Issue #140, March/April 2005


Restoring Neighborhoods, Rebuilding Markets

New Housing Directions For Struggling Cities


Richmond, Virginia, is offering soft loans to “urban pioneers” willing to buy, fix up and move into a vacant house in the city’s Jackson Ward area. Pioneers are eligible for up to $35,000, if they invest $70,000 of their own money. They are not required to make payments on the loan, and, if they live in the house for seven years, the entire loan is forgiven. The city of Baltimore and private funders have pooled resources to create the LiveBaltimore Home Center, a professionally staffed office that markets the city’s neighborhoods to middle- and upper-income homebuyers. One of their strategies is to target people working in Washington DC, and to show them how much more house they can get for their money in Baltimore. In Camden, New Jersey, the city and state are providing nearly $160,000 per unit in capital subsidies to support a new development of 28 upscale townhouses priced from $160,000 to $190,000, aimed at middle- and upper-income homebuyers in the Cooper Grant neighborhood, close to Rutgers University and downtown Camden.

These three efforts have important features in common: They use public funds, yet are aimed not at the traditional beneficiaries, but at middle- or even upper-income households. This is not a coincidence; rather these strategies are variations on a theme that is being explored more seriously by a growing number of American cities. Each makes up a part of a larger strategy being mounted to jumpstart the housing market by building demand on the part of people who have the money to choose between neighborhoods, or between the city and its suburban neighbors.

While some cities such as Chicago and Boston have thrived in recent years, others such as Buffalo or Detroit have not. Even in cities that are doing relatively well, many of the neighborhoods have declined. Jersey City’s “Gold Coast,” where luxury apartment buildings abut gleaming office towers, is only a few minutes from neighborhoods where abandoned shells dot trash-strewn streets. The greatest problems, however, are found in cities like Buffalo or Camden where weak demand affects the entire city.

Weak demand locks the housing market in these cities into a cycle of decline. There are more housing units available than there are people looking for housing. Since most of those looking for housing have little money, housing prices are low, well below replacement cost. While low prices do make housing more affordable, they can cause problems that outweigh any good they do. Properties with little market value deteriorate as owners see little economic benefit to rehabilitating, or even maintaining them. Developers have no incentive to build in low-value areas, and buyers tend to avoid them because they are not seen as sound investments. Houses sit vacant longer and, as their value and condition deteriorate, they are abandoned.

A neighborhood dotted with abandoned buildings, where owners have no motivation to invest in their properties, is a neighborhood in trouble. Families who improve their economic conditions move out, and few families who have choices move in. Absentee, short-term ownership increases, and the neighborhood declines. Even the most distressed cities have some stable neighborhoods, but those areas are often not immune from conditions that could lead to future destabilization.

These cities’ problems are not housing shortages and escalating prices, but population loss and weak housing demand. Unless a city addresses the market dynamics behind so much of the decline, conditions are unlikely to change. In most cities, that will require policy changes and major changes in the way housing resources are used.

Cities spend millions every year to improve housing conditions and prevent neighborhood decline by building affordable housing projects, helping low-income homeowners fix up their properties and demolishing abandoned buildings – all without changing the underlying conditions. Many communities scatter limited resources in ways that help only a few direct beneficiaries, with little sustained community-wide benefit. While some cities, like Richmond, concentrate their housing resources in selected neighborhoods, most lack clear priorities for spending housing resources and, therefore, do not allocate them strategically.

Housing policies should focus on improving neighborhoods, not on adding housing units as an end in itself – a questionable goal in cities with surplus housing stocks. Housing resources must be invested in ways that will foster a more diverse economic mix in the city’s neighborhoods, making cities more competitive in their region, while ensuring that the city’s present residents, at all income levels, benefit from these changes. The following suggest some of the directions in which change should take place.

It’s About Neighborhoods
People pick neighborhoods, not just houses. While they may trade off some present quality of life benefits for greater future potential, they are unlikely to pick a neighborhood on the decline, however attractive it may look today. This is as true for the family in the neighborhood deciding whether to stay or leave, or the family from outside choosing where it will settle.

Housing investments have a powerful effect on a neighborhood’s vitality, yet historically, housing development and neighborhood improvement have rarely been linked to one another. Housing projects were often built as self-contained entities, hiding behind walls or surrounded by parking lots. Neighborhoods were loaded with low-income rental units, blocking options that might make the neighborhood more economically diverse.

