Another step to solving the housing crisis: downsize cities by destroying neighborhoods

Summary:  Slowly America comes to grip with the terrible decisions necessary to solve the housing crisis.   We have too many vacant homes, the key driver of the housing crisis.  A surplus of anything leads to falling prices until the surplus disappears, one of the iron laws of economics.  Yet even now this is not understood by many Americans, hence the increasingly insane proposals to prop up home prices at levels Americans cannot afford.  But since we do not see the problem, we can neither treat it early nor effectively cope with it once it hits in full force.

As seen in the previous posts in this series (see the links at the end) desperate times force drastic policy changes.  This post describes the growing housing crisis in two dimensions.

(1)  Approximately 15% of the housing units in the US were vacant in the 4th quarter (per the US Census).  That’s almost 18 million units.  In the 4th quarter of 1994 it was 10%; in the 4th quarter of 1998 it was 11%.  Worse, many of these vacant units are in areas with net out-migration, usually due to lack of jobs — one of the most intractable of economic ills, usually rooted in a combination of dysfunctional local governance and entrenched organized crime.

(2)  Needless to say, these things also tend to create unemployment and homelessness.  Homeless people and people-less homes.

Content

  1. Residents of Sacramento’s Tent City to Move to Fairground“, New York Times, 25 March 2009
  2. Cities Deal With a Surge in Shantytowns“, New York Times, 26 March 2009 — Looking at Fresno, CA — people without jobs or homes.
  3. Off-the-cuff suggestion prompts discussion on what to do with abandoned neighborhoods in Flint“, The Flint Journal, 17 March 2009 — Destroying neighborhoods to save the city.
  4. Banks Starting to Walk Away on Foreclosures“, New York Times, 30 March 2009 — An ugly development.

Excerpts

(1)   ”Residents of Sacramento’s Tent City to Move to Fairground“, New York Times, 25 March 2009 — Excerpt:

After weeks in the national spotlight, the tent city in Sacramento is closing its run. Gov. Arnold Schwarzenegger and Mayor Kevin Johnson said Wednesday that they would move the riverside encampment’s 125 residents – down from a peak of 200 – to the state‘s fairground until at least July. The move, according to the governor, will give the homeless a “dry shelter, reliable health care and warm meals.”

(2)  Cities Deal With a Surge in Shantytowns“, New York Times, 26 March 2009 — Looking at Fresno, CA — people without jobs or homes.

While encampments and street living have always been a part of the landscape in big cities like Los Angeles and New York, these new tent cities have taken root – or grown from smaller enclaves of the homeless as more people lose jobs and housing – in such disparate places as Nashville, Olympia, Wash., and St. Petersburg, Fla.

In Seattle, homeless residents in the city’s 100-person encampment call it Nickelsville, an unflattering reference to the mayor, Greg Nickels. A tent city in Sacramento prompted Gov. Arnold Schwarzenegger to announce a plan Wednesday to shift the entire 125-person encampment to a nearby fairground. That came after a recent visit by “The Oprah Winfrey Show” set off such a news media stampede that some fed-up homeless people complained of overexposure and said they just wanted to be left alone.

The surging number of homeless people in Fresno, a city of 500,000 people, has been a surprise. City officials say they have three major encampments near downtown and smaller settlements along two highways. All told, as many 2,000 people are homeless here, according to Gregory Barfield, the city’s homeless prevention and policy manager, who said that drug use, prostitution and violence were all too common in the encampments.

“That’s all part of that underground economy,” Mr. Barfield said. “It’s what happens when a person is trying to survive.” He said the city planned to begin “triage” on the encampments in the next several weeks, to determine how many people needed services and permanent housing. “We’re treating it like any other disaster area,” Mr. Barfield said.

… The growing encampments led the city to place portable toilets and security guards near one area known as New Jack City, named after a dark and drug-filled 1991 movie. But that just attracted more homeless people. “It was just kind of an invitation to move in,” said Mr. Stack, the outreach center manager.

On a recent afternoon, nobody seemed thrilled to be living in New Jack City, a filthy collection of rain- and wind-battered tents in a garbage-strewn lot. Several weary-looking residents sat on decaying sofas as a pair of pit bulls chained to a fence howled.

(3)  Off-the-cuff suggestion prompts discussion on what to do with abandoned neighborhoods in Flint“, The Flint Journal, 17 March 2009 — Destroying enighborhoods to save the city.

Property abandonment is getting so bad in Flint that some in government are talking about an extreme measure that was once unthinkable — shutting down portions of the city, officially abandoning them and cutting off police and fire service. Temporary Mayor Michael Brown made the off-the-cuff suggestion Friday in response to a question at a Rotary Club of Flint luncheon about the thousands of empty houses in Flint. Brown said that as more people abandon homes, eating away at the city’s tax base and creating more blight, the city might need to examine “shutting down quadrants of the city where we (wouldn’t) provide services.”

He did not define what that could mean — bulldozing abandoned areas, simply leaving the vacant homes to rot or some other idea entirely. On Monday, a city spokesman downplayed Brown’s comments.

