Detroit: from Motown to housing hub

Bankruptcy, financial crisis and the mass exodus of one million citizens gutted Detroit's housing market. Now, the city is experimenting with unorthodox ways to reignite interest in Motor City

Matthew Goldstein
Thursday 21 December 2017 15:59 GMT
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The city's decline has resulted in severe urban decay and thousands of empty buildings
The city's decline has resulted in severe urban decay and thousands of empty buildings

Bank of America and JPMorgan Chase, the country’s two largest banks, trace their roots in Detroit back decades to when they helped finance the city’s once-booming auto industry.

These days, Detroit is still struggling to recover from the 2008 financial crisis and the two banks have pledged to help resuscitate the city and its crippled housing market. So, guess how many home mortgage loans these two enormous banks made last year in this city of 637,000 people.

Bank of America made 18. JPMorgan did just six.

Detroit’s hometown lender, Quicken Loans, made the most – a mere 90.

Midwestern cities like Detroit have long embodied the American can-do spirit. Over the course of a century, Motor City melded assembly-line prowess with freedom-of-the-road ideals to help define a nation. In the post-war years, Detroit became the epitome of the American dream, a place where factory workers without college degrees could make enough money to buy a house of their own.

Yet, as home prices soar across the United States – particularly on the coasts – Detroit remains a poster child for the economic crisis and housing collapse of a decade ago. Boarded-up homes and rubble-strewn fields litter the landscape.

Today, a house can be bought here for the price of a used car.

What is truly surprising about that, though, is how difficult it still is for buyers to actually buy. Basically, prices are too low for lenders (who see the deals as too small or risky) but too high for buyers (who may be cash-poor). There aren’t enough houses in move-in-ready condition – and not enough money to fix them up.

This strange situation has turned Detroit into an unlikely petri dish for experiments in how to kick-start a housing market that is, depending on your perspective, either slumbering or comatose.

Will a neighbourhood of “tiny houses” for the poor help fix things? Or how about rehabbing city-owned homes, and selling them at a loss, to jump-start the action? Other more conventional – if risky – ideas involve providing no-interest financing to fix up tumbledown properties. Or offering mortgages for homes that normally would be too small to be worth a banker’s trouble.

One local financier is even trying to beautify bulldozed neighbourhoods by planting thousands of trees on 160 acres of vacant land his firm has gobbled up.

And while Detroit is worse off than most big cities, housing policymakers nationwide are keeping a close eye to see what lessons can be learned.

To understand how far Detroit has fallen, consider the statistics. In the mid-2000s, banks were writing some 7,000 mortgages a year. Then, the financial crisis nearly destroyed the US automotive industry, Detroit’s economic heart. Jobs disappeared; citizens fled. Last year, there were more than 700 mortgages made in Detroit, up from 200 at the depth of the crisis but barely 10 per cent of the level a decade earlier.

Those bleak numbers, however, do not tell the whole story. Behind the scenes, nonprofit groups, foundations, local officials and a dozen banks, including JPMorgan, Bank of America and Quicken, are trying to varying degrees to reanimate the mortgage market in Michigan’s largest city.

Detroit has one of the highest percentages of low income residents in the US

Success, however, often comes achingly slow.

At 15455 Winthrop Street, on one of Detroit’s better manicured blocks, there is a freshly rehabbed three-bedroom home. The bungalow was fixed up by the city itself, through its land bank, which acquired the house a year ago after the county foreclosed on the owner for failing to pay taxes. The land bank did a gut renovation with money provided by a grant from Quicken.

Since August, the land bank has been trying to sell the house, with a price tag of at least $79,900 (£59,800). More than 80 people have come to check it out. But so far there have been no takers.

Even happy stories are the product of a slog. Erica Wyatt struggled to pay down her debts and then searched for two years before she managed to get a mortgage from Fifth Third Bank to buy a four-bedroom home for $92,000. The transaction happened only because Wyatt, a single mother with four children, received $15,000 in down-payment assistance.

Wyatt, who grew up in Detroit, says she was determined to move back into the city after renting a home in a suburb. “I wanted to make sure my children saw that not all of Detroit is bad and there are some beautiful neighbourhoods,” says Wyatt, 39, who works for an insurance company.