Meanwhile, billions are spent on urban schools, and even the most cash-poor city spends millions each year to maintain and improve its streets, sidewalks, parks and community centers. Few cities, however, link these resources to a strategy for changing not only the physical appearance, but also the market dynamics of the neighborhood.

Cities and CDCs must come together around comprehensive strategies to improve each neighborhood’s quality of life and enhance its competitive position in the housing market, making it a community of choice. That demands a radically different approach to looking at neighborhoods – targeting resources for sustained change, rather than band-aids. Well-planned, well-executed neighborhood development strategies (see text box below) send a powerful signal to both existing residents and newcomers that the city cares about its neighborhoods. American cities, as the phrase goes, are cities of neighborhoods, and the outcome of any city’s strategy will be determined by what happens in its neighborhoods.

NEIGHBORHOOD STRATEGIES FOR MARKET CHANGE
  • Plan. Develop a credible, market-based strategy for neighborhood revitalization involving the full range of neighborhood stakeholders in the process.
  • Target resources. Pool public funds strategically, targeting the key activities or geographic areas where they can have the greatest impact.
  • Tailor strategies for neighborhoods at risk. Target strategies for these areas, stressing the restoration of scattered vacant and abandoned properties that place entire blocks at risk, along with quality of life improvements, to influence critical decisions by existing residents and future homebuyers.
  • Build on assets. Use existing or new open spaces, schools, transit stops and commercial developments as anchors to create market demand, particularly in areas needing major redevelopment.
  • Build quality. Use good planning and design as a strategy to enhance the quality of life and improve a neighborhood's competitive position. Make every new development and every renovation add visible value to the neighborhood.

Under its Neighborhoods in Bloom program, Richmond redirected nearly all of its discretionary funds, including HOME and CDBG, into six of its 49 neighborhoods, in order to have a major effect on those neighborhoods. Since initiating that effort in 1999, the city has seen dramatic changes in market activity and in the quality of life in those neighborhoods. In Baltimore, the Patterson Park CDC has worked steadily to rebuild its neighborhood by concentrating on vacant properties. Since 1996, the CDC has rehabilitated over 200 houses, generated millions in private investment and benefited from dramatic increases in property values and higher tax revenues for the city, while preserving affordable housing for the neighborhood’s lower-income residents.

Making Cities Competitive
Population loss and concentrated poverty both reflect the outward movement of residents who acquire the economic means to leave a declining city. Unless cities can reverse that pattern, convincing the middle- and upper-income families that can afford to live elsewhere to stay, they will remain locked in a self-perpetuating dynamic of continued deterioration and impoverishment.

Fostering a more diverse economic mix can trigger an economic chain reaction that, if properly managed, with attention given to the housing needs of the city’s lower-income residents, can benefit everyone through:

  • increased housing demand, which raises property values, attracts investment, reduces abandonment and increases housing and neighborhood quality of life;
  • higher property values, which provide more revenues for the city, which translate into improved municipal services or lower taxes; and
  • increased disposable income, which enhances business and job growth, particularly for the retail and services sectors, within the city.

Since housing usually makes up between 60 and 80 percent of the average city’s total property tax base, a city can build its revenue base more effectively by increasing even modestly the value of its residential real estate than by attracting new businesses and industries, or by building stadiums and convention centers. The best way to raise real estate values is to raise the value of the existing housing stock by improving neighborhoods and making them more attractive to an economically diverse body of homebuyers.

While the future of each city will ultimately be determined by the future of its neighborhoods, neighborhoods themselves do not exist in a vacuum. The future of neighborhoods will not only be determined by their own efforts to improve, but also by how well the city focuses on some key citywide strategies for market change.

CITYWIDE STRATEGIES FOR
MARKET CHANGE
  • Think strategically. Make sure everyone – city government, CDCs, local funders, other community organizations – is on board with a strategy to rebuild the city and its neighborhoods.
  • Build a positive investment climate at city hall. Create user-friendly, predictable and fair processes to govern redevelopment. Rework the city's codes to make sure that they reflect the city's goals while providing investors with maximum flexibility.
  • Use public funds to fill market gaps. Used strategically, these funds can motivate the investments that will help revitalize the community.
  • Capture the market. Target housing markets as systematically and aggressively as businesses, visitors or conventions, carrying out a sustained, targeted marketing strategy.
  • Build on assets. Identify the city's competitive assets – a historic district, a major university or medical center, an ethnic neighborhood or an entertainment scene – market and use them to anchor housing and neighborhoods.

