts in stabilizing and normalizing the market. 

An interesting report  was released by such a partnership this morning demonstrating the positive impact of blight removal stimulated by a U.S. Treasury program--Hardest Hit Funds.

A few questions:  

At this point in Detroit's recovery, how important is blight remediation as a strategy to improving the housing market?  

Is there concern about next steps once the federal funds have been exhausted for blight removal?  

Thanks Don for calling attention to this report, which is hot off the presses.  As you noted,  this morning, Rock Ventures, the Skillman Foundation and Dynamo Metrics released a new study on the impact of blight elimination strategies in Detroit.   As we've discussed here, blight is one of the major challenges facing Detroit.  The study, "Measuring the Impact of Detroit's Blight Elimination Program" assessed the role of Hardest Hit Funds (HHF) on the valuation of homes in the surrounding area.  Supported by the US Department of Treasury, HHF was created in 2010 to provide aid to states nationwide who were hardest hit by the housing market downturn.  The Michigan State Housing Development Authority pushed for $100 million of the funds be allocated for blight elimination.    Detroit used these funds to demolish vacant and abandoned properties across the city. 

The study, which I am still pouring through, indicates that just 18 months after the implementation of HHF blight elimination efforts, we are already seeing positive results.  The rapid and strategic blight remediation efforts in low and moderate vacancy areas support by HHF has fostered a dramatic rise in home values.

New analysis finds that the valuation of homes within 500 feet of an HHF demolition rose by approximately 4.2%, or more than $209 million. In HHF zones where a multi-faceted blight elimination strategy was deployed, homes in these zones increased by 13.8 percent, or nearly $410 million.   For every dollar invested in HHF demolition, we’re seeing an increase in home equity of $4.27 and for every dollar invested in the HHF zones we’re seeing an estimated return of $8.35.

These new findings demonstrate the essential role of Hardest Hit Funds in supporting effective blight remediation efforts in Detroit.  However these funds will soon be expended and currently there is no other source of funding available to maintain the momentum they have generated.  Detroit will once again have to get creative to find new sources of funding to support their blight removal efforts.

 

I know that Dekonti has given some thought to some strategies for blight elimination and I would love to hear her ideas. 

Thank you Don and the entire team at the Urban Institute for hosting this session.  Having spent the summer in Detroit working with the City and the Detroit Land Bank, I saw first hand the tremendous impact blight removal is having throughout the city.  It is not only improving property prices for surrounding residences, it is also serving as a catalyst for investment throughout the city.  (Note the Dynamo research report that highlights the significant multiplier impact associated with the funds that have been used to date to remove blighted and abandoned buildings)The model that has worked so well in Detroit, it should be considered in numerous cities throughout the country.

 

 

 

Erika’s point about distressed sales and the impact on appraisals is critical.  When we began working with Liberty Bank to expand credit and provide financing for the rehabilitation of homes purchased through the Detroit Land Bank Authority auction, the mismatch between cost to rehab a home and the appraised value presented a real obstacle. Another challenge we have faced is the lack of licensed and bonded contractors that are well-positioned to take on the rehab projects required to boost home values in the neighborhoods.  But many of the small, local contractors that would like to take on these projects face their own set of challenges, one of which is access to flexible capital that allows them to hire or purchase supplies on the front end of a project. Detroit Development Fund recently launched the Entrepreneurs of Color Fund (we were proud to partner with Kellogg Foundation to seed the fund).  This Fund is the only one I’m aware of in Detroit that has created a product specifically for small contractors.  Hopefully this increases the number of qualified contractors available for home repair and renovation work.

