Banks demolish foreclosed homes, raise eyebrows

Jeff Tyler Oct 13, 2011

Banks demolish foreclosed homes, raise eyebrows

Jeff Tyler Oct 13, 2011

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.

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