REQUIRED READING: We should endeavor to achieve full recovery in all of the many diverse housing markets around the country. The private market will likely drive recovery in many locations, and in those locations, the appropriate role of government may be to monitor local activity and ensure that the actions of the private markets improve neighborhoods and provide opportunity for all families, regardless of income, race, ethnicity or housing tenure.
However, some neighborhoods likely will not recover without the assistance of government, and in this time of scarce resources, it is critical that the public sector has the information and tools necessary to ensure that any assistance that is provided is effective and efficient.
To begin to answer the questions of how the public sector can help achieve these goals, I will return to the typology of vacant properties introduced earlier.
A resonating boom
The first type of market – the ‘housing boom’ areas – has relatively high median incomes and new housing stock. These characteristics are attractive to investors, and many investors are reportedly purchasing vacant homes and converting them to rental. Given the recent tightening of the rental market, such a strategy could be a win-win scenario for communities that need more affordable rental homes and suffer from an excess of single-family vacant units.
In January 2012, the Federal Reserve released a staff paper on housing issues that went into some detail about the potential benefits of converting foreclosed properties to rental. In April 2012, the Federal Reserve released a policy statement that outlines supervisory expectations for residential rental activities for certain banking organizations.
Phoenix is a good example of an area with many census tracts that fit into the ‘housing boom’ typology. Phoenix was one of the areas hit hard during the housing bust, with a peak-to-trough decline in prices of more than 50%. More recently, however, prices in Phoenix have rebounded with a double-digit increase over the 12 months ending in July.
Reportedly, much of this demand is driven by investors who are converting vacant homes into rental properties. Direct statistical evidence on investor activity at the local level is not available. However, because investors tend to finance their purchases with cash or other non-mortgage financing, the level of cash purchases can provide an indicator of investor activity.
In the past two years, the fraction of home purchases financed with cash in the Phoenix area was much higher than the national average. This is an example of the private market stepping in to purchase vacant units and, in turn, increasing housing values.
As encouraging as this trend may be, it is not a panacea.
For example, it is possible that aggressive investor activity could crowd out potential homeowners, especially low- to moderate-income households. In addition, investors are not interested in all markets; therefore, there will still be some areas where private investment will not step in to curb the problems associated with vacant properties.
The problem of investors crowding out local home buyers could be addressed through ‘first look’ programs that provide a window, usually 15 days, during which time only prospective home buyers and nonprofits may bid on a property. In Phoenix, nonprofit organizations and local government officials used Neighborhood Stabilization Program funding and enlisted local real estate professionals to match vacant homes with eligible homebuyers. These are important programs. Community leaders, banks and real estate professionals should continue to collaborate to ensure that prospective homeowners are given a fair chance to bid on available properties.
However, most prospective home buyers and local nonprofits cannot bid on a property if they cannot access mortgage credit. Results from the Federal Reserve's senior loan officer opinion survey suggest that banks are less willing to provide mortgage credit now than in 2006 to borrowers with lower credit scores or smaller down payments.
We hear much the same story from community groups and housing counselors who report that low- and moderate-income and first-time home buyers, especially, are finding it increasingly difficult to meet the requirements for a home purchase loan due to limited funds for a down payment or weaker credit scores. While prudent lending may warrant tighter underwriting standards relative to pre-crisis levels, it is also important to ensure that tight credit does not unnecessarily dampen the housing recovery and disproportionately affect creditworthy low-income and minority home buyers. And without the participation of owner-occupants, it will be difficult for many housing markets to recover.
Like Phoenix, Oakland, Calif., is also reportedly experiencing a significant amount of investor activity that may be crowding out purchases by prospective home buyers and nonprofits. We hear complaints that many of these investors are not based in Oakland, causing residents to express concern about external ownership of their neighborhoods and the long-term implications of absentee landlords.
In an attempt to address these concerns and provide more homeownership opportunities to low- and moderate-income Oakland residents, a national nonprofit, Enterprise Community Partners, is working with a private real estate fund to direct some of the private dollars seeking investment properties in Oakland. The nonprofit partnership is using a complex data-driven platform to identify targeted low- and moderate-income neighborhoods in the city, purchasing vacant properties, rehabilitating them through a local workforce development program and converting them to rental.
The ultimate goal is to ensure that the properties remain local neighborhood assets. To achieve this, the partnership is prioritizing rentals and sales to qualified local residents or nonprofits. Such an innovative strategy seeks to complement local government and investor activity so that residents can share in the benefits of a housing recovery.
Low demand, large concerns
Not all markets are equally attractive to private investors, so some governments are developing programs to attract private capital to ‘low-demand,’ high-vacancy neighborhoods. Baltimore provides a good example of such a program.
Baltimore is burdened with approximately 16,000 vacant and abandoned buildings, about a quarter of which are owned by the city. Much of this vacancy has been caused by population loss and suburban flight – Baltimore has lost nearly one-third of its population over the last 50 years.
However, not all parts of Baltimore have a significant number of vacant properties. In fact, only 5% of census tracts in the Baltimore metropolitan area have a long-term vacancy rate in the top decile of the national distribution. The city of Baltimore has recognized these micro-market distinctions and initiated an innovative data-driven program to identify areas with a high concentration of vacant properties and turn these properties into valuable assets.
