Nov. 1 (Bloomberg) -- Adam Meister wants to see the blight of foreclosures erased from his Baltimore neighborhood. He’s just not sure the latest federal rescue program is using the right tools.
Speculators bought bundles of vacant row homes in the city of 621,000 residents from the local government during the housing boom, only to walk away when the market crashed. Now the U.S. is spending $26 million on renovations designed to drive up prices and spark investor-backed redevelopment in pockets of Baltimore where vacancies are spreading.
“If it brought us homeowners that would be great,” said Meister, an Internet marketing consultant who moved onto a largely abandoned stretch of Linden Avenue in 2003 and started a “buy-a-block” movement that persuaded a dozen like-minded people to move in and renovate. “But if it just turns into another three-unit apartment that falls apart again, then it’s a huge waste of money.”
As the Obama administration seeks to resuscitate the ailing residential market through a patchwork of programs, officials are struggling to find the right mix of public and private dollars to reverse the devastation inflicted by more than 4.1 million foreclosures and the loss of $6.6 trillion in property values since 2006. Their success on two fronts, foreclosure prevention and mortgage refinancing, has been limited.
$7 Billion Program
The government’s main housing efforts -- one that pays banks to modify monthly payments for delinquent borrowers, and another that allows underwater borrowers to take advantage of lower mortgage rates -- have helped far fewer people than the administration anticipated.
Meanwhile, its three-year-old Neighborhood Stabilization Program is directing $7 billion to cities across the country hardest hit by the housing collapse, including Baltimore. While it’s too early to judge NSP’s effectiveness, Obama is pushing a $15 billion plan to expand the initiative, which allows communities to develop their own strategies to remake neighborhoods and attract investors.
The scope of the challenge is daunting. The U.S. had 15 million vacant housing units last year, an increase of 44 percent from 2000, U.S. Census data show. Default notices rose 14 percent in the third quarter from the prior three months, according to RealtyTrac Inc., an Irvine, California-based data seller.
Empty houses push down a neighborhood’s property values, according to multiple studies such as a 2009 report by the Center for Responsible Lending, which said foreclosures will affect 91.5 million nearby homes through 2012. That will reduce property values by $20,300 for each household, according to the group, which seeks to protect homeownership and family wealth.
The case for increased government spending is clear, said Dan Immergluck, a housing policy professor at the Georgia Institute of Technology in Atlanta who supports expanding NSP. The longer a home stays vacant, the more costly it is to renovate, he said.
“Investors have been a huge part of the market and it hasn’t worked by itself,” he said. “Some houses need to be knocked down, others need substantial renovation, some of which investors aren’t able or willing to do by themselves.”
Stan Humphries, chief economist at Zillow Inc., a Seattle-based firm that tracks home values, said the program makes more sense as a way to address affordable housing than foreclosures.
“This is better left in the domain of private investors, rather than having the government attempting to second guess what the market really wants,” he said.
Investors accounted for almost one out of every five homes purchased in September, according to the National Association of Realtors.
The federal government’s efforts to prevent foreclosures have failed in part because they take a one-size-fits-all approach, said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. The Neighborhood Stabilization Program, which was rolled out in three rounds, allows for approaches tailored to local conditions.
Cleveland and Detroit, which suffered from years of population loss, are knocking down hundreds of homes. Minneapolis is subsidizing the renovation of about 400 properties, primarily by filling the gap between the market value and the cost to a developer to buy and fix them up. Palm Beach County in Florida, which has struggled to find buyers for its renovated homes, is providing about $29 million in loans for buyers purchasing vacant or foreclosed properties as primary residences.
Participants in the program across the U.S. have renovated 11,545 single-family homes since the money began flowing to neighborhoods in 2009, with an additional 24,000 sales projected, according to the U.S. Department of Housing and Urban Development. Some 26,000 rental apartments are set to be built or rehabbed with the federal grants.
“Our intent is not to compete with the private sector,” Yolanda Chavez, deputy assistant secretary for grant programs at HUD, said in a telephone interview. “Even with $15 billion, we won’t be able to take care of the problem.”
Jack BeVier, a partner at Dominion Group, which buys and renovates homes in Baltimore, said he would prefer that market forces be left alone to do the job.
“We’re very much of the mind that turning neighborhoods has to be market driven,” BeVier said.
Still, he said few redevelopers survived the housing bust in Baltimore and some neighborhoods could use a jump-start, even if it’s provided by the government.
“To maintain momentum, we need a certain level of activity,” he said.
The Neighborhood Stabilization Program has already provided money used to purchase and rehabilitate a half-dozen properties in Reservoir Hill, where median home values plunged 79 percent to $45,000 last year from $210,000 in 2006, according to data compiled by the Baltimore Neighborhood Indicators Alliance-Jacob France Institute at the University of Baltimore.
Healthy Neighborhoods Inc., which is leading a group that includes other nonprofits, a for-profit developer and the city, is trying to promote homeownership and lift prices in seven “tipping-point” Baltimore communities, including Reservoir Hill, where weak demand and the costs to renovate deteriorating 3,000-square-foot houses has sidelined investors.
Accentuating the Positive
The goal is to create a base of demand that investors can build on by focusing on the strongest blocks first, said Mark Sissman, president of Healthy Neighborhoods. The nonprofits are marketing the assets of a community burdened by a history of drug-related crime: low prices, expansive rooms, historic architecture and location, next to the park where the city zoo is located and three miles from downtown.
