Do real estate investors really destroy minority neighborhoods?
By taking converting millions of lower and middle tier homes into rentals, is it true investors are locking minorities out of homeownership?
These and similar contentions are not new, but they linger in the minds of policy makers, journalists and community leaders even as the Foreclosure Era winds down and the housing recovery makes ailing homeowners healthy.
Perhaps the rap against real estate investors was articulated most bluntly last year by Juan Martinez, president of the National Association of Hispanic Real Estate Professionals.
“Wall Street wins again! Large investors through channels that are unavailable to owner-occupant buyers are purchasing hundreds of thousands of residential properties. With new housing construction still at a low and buyer demand on the rise, these programs have eliminated housing stock from the owner-occupant market at a time when first-time homebuyers can buy affordable housing at low interest rates…“
“Failure to provide home buying opportunities to some of the most important growth segments of our nation – such as the Latino community – not only jeopardizes economic growth for our nation, it com-promises the long-term financial stability of a generation,” he said.
Homeownership is more than a housing option. It’s a political rallying cry, a way to measure personal success, and a barometer of social and ethnic parity.
In 2002 minority homeownership became a national priority. “(President George W.) Bush pushed hard to expand home ownership, especially among minority groups, an initiative that dovetailed with both his ambition to expand Republican appeal and the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards,” said the New York Times after the bubble broke.
Homeownership is also great for business. It sells houses for homebuilders, loans for lenders, securities for Fannie Mae and Freddie Mac and commissions for real estate agents. Collectively, the special interest groups that represent these and affiliated businesses are sometimes called the Homeownership Lobby.
It has been amazingly effective not only on the political front like supporting the Bush initiative in 2002 but also in shaping the way America thinks about homeownership.
For example, thanks in large part to research and PR generated by the Homeownership Lobby. We know homeownership raises test scores, graduates more high school students, stops crime, increases charitable activity, lowers teen pregnancy by children’s living in owned homes, reduces teens’ television screen time, improves health, lowers teen delinquency, raises housing prices—the list goes on but you get the idea.
For eight years I was the top public relations executive for a leading member of the Homeownership Alliance and served on its steering committee. We never realized our efforts might encourage lenders to make toxic loans to people who couldn’t pay them back, or Fannie to sell lenders’ poisonous subprime paper on Wall Street or real estate agents to sell homes to families that couldn’t afford them.
It was the Boom and home prices looked like they would soar forever.
So explain again why real estate investors are the ones responsible for destroying minority neighborhoods? Didn’t they clean up the messes the others left behind, often turning abandoned shells into decent homes and making a buck in the process?
At long last, responsible housing experts have taken a hard, objective look at what actually happens in these neighborhoods.
Looking at the Data
A multi-city study of the role of investors in low and moderate-Income neighborhoods by the Brookings Institution’s Metropolitan Policy Program, Harvard University’s Joint Center for Housing Studies, the New York University Furman Center for Real Estate and Urban Policy, and the Urban Institute’s Center for Metropolitan Housing and Communities was quietly published late last year but received little media attention.
The study was published yesterday by the Joint Center.
The researchers looked at neighborhoods in four market areas across the country representing a range of market conditions, including Atlanta, Boston, Cleveland and Las Vegas. In each market, the researchers focused on the activities of investors in acquiring foreclosed properties in low? and moderate?income neighborhoods in the metropolitan area core county.
Here are some of the key findings:
- With the exception of Cleveland, investors in the remaining three case study areas did not appear to target their investments in low?income and/or high?minority neighborhoods. In Cleveland, investors of all sizes were present in minority and distressed neighborhoods, but the largest investors were present in these neighborhoods almost exclusively, while investors of other sizes were present in neighborhoods and cities throughout the county.
- Strong investor support networks in the four case study communities provide investors with a number of informational and financial advantages over owner occupants and nonprofits that enabled them to be more nimble and act quickly in identifying and purchasing foreclosed properties.
- All four of the case study teams found that, for the most part, investors will invest in rehabilitation if these improvements offer a suitable return on investment, or, alternatively, if public subsidy is available. Across the four case study communities, the level of rehabilitation that investors were prepared to undertake on a foreclosed property was influenced by the following factors: the anticipated return on this investment either from rental income or price appreciation, the level of crime or vandalism in the neighborhood where the property is located, whether the investor was based locally or out?of?state, the age of property, the availability of tenants with Housing Choice Vouchers, and whether the property’s intended use was for rental vs. owner occupancy/resale.
- Private investors in Atlanta estimated renovation costs at $5,000 to $50,000 per property, while investors in Las Vegas who employed a holding strategy estimated renovation costs at approximately $5,000. Compared to other case study areas, investors in Boston cited the highest range of renovation costs, from $25,000 to $125,000 per property, with one investor noting that he typically spends a minimum of $50,000 to $60,000 on rehab.
- Rehab strategies also varied among investors depending on whether investors were based locally or out?of?state. This may reflect differences in the motivation and skills of these two classes of investors. In some cases out?of?state investors may be lured by the prospect of quick investment returns from property flipping without a deep understanding of the market conditions in neighborhoods where these properties are located. In contrast, local investors should have greater market knowledge and have greater ability to closely manage these properties given their proximity.
The four studies, which are clearly the most exhaustive reviews of investing in lower income communities, found a few issues, such as flippers “milking” properties and skirting of local building codes because neither profit potential minor subsidies were adequate, but nothing like the widespread impact on neighborhoods of, say, the foreclosure blight that investors cleaned up.
Photo Credit: Luigi Rosa has moved to Ipernity