Striving to restore the Detroit housing market
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Detroit city leaders target eight promising neighborhoods, moving quickly with demolitions, renovations and sales.
"I love that this is my home," Trouser said. "I'm creating a home for myself with longevity."
Wooing atypical buyers such as Trouser is one component of a bold new experiment designed to address a six-decades-long exodus of 1 million people who left this once-mighty city with vast swaths of decaying houses and weed-choked lots.
No American city the size of Detroit has ever endured such a prolonged structural decline of its housing stock. Because Detroit suffered an economic disaster rather than a natural one, federal programs to redevelop communities such as the ones deployed in New Orleans after Hurricane Katrina and in New York and New Jersey after Hurricane Sandy are not available.
The big question for policymakers: How to restore a functional housing market in a city in which neighborhoods are disappearing, banks aren’t lending and property values are among the lowest in the nation?
Civic and business leaders are targeting eight neighborhoods that they determined have the best chance of turning around. To clear out the inventory of vacant houses, the city is moving aggressively to demolish structures that are beyond repair and auction ones that are salvageable. And the community bank that helped Trouser has initiated an effort to sell newly rehabbed houses even if it means taking a loss.
Zillow economist Stan Humphries compared Detroit’s effort to overhaul its housing market to what Eastern Europe went through after the fall of the Soviet Union during the transition from a state-owned system to individual ownership. “A functional real estate market has almost ceased to exist in a lot of these neighborhoods,” Humphries said.
Of all the barriers to homeownership in Detroit, the easiest to overcome is price. Houses are cheap. The average price is about $38,000.
One of the least expensive ways to buy a house is through auctions run by the Detroit Land Bank Authority; bids start at $1,000. The agency, created in 2007 but given new life under Mayor Mike Duggan (D), is charged with returning abandoned properties into productive use.
As of November, the DLBA had 22,351 residential structures and 54,669 vacant lots in its inventory. To put it another way, the agency owns about one-fifth of the land in the city.
The land-bank auctions are giving people who once viewed homeownership as beyond their means a chance to own a home.
The winning bid
Born and raised in Flint, Mich., Trouser came to Detroit at age 15 when the foster-care system placed her in a girls’ home. In high school, she was tutored by Roderica James, who later became her mentor. James was the one who encouraged Trouser to become a homeowner. They picked three houses for Trouser to bid on. The first home sold for $10,000, well above Trouser’s budget. Trouser was outbid $1,500 on the second one.
“I was discouraged,” she said. “I had such high hopes.”
In early November 2014, James called to tell her that no one had bid on one of the houses they had considered. Trouser hadn’t been impressed with it.
“This house makes you itch with all the holes in the walls,” she said.
The home had sat empty and been stripped by vandals, but James pointed out that most of the problems were cosmetic, not structural. After talking it over, Trouser decided to go for it. At 4:52 p.m., she took out her phone and bid the minimum amount of $1,000. Then she waited to see if anyone else would top it. No one did. The auction closed at 5 p.m., and she became a homeowner.
Trouser’s house came with an arched brick fireplace, crown molding and decorative niches. Unfortunately, like many abandoned homes in Detroit, it had been ransacked. The bathroom had a tub but no toilet or sink. All that was left in the kitchen were a few cupboards. The electrical and plumbing systems needed work. The porch and vestibule were falling in. And the roof had to be repaired.
“Things seemed very, very overwhelming to me,” Trouser said.
The first contractor gave her an estimate of $80,000, which would have meant that the renovations would cost more than the property was worth.
Trouser, who paid cash for the house, was determined not to take out a loan. She received a $25,000 grant from Talmer Bank and Trust, a community bank headquartered in Troy, Mich., to make the repairs. She eventually found a contractor willing to work within her budget.
Trouser estimates that she spent $7,000 above the $25,000 grant on a house she now owns free and clear. Because she has no mortgage payments, she has financial security she never dreamed possible.
“You grow up and you live in different conditions. It’s mine and I can create any kind of environment I want,” Trouser said. “I have to get used to being stable. I’m so thankful I don’t have to keep starting over.”
Darren McDonald also purchased his house, one block from Trouser’s, through a DLBA auction. McDonald, 47, who works at the Detroit airport, never imagined he would own in the Marygrove neighborhood in northwest Detroit. A lifelong Detroiter, McDonald grew up thinking that the black middle-class community was out of his reach.
He paid $5,100 for a 1938 brick Colonial Revival. Like Trouser’s home, McDonald’s house needed lots of work. The interior wall materials were missing downstairs. He had to put in new plumbing and electrical service. Nothing was left of the kitchen, and the bathroom had just a tub and toilet.
