The Work of Neighborhood Stabilization

Foreclosures are blighting neighborhoods across the country. There's no question that something needs to be done. But to react effectively, the field of community development needs to carefully consider which areas should be targeted and how much can be saved, argues Charles Buki.
Photo: Charles Buki

While the US economy continually adjusts to a housing market yet to hit a firm bottom, billions of dollars are set to flow into communities across the country in an effort to stabilize neighborhoods imperiled by predatory lending, ill-informed borrowing, and subsequent foreclosure. Resources heading into communities -- federal dollars funneled through states in most cases -- will flow under the guise of neighborhood stabilization. But based on the history of local use of federal dollars for housing and community development, there are reasons to pause and think carefully about just how this money will be spent, by whom, towards what ostensible aims, and with what potential set of results. Indeed several questions surface and ought to get a fair hearing before final deployment decisions are made.

Which of the underlying governing variables that helped shape the predicament we're in now remain in place? Which of these inputs are being fundamentally rethought and dismantled before supposedly resuscitative resources hit the street? Whatever the merits of the actions that shaped the growth and then collapse of the housing market, what guiding principles of past behaviors figure into the future? Are the housing policy principles and programs that gave direction to previous public policy being fully reconsidered? The history of housing and neighborhoods in America is more a history of iterative adjustments than well-crafted overhauls. It's important to know whether the billions now intended to deal with subprime disasters and foreclosures are more likely to tinker with things as they have always been, or rethink the total process.

Further, how do we avoid facile answers to the dilemma of a housing and community development challenge far larger than the resources with which we have to respond? It seems especially wise -- since even the large amount of money Congress passed is far less than sufficient -- to be approaching the challenge of neighborhood stabilization knowing we have much less than is truly needed.

It's important to pose these questions because the housing and community development field -- the group of professionals essentially tasked with deciding how to spend billions preempting further decline in many of our nation's housing markets -- is notorious for asking far too few basic questions. Remarkably, we are some of the same practitioners that have partial responsibility for the fix we're in the first place.

Photo: An area in decline

How can we explain policies and programs that rarely attempt, much less achieve the aim of deconcentrating poverty? How can we explain continual reliance on housing unit development systems when in many markets it was rarely clear that more units were necessary and never clear that the delivery system crafted the last 25 years made much sense? This is not an indictment of the whole of the community development field. Far from it. Our role in the current morass pales when compared to the bulldozer work done by Countrywide, Citigroup and Washington Mutual and others. But because we do own some share of the current state of affairs, and because it's our field that will determine how to spend scarce resources to try to fix things, at the very least we should think very carefully about the ends we're pursuing and our means of getting there.

Based on my experience in every kind of market -- from Saginaw, Michigan to Oil City, Pennsylvania to Santa Fe, New Mexico to Bridgeport, Connecticut -- there is at least one meta theme that must be acknowledged. Simply said, there are two America's now: one that can repay what it borrowed, and one that can't. Most of the time, the America that can repay on its own is geographically concentrated.

Bad loans have followed speculation of one sort or another -- speculation by developers overbuilding new housing and investors aiming to acquire and flip, and speculation by unqualified borrowers aspiring to own or to move up. Such speculation has wound up mainly hurting low- and moderate-income Americans either directly in the form of an eviction notice or indirectly in the form of being the neighbor to a soon-to-be-vacant house, which will impact values in ways demonstrably negative and viral.

Fortunately, there are numerous ways to attack the viruses of default, foreclosure, vacancy, distress, auctions, more speculation, bottom-feeding acquisition, and questionable remarketing. At the core will be proper re-pricing of loans, but the mechanics of how to re-price the loan is not the point. What matters is which loans to re-price. Let me state again: the mechanics of working out problem loans, or property disposition or loans and houses already in advanced distress is, while not unimportant, substantially less important than the logic used to determine which houses on which streets in which parts of town should receive attention.

With perfect resources, every vacant property once owned by a working family in Bridgeport, CT, or Saginaw, MI who over-borrowed would be the target of our efforts. Each home would be stabilized and, in turn, any further decline on those streets would in part be stemmed. But $4 billion will not do it, while hundreds of billions in mortgages are at risk.

So the unavoidable question is this: if we can't address every property in trouble on every imperiled street in every at-risk neighborhood, then which ones should we address and where?

Mistakes From the Past

Based on past behaviors over 25 years of community development history, the prototype response to such a challenge will have two likely tendencies. One will be to put deep resources into those communities hurting the most. Another will be to put a little bit everywhere.

