Detroit Survival Depends of Speed of Destruction

Media Reports News

Detroit Survival Depends of Speed of Destruction

May 30, 2013 [Jeff Green and Prashant Gopal, Bloomberg]

William Pulte says the only way to truly save Detroit and get the housing market functioning properly again is to destroy large swaths of the city as quickly as possible.

Pulte, a scion of the family that created PulteGroup Inc. (PHM), the largest U.S. homebuilder by revenue, has already knocked down 10 blocks on Detroit’s Southeast as part of the proposed nonprofit Detroit Blight Authority program. It’s a preview of the effort he says is needed to get ahead of the metal strippers and arsonists devastating the city’s property values.

“We’re trying to do total blight elimination,” Pulte said, standing in the middle of the blocks his group cleared in February. “You can go tear down one home here and then tear down one in another area, but if you go into one area and take down everything, that’s what really makes a difference.”

Housing markets in Detroit and other rustbelt cities such as Cleveland and Buffalo are hampered by decaying, vacant homes even as sales of existing homes hover around a three-year high nationally. Pilfering of vacant units in urban areas cut the number of U.S. homes with complete plumbing by about 10.4 percent from 2008 to 2011, according to U.S. Census data compiled by Bloomberg, including 66,722 such homes alone in Detroit.

Unmanageable City

Blight has made Detroit unmanageable. As the tax base shrinks, the cost of municipal services such as police and fire protection, bus service and garbage collection, stays the same or even rises. Sparsely populated neighborhoods see increases in crime and fires, including arsons. The state has appointed bankruptcy attorney Kevyn Orr as emergency financial manager to take over the city finances and he has said bankruptcy is an option to lessen the burden of about $15 billion in debt.

“We have a city built for 2 million and only 700,000 people living here,” said John George, who has run the grassroots Motor City Blight Busters organization for the last quarter century, tearing down about 300 dwellings mostly by hand in the city’s impoverished Brightmoor neighborhood. “We have to get rid of what we don’t want, don’t need and can’t use.”

On some streets in Brightmoor, just one or two houses per block are occupied, with another two or three fire-damaged, while the rest stand open to the elements, stripped of anything of value.

Blight Authority

Pulte, managing partner at Pulte Capital Partners LLC, a fund that invests in building products businesses, said he wants to prove the expertise his family has gained building homes can help the city knock down 13,000 vacant homes a year — about the size of Paducah, Kentucky, or Juneau, Alaska, and clear brush and other debris from hundreds of other lots.

A demolition project on the scale of the Detroit Blight Authority would be a welcome relief, said George.

“To target 10 to 15 blocks at a time is genius,” said George, pausing for an interview during the demolition of a house last week. “Property values and spirits would soar. It’s hard to get people to make an investment in a war zone.”

Attention is shifting to the role that demolishing buildings can play in bolstering the value of the remaining dwellings, said Nigel Griswold, principal at Griswold Consulting LLC in Stockbridge,Michigan. His 2007 study of Flint, Michigan, determined that the demolition of 435 structures there increased real estate values surrounding those sites by about $112 million, he said.

Rustbelt Research

“There is tons of this research happening because of the foreclosure crisis,” he said. “The post-industrial, rustbelt cities are having their day, kind of.”

A similar 2007 study in the New Kensington neighborhood of Philadelphia found that vacant land improvements increase the value of surrounding homes by as much as 30 percent, or by about $12 million in the area studied, said Susan Wachter, a professor of real estate and finance and co-director of the Institute for Urban Research at the Wharton School at the University of Pennsylvania.

A similar push to knock down abandoned structures in the South Bronx area of New York City in the 1970s and 1980s was a big part of New York’s eventual rebound, she said.

“So although it looks hopeless in many of these cities, there is hope if you can get ahead of the problem,” she said.

The Detroit Blight Authority group already has funding for its next demolition demonstration area and is waiting for the proper permission from the city to proceed, Pulte said. The group plans to clear out 15 blocks as early as next month in another area of Detroit plagued by blight, he said. Because the project is not yet approved, he declined to identify the area.

Family Business

Pulte, who worked in the family house-building business during the summers when he was in high school, is relying on the expertise of his grandfather and namesake, the founder and chairman emeritus of the home-building company. The elder Pulte built his first home in Detroit in 1950, which his grandson says is still standing. PulteGroup, which last year built more than 5,000 new homes, isn’t involved.

For the first project, crews with 30 to 40 pieces of heavy equipment took 10 days and four waves of work to demolish 10 blocks and clear all the brush and debris, he said. The non-profit was able to clear the area for about $5,000 a building, or about half the market rate, Pulte said. About 94 percent of the material was recycled, he said.

The scale of the project would be beyond anything underway in the U.S., said Alan Mallach, a senior fellow at the Brookings Institution in Washington who has published research supporting demolishing homes in blighted areas to improve conditions.

