In housing meltdown, cities turn into buyers

Guess who's moving in on the local housing scene?

You are, fellow taxpayer.

In an extraordinary effort to save neighborhoods ravaged by unprecedented numbers of foreclosures, Minneapolis and St. Paul are spending millions of dollars to buy and repair houses and put new owners back in them. It's an unusual governmental reach into the housing market, fueled by federal money and reminiscent of urban renewal and freeway building 50 years ago.

The cities aren't clear-cutting blocks of houses and downtown buildings as they did in the 1960s, but they are leaving their mark with bulldozers and construction crews. It's a response to an urban disaster playing out across the nation, where waves of foreclosures and abandoned buildings have lowered property values, attracted crime and bred despair.

At stake, city officials and residents say, are safety, character, quality of life and, in all practical terms, tax base.

"I can guarantee if we weren't doing what we're doing, we'd lose the properties to investors and flippers," said Cecile Bedor, St. Paul's planning director. The focus areas are parts of north and south-central Minneapolis and central and eastern St. Paul.

Between 2007 and last month Minneapolis spent $9.4 million acquiring 220 properties. That's half of the time it took the city to buy 280 properties in the first six years of the decade.

Neighborhood activists and city officials blame out-of-town investors and absentee landlords for much of the decline in some neighborhoods.

As housing values soared earlier in the decade, investors snatched up properties and stripped equity from them. Meanwhile, other people who weren't qualified bought homes through exotic loans that eventually led to foreclosure. Authorities uncovered mortgage fraud rings. And as banks took back their properties, the blocks those homes sat on grew shabby and attracted vandals, squatters and copper thieves. City resources were stressed.

Consider:

• The number of vacant and boarded buildings in Minneapolis jumped from 286 in 2004 to 857 in 2008. St. Paul saw an increase of 370 to 2,000.

• From 2005 to 2008, foreclosures in Minneapolis went from 870 to 3,000. In St. Paul, they grew from 480 to 2,200.

One result was that two years ago, people would roll through the intersection at 6th Street and 31st Avenue N. in Minneapolis, too scared to stop.

One notorious home served as a drug bazaar. A couple of doors down was a brothel. A few burned-out and boarded-up hovels were nearby. Three-quarters of the properties in the four-block area were razed, boarded or foreclosed upon.

Today, there are snow-covered vacant lots where the problem properties once sat. It's quieter now and, this spring, a new house will be built, the first of an eco-friendly development.

It's an example of what can happen when cities, neighbors, nonprofits and others work together to clear out the bad, he said.

There's not enough money to fix all of the housing problems, experts say, but doing nothing isn't an option. Get rid of problem properties, save the houses that can be saved, and give a hand to home buyers willing to heal a hurting neighborhood. Most of all, they say, give confidence to those left behind that it's worth investing in their homes.

Many funding sources

Money to finance the fight against blight is coming in from all areas, from foundations to banks to taxpayers.

In one program alone, the federal government is pouring $65 million into Minneapolis and St. Paul for the cities to buy, raze, repair and lure new owners to hundreds of properties. It's part of a $6 billion federal stimulus plan, the Neighborhood Stabilization Program (NSP), intended to rescue U.S. neighborhoods hit hardest by foreclosures.

Minneapolis and St. Paul are using slightly different approaches with their money.

Minneapolis is trying to avoid owning many properties, so it's using the bulk of its NSP funding for nonprofit and community development groups to buy and rehab houses. The city will buy and knock down some buildings that aren't worth saving and "banking" the land until it can be redeveloped.

Both cities are using some of the money for home-buyer assistance programs.

Some are skeptical

While skeptics acknowledge the dilemma cities face, they also question the wisdom of more governmental involvement in real estate and wonder how long the cities will sit on lots that don't pay taxes.

"What's the city doing in the land speculation business?" asked Phil Krinkie, president of the Taxpayers League of Minnesota and a heating contractor who has worked in hard-hit St. Paul neighborhoods. "To have the government step in and own or tear property down based on the current market is ludicrous because they'll sit with empty property for who knows how long."

Then, Krinkie said, the city will have to create new subsidies for construction or to get rid of the vacant land.

Stuart Simek is a private developer who has done projects in St. Paul. He said the city will need to provide financial incentives or multi-lot parcels to entice private developers into the neighborhoods.

Hundreds of more houses are set to be picked up by the cities and nonprofit developers in the next two years, either for renovation or razing. As more homes come back on line, the cities will try to put hundreds of new owners in them.

"At the end of the day, if a government program is successful, the government isn't necessary," said Tom Streitz, Minneapolis' housing director. "A healthy housing market doesn't need government intervention."