Many cities have taken important steps in these directions. Milwaukee established the Milwaukee Development Center, a one-stop center for people who want to build or fix up houses in the city. The center provides the information they need and enables them to track the progress of their applications online. In Buffalo, a CDC and a neighborhood coalition on the city’s west side partnered with the local Board of Realtors to market their neighborhood. Using the slogan “Catch the spirit,” they created a Web site, sponsored tours and disseminated promotional materials. In New Haven, Connecticut, Yale University has helped spur the housing market by offering its employees $25,000 to buy houses in select neighborhoods. Buyers receive $7,000 at closing and $2,000 per year for nine years. Nearly 600 families have bought houses through this program.

Few cities have a major university willing to put up its own money to build market demand. Usually, it takes public funds to fill market gaps. With limited funds and competing demands for dollars, cities must be sure to get the greatest return for every dollar spent. The Camden project might not meet this test. At much less cost, the city might be able to motivate middle-income families to fix up and move into the vacant houses in the neighborhood, which would probably trigger a more powerful chain reaction than the new housing being planned by the city. Such a strategy could make it possible to sell new houses with far less per unit subsidy in only a few years.

In their haste to attract outsiders, cities must also be careful not to lose track of the people who already live there. If cities fail to make themselves attractive to the local families, they will lose them. In addition to attracting middle- and upper-income families from outside, cities must treat their upwardly mobile households as a critical civic asset and give them good reasons to stay and invest their resources in the city.

Targeting present residents
Cities are for everyone. Building the housing market and improving the quality of life for lower-income households are complementary, not conflicting, goals. Failing to address the needs of poor families, who will remain disproportionately concentrated in cities for the foreseeable future, will not only perpetuate the conditions that are both cause and symptom of the city’s distress, but will also sow the seeds of future conflict and polarization in a changing city.

The real question is not whether to create affordable housing, but how to do so in ways that best contribute to the larger market-building strategy. Affordable housing should be designed to build both community and individual assets. Homeownership, including shared-equity housing, land trusts and resident management, should be encouraged. Housing should be high quality, linked to larger revitalization efforts and, where feasible, integrated into mixed-income housing schemes. Policies that can lead to excessive poverty concentrations must be carefully avoided.

Finally, cities should plan for success. If a city’s strategy to rebuild its housing market is successful, the results will inevitably put pressure on housing prices in some neighborhoods or citywide. If parts of a city are thriving, speculation may push prices up in even the city’s more distressed neighborhoods – despite the absence of genuine demand. Cities should not assume that a stronger housing market will never happen; instead, they should build in strategies to ensure that a stable stock of affordable housing is preserved, and that long-term residents are not squeezed out of suddenly desirable neighborhoods (see text box below).

STRATEGIES TO PRESERVE AFFORDABILITY
  • Use tax increment financing to create affordable housing preservation resources.
  • Acquire strategic properties to place in social ownership for long-term affordability.
  • Foster affordable homeownership through shared-equity alternatives, such as land trusts and limited-equity coops.
  • Bank land for future construction of lower-income or mixed-income housing.
  • Offer financial incentives to rental property owners to upgrade and preserve buildings as affordable housing.
  • Use vacant property receivership to target buildings held vacant for speculation.
  • Enact anti-speculation or anti-flipping ordinances.
  • Establish property tax circuit breakers to mitigate the impact of market appreciation on lower-income homeowners.
  • Adopt inclusionary ordinances.
  • Adopt linkage ordinances requiring contributions to an affordable housing trust fund.

Promoting Change
The need for change in America’s distressed cities is beyond question. The changing housing policies that cities are beginning to explore involve new ways of thinking about the community, new ways of doing business, new skills and new partnerships. CDCs are a critical part of the process, along with local governments. As the voice for neighborhood revitalization in their communities, they have a responsibility to promote change, even when it may appear to be in conflict with their short-term organizational interests.

Alan Mallach is research director of the National Housing Institute. The themes in this article are based on a policy paper prepared by NHI for the Community Development Partnerships’ Network, Local Initiatives Support Corporation and The Enterprise Foundation. Short and long versions of this paper are now available at www.nhi.org/policy/index.html.