 

I too have only scratched the surface of the report, yet anecdotally this makes perfect sense. Time and time again, with clients looking to lease, buy or improve, I’ve seen their enthusiasm dampened. Not by the technical problems of housing value, price points or such but by the conditions of surrounding property. Additionally, we’ve seen many transactions thwarted by the borrower’s inability to obtain property insurance specifically because of the proximity of vacant and abandoned homes. As Federal resources for demolition activity are depleted concern about sustaining momentum is significant. We can point to the tangible benefits of blight removal activities, yet we must also remember that these programs are not active in every Detroit neighborhood, there are thousands of occupied properties which are at a tipping point because of their state of disrepair, and that additional vacancy and abandonment fueled by tax foreclosure is likely. One idea is to increase our engagement in activities like dismantling and deconstruction. While deconstruction is typically more expensive than demo, in the case where there are fewer resources for demo, deconstruction as a workforce development opportunity can open the door to previously unavailable funding streams toward blight removal. See one example here: deconstruction-interview

Tim makes a good point of the need for demolition not only to support values but also to increase homeownership and occupancy. Upon a cursory glance, this report appears to be hugely promising for the development of the pay for success model also known as social impact bonds, where “investors” pay for improved social outcomes that result in public sector savings.  Social impact bonds have the potential to recruit the capital needed in the near term for demolition and stop the devaluation caused by blighted buildings.  Can you imagine the acceleration of Detroit’s housing recovery if dollars were made available immediately and the city could continue to surgically remove dangerous buildings from its most viable neighborhoods! However, the question remains: how do you translate the valuation increase into an income stream for social impact bond investors that doesn’t compete with or diminish other measures needed for Detroit’s revitalization.

Such a rich thread of conversation.   Starting with the workforce angle, thanks to Janis for raising the obstacles related to the lack of qualified and bonded contractors to perform home rehab and repair.   This workforce component then connects to Tim Thorland's points about how deconstruction, although more expensive than demolition, provides an array of positive benefits, not the least of which is carving a broader on-ramp for skilled workers to gain experience in the residential construction pathway.  

Then, Dekonti's point is critical both in terms of the importance of strategic demolition (or deconstruction) in propping up values (addressing the appraisal issue) in certain neighborhoods.  It appears that we have broad agreement that blight elimination and demolition are critical to addressing the appraisal issue, which is critical to increasing homeowner financing and mortgages in Detroit.

  

Bringing us back around to the Detroit Demolition Impact Report, the demonstrated return-on-investment with the concern about sustainability of the pace of demolitions given funding uncertainty.  This figure from the report really shows the impact of HHF and demolition on home sale prices

Hardest Hit Fund Demolitions Have Positive Impact on Sale Prices in Most NeighborhoodsTwo questions here related to keeping targeted demolitions on track:

Should social impact bonds be quickly elevated as a strategy for financing demolition (or deconstruction) to keep the momentum going?

Can we identify any other viable funding sources (local, state, federal, private) that could fill the gap once the Hardest Hit Funds are exhausted?  

For those "in our listening audience" who are less familiar with Social Impact Bonds, they are a disruptive innovation that are being used to attract private capital to scaling evidence-based programs.  We launched a Pay for Success Initiative at Urban several months ago that is helping to identify the evidence-based programs that are most suited for a Pay for Success/Social Impact Bond approach.  In that vein, my colleague John Roman wrote a blog several years about using Social Impact Bonds to address blight.  

The main challenge, as Dekonti points out, is figuring out the public revenue stream that would "take out" the private investors if a SIB for demolition proved successful.  Property taxes are an obvious source, but as Tim has alluded, the property tax system is not functioning properly at this time.  In order to make a SIB work, I think it would need to be accompanied by or facilitate some broader reforms of the property tax assessment system in Detroit.  I understand that one of the major reasons Detroiters lack confidence in their property tax assessments is that the underlying property appraisals have not kept pace with changes in the market.  Many Detroiters are paying beyond what they can afford, and I understand, many homeowners are paying more in property taxes than their mortgage. 

So, I think it is a useful thought experiment to consider a SIB for demolition, but there are a lot of elements that needs to be thought through carefully.  

An alternative/blended approach might be to think about a SIB for an evidence-based training/workforce development intervention that trained young people in deconstruction.  Maybe a modified approach to Youthbuild

I would like to re-echo the point Tim made about property taxes being really high, and Erika mentioning the need for property tax reform.

Far more of the properties that are being foreclosed on now are for non-payment of property taxes, rather than non-payment of mortgages. Wayne County is scheduled to auction nearly 29,000 properties in the fall for non-payment of taxes.