This initiative, called ‘Vacants to Value,’ uses data and targeted housing code enforcement to foster redevelopment in areas where there is modest private investment interest. Using a variety of real-time data sources, this program has developed market typologies down to the census block-group level so that it can accurately determine the needs of specific neighborhoods and apply targeted programs to best meet those needs.
For example, the city is targeting approximately 700 vacant properties in weak market areas where large-scale investment – encompassing at least a city block – is necessary to catalyze private investment. In healthier neighborhoods, the city believes that increased code enforcement and home buyer or developer incentives should be enough to reduce vacancy and stabilize neighborhoods. In Baltimore's hardest hit neighborhoods, the city is demolishing, holding or maintaining properties that are unlikely to attract any private investment in the near future.Â
Unfortunately, in some cases, vacant homes are beyond repair and will never be habitable again. In these instances, demolition is often the best solution, and land banks can be a good way to hold the property until it can be converted to a better use. A land bank is a governmental or nongovernmental nonprofit entity established, at least in part, to assemble, temporarily manage and dispose of vacant land for the purpose of stabilizing neighborhoods and encouraging re-use or redevelopment of urban property.
Land banks have been around since the early 1970s, but the recent foreclosure crisis has stimulated the creation of several new land banking programs, including in New York State and Kansas City, Mo. A key characteristic of the new generation of land banks is that they often include mechanisms to self-finance over time, including the ability to recapture a portion of the property taxes for a fixed period of time after the property is put back to productive use.
As encouraging as these new self-financing features are, land banks and municipalities are still struggling with the high costs of demolition. For example, in Cuyahoga County, home to Cleveland, about 80% of the approximately 100 properties per month that the land bank acquires need demolition, but at $10,000 in average costs per demolition, the Cuyahoga Land Bank is struggling to find the resources to fund this activity.
The state of Ohio recently dedicated $75 million of its direct payments from the attorneys' general National Mortgage Settlement to fund a new grant program for demolition of abandoned and vacant properties statewide. This $75 million still will not solve all of Ohio's demolition needs, but leveraging public and private funds like the settlement or developing new national sources of bond financing could help address this local problem.
In the 'burbs
The last category of high-vacancy areas in the typology is ‘traditional suburban’ neighborhoods. In contrast to the other two types of high-vacancy census tracts, these neighborhoods are more evenly spread across many metropolitan areas, illustrating that vacancy can be a problem in any community.
Furthermore, ZIP codes in the ‘traditional suburban’ tracts do not tend to have a higher share of property vacancies resulting from foreclosure than other ZIP codes, which demonstrates that some neighborhoods are struggling with long-term vacancy issues even though they did not experience large numbers of foreclosures. While the vacancies faced by these suburban areas might not have been caused by foreclosure problems, the costs to neighborhoods are every bit as real. Such areas represent additional opportunities to use the lessons of the recent crisis as local leaders strive to better understand the root cause of high vacancy levels and to target limited resources.
Consider the situation faced by Oklahoma City, which estimates that 8,000 urban properties have been vacant for more than three years, and that the number of vacancies is increasing. The city's historically high housing vacancies mostly stem from cultural and demographic changes that have occurred over decades, as well as inadequate building code laws and enforcement.
Interestingly, the area did not experience the housing boom and bust that occurred in much of the nation. Whereas national house prices rose by 89% between 2000 and 2006, prices in Oklahoma City rose by only 35%. In addition, house prices in Oklahoma City have been flat since 2006, a sharp contrast to the large drop in national home prices.
But even though the vacancy rates in Oklahoma City are not a direct result of the housing boom and bust, it may be that newer solutions developed for ‘housing boom’ and ‘low demand’ areas can be combined with traditional community development policy tools to help solve a problem that developed over decades. Indeed, city planners recently concluded that the city could not tackle neighborhood revitalization without addressing vacancies.
Increasing costs for needed city services, reduced revenues and barriers to growth resulting from deteriorating infrastructure all combined to lend urgency to these efforts. As has been the case in other cities, officials in Oklahoma City realized that gathering data was a necessary first step. Starting earlier this year, they embarked on an ambitious study to determine the total cost resulting from vacancies. The city will then use the findings from the study to support enactment of tougher code enforcement to recover lost revenue, including assessment of fines against owners who fail to maintain their properties.
This combination of new measurements and old tools to develop solutions should serve as an example to many ‘traditional suburban’ areas around the country that have experienced, and will continue to experience, vacancy issues.
The potential fallout of high rates of vacancy – blight, crime, lowered home values and decreased property tax revenue – is the same for every neighborhood and community. But there is no one-size-fits-all solution to the vacancy problem.
Taking account of such differences will be important in crafting solutions to the problems caused by those vacancies. Hopefully, these examples and other ideas will inspire new and creative solutions to the difficult issues faced by communities. Certainly, different housing markets will recover in different ways and at different paces. In some areas, the private market will lead the way, while in others, government will have to use precious resources wisely to catalyze recovery.
The examples I've discussed also illustrate the value of using data to understand vacancy issues, to determine which neighborhoods are experiencing which challenges and to design appropriate policy solutions. Solving the problems of long-term vacancies will require the best efforts of public, private and nonprofit leaders locally and across the country. I can assure you the Federal Reserve System will continue to support recovery through the use of all its policy tools and research capacity.
Elizabeth A. Duke is a governor of the Federal Reserve Board. She can be reached at (202) 452-3000. This article is edited and adapted from a speech delivered at the Federal Reserve Bank on Oct. 5, 2002.