“Nobody has done homes in the volume of 10,000 or more, there’s been nothing of that scale,” he said.

Most Ambitious

The most ambitious project underway elsewhere in the U.S. is the Cuyahoga County Land Reutilization Corp. in the Cleveland area, Mallach and other researchers said.

That group has spent about $20 million in federal and local funding since 2009 to demolish 2,000 vacant homes, said William Whitney, chief operating officer for the Cuyahoga County organization. He estimates that another 20,000 properties still need to be knocked down.

“It’s making a huge difference to the neighbors,” Whitney said in a telephone interview. “Some of the land is able to be reimagined and reused into green space and fairly sophisticated gardens and parks.”

The group, which has another $5 million of funding, is acquiring 100 properties a month and demolishing about 900 of them a year, he said.

Population Loss

While other cities aren’t demolishing as many homes as Detroit and Cleveland, it’s a relatively common practice in places that are experiencing population loss, said Michael Brady, vice president of policy at the Washington-based Center for Community Progress, a non-profit group that advises communities on returning abandoned properties to productive use.

Communities that have demolished homes include Flint, Youngstown, Ohio, the southside of ChicagoNew OrleansSt. Louis, Louisville, Kentucky and Buffalo, New York, he said.

The scale of demolition in some areas is limited by funding, not need, he said. In other cities, the housing market is strong enough to take care of the vacancy problems, he said.

“You’d be hard pressed to find the scale of demolition in Detroit or Cleveland,” Brady said. “There are other places doing it, but nothing close.”

Pulte said he’s collaborating with the Detroit Future City plan, an effort to transform Detroit into a sustainable city by 2030 by focusing on increasing the density and improving city services in healthy residential areas. Less stable areas of the city, such as those where Pulte would like to level blocks of dwellings, are converted to other uses such as parks or open spaces, according to the plan.

Actively Lobbying

The group is actively lobbying for funding and support from foundations, the city and the state and hopes to use the pilot areas to win approval for a formal project and move up to full scale, he said.

“Blight is a cancer,” he said. “We have to have all hands on deck on this.”

The city’s decline predates the housing crisis. Jobs left Detroit as auto plants moved to the suburbs and to other countries with the globalization of the industry. Manufacturing jobs in the city fell to fewer than 27,000 in 2011 from about 296,000 in 1950.

Detroit now has eight people per acre, down from 21 per acre in 1950. The city, which peaked at 1.85 million residents in 1950, has lost a quarter of its residents since 2000. The population fell to 701,475 people last year, according to U.S. Census estimates released last week.

Property Prices

Property prices in the city fell as much as 50 percent from their peak at the end of 2005, hitting bottom in April 2011, according to an S&P/Case-Shiller Index (SPCSDET). Since then, they’ve recovered by about 25 percent.

A total of 413,146 properties in Detroit had at least one foreclosure filing in the seven years from 2006 through 2012, representing 22 percent of all households in the metropolitan area, according to RealtyTrac. Foreclosures made up 30 percent of the sales in the Detroit area in the first quarter, a RealtyTrac report released today shows. That trails only Atlanta, Riverside-San Bernardino in Southern California and Chicago.

There were just 578 mortgages for purchases last year, according to RealtyTrac. In Pittsburgh, which has less than half the population but healthier finances, there were 5,513 mortgages, figures from the Irvine, California-based data provider show.

Coordinated Efforts

The best way for the project to succeed is for it to be coordinated with other efforts to revitalize the city to reduce unintended consequences, Brookings’ Mallach said.

Dan Gilbert, the founder of mortgage lender Quicken Loans Inc., and owner of the Cleveland Cavaliers basketball team, is leading an effort to encourage development in Detroit’s downtown, buying up buildings and moving thousands of jobs and new ventures to the area. That’s also increasing demand for downtown housing.

The city may also benefit from the rising fortunes of the Big Three automakers. General Motors Co. (GM)Ford Motor Co. (F) and Chrysler Group LLC have seen rising revenue and profit in the wake of wrenching bankruptcies and restructurings, earning a combined $13.5 billion last year. The Detroit area automakers all gained market share in the first quarter for the first time in 20 years.

Broader Solution

Blight busting may be most effective when it’s part of a broader solution and can be counterproductive in isolation.

As an example, a study of Buffalo, where 2,814 buildings were knocked down in a five-year span from September 2007 through August 2012, crime simply shifted away from areas that were cleaned up to less stable areas nearby, a University of Buffalo-State University of New York study released this year showed.

In the end, a more aggressive effort is needed nationally to fight the problem, Mallach said, citing data that from 2000 to 2010, the total number of vacant housing units in the U.S. increased by 44 percent to 4.5 million, with a concentration in older, rustbelt cities.

“It’s certainly worth trying,” Mallach said. “Very recently people have started to get the idea that demolition in these cities isn’t just a desperate last resort for the worst properties. It’s something you can really use to help stabilize the market and neighborhoods.”