Detroit Homes Rot as Appraisals Stopping Sales

Jeff Kowalsky/Bloomberg

In most American cities, a limestone home with a large front turret and paneled library would have a waiting list of buyers at $135,000. In Detroit’s Rosedale neighborhood, it almost didn’t sell at all.

The first offer of $150,000 fell through when the 2,600-square-foot Tudor style home appraised for $85,000, dragged down by comparisons with sales of foreclosed homes in nearby rundown areas, said Tom Goddeeris, executive director of the non-profit Grandmont Rosedale Development Corp., which rehabbed the home. A $135,000 offer squeaked by after a $110,000 appraisal, he said.

“We felt we had little choice but to take the second offer, although there were obviously willing buyers at higher prices,” said Goddeeris, who estimates similar mismatches between market value and appraisals mean the association loses about $15,000 on each home they fix up and sell in the 5,500 property area. About 10% of Rosedale’s homes are vacant.

Flawed appraisals and a dearth of normal, nonforeclosure sales to serve as comparisons have put mortgages out of reach for most potential buyers, even in the best neighborhoods like Grandmont Rosedale that are the focus of officials’ efforts to revive Detroit. In a city of about 700,000, there were just 578 mortgages for purchases last year, according to RealtyTrac.

Salvaging neighborhoods like Rosedale requires a functioning mortgage market, said David LeClerc, manager of lending at Michigan Lending Solutions, an umbrella group for eight nonprofits working to create an alternative mortgage lender funded partly by investors.

Detroit has been on the decline for decades thanks to plummeting property values, lost jobs and crime, while the U.S. housing bust in 2007 and subsequent recession dragged two of the three largest carmakers into bankruptcy and disproportionately hit the region’s real estate market. The city now has 8 people per acre, down from 21 per acre in 1950, and 65,000 vacant homes, many slated for eventual demolition.

The Detroit nonprofits propose a fund of about $40 million backed by investors and the state that would provide mortgage loans, relying on local appraisers with better knowledge of Detroit’s neighborhoods. The aim would be to finance enough purchases at realistic values in a given neighborhood that could serve as comparisons for bank loans in the future, LeClerc said.

The local government is pursuing plans to create a sustainable city by 2030 by focusing on increasing the density and improving city services in healthy residential areas such as Rosedale, while less stable areas of the city, with high vacancies and crumbling housing, are converted to other uses such as parks or open spaces, said Dan Kinkead, an architect at Hamilton Anderson in Detroit and one of the consultants on the Detroit Future City study.

A broken mortgage system means that residents are missing out on some of the lowest borrowing costs on record with the average rate for a 30-year fixed loan at 3.54%, according to Freddie Mac. Of the 578 mortgages for purchases last year in Detroit, they had an average sales price of $53,285 and an average loan amount of $49,176, according to RealtyTrac. In Pittsburgh, which has roughly the same population, there were 5,513 mortgages, with an average sales price of $182,614 and an average loan amount of $157,240, RealtyTrac said.

“The goal is to fill the gap between where we are today to get the housing in specific targeted neighborhoods to be conforming,” LeClerc said. “We need to start to build up consistency. You can continuously, gradually, increase the value in the market.”

Homeowners not in default aren’t going to sell homes when appraisals are so far below perceived market value and foreclosed homes dominate sales, LeClerc added.

The Michigan Neighborhood Recovery Loan would apply revised underwriting criteria that would make it easier to get appraisals more accurately reflecting a home’s market value in Detroit and other stressed urban areas, LeClerc said. The group is seeking about $25 million from investors, who would get the first returns, with the rest coming from private investors and nonprofit foundations, he said.

The mortgages would be pooled and risk would be spread out among the lenders so that investors would be paid first, followed by the state and then the foundations, he said. The foundation money would only be at risk if more than 30% of the loans defaulted, he said. The fund is seeking $10 million from the Michigan State Housing Development Authority as well as contributions from foundations to help cover the risk.

Detroit has had some success reviving its Midtown and Downtown areas, where a consortium of employers are offering workers $20,000 in purchase assistance to move in, though there is still very little lending, as banks remain wary and appraisals lag behind the market, said Ed Potas, a real estate developer for Midtown Detroit, one of the nonprofits behind the proposal.

Even with $20,000 subsidies available for a mortgage, most people are still renting in Midtown and Downtown, Potas said. About 92 mortgages have been financed in the targeted areas among about 900 total people participating, he said. So far, only one of those has defaulted.

“If the city cannot capitalize when we have market demand, it’s going to be pretty difficult to make things work here,” said Susan Mosey, president of Midtown Detroit.