In the case of the former, we can envision a scenario where a state receives $30 million, and now must determine how much goes to city A, how much to city B, and so on. Most states will adopt the same per capita approach used to drive other formula amounts from the federal government. But then the real work begins.

In my experience, most city neighborhoods can be classified into market "types" ranging from healthy to distressed. All will have some level of foreclosure to tackle. Where to spend the money? Let's say a community winds up with $1million. Should it spend $1 million to fix ten problems in a pretty healthy neighborhood, or $1million fixing 5 problems in a greatly distressed area?

The past tendency in our field was to deploy the $1million across the city thinly, or to concentrate resources where there is greatest need at the bottom.

The first approach is decried as politically driven, scatter shot and very low impact. The second approach designates qualified neighborhoods and has given us public housing towers and tax credit investments skewed to the most at-risk households in neighborhoods where market conditions will hardly ever improve as the result of more subsidies.

How does this happen? For starters the right question isn't commonly enough asked at the local or state level. Housing and neighborhood policy tends to get crafted by asking where is the area of greatest need. Political decisions tend to get made by asking where is the area of greatest support by the community and by officials. Resources usually follow questions, but are the right questions being asked?

Photo: Home for Sale

The question at the center of the challenge of neighborhood stabilization - now amidst the current fiasco or at any other time - is not where is the area of greatest need, but which area has the greatest chance for success? There are many good reasons community development professionals have been historically loath to ask this question. But I suspect the main reason is that it seems unfair to even contemplate the answer, much less precipitate it.

The parts of a city that are most likely to succeed are the middle market neighborhoods still showing signs of strength, neighborhoods with problems but with counterpoised assets that are marketable with minor improvements. These are the neighborhoods where pocket blight can be wrestled to the ground before it takes root. These are the neighborhoods where social norms provide running room for improvement.

Yet these are not the neighborhoods we have historically chosen to focus our community development efforts in, and they are not the places we are likely to deploy the new stabilization resources in, either. This is most unfortunate, because it is these neighborhoods that have not yet -- but well might -- tip. These are the neighborhoods where there remains some semblance of equity, where loan-to-value ratios still offer some kind of collateral, where such market strengths have not yet been replaced by renewed speculation and added slum landlord practices. Then why invest here? Because these are the neighborhoods that will tip downward without an intervention, and these are the neighborhoods where relatively modest interventions in concentrated doses can redirect market forces, generate value, stem disinvestment, and spur tax base renewal.

In my experience, though, because the residents of these neighborhoods are lower middle income and the working poor, and because these neighborhoods are not yet completely distressed, they are apt to be passed over or receive glancing attention. The argument will be that there are other neighborhoods of greater need, in greater distress. This will be true. But the recovery costs will almost always exceed the resources available and while these neighborhoods are trying to recover, truly savable neighboring submarkets will have turned, and failed.

Finding the Right Questions

To many of us the concept of triage is a grotesque logic model to consider. It assigns to patients probable trajectories of recovery based on a range of interventions. It then subtracts the resources that might save a distressed patient and donates them to one less distressed. But this is also a syllogism, whereby the unfairness of triage is calculated in the fantasy world of enough doctors and enough blood plasma to go around. In truth, a world with too little resources is the world we live in. Too few livers for people who need them. Too few police covering too wide an area. This is a distributional problem.

Traditional community development also compounds this problem by affixing to the work the belief that cleverness in our intervention can so stretch scarce resources that we can in fact save everyone. But we would be wise to examine more closely the kinds of creative efforts we've used in the past, and how in fact, they have turned out.

To get more low-income people housed, rather than fewer, we have historically opted to build on the cheapest land. This has served the purposes of many politicians, activists, and developers quite well with the result being a disastrous concentration of poverty.

To get distressed markets working again, we have hewed to our edifice complex and too often pursued a "Field of Dreams" strategy, building new products in weak neighborhoods convinced that the market will come.

To get families patently unqualified to buy a home, we've completely neglected the ground rules of due diligence, paying little or no attention to collateral, credit, or capacity or the eventual likelihood of disastrous foreclosures.

Depending on the moment, there is little question that each of these approaches made some kind of sense. But what all these and other similar tactics have in common is they are all too clever by half and were forged under pressure caused by seeing community development not as a distributional challenge but as a moral imperative.