Mayor Duggan recently lowered property assessments by 5 to 20 percent, but homes still remain over-assessed.  Moreover, according to a 2015 study by the Lincoln Institute for Land Policy and the Minnesota Center for Fiscal Excellence, out the 50 largest cities in the US, Detroit’s homestead property tax rates were the highest ($5964 per $150,000 assessed value.) This combination of high tax rates on inflated appraisals means that many borrowers who could otherwise afford to live in their home are unable to make the property tax payments. While the county has shown some flexibility in payment plans, these foreclosures contribute to distressed sales, which in turn lower property values. And very high property taxes are capitalized into non-distressed sales, exerting a further drag on their market value. Property taxes are essential to provide city services, but perhaps some of the necessary funds can be shifted to other sources.

These are such important points.  Thanks Erika and Laurie for digging deeper into creative social impact solutions and flagging the property tax issue.   The over-valuation of homes seems to be an issue in homeowner preservation as well as blight control with many low-income homeowners unable to experience the cost-benefit of homeownership in a sustainable way.

We will pivot the conversation to emerging mortgage products and lending programs seeking to address some of the issues discussed earlier.   As shown on p. 4 of the Detroit Housing Tracker, a number of niche products  have been developed to fill home purchase and/or rehab gaps in the marketplace.  Some are focused on particular populations, while others are focused on particular neighborhoods.  According to the Federal Reserve, cash transactions outnumbered recorded mortgages 20-1 in 2014, so the need is evident.

 

Questions:

Of the current products in the marketplace, which ones, if any, have the potential to reach large scale?

What other types of mortgage or financing products are needed to provide more opportunity for homeownership?

First of all, I would to give kudos to all parties and partners that are trying new products and approaches in Detroit.  As I think our exchange has illustrated, it is really challenging.  The creativity and commitment so many have demonstrated thus far should not go unnoticed.  That said, these efforts should be assessed to identify impact and opportunities to scale.  Many of them are so new that it is hard to say -- at this point -- what is scalable. 

I do think one missing piece is a second mortgage product that could help homebuyers finance the extensive rehab required on these properties.  It is very challenging to go to a high LTV on a first mortgage, but it may be more possible to finance a smaller second mortgage with more favorable terms and a back-stop to enable this rehab to occur.

Though I really appreciate Janis's point that we also need to grow the number of bonded contractors to do the work and the new program she mentioned that JP Morgan Chase just launched, the Entrepreneurs of Color Fund, sounds really promising. 

Erika, you've hit the nail on the head. The programs listed in the Detroit Housing Tracker are all meaningful efforts that will have impact. Yet, because they mostly employ subsidy their scale will be limited by the scope of the capital outlay each provider can offer. While value in the mortgage market is governed by the appraisal process and the lack of a scaled comparable market has further compromised sustainability in the market, the demand side of the equation shows us the 'Value is in the eye of the beholder'. Purchasers are willing to be more aggressive with the amount of their investment regardless of what professionals or the market tell them about value. Southwest Solutions has been a champion of the idea of a specialized Loan Fund for years. We believe that a properly structured first and second mortgage product of this type will be successful. Importantly, however, is that a robust Homebuyer and Financial education component go along side this product offering to ensure Buyers fully understand the benefits and risks of this type of product. Remarkably, a team of institutions and organizations are working on launching this very product, and hopefully soon. Similar efforts are being undertaken in other cities such as Milwaukee. Additionally, regulatory support of this concept reinforces its validity. See these comments from the OCC

We want to issue our deep appreciation to our participants in this inaugural policy debate on Detroit’s housing challenges and potential solutions.   Throughout the past few days, we have been able to dig deep on several issues, including lack of qualified contractors and workforce pipeline, return-on-investment for demolition, appraisal issues, innovative  products and programs, social impact bond financing, distressed sales, and the role of subsidy in returning Detroit’s housing market to normalcy and stability. 

A few reminders.  The Detroit Housing Tracker will be published quarterly so keep an eye out for the next edition later this year.   Also, our Detroit-focused work is just beginning, and we look forward to engaging the nonprofit, public, philanthropic, and private sectors in continuing Detroit’s recovery while expanding opportunity for more residents in the City.   And let's keep the conversation going on Twitter.