Detroit’s Tricky Three-Point Turn
Most drivers are familiar with the sinking feeling of realizing you’ve been speeding down the wrong road for too long and, suddenly, must change direction. But pivoting a lumbering vehicle on a treacherous road is never easy. Mastering the delicate do-si-do of the three-point turn is essential – both literally, and in the case of the Motor City, figuratively as well.
After a half a century of economic challenges, culminating with the city’s December 2013 bankruptcy, Detroit’s leaders are embarking on a tricky three-point turn of their own, with the aim of turning around the city’s economy and housing market. And while it is too early to claim success, the city is clearly making progress.
Recently, Zillow hosted public officials, community leaders and real estate professionals in Detroit for a discussion on the challenges, opportunities and lessons learned from Motown’s efforts to revitalize their city and reignite their housing market. The discussion was the latest in our Housing Roadmap to 2016 series, meant to address local housing issues in the cities where they matter most.
To see our panel discussions in their entirety, please see our videos here and here. Below is a video with highlights of our tour of Detroit, with a more detailed summary following.
Detroit is certainly unique, and in some respects, the issues it is confronting are exaggerated relative to other cities nationwide. But the underlying challenges – and opportunities – will be familiar to many U.S. cities.
The Re-ignition of Urban Detroit
The Detroit housing market has experienced substantial turmoil over the past decade. The city’s housing market never quite benefited from the mid-2000s boom, was hard hit by the Great Recession and has struggled to recover to the same extent as the rest of the country. One result is that the share of homeowners in negative equity remains extremely high in Detroit.
But according to those on the ground, Detroit is coming back. Perhaps more so than at any point in the past 40 years, according to one participant, there is a sense that the bottom is in the rear-view mirror.
Still, the city’s recent gains remain tenuous. In some neighborhoods – including Downtown and Midtown, where there have been major investments or where there are strong anchor institutions – home values have improved so much that affordability is an emerging concern. Other neighborhoods continue to face the daunting challenges of abandonment, disrepair and depopulation. And still other neighborhoods lie somewhere in between. The city is akin to a patchwork quilt, with pockets of strength intermingled with pockets of continued risk.
The recovery is beginning to spread beyond the Downtown and Midtown core to adjacent neighborhoods, particularly along the route of the new M-1 light rail line, as Detroiters unable to find housing in the most popular neighborhoods seek more affordable options.
Still, Detroit’s population has declined by more than two-thirds over the past half century, from almost 2 million to about 700,000, but its land area is larger than that of Manhattan, San Francisco and Boston combined. But those cities have a combined population of about 3.1 million, more than four times that of Detroit. Detroit’s land area is exceptionally large, but combined with an increasingly sparse population, the city can appear dauntingly sprawling. There is substantial debate around the appropriate and viable residential footprint of Detroit moving forward.
This is a sensitive question. As one participant noted, “Detroiters are stubborn; they’re committed to their communities.” This has helped the city survive decades of economic hardship and underscores the city’s close-knit social fabric, but also sometimes makes communities reluctant to change or evolve. Some Detroiters remain attached to the notion that the city must return to its former glory days, but others doubt this goal is realistic, and are more open to a different Detroit emerging.
The city’s leadership has said it is committed to preserving the entire city. But faced with limited resources, this commitment raises thorny questions around the types of investments that city, state, federal and private actors should focus on. Should the city focus on targeted (if also narrow) investments that are likely to yield the greatest return on investment? Or should resources be distributed more equitably across the city, even if doing so might limit their impact?
But there is room for both. Some current investments, including construction of the M-1 light rail corridor, are targeted. Others, like the work of the Detroit Land Bank Authority (DLBA), are more diffused. The DLBA is a unique public entity responsible for managing properties that came to be owned by the city after being foreclosed upon.
The two main tools used by the DLBA are auctions and demolitions.
According to DLBA officials, demolitions are a small but essential part of the bank’s work, and aim to strengthen local communities by removing properties that diminish the value of adjacent properties or that have become public safety hazards. Most funding for demolitions is provided through emergency federal funds allocated during the recession. But DLBA officials are now expressing some concern that these funds will expire at the end of 2015. Without demolitions, some recent progress could rapidly regress.
DLBA holds auctions for those properties that aren’t too far gone and could still make decent homes. But those auctions bring challenges of their own.
Appraising What’s Under the Hood
On the surface, buying a home in Detroit appears to be remarkably affordable. Given the large stock of available inventory, home prices are extremely low. Even so, there are very few home sales in Detroit, and many potential buyers complain about the challenges of getting a mortgage.
To understand these challenges, it necessary to get beneath the hood of Detroit’s housing stock. Much of the available purchase inventory is in a state of deep disrepair. Real estate professionals in the city said that move-in-ready properties sell very quickly, but many more properties require substantial investment and rehabilitation before they are ready for occupancy.
This is not an insignificant challenge. In the United States, our housing finance system is set up to buy homes, not to renovate them. Our system for financing rehabilitation and renovation of existing homes is built around home equity – people who have lived in their homes for some time have presumably built up sufficient equity to borrow against in order to finance upgrades. But for new home buyers without much – if any – equity, obtaining financing for rehabs is tenuous and tricky.
Many of the challenges revolve around low appraisals, which are the product of an extremely limited pool of comparable sales by which to judge a home’s potential value – a vicious and self-perpetuating cycle. During the mid-2000s housing boom, overly optimistic appraisals are thought to have contributed to the rapid run-up in prices. In response, legislation enacted in the wake of the recession imposed new guidelines on how appraisals are conducted. But in Detroit, local real estate professionals said they fear these new guidelines are now holding back the city’s housing recovery.
One local lender that has been able to surmount the appraisal challenges in Detroit is Talmer Bank. According to one participant from Talmer, the bank invests more heavily in understanding errors in standard appraisal documents. These appraisals are more costly, since they require more time and local expertise, but also allow the bank to generate more loans in the city. Talmer also relies on loans with high loan-to-value ratios, allowing the borrower to put less money down on a home purchase and have more leftover to fund renovations. Because of the risks associated with high levels of debt, Talmer keeps these loans in its portfolio, rather than re-selling them in the secondary market. In some instances, the loans are refinanced into more traditional products once renovation is complete.
Another approach pioneered by several local nonprofits and community groups – with assistance from philanthropic sources – is to absorb the gap between the appraised value of a home and its actual, agreed-upon price. In some neighborhoods, this has gradually improved the pool of comparable sales that appraisers rely on.
Looking Ahead
The folks we spoke with all agreed that Detroit faces big, structural challenges, of which the housing market is only one. For Detroit to prosper more broadly, there needs to be greater focus on difficult issues like employment and wages. But in the near term, civic leaders are also focusing on actionable changes. And, however slowly, things are turning around.
Yes, Detroiters are stubborn and fiercely committed to their communities. But it’s a delicate balancing act to navigate between holding firm, and getting stuck in the mud.