Foreclosures May Define Declining Cities

declining citiesA study analyzing the Great Recession and the unprecedented number of foreclosures we are experiencing comes to some chilling conclusions. Funded by the Mortgage Brokers Association and Wells Fargo, it identifies the short and long-term risks associated with job and population losses.

Very few in the multifamily sector did not experience high vacancy factors from 2007  to 2009, although the worst seems to be over for a few select (rebounding) urban markets.  Unfortunately, there are many areas still struggling with historically low occupancies and continuing high rates of foreclosures.

As vacant properties proliferate – often accompanied by a lack of maintenance on the owner-lender or private owners’ part – deferred maintenance takes over like a metasticizing cancer.

Here are a few of the frightening conclusions reached by these researchers:

  • The empirical evidence on declining cities strongly confirms widely varying experiences among submarkets of metropolitan areas that experience persistent and negative shocks to housing demand. Indeed, some of these neighborhoods and submarkets experienced declines so severe that their future viability seems questionable or, at a minimum, that the road to recovery will be protracted.
  • The vacancy evidence also suggests the importance of moving beyond the standard definition of vacancy – no one occupying the unit at the time of an interview – to one that incorporates information about the duration of the vacancy.
  • There will be and already have been substantial threats to the viability of certain neighborhoods. This, I think, is a critical point that will likely be well understood by potential home buyers and lenders, who will want to avoid places plagued by high foreclosures, vacancies and a deteriorating housing stock due to deferred maintenance. The flip side of this prediction is that potential buyers and lenders will favor those markets where information about the neighborhood’s future vitality is readily available.

The report has many other conclusions and a full copy of the 84 page (pdf format) report can be accessed with this link. It is very clear, however, that property managers and owners need to think beyond an immediate neighborhood concern. Where leadership efforts and support are needed, long-term strategies and goals need to be encouraged for the preservation of whole communities.

There is no place in today’s economy for petty neighborhood competition between owners. Protecting the value of a property investment has to include a broader vision. If you haven’t joined a local apartment association, now is probably a good time.

Creative strategies to beautify publicly-maintained areas, improve local schools and increase the kind of infrastructure that attracts businesses, the arts and cultural organizations are critical to a healthy, vibrant economy. Reducing prolonged property vacancies and deferred maintenance and propertycare are also critical to preserving a neighborhood’s vitality.

Appraisers and lenders are creating the usual problems for potential home and apartment buyers with an additional complicating factor making it even more difficult in some hard hit neighborhoods. Professional appraisal standards require the appraiser to identify the ’status’ of an individual property’s neighborhood.

If in the appraiser’s opinion the property is situated in a ‘declining’ neighborhood, the lender will generally be unable to re-sell that loan to a HUD-related lender like the FHA, Fannie Mae or Freddie Mac. Hence without a community reinvestment agency (CRA) loan in a previously federal-government-targeted area, even a ‘perfect’ borrower will be turned down.

This can disproportionately impact those neighborhoods which contain substantial populations of minority households. It also puts lenders in an untenable position. If they decline a loan based on a prediction of a future ’substantial decline’ in that particular neighborhood, their decision may be challenged under the Community Reinvestment Act which prohibits ‘red-lining’.

Unfortunately, without public sector investment and support, these fragile communities may face even further decline. Property owners in these at-risk neighborhoods – which appear to be any neighborhood with high unemployment, excessive numbers of foreclosures, increasing percentages of vacant properties and slipping sales prices – need to take aggressive actions to turn these neighborhoods around before the decline becomes intractable.

Strategies should also be developed to minimize vacant housing in collaboration with local government, property owners, lenders and the business community. Passing new regulations or enforcing those already on the books to require absentee owners (and lenders) to maintain lawns and similar appearance minimums can prevent an impression of neighborhood blight.

This recession is unlike any most people living today have experienced. The vitality of some communities may not recover if they become embedded in the public psyche as deteriorating locations.

This study emphasizes that neighborhood choice may become an even more “important component of housing decisions”, certainly one no property owner or manager can afford to ignore.