The NYTimes Magazine has a just-read piece today on Cleveland's unenviable status as one of America's bellwether hubs for the foreclosure crisis making its way around the nation. While the Richmond region has managed to dodge the bullet so far -- banks in the area had about 350 homes for sale in March, Richmond BizSense reports; and the number of foreclosures in the Richmond market dipped slightly in February -- most analysts expect the numbers to climb regionally as we move into 2009.
One lesson worth taking away from Cleveland doesn't seem to be on the Richmond region's political radar -- to stem the tide at any cost. The consequences of having 10,000 abandoned homes in an urban market is nothing short of disatrous.
In the ensuing years, the city’s real estate was transformed into an Alice-in-Wonderland-like landscape. Local officials began keeping track of foreclosed homes by placing red dots on large wall maps. Some corners of the map, like Slavic Village, are now so packed with red dots they look like puddles of blood. The first question outsiders now ask is, Where has everyone gone? The homeless numbers have not increased much over the past couple of years, and it appears that most of the people who lost their homes have moved in with relatives, found a rental or moved out of the city altogether. The county has lost nearly 100,000 people over the past seven years, the largest exodus in recent memory outside of New Orleans.
Banks are now selling properties at such low prices — many below what they sold for in the 1920s — you have to wonder why they bother to foreclose at all. (The F.D.I.C. estimates that each foreclosure costs a bank on average $50,000, more than if they were to do a loan modification.)
The article goes on to describe the impact that a mountain of foreclosures has had on Cleveland's population, its court system and the fabric of its very community. Cleveland's foreclosure crisis started several years ahead of the rest of the country, and it happened in a market that didn't boom as insanely as many other urban markets.
Most of the foreclosed homes are abandoned, and gutted. Many house squatters. The banks refuse to secure or repair them -- or even sell them to the city. The cost to tear down a gutted, vacant house is $8,000 on average -- it would cost $80 million for Cleveland to reclaim its housing market.
And let's not get started on the new bubble building in Cleveland -- a bubble likely to be replicated elsewhere:
At this auction, Brancatelli was introduced to the Tomasis. They are both in their 40s. Before investing in real estate, Sheila Tomasi owned a small chain of clothing stores and Eric Tomasi was a mortgage broker and before that managed a chain of sporting-goods stores. Brancatelli found them surprisingly open, unlike some of the other wholesalers — or “bottom feeders” as some derisively refer to them — who wouldn’t return his phone calls or e-mail queries. He invited the couple to a gathering of local housing activists, and they laid out their business plan. Brancatelli was curious to find out how anyone was making money in a market where houses were selling for a few thousand dollars on eBay.
The Tomasis said that they owned about 200 houses in Cleveland. (They purchased 2,000 homes last year, in 22 states.) They explained that they, unlike most other wholesalers, provide each buyer with the mechanicals — pipes, a boiler, a furnace, all the basic materials that had been stripped — that the purchaser would then be responsible for installing. Brancatelli derived some comfort from this description. From his background with a nonprofit housing group, he knew the theory that people who put sweat equity into a house will be more committed to its upkeep and to making the mortgage payments. The financing the Tomasis laid out, though, made Brancatelli squirm. The purchaser would pay $500 down and then make monthly payments of no more than $450, which was below local rental prices. But the interest rate was 10 or 11 percent. What most concerned Brancatelli was that the Tomasis eventually hope to package the mortgages and sell them to investors.
“It’s Groundhog Day all over again,” Brancatelli remembers thinking to himself. “Intuitively, it doesn’t make any sense that a person from California would be buying hundreds of distressed properties in a place that’s in a downward spiral. It has nothing but the makings of someone coming to pillage our neighborhood.” But did that mean he shouldn’t work with the Tomasis? If he considered them the enemy, he wondered, where would that get him? Eric Tomasi assured Brancatelli and the others that they had a shared interest. “I want to put people in homes,” he said. “And you want to get homes occupied.”
Pianka says Brancatelli faces a difficult choice: work with the Tomasis to make sure their properties are maintained and then sold to people who make the payments, or contest the Tomasis’ efforts and lose any oversight.
What's the plan for the Richmond region to avoid Cleveland's fate as the economic crisis continues to push its way unabated through the local economy?
