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The New Redlining and Northeast Ohio’s Broken Housing Market

28 February 2013 No Comment

I know people from all over the country salivate at the price of real estate in places like Cleveland and Detroit. And it’s true you can own a incredible home for next to nothing–but you’d better have cash.

The Cleveland housing market is so utterly fucked up, it’s hard to even know where to start. But I’m one of the people trying to take advantage of it. I own a 1890 Victorian wood home in Cleveland’s Detroit Shoreway neighborhood–considered up-and-coming, in the Cleveland way. The neighborhood isn’t considered the nicest in the city, but it’s among them.

Even though my house is newly renovated (new flooring, new appliances, etc.), it was recently appraised for $60,000. I know. That seems sorta great. But owning a home worth $60,000 puts a person in a tough spot, even if they owe less than that, as I do.

Here’s why: the parts that go into building–and, crucially, maintaining–a house in any market cost more than $60,000. A roof? Maybe $12k. Windows? At least $5. A furnace? $2,500 at best. Appliances? $4k? It adds up fast. Skilled tradesmen aren’t cheaper in Cleveland than in a suburb. A roof is a roof is a roof, and a water heater is a water heater. And people who own $50,000 homes need roofs just as much as anyone.

But people who own $50,000 homes in Cleveland might not be able to borrow the money to fix their roof if something goes wrong, even if they make a fair amount of money. Banks just don’t see these properties as a good bet. I know this for a fact because I own a newly renovated home in one of the city’s better neighborhoods and I can’t get a bank to loan me a dime. Even though my credit score is considered good. Even though my annual salary is close to the remaining balance on my home.

It’s not a matter of credit or income: it’s simply the appraisal, they tell me. Fifth Third Bank. Third Federal Savings and Loan.

When an appraiser comes out to your house in Cleveland, her job is to make a tally of the amenities in your home–two-car garage is a plus, extra bathroom is $5k or whatever–and subtract the negatives. Then they find three “comps,” or comparable homes.

But this process is biased at every step of the way against people who want to buy homes in walkable, diverse neighborhoods.

To begin, there’s the process of finding comps, homes that are comparable to yours. If you were buying a home in a tiny suburb, the comparable homes would almost certainly be in the same damn suburb, or an adjacent, essentially identical one. In Cleveland, not so much. Almost 400,000 people live in Cleveland spread out over a diverse assortment of neighborhoods in varying conditions. But all these neighborhoods share a school district and so, to appraisers, they are all basically the same.

In truth, Cleveland is segmented into many submarkets, even within neighborhoods, so that there might be dramatic variations. In individual neighborhoods, there will be an understanding of this: home values drop off sharply south of Lorain Avenue, or I-90 West, or wherever the case may be. Home values on X Street are better than Y Street because X Street is more desirable than Y.

But appraisers do not recognize these distinctions at all. Virtually any house on your side of Cleveland could be considered comparable. And whatever side of Cleveland you live on, you can be damn sure there are a few houses selling for $12k or whatever. So even if you live on a plum street, or section of your neighborhood, the fact that there’s some blight nearby (and this cannot be escaped in Cleveland) means you are screwed.

The market has totally and fundamentally broken down when a financially stable and credit worthy homeowners can’t borrow the money they need to keep their houses in a state of good repair. Decline is more or less a self-fulfilling prophecy if the banks have drawn a red line around your neighborhood.

The truth is, the housing market in Northeast Ohio is socially constructed, and nobody has contributed to that construction more than the real estate and banking industries. They are making very clear value judgements about Cleveland neighborhoods and about surburban neighborhoods in their supposedly unbiased assessments. And urban neighborhoods, the most affordable places, are the big losers in this scheme.

There’s nothing fundamentally less valuable about an 1890 home in Detroit-Shoreway than the McMansions in Avon that sell for $400k. It’s really a matter of preference. Some people prefer to live in all-white suburbs with “good schools” and they don’t mind driving 40 extra miles a day to do so. And fine for them. They certainly have an array of choices. They are the prime beneficiaries–or losers, depending on your perspective–of our current scheme.

But some people think there’s value in having a home that is close enough to retail destinations that they can walk or take transit. They might not even (gasp!) want a garage. Some people like historic homes; appraisals consider old homes a net negative, no matter how well preserved they are.

In some markets, Washington D.C. notably, the latter type of neighborhood has overtaken the former in market value. But Cleveland (its financial institutions and real estate market) is a laggard in the extreme. So institutionalized are the pre-housing-bust sensibilities about what makes a house or neighborhood good, that it makes opting for the alternative next to impossible.

For example, financial institutions in Cleveland generally won’t loan you money to purchase a foreclosure, for whatever reason. That’s a good 40 percent of the Cleveland market, at least. On top of that, the average lender won’t loan you money to do a purchase-rehab (too much trouble I guess). That encapsulates, I’m guessing, at least 85 percent of the Cleveland housing market. These processes, in addition to lazy and fundamentally inaccurate appraisals, might as well be a new form of redlining.

And here’s the important thing. Don’t think for a second that the places banks are dying to lend you money to live in–Avon, Beachwood, Chagrin Falls, whatever–don’t just happen to be the whitest places in the region. They are. Middle class white people like me can buy homes wherever we want and can afford, as long as there aren’t too many people of color living nearby. Otherwise, forget it.

The whole thing is such a scam. The Northeast Ohio real estate industry will tell you a home in Lorain is worth 10 times less than a similar home in Westlake, that a home in Cleveland is worth five or more times less than a similar home in Rocky River. And it’s all just based on assumptions about what kind of person you are. These assumptions are biased and bogus. They do not recognize the increasing diversity of American households.

And they, in essence, are still operating as if the housing bust never happened. For one, they’re assuming you have school-aged children, like almost every household did in the 1960s. The local real estate market’s number one valuation factor is the supposed quality of the school district (which again you can bet corresponds exactly to the share of the school district that is lily white and middle class). This is total baloney, though, as the population ages and as demographics change. Only one in five households in the United States is a family with school-aged children anymore. This idea of the nuclear American family, mom and dad and 2.5 kids, is such a myth now–but it’s one the Northeast Ohio real estate market refuses to let go of.

They’re also assuming you’re the type of family that likes to have one car per adult. They’re assuming you like a big yard–just what the glut of Baby Boomers entering their retirement years need, right? It’s so bogus.

The upshot is, banks or real estate agencies aren’t going to help you out if you want to buy a low-cost fixer upper in Cleveland. These two industries teamed up over the last few decades to produce our fundamentally broken housing market and they aren’t giving up now. They want to put you in the most expensive house you can possibly afford. A “new build” if possible–all the better for folks trying to make a quick buck–on a former farm field, far away from every conceivable amenity, save a television set, a Walmart, and an interchange.

It’s sad, because the lesson of this housing bust, in my opinion, was BUY A CHEAPER HOUSE THAN YOU CAN AFFORD, FOR THE LOVE OF GOD. But if you want to do so, you’d better have cash.

-A.S.