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Banks demolish foreclosed homes, raise eyebrows
An eviction team removes household belongings from the children's room during a home foreclosure on October 5, 2011 in Miliken, Colo.
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Kai Ryssdal: The great flaw in the American housing market right now is pretty fundamental: too much supply, not enough demand. There are just way too many foreclosed and abandoned properties out there, which is making everything else tougher to sell.
So since they haven't been able to drive any new demand, some banks are doing the completely rational -- if kind of unbelievable -- thing and cutting their supply. In states like Ohio, banks are finding it's cheaper to tear houses down than to try and sell them.
Marketplace's Jeff Tyler has the story.
Jeff Tyler: Just like homeowners, banks sometimes walk away from properties they can no longer afford.
Emory law school professor Frank Alexander says the value of abandoned homes drops quickly and banks don't want to invest to remodel them.
Frank Alexander: It is cheaper for the bank simply to say, 'Here. We will walk away from the property, and we will actually give you the money to clean up the property by demolishing it.'
That's especially true in Ohio, where cities have established land banks to tear down abandoned properties. Sometimes they'll replace the old eyesore with a new park. But not all communities like the idea of demolishing the neighbor's house.
John Rossi is an Ohio real estate broker and appraiser.
John Rossi: Most people would want to see things grow and expand, and new people move in as opposed to just taking out the housing stock.
Zillow chief economist Stan Humphries says it only makes economic sense to destroy houses in certain markets, in certain circumstances.
Stan Humphries: And that is: long-term vacancy and the expectation that demand is not going to return at the level where these homes are going to be needed any time soon.
In those cities where demolition makes sense, is there a moral issue for the banks? Again, Emory professor Frank Alexander.
Alexander: There is certainly a major philosophical and functional disconnect when a bank has refused to do a loan modification. And then, the house becomes vacant and is torn down.
He says some banks are now realizing -- too late -- that it might have been cheaper to keep those cash-strapped borrowers in their homes.
I'm Jeff Tyler for Marketplace.
As both a Realtor® and Appraiser herein the Mahoning Valley for over 30 years (and story contributor), Youngstown, Ohio is an example of a shrinking city trying adapt.
In 1950 the city was a vibrant steel town with 170,000 people. With new found affluence people moved to the suburbs, the steel mills began to close in the late 1970s, and by 2000 Youngstown had a mere 82,000 inhabitants, a decline of near 52% from two generations earlier. The urban neighborhoods show signs of that shrinkage and population flight: abandoned buildings, empty overgrown lots, high crime, high unemployment, poor schools, and an aging and increasingly minority population as a percentage of the total.
After several failed attempts at trying to ignite economic development, like many other Rust Belt cities, Youngstown took a far more radical approach. The city began executing on a plan to encourage neighborhoods to raze under-occupied dwellings, remove streets and alleys, in an effort to form larger green space parcels, enhanced development tracts, and develop new parks. There is a pragmatic acceptance of Youngstown’s decline.
The media reception of Youngstown’s plan was low initially. Former Mayor Jay Williams is now a member of the Obama administration, named head of Office of Recovery for Auto Communities and Workers.
Accepting shrinkage gained national attention more recently when the city’s approach appeared on the front pages of USA Today and the Wall Street Journal, on National Public Radio’s Morning Edition, on the Voice of America, and on the New York Times Magazine list of 2006’s most interesting ideas.
The current Youngstown 2010 Vision “Major Principles†can be reviewed at
(http://www.cityofyoungstownoh.org/about_youngstown/youngstown_2010/visio...)
The first principle is “Accepting that Youngstown is a smaller city.â€
As for the other major metropolitan center Warren, the same external forces are impacting upon the housing market.
See May 26, 2011 story “A Blueprint America Report: The Incredible Shrinking City,†a program which is part of “Need to Know,†a PBS news program.
(http://www.pbs.org/wnet/blueprintamerica/reports/shrinking-cities/video-...)
In fact, recently released data shows foreclosures among outstanding mortgage loans in the Youngstown-Warren-Boardman, Ohio-Pennsylvania metropolitan statistical area were 4.66% in July, up from 4.14% in July 2010. Ohio's July rate was 6.65%, down from 6.82% in July 2010, while the U.S. rate dropped from 7.89% in July 2010 to 7.20%.
See also: Raze the Roof: Cleveland Levels Vacant Homes to Revive Neighborhoods
(http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_07-05.html)
This plan just goes to show how nothing has changed in finance and real estate development, and won’t until the issue is forced with strict legislation that curbs the financial appetite for asset-backed securities. “Demand†is only one part of the picture; the other is the willingness of banks to lend. And who do they want to lend to? Their crony capitalist development buddies who will get appraisers on account to overvalue the property, then the whole market—another bubble ripe for kickbacks and creative accountants to manage with more financial “innovationâ€â€”maybe a feature in Time magazine about the new entrepreneurs, etc. The jig is up people. Face it. A recent story about how MGM wants to demolish its 27 story Las Vegas hotel before it even opens over litigation concerns says it all. This sort of corporate development model where most of the money is made up front has gone on since the Savings and Loan fraud, and then went on steroids as Wall Street got into it in the nineties. Oh, sure, they care about grandmothers and the disenfranchised, as long as the dividends keep rolling in. And even if their motivations were purely altruistic or utilitarian, who wants to see the landscape scarred by the huge corporate developments, whether they’re affordable or selling for half a million a condo? Restore those great old homes and get local banks to lend to individuals, not corporate power brokers. Here’s a link to the Las Vegas story: http://www.lvrj.com/business/mgm-resorts-targets-harmon-hotel-for-demoli...
Thanks for doing this story Jeff. I had heard about banks doing this in Cleveland and have been thinking about it since. There was a spokesman (can't recall if it it was someone from the bank or the city) that said "no one wants to live in these houses anyway," but I doubt it's that simple. Seems more likely that the banks simply don't want to pay anything in the way of taxes or repair and, after having foreclosed and evicted people, bulldoze the houses. I would love to see this portion of the story explored in addition to the "too much housing inventory" angle. The banks are acting like sociopaths here in my opinion.
I have been saying this for two years. The market is over built. Get rid of the properties in poor shape with no prospect of being sold and rehabbed. It will increase the value of area homes in the long run, and give current property owners a break from this foreclosure spiral.
Demand will return when prices are allowed to adjust accordingly. It seems crazy to destroy places to live when the cost of living is already so high and people's incomes are falling across the country. I think I'd like to hear some explanation of why detroying something of value benefits anyone.