While the program requires that homeowners benefiting from the government money can’t earn more than 120 percent of the local median income, Healthy Neighborhoods is not targeting low-income buyers. A third of the neighborhood lives in subsidized housing and could benefit from an influx of middle-income buyers, said Sissman, whose group offers a separate loan program without income restrictions.
The homes in Reservoir Hill are being sold for less than the cost to buy and rehab because market values are so low they wouldn’t be appraised at the full cost. Neighboring homes will experience a lift in values when the empty home is fixed and filled, Sissman said. One house now under contract, with a skylight, hardwood floors and whirlpool tub, is listed for $230,000. The group spent $52,000 for acquisition and $323,000 for renovations.
“We’re a perverse social program,” Sissman said. “We’re trying to drive home values up because that’s good for the neighborhood.”
The challenge for Healthy Neighborhoods goes beyond buyer perceptions about crime and the prospects of further declines in the U.S. housing market. It must find people with an income and credit history that can meet today’s tough lending standards. The nonprofit alliance, which has housing counselors working with potential buyers to repair credit, has purchased 90 homes, 14 of which have been resold to homeowners. Individuals who repair and move into abandoned properties in target neighborhoods can also receive $25,000 in NSP money to defray the costs.
In Florida’s Miami-Dade County, attracting investors isn’t the problem; it’s competing against them, said Arden Shank, chief executive officer of Neighborhood Housing Services of South Florida, which is leading a group of organizations that received $89 million to build and rehabilitate about 150 homes and 1,105 rental apartments. They’re losing to cash-wielding buyers, acquiring 37 single-family homes after chasing more than 600 of them, Shank said.
He has gotten some help from the two-year-old “first look” program, which gives Neighborhood Stabilization Program participants the right of first refusal before participating banks make properties available to investors and other buyers.
Shank said he’s trying to keep homes out of the hands of flippers, who resell quickly, and absentee landlords.
“Way too often they throw a little paint on and rent them or purchase and then turn around and sell them for a higher amount without doing anything,” Shank said.
Rick Shaffner, a partner with Quality Property Partners LLC in Fort Myers, Florida, said the government shouldn’t be first in line for homes that the private sector could more efficiently handle. The company, which employs six people, has turned 150 vacant homes into rentals and sold a dozen more to first-time buyers, Shaffner said.
“We’ve transformed neighborhoods where almost nobody lived on the block,” Shaffner said. “We don’t want that asset going away.”
David Cotton, a private contractor in St. Lucie County, Florida, said the government is providing temporary jobs for construction workers until the housing market returns. Cotton, who built 35 homes from 2005 to 2006, saw his business disappear after the crash. Since 2009, he has renovated 20 houses paid for with the federal money.
“Some people don’t like the idea and some people do,” Cotton said of the federal funding. “But it creates work for people and it improves the neighborhood. What I do notice is that when I work on a house, it gives neighbors an incentive to go and fix their own house.”
The Obama administration has proposed expanding NSP as Project Rebuild, targeting $15 billion to support 191,000 jobs in real estate and construction and fix at least 150,000 properties nationally. The program would be extended to blighted commercial strips and allow private developers to also compete for a portion of the funds.
Project Rebuild, which HUD Secretary Shaun Donovan has been on a nationwide tour promoting, has a difficult path to approval. It’s included in the $447 billion American Jobs Act, which Republicans have blocked in the Senate. The goal of the new program is to get investors “engaged” in the battle to save hard-hit neighborhoods, said Craig S. Nickerson, president of the National Community Stabilization Trust, which runs the “first look” program.
“With Project Rebuild, the emphasis is on public-private partnerships,” Nickerson said. “We can bring an army to the fight and not just a band of merry men.”
Chris Mayer, a professor at Columbia Business School in New York who is also a consultant for a group of real estate investors, said NSP is too small to meaningfully improve the damage of foreclosures and could be better used in other ways such as hiring police and putting more effort into code enforcement.
“There’s an enormous amount of private capital that would really like to invest in this market and they’re willing to do this without the subsidies,” Mayer said.
Progress Comes Gradually
Immergluck, the Georgia Institute of Technology Professor, is among the supporters of NSP who said it’s too soon to judge its success. The program by its nature will have mixed results because the strategies and market conditions vary.
Without intervention, “we’ll see entire neighborhoods left to rot,” he said. “Some of this is a form of governmental reparation. We have to be responsible for the damage we let happen.”
Jacob Green lives three blocks away from Meister on Callow Avenue, among the most desolate stretches in Reservoir Hill. The 34-year-old software engineer said he is the only single-family homeowner on a block dominated by boarded-up homes and rentals.
While the 3,000-square-foot home he bought for $200,000 in 2005 is probably worth half as much, the neighborhood has improved. Residents on neighboring Newington Avenue have spruced up the area with trees and iron flower boxes on the windows financed by Healthy Neighborhoods. A community farm that took over an empty lot on Whitelock Street last year now sells green peppers, spring onions and swiss chard on weekends. And the open-air drug market that once operated on his block is gone, he said.
The neighbors have done their part. Now it’s time to start the engine of redevelopment, he said.
“It can’t be done 100 percent by the market,” Green said. “Somebody has to come in and kick start it, then the market takes over.”
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