Bob Campbell, Brown’s spokesman, said the acting mayor was speaking hypothetically about a worst-case scenario, “not something that would be laid out in the next six months” while he’s in office.

But City Council President Jim Ananich said the idea has been on his radar for years. The city is getting smaller and should downsize its services accordingly by asking people to leave sparsely populated areas, he said. “It’s going to happen whether we like it or not,” he said. “We’d have to be creative about it, but it’s something worth looking into. We’re not there yet, but it could definitely happen.”

… The concept of “shrinking cities” isn’t new to urban areas similar to Flint. Last year, the city of Youngstown, Ohio, proposed incentives to encourage people to move out of nearly empty blocks and relocate to more populated areas closer to the heart of the city. Some people were offered upward of $50,000, according to news reports. The idea was to shut down entire streets and bulldoze abandoned properties so the city could discontinue services such as police patrols and street lighting, according to a CNN report.

The problem came, understandably so, when officials asked residents to move.

(4)  Banks Starting to Walk Away on Foreclosures“, New York Times, 30 March 2009 — Excerpt:

SOUTH BEND, Ind. – Mercy James thought she had lost her rental property here to foreclosure. A date for a sheriff’s sale had been set, and notices about the foreclosure process were piling up in her mailbox. Ms. James had the tenants move out, and soon her white house at the corner of Thomas and Maple Streets fell into the hands of looters and vandals, and then, into disrepair. Dejected and broke, Ms. James said she salvaged but a lesson from her loss.

So imagine her surprise when the City of South Bend contacted her recently, demanding that she resume maintenance on the property. The sheriff’s sale had been canceled at the last minute, leaving the property title – and a world of trouble – in her name. “I thought, ‘What kind of game is this?’ ” Ms. James, 41, said while picking at trash at the house, now so worthless the city plans to demolish it – another bill for which she will be liable.

City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal – from legal fees to maintenance – exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.

In Ms. James’s case, the company that was most recently servicing her loan is now defunct. Its parent company filed for bankruptcy and dissolved. And the original bank that sold her the loan said it could not find a record of it. “It is what some of us think is the next wave of the crisis,” said Kermit Lind, a clinical professor at the Cleveland-Marshall College of Law and an expert on foreclosure law.

For older industrial cities like South Bend, hard times in the mortgage market began before the recent national downturn, as did the problem of bank walkaways. In the case of Ms. James, a home health care administrator, the foreclosure proceedings began in the summer of 2007, when she could not keep up with the adjustable rate on her mortgage.

In Buffalo, where officials said the problem had reached “epidemic” proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled.

In Kansas City, Rachel Foley, a lawyer who handles housing cases, said bank walkaways were “a rare occurrence two to three years ago.” “We’re seeing them dumped more and more at the moment,” she said.

… The soft housing market and the vandalism that often occurs when a house sits empty are the two main factors influencing the mortgage holders’ decisions to walk away, said Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country. “Oftentimes when the foreclosure starts out, it’s a viable property,” Mr. Rothenberg said, “but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times.”

… Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter, said some properties had become such liabilities for investors that it was not even worth holding on to them to strip valuable fixtures, like kitchen appliances, toilets and hardware. “The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can,” Mr. Cecala said. “It’s just a sign of the times that things are so bad no one wants to take possession of the property.”

In South Bend, boarded-up houses for whom no one has stepped forward are dotting the landscape, adding a fresh layer of blight to communities that were already scarred from the area’s industrial decline.

Other posts about the housing crisis:

  1. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  2. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  3. Destroying houses in order to boost home prices, 16 December 2008
  4. The housing crisis allows America to look in the mirror. What do we see?, 9 March 2009

Originally published at Fabius Maximus and reproduced here with the author’s permission.

3 Responses to "Another step to solving the housing crisis: downsize cities by destroying neighborhoods"

  1. Guest   April 2, 2009 at 12:01 pm

    Interesting articles. When cities grow (meaning population increase), they encroach on adjoining farmlands and extend the urban landscape. When the reverse happens, i.e., when the population declines, there should be a way to return the outlying area to agriculture or other uses. What we lack is an orderly process by which this can be done. Sure, it is very disruptive to people living in these areas; but the underlying economic realities cannot be ignored for long. Shrinking cities is a more sensible alternative to allowing them to fester with blight or even perish from negligence.

  2. Anonymous   April 2, 2009 at 12:40 pm

    This is a clear case of ‘chickens coming home to roost’. Urban planning that has allowed for urban sprawl and gated communities, in effect cutting people off from reality, has seen its writing on the wall. “You have been weighted, measured, and found WANTING!”

  3. Anonymous   April 25, 2009 at 4:45 am

    It is estimated that Obama’s plan could benefit 8 to 9 million homeowners from the new modification procedures. So how do you know you qualify for the Mortgage Modification? Check the website http://obamamortgage2009.blogspot.com/to see if you qualify. I was also in trouble and I am glad I did check it before I talk to my mortgage company and it helped – John Mayer, California