Detroit Homes Rot as Appraisals Stopping Sales: Mortgages
In most American cities, a limestone home with a large front turret and paneled library would have a waiting list of buyers at $135,000. In Detroit’s Rosedale neighborhood, it almost didn’t sell at all.
The first offer of $150,000 fell through when the 2,600- square-foot (242 square-meter) Tudor style home appraised for $85,000, dragged down by comparisons with sales of foreclosed homes in nearby rundown areas, said Tom Goddeeris, executive director of the non-profit Grandmont Rosedale Development Corp., which rehabbed the home. A $135,000 offer squeaked by after a $110,000 appraisal, he said.
“We felt we had little choice but to take the second offer, although there were obviously willing buyers at higher prices,” said Goddeeris, who estimates similar mismatches between market value and appraisals mean the association loses about $15,000 on each home they fix up and sell in the 5,500 property area. About 10 percent of Rosedale’s homes are vacant.
Flawed appraisals and a dearth of normal, non-foreclosure sales to serve as comparisons have put mortgages out of reach for most potential buyers, even in the best neighborhoods like Grandmont Rosedale that are the focus of officials’ efforts to revive Detroit. In a city of about 700,000, there were just 578 mortgages for purchases last year, according to RealtyTrac, an Irvine, California-based data provider.
Salvaging neighborhoods like Rosedale requires a functioning mortgage market, said David LeClerc, manager of lending at Michigan Lending Solutions, an umbrella group for eight non-profit working to create an alternative mortgage lender funded partly by investors.
Detroit has been on the decline for decades thanks to plummeting property values, lost jobs and crime, while the U.S. housing bust in 2007 and subsequent recession dragged two of the three largest carmakers into bankruptcy and disproportionately hit the region’s real estate market.
The city now has 8 people per acre, down from 21 per acre in 1950, and 65,000 vacant homes, many slated for eventual demolition. With the city teetering on the brink of bankruptcy after running up a budget deficit of almost $327 million last year and facing $14 billion of long-term obligations, the state appointed Kevyn Orr, a bankruptcy lawyer who helped save carmaker Chrysler Group LLC, as the city’s emergency manager.
The Detroit non-profits propose a fund of about $40 million backed by investors and the state that would provide mortgage loans, relying on local appraisers with better knowledge of Detroit’s neighborhoods. The aim would be to finance enough purchases at realistic values in a given neighborhood that could serve as comparisons for bank loans in the future, LeClerc said.
The local government is pursuing plans to create a sustainable city by 2030 by focusing on increasing the density and improving city services in healthy residential areas such as Rosedale, while less stable areas of the city, with high vacancies and crumbling housing, are converted to other uses such as parks or open spaces, said Dan Kinkead, an architect at Hamilton Anderson in Detroit and one of the consultants on the Detroit Future City study.
A broken mortgage system means that residents are missing out on some of the lowest borowing costs on record with the average rate for a 30-year fixed loan at 3.54 percent, according to Freddie Mac. Of the 578 mortgages for purchases last year in Detroit, they had an average sales price of $53,285 and an average loan amount of $49,176, according to RealtyTrac. In Pittsburgh, which has roughly the same population, there were 5,513 mortgages, with an average sales price of $182,614 and an average loan amount of $157,240, RealtyTrac said.
“The goal is to fill the gap between where we are today to get the housing in specific targeted neighborhoods to be conforming,” LeClerc said. “We need to start to build up consistency. You can continuously, gradually, increase the value in the market.”
Homeowners not in default aren’t going to sell homes when appraisals are so far below perceived market value and foreclosed homes dominate sales, he said.
The Michigan Neighborhood Recovery Loan would apply revised underwriting criteria that would make it easier to get appraisals more accurately reflecting a home’s market value in Detroit and other stressed urban areas, LeClerc said. The group is seeking about $25 million from investors, who would get the first returns, with the rest coming from private investors and non-profit foundations, he said.
The mortgages would be pooled and risk would be spread out among the lenders so that investors would be paid first, followed by the state and then the foundations, he said. The foundation money would only be at risk if more than 30 percent of the loans defaulted, he said. The fund is seeking $10 million from the Michigan State Housing Development Authority as well as contributions from foundations to help cover the risk.
Detroit has had some success reviving its Midtown and Downtown areas, where a consortium of employers are offering workers $20,000 in purchase assistance to move in, though there is still very little lending, as banks remain wary and appraisals lag behind the market, said Ed Potas, a real estate developer for Midtown Detroit, one of the nonprofits behind the proposal.
With so many homes in foreclosure and so few appraisers familiar with Detroit neighborhoods, the disconnect is paralyzing traditional lending, he said.