McDonald also received a $25,000 grant from Talmer Bank for renovations. He estimates that he spent an additional $25,000, including the purchase price, taxes, closing costs and repairs.
Having owned a home once before in Detroit, McDonald was asked about the difference between the two purchases. He said, simply, “no mortgage payments.”
He sees buying a home as a contribution to Detroit’s recovery.
“I was born and raised here,” he said. “I do want the city to come back. This is one part of it coming back.”
Lending hurdles
One of the biggest difficulties the land bank has encountered as it tries to put homes back into private ownership is appraisals. Because the homes require substantial repairs, buyers need a loan based on what the home will be worth after renovation, not what it sold for. The problem is that the home financing system is not set up this way. The American real estate market handles home loans in two ways: a mortgage to purchase a house and a home equity line of credit or loan to renovate.
“Both those fail the conditions that you find in Detroit,” Humphries said.
Talmer Bank is one of the lenders that have found creative solutions to the problem.
“There are areas that are very difficult for mortgage lenders to address, and one of them is loaning more than 100 percent of the value of a home,” said Patrick Ervin, Talmer’s executive managing director. “In order to make many of the houses in Detroit work, more money has to go into them than what they are going to appraise for.”
The gap that exists between how much it costs to buy and repair a home and how much it will sell for continues to be a stumbling block for most lenders. Talmer first tried making $25,000 grants to auction buyers. Trouser and McDonald were two of the 18 grant recipients. But the bank soon learned that a grant wasn’t an efficient solution to the problem.
Now it is buying homes, fixing them up through a partner, Southwest Solutions, and selling them at whatever the market will bear, which could be at a loss that the bank would underwrite. The benefit of this method is that it generates a comparable sale that raises home values in the neighborhood.
Statistics show how difficult it is to obtain a mortgage in Detroit. Two years ago, only 529 homes in Detroit were purchased with a mortgage, according to data from the Home Mortgage Disclosure Act. That number was up from 318 in 2011. The vast majority of buyers don’t use mortgages. In the fourth quarter of 2014, 80 percent of the home sales in Detroit were cash transactions.
“It’s one of those critical-mass questions: How many transactions do you have to have in a market before the market starts to generate itself with the right kinds of transactions?” said George W. McCarthy, president of the Lincoln Institute of Land Policy. “There are very few lenders serving the market.”
From the early 1900s until 1950, the population of Detroit — a sprawling city of nearly 140 square miles — swelled to 1.85 million.
When the city’s economic foundation collapsed and the population contracted to 700,000, many homes were abandoned. Detroit is littered with about 40,000 houses that are beyond repair. Some of them can be found in the neighborhood where Trouser and McDonald live. Lola Holton, president of the Fitzgerald Community Council, which encompasses Marygrove, has lived in her home for 40 years. She remembers how vibrant the neighborhood was when she and her husband arrived.
Now, Holton has five vacant houses on her side of the street, and four others plus an empty lot on the other side. The pink begonias in the flowerpots on her steps are one of the few bright spots on the block.
“I’ve lived around vacant houses way too long,” she said.
The task of razing the properties has fallen to the land bank.
“The demolition that they are doing is really unprecedented,” McCarthy said. “It is helping to deal with the blight, at least in specific, targeted neighborhoods, helping to elevate the value of the houses that remain.”
Craig Fahle, director of public affairs at the land bank, estimates that close to 8,000 homes will have been demolished by the end of this year at a cost between $12,000 and $15,000 per house.
“All of a sudden, that person who has been sitting on that vacant house has incentive to do something with it because they are going to make money,” Fahle said.
Selective intervention
For all the progress the land bank has made in addressing blight, it has faced criticism for not spreading its resources equally around the city. Instead, it has taken a survival-of-the-fittest approach, focusing on neighborhoods that have the best chance of coming back.
“You’ve got to pick and choose where those dollars are going to have the biggest impact,” Fahle said.
Ervin of Talmer Bank is one of those longtime Detroiters who has lived through numerous promises about the city’s recovery. He has also faced personal hardship. Like many others, he owes more on his house than it is worth. Nevertheless, he thinks that things will be different this time.
“There’s a feeling that is shared by most people in metro Detroit, especially those of us who are older and a little bit crusty and cynical. We’ve had multiple times when we’ve heard [that] now is the time Detroit is going to be revitalized,” Ervin said.
“So you get a little bit jaded after years of it’s always coming back,” he added. “But I will tell you this in all candor and all honesty: We have never had momentum in my lifetime in the city of Detroit as we have today. I know it will happen. I hope it will happen faster, but it is happening.”