Some of the ideas seem like stopgap measures. A social services group’s community of “tiny homes” – 400sq ft structures with nothing more than a bedroom, a bathroom and a kitchen – is being erected to provide housing to people who are homeless or disabled. The project, led by the Rev Faith Fowler, executive director of Cass Community Social Services, is taking place on vacant land the charitable organisation bought from the city.

The dollhouse-like structures – seven so far – are near the organisation’s main social services facility, in a rather desolate area of Detroit off Rosa Parks Boulevard. In all, Fowler hopes to build two dozen small homes, which will be rented for as little as $250 a month and eventually deeded over after seven years to a select group of homeless or poor individuals.

Tiny-house living can take adjustment, even for people with no roof over their heads at all. Fowler says that one homeless veteran told her the homes were too small to compete with a traditional homeless shelter.

Still, for some, the homes are perfect. One of the first tenants to move in this past summer is a former Methodist minister, David Leenhouts, who was forced to give up his ministry near Cleveland because of health issues that make it difficult for him to walk and talk.

Leenhouts, who grew up in the Detroit area, says his college-age son told him the small home, with a steepled ceiling, was all he needed because everything is within just a few steps. Leenhouts, 59, says, “I have no idea where I would be living if I was not chosen for a tiny house.”

That said, a cluster of tiny homes hardly seems scalable in a city as big as Detroit. And almost by definition, a tiny home isn’t a viable option for a family with children.

It’s also an example of why the long-term prognosis for Detroit’s housing market remains uncertain at best. Much of the work going on is taking place block-by-block – much like the tiny-home homeless experiment – and there are a lot of blocks in this 139sq mile city.

The land bank is beginning to sell off its 25,000 vacant homes under a ‘Rehabbed and Ready’ programme

“The pilot programmes help some people, but they are on the margin,” says Gregory Markus, an emeritus professor of political science at the University of Michigan and executive director of Detroit Action Commonwealth, an advocacy group for low-income residents. “’The root problem is that Detroit is the poorest big city in America.”’

The national poverty rate is 14 per cent, and Detroit’s is 36 per cent. Markus says that, without more jobs, home buying would remain a largely unattainable goal.

Detroit’s population peaked in the 1950s at nearly two million and has been falling ever since. The financial crisis and the city’s bankruptcy filing in 2013 hollowed out what was left of its once large, middle-class African-American community. Over the past decade, there have been more than 150,000 home foreclosures here.

Detroit lacks “a functioning housing market”, a report last year bluntly declared.

Things are so difficult that simply finding a contractor to rehab a home can be an ordeal. “We had several contractors who didn’t want to do work in the city,” says Heather McKeon, 35, who along with her husband, Matthew, recently moved into a fixer-upper in Detroit’s up-and-coming Corktown neighbourhood. “They would say, ‘I don’t trust that I can keep my tools here’.”

She added: “It is still sort of flabbergasting to be laughed at.”

McKeon, an interior designer, says many insurers wouldn’t sell them a homeowner’s policy on an unoccupied home under renovation. Ultimately, they got a policy from a subsidiary of Munich Re Group of Germany.

The largest property owner

Many of the efforts to resuscitate the housing market begin with the Detroit Land Bank Authority, a government agency that is the city’s single largest property owner. The land bank owns some 25,000 vacant homes in various stages of disrepair, another 4,200 occupied homes and 65,000 grass-covered lots where homes once stood before the city tore them down in an effort to fight blight.

Throughout Detroit, the land bank has sold 44 homes under its “Rehabbed and Ready” pilot programme. The programme is funded with a $5m grant from Quicken. At the closing, the buyers get a $1,500 gift card from Home Depot to buy appliances.

The programme, though, is losing money – an average of $21,000 for every home sold.

The land bank’s operations are not without controversy. Housing advocates have complained it has focused too much attention on rehabbing homes in just a few neighbourhoods, and on tearing down dilapidated homes elsewhere. A federal grand jury has been investigating the awarding of contracts to tear down more than 12,000 dilapidated homes as part of a war on blight led by Detroit’s first-term mayor, Mike Duggan. The investigation is looking into why costs soared under the demolition programme, with almost $140m in mostly federal money being spent.

With derelict properties going for a song, the land bank is losing an average of $21,000 for every home sold (Rex)

Homes are certainly worth more in Detroit now than they were a few years ago. Citywide, the median value for a house here is $47,700, a 40 per cent gain over the past two years, according to Zillow. Stately homes in the Villages, a group of neighbourhoods with tree-lined streets, located not far from the affluent suburb of Grosse Pointe, Michigan, have sold for more than $400,000.