We are at a moment where once again we have a distributional challenge. More than two million foreclosures. $4 billion dollars. I doubt very much that $2,000 per house will fix this problem. I doubt that a street of 40 homes with 30 foreclosures can be fixed for $60,000. What we want to be asking is whether to fix the street with 30 of 40 homes in trouble (and in what kind of trouble according to a gradient) for $3 million with little chance of being turned around, or the street with 5 of 40 for less than $1 million and with a high probability for recovery.

I don't have easy answers -- in part because there aren't any; but also because we're charting new territory while covering the same ground. What I do know is this: we should be asking questions like:

  • What are the criteria for deploying scarce resources? How are decisions getting made?
  • Is it reasonable to "triage"? Who gets left out? Are there other ways to tend to the least able than to leave them to their own too meager resources?
  • What, ultimately, is the problem we are trying to solve? Are we trying to save every neighborhood when we know that's patently not achievable? Or make a good show of trying?

My own recommendation for municipalities developing their criteria for intervening in their housing markets is as follows:

  • "Type" all your submarkets according to demand
  • Invest most of your capital resources in leveraging the assets of middle market neighborhoods that have pocket but not pervasive blight, with working families that have the capacity to carry the neighborhood forward
  • Invest the balance of capital resources in the work of shrinking distressed markets for future viability, usually through demolition and generation of open space
  • Dually deploy public safety efforts (to buttress real estate work) in hot spots at the bottom and markets in the middle
  • Measure all efforts against the one metric that counts: fair share distribution of strong households

Using these criteria will not reach every challenged neighborhood in your city. But the ones you do reach will recover.

Charles Buki is principal of czb, a Virginia-based neighborhood planning firm specializing in deep dive analysis, strategy development, and implementation of revitalization plans.



Neighborhood Stabilization

This is an excellent and brave article. My own take is that an asset allocation (portfolio investment) strategy might be useful in neighborhood stabilization related to high foreclosures and vacant houses. The investor (city) has a mix of capital and non-capital (regulations, policing, counseling, community organizing) resources to invest in neighborhoods that are deteriorating. Picking "winners" is difficult and uncertain, but can be informed by some knowledge of the market. Investing in easy winners has little return, and those returns are reduced by opportunity costs. However, small investments on the non-capital side could yield large returns by restoring confidence in these neighborhoods.

Buki's middle market neighborhoods category has the best potential for returns relative to risk for capital investments. But the investments should be timed to shift elsewhere when returns are achieved (as evidenced by indicators of stabilized demand). Asset allocation requires regular review of the performance of the portfolio in each risk class and shifting resources according to performance.

The low market has high potential (which is why "greatest need" is such a compelling argument) but also has high risk. Selecting a portfolio heavily weighted to high risk requires very deep pockets (which nobody has in this business) and the patience to stay at the roulette table while the losses mount.

Completely avoiding high risk (or triage) is also not a good strategy. For these neighborhoods, I think the strategy has to be more diverse than avoidance or demolition. Some capital investments could be made on an experimental basis but should reflect strong fundamental market characteristics (location and amenity value per cost). If the land (blocks or acres) was undeveloped, would you build houses on it?

Vacant houses could be "moth-balled" if at all possible (securing the building from further deterioration, although the technology to do this effectively needs to be examined so that the moth-balled building is a good alternative to demolition). Concentrated demolition would be the last resort strategy. We need a new urban renewal program to assist in converting obsolete residential areas into more productive uses while avoiding the mistakes of the earlier urban renewal program (no small order).

Where preservation is the goal, demolition should be considered on a very targeted basis. Some of the properties in "middle-market" neighborhoods could be very costly to bring back onto the market and capital investment might not be justified. However, if left vacant these houses could be a risk factor for the other investments in the neighborhood, which could make them candidates for demolition.

In addition to neighborhood metrics (including social capital) that would help classify according to risk, investment resources should also be classified. Investors (cities) that treat their resources as silos (e.g. a CDBG silo, a Neighborhood Stabilization Program silo, a General Fund silo) are likely to underperform. In developing a neighborhood investment strategy, both capital and non-capital resources should be linked to the market potential profile of the city's neighborhoods.

None of this is science, but neither is any other investment strategy. Some metrics are needed (investing blindly or investing heavily with high risk seldom work), but the decisions cannot be made on metrics alone. Intelligent investing of public resources will require market metrics that identify neighborhoods where people want to live and will continue to invest when markets are stablized, and where demand can absorb the supply of vacant units.