Even with $20,000 subsidies available for a mortgage, most people are still renting in Midtown and Downtown, Potas said. About 92 mortgages have been financed in the targeted areas among about 900 total people participating, he said. So far, only one of those has defaulted, he said.
“If the city cannot capitalize when we have market demand, it’s going to be pretty difficult to make things work here,” said Susan Mosey, president of Midtown Detroit.
The Michigan experiment, which would include Detroit as well as Grand Rapids, the state’s second-largest city, as well as Kalamazoo, Flint, Battle Creek and Pontiac, is based on an approach used in the Minneapolis-St. Paul area. It’s also being considered by cities in Pennsylvania and Florida.
Similar models are being developed in Pennsylvania and Florida as more cities grapple with the issue, said Douglas Robinson, a spokesman for NeighborWorks America, a non-profit advocate for homeowners and renters which tries to solve urban housing issues nationally. The group is a technical adviser to the Michigan Lending Solutions plan.
“If you buy a $25,000 house and fix it up, there’s no way you’re going to get the right appraisal unless you have the right programs in place,” he said.
In the Minneapolis-St. Paul area, a $50 million loan program that started in September and a smaller predecessor have financed about 70 mortgages so far, with a goal of about 400, said Jim Erchul, executive director of Dayton’s Bluff Neighborhood Housing Services in St. Paul, one of the groups supporting the program.
The consortium of private investors, state and local funding and non-profit lenders is targeting U.S. Census tracts with a high percentage of foreclosures to try and find new residents for vacant properties, he said. The return on the fund is estimated at 5 percent, Erchul said.
Supporters of the Michigan fund, which studied the Minnesota program to create their model, are waiting for a state decision on participation, LeClerc said. The Michigan State Housing Development Authority isn’t able to participate in the program under current statutes, said Mary Townley, a spokeswoman. The agency will continue to discuss other options with the groups, she said.
The situation only gets worse for the waiting. Unlike General Motors Co. (GM) and Chrysler, which have been revived by a government bailout, Detroit continues to decline. The city’s population, which peaked at 1.85 million residents in 1950, has fallen by a quarter of its residents since 2000. It fell to 714,000 people in the 2010 census. Wayne County, which encompasses it, last year put a record 21,350 tax-delinquent properties up for sale and sold 12,333. Another 22,000 may go on sale this year.
Detroit leads U.S. cities in homes that the Census Bureau says lack basic plumbing as vandals strip homes of pipes and fixtures almost as soon as they go vacant. With about 19 percent of its 360,951 units lacking complete plumbing, Detroit trailed only Gary, Indiana in the concentration of bathroom-deficient housing among large U.S. cities, according to the census.
The spreading housing crisis has mortgage advocates in the rustbelt city struggling to find new solutions as residents use a triage system of cash sales, land contracts and incentive programs to make sales.
One out of about every three mortgages is a land contract in the predominantly Hispanic neighborhood in Southwest Detroit, said Timothy Thorland, executive director of Southwest Housing Solutions, which is trying to stabilize housing and improve neighborhoods.
The home in Goddeeris’s Rosedale neighborhood represents just the kind of density and stabilization that Detroit Future City is seeking, he said. The development corporation has fixed up and sold 27 previously vacant homes in the area, with 15 going to people moving into Detroit from other areas outside the city.
For the limestone Tudor, it was a young couple that included a Detroit police officer able to take advantage of down payment assistance for cops willing to buy homes in the city, he said.
Without some sort of relief from the appraisal mismatch, the cost will continue to be steep, Goodeeris said. The 10 percent vacancies now compare with 2 percent in 2000, when house values averaged about double the current amount, he said.
The Grandmont Rosedale Development Corp. spent about $84,000 fixing up the limestone home with four bedrooms, 2.5 bathrooms, a finished basement and wood paneled library after it was picked up in foreclosure. Similar-sized homes in Chicago and Pittsburgh are selling for about $450,000.
The group remodeled the kitchen, replaced the roof and added zoned heating and cooling after removing outmoded boilers and radiators -- bringing their total development costs to $134,000 and netting them a $24,000 loss on the project, he said. Grants from the Kresge Foundation and the Ford Foundation helped offset some of the losses, which would have been eliminated if the home could have sold for the first offer of $150,000.
Within a mile of the neatly kept lawns and sprawling houses of Rosedale are the burned out blocks of Detroit’s Brightmoor neighborhood where many streets have only one occupied home, surrounded by burned structures, garbage and weed chocked lots. Those often get lumped in with appraisal comparisons, he said.
“It’s really reached the point where we can’t get the values in the resale for what it costs us to buy a house and renovate it,” Goddeeris said. “If we could get the lending solutions fund, we can probably pretty much close that appraisal gap.”
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