But progress is largely limited to a few neighbourhoods. About half of the mortgages written in Detroit last year were for homes purchased in just six ZIP codes, according to data from the real estate information firm RealtyTrac, now part of Attom Data Solutions. There are 25 ZIP codes in Detroit.

A question of commitment

One question is whether the money that banks are providing signifies a long-term commitment or an effort to score points with federal regulators. Banks are expected under the federal Community Reinvestment Act to make loans in communities with large numbers of poor- or moderate-income residents in order to spur economic activity.

The down-payment-assistance programme that helped Wyatt buy her home, for instance, was financed by a settlement Wells Fargo reached a few years ago in a housing class-action lawsuit. The settlement money is drying up, though, and the bank says it is not sure if it will renew the programme. So far, it has provided assistance to 180 homebuyers in the city.

Bank of America says it is committed to working in Detroit and is providing up to $4m to fund no-interest loans that have enabled 400 homeowners to fix up properties. The bank, working with two nonprofit groups, also has said it is willing to finance $55m worth of mortgages in Detroit. So far this year, the bank has issued 23 mortgages in Detroit – up from 18 in 2016 – and has increased the number of loan officers in the city.

JPMorgan says it, too, was here for the long haul. Jamie Dimon, the bank’s chairman and chief executive, regularly promotes its Invested in Detroit programme, which includes up to $150m for housing and commercial development and funds for research by the Urban Institute in Washington, DC, to study ways to revive Detroit’s economy and housing market.

After a $2.5bn renovation, many properties in Detroit’s downtown are now filled with new businesses (Getty)

Still, the money shelled out by the banks pales in comparison to the estimated $2.5bn that Dan Gilbert, Quicken’s founder, has spent buying and renovating more than 95 largely vacant properties, including old department stores, in Detroit’s downtown. Now most of those buildings are filled with new businesses. A company backed by Gilbert brought high-speed internet to downtown, and Quicken paid $5m for the naming rights for a recently opened streetcar system called the QLine that makes 12 stops along its 3.3-mile path.

Perhaps the most vexing issue is the reluctance of banks to give loans to people to buy cheap homes. It’s simple business: The costs of underwriting a $50,000 mortgage – doing all the paperwork, the credit checks and the inspections – are the same as for much larger mortgages that can generate more bank revenue. Plus, when homes are in such disrepair, often they are appraised for much less than the amount the borrower needs to fix it up.

When cash is scarce

That means the collateral on the loan is worth less than the amount the bank is owed. In today’s risk-averse banking culture, that’s a big no-no.

One alternative is the Detroit Home Mortgage project. Started in early 2016, the programme works with a handful of banks to get an appraisal for a house that’s based on the “true value” of the home after it’s been renovated, not in its current dilapidated state. The process effectively involves two loans – one to cover the purchase of a home, and a second mortgage that effectively covers the renovation work. The second loan is backed by a bank and various foundations involved with the programme.

So far, 54 homebuyers have bought homes through the programme, among them McKeon and her husband.

The lack of move-in-ready homes means house buyers must be prepared to do a lot of the repairs themselves (Getty)

The Detroit Home Mortgage project is now looking to get banks to provide low-interest loans directly to local contractors, so they can renovate more homes and get them into move-in-ready condition.

But for now, the lack of move-in ready homes means homebuyers like the McKeons need to be something of urban pioneers – fixing everything from broken water lines to antiquated electrical wiring.

The prospect of people moving into Detroit from the suburbs or city residents getting mortgages is of course sweet music to local real estate agents. Until now, much of the business for them has been handling all-cash deals. But several say they are looking forward to getting local residents into homes with traditional financing.

Dorian Harvey, a Detroit native and the incoming president of the Detroit Association of Realtors, says he would like for the city and land bank to move quicker to get vacant homes into the hands of local residents. Harvey, a Morehouse College graduate, says he comes from the camp that believes the rebirth of Detroit is going to have to happen from the ground up with everyone taking part – contractors, real estate agents and local investors.

But he isn’t necessarily waiting on government largesse. “There are untapped resources in the city, and we need to tap them and the city needs to tap them,” says Harvey, who added there’s money to made in Detroit. “My heart is liberal but my money is conservative.”

© New York Times

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