Ted Koebel
Urban Affairs and Planning
Virginia Tech
Blacksburg, VA 24061

Neighborhood Stabilization Program

Dan Hoffman

Mr. Buki and Ted Koebel's comments are right on, if one takes the view that the best that can be done ubder federal rules is replace a poor family with a bad mortgage with a slightly less poor family with a better mortgage. While it would certainly be better for these households to have an affordable mortgage rather than a quasi-criminal one, what what would be better yet is for
this housing to be used in ways that creates linkages between these households and other support systems.

For example, in virtually every state there is a waiting list of developmentally disabled adults seeking housing so that they can live independently, or substantially independently. In some states the waiting list is thousands of people long. By taking the time to work with disabilty groups, the families of these individuals who already are primary care givers (and would continue to be so, reducing the service costs that stymie so many special needs housing projects)and others, new housing opportunities at a price otherwise unontainable could be seized. Moreover, these units could be utilized while permanently removing them from a currently over-supplied housing stock, buoying up depressed housing prices elsewhere. In some instances the same could be done with the elderly.

Moving in a different direction, municipalities that would like lower paid employees to live in their communities could craft efforts to market this housing to their own employees. Working with land trusts, nonprofits and other groups this housing could also be retained, while becoming part of a municipality's permanent affordable housing stock and a permanent source of housing for municipal workers. Similar efforts could be made with local institional employers. Hospitals, for example, are largely uneffected by the current economic slump and continue to recruit nurses from around the world as well as steal from each other. Providing affordable housing opportunities for these employees would do much to help strengthen the competitive position of these employers while also creating opportunity for workers.

To the extent that available units are proximate to each other new, stable communities, with residents who have real stakes and relationships in the broader community could be created. These communities could be further strengthened through creative use of residential improvement districts, TIF districts and the like.

Finally, in a world of rising energy prices, cities are going to become increasing desirable for nonpoor households. Even cities that have seen little displacement pressure are likely to see more as long suburban commutes become economically unsustainable. Displacement, which has not been a problem in many distressed cities and neighborhoods is likely to become a greater problem in the decade ahead. Having housing and land that can be used as a place to save or create new affordable housing opportunities for the not yet dispossed will also be vital.

This is undoubtedly not the last funding of this sort that cities will be receiving over the next year or so and opportunities to increase flexibility regarding the use of NSP money may rise even early next year as the first funding arrives in city halls around the nation.

The opportunity to do better than a better reshuffling the deck of poor folks in need of housing exists and one hopes that cities and states receiving NSP funding will get beyond the immediate crisis to create some new opportunities out of this national disaster.

Robert Goodspeed's picture

How to allocate

Charles, you speculate the states will just adopt a formula approach to sharing NSP funds with cities. It would be interesting to compare the various approaches actually used. In Massachusetts, the state plans to announce their plan Monday with a public information session later in the week.

As that announcement notes, HUD and the law itself has already set a variety of criteria on how the funds will be used that diverge from your suggestions the funds should be used to stabilize "middle market neighborhoods."

Charles Buki's picture

The Central Issue of the Stabilization Funds

Federal constraints on the deployment of funding will make it hard for states to carve out the maneuvering room and flexibility to allocate these dollars towards the middle market (ie working class and low income) neighborhoods that are at risk, but at the same time are recoverable. Why? Because the pressure to create such a fund stems not from an objective to spend where success is possible, but the problematic conceit that merely being responsive to areas of greatest need is, in and of itself, tantamount to success.

Such flawed reasoning was absent in the design and implementation of the very successful Hope VI effort, a push to deconcentrate poverty, prioritize numerous areas of great need into a few that had a probability of turnaround, and intensively invest in a targeted manner. The conceptual DNA of the Hope VI program should have been the core of all subsequent federal housing efforts. Instead it is the rare community development initiative that attempts to deal with the underlying governing variables of neighborhood decline and blight.

Hopefully Massachusetts and other states will aggressively interpret the federal rules accompanying stabilization funding, direct their attention to the challenge of achieving success with limited resources, and enable participating jurisdictions to follow-through with micro market targeting. Distress resulting from subprime lending and subsequent foreclosure crises is many things, and is a result of many inputs. Whatever else is true of this dilemma, dealing with it with less than optimal resources makes this a distributional challenge as well. Context has never been more important.

The way you make the most of scarce resources is to get a return on your initial investment, and roll gains into the next effort, much as Mr. Koebel from Virginia Tech suggested. What you do not do is find the most hard hit household on the toughest street in the most distressed neighborhood in the weakest weak market city, invest less than needed to get a turnaround, and repeat; yet it feels very much like this is exactly what may transpire.

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