Should Detroit Continue Demolishing Dilapidated Housing?

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Tax Policy

Markets in vibrant cities provide incentives that offset the costs of tearing down and replacing unwanted housing with newer housing. Cities in decline may lack these market incentives, requiring the public to step in and pick up demolition costs. In this article, Michigan State University's Mark Skidmore discusses the social benefits and costs of using public funds to remove unwanted housing in Detroit.

Mark Skidmore

By Mark Skidmore

Mark Skidmore is Director of the North Central Regional Center for Rural Development, Department of Agriculture, Food, and Resource Economics, at Michigan State University. Mark holds a B.A., M.A., and Ph.D. in Economics, and is a Professor and Morris Chair in State and Local Government Finance and Policy at Michigan State University. Mark is also a Visiting Fellow at the Lincoln Institute of Land Policy.

Housing markets in many urban core areas are plagued by ongoing population decline. Aside from dealing with the challenges associated with an eroding economic base, these places must deal an excess supply of housing. Excess housing stock places downward pressure on housing prices and vacant properties quickly become dilapidated and unlivable. Many such properties fall into tax delinquency where ownership transitions to a land bank or some other public entity. Throughout the nation, urban areas pay to have dilapidated structures demolished. However, demolishing properties is not costless. In Detroit, the average cost of demolishing a house is about $20,000; managing environmental hazards such as asbestos removal can be expensive.

Since 1950 Detroit's population has fallen from 1.8 million to about 700,000. Every year Detroit spends millions of dollars in state and federal funds to demolish dilapidated unwanted structures. In more vibrant cities, markets provide the proper incentive for private investors to tear down low quality housing and build new higher quality structures. However, in declining areas the profit motive is insufficient to motivate the private sector to eliminate blight because the value of property is too low to justify the costs of demolition and motivate new construction.

Social Benefits, Costs

In these circumstances, there is a rationale for the public sector to step in and remove blight, and this is especially true when the social benefits of demolition exceed the social costs. In the Detroit context, social costs are tax payer dollars used to demolish structures, whereas the social benefits accrue primarily to property owners of parcels near demolitions: Removal of dilapidated structures lifts the values of nearby properties. There are other benefits such as reduced public costs associated with dealing with arson, etc. However, the primary benefit to society is neighborhood improvement and the the increase in property values resulting from blight removal.

In a recently published article, Dusan Paredes and Mark Skidmore (2017) conducted an analysis to determine the net benefit of demolishing dilapidated structures in Detroit. Using spatial econometric analysis, they estimate the changes in property values resulting from demolitions. It is important to recognize that in Detroit a demolition typically results in a vacant lot, which also has a negative effect on nearby property values, but not as negative as dilapidated structures. Their analysis revealed that removing dilapidated structures increased property values by 8.7% for properties within a 0.05 mile radius of the demolition. However, the remaining vacant lot is estimated to reduce to property values within the same radius by 4.9%, so that net effect is a 3.8% (8.7% minus 4.9%) increase in property values.

Positive Impact on Property Values

The good news is that demolitions have a measurable positive impact on property values. Paredes and Skidmore took the evaluation a step further to determine whether the benefits in terms of the aggregate increase in property values exceeded the costs of demolishing 6,035 properties. Their estimate indicated that the sum of these property value increases fell substantially short of the costs. This is because property values in most parts of the city remain very low, even after more than 8 years since the real estate crisis. Detroit was hit particularly hard by the crisis because so many of the home loans were subprime. As the crisis unfolded, rates were adjusted higher and lending dried up, leading to a large scale foreclosures and a collapse in housing prices. As of 2015, average sales prices in many parts of the city were still under $10,000. With such low property values the aggregate increase resulting from demolitions is too small to cover the costs. Further, Paredes and Skidmore determined that even under a very optimistic scenario (a tripling of housing values), it would take more than 50 years to recover the costs in the form of property taxes.

Should society continue to invest in demolitions in Detroit? The authors argue that despite the negative benefit-cost result, investments in the demolition of blight is justified for several reasons. First, demolition removes barriers to potential future development. Second, there may be potential synergies with other policies such as improving public education and reducing crime. The gains in property values associated with improved public services are enhanced by the removal of blight. Third, new research by Camila Torrejón, Dusan Paredes, and Mark Skidmore (2017) show that demolishing dilapidated structures also helps improve tax compliance…property tax delinquency is reduced in neighborhoods where blight is removed. Finally, there are equity considerations. Many government expenditures are redistributive in nature. It may be that the society wishes to help improve the quality of life in declining urban areas by helping to pay for the removal of blight. With continued investment in the people and the city, Detroit can once again be a heathy and vibrant city.

References

Paredes, D. and Skidmore, M. 2017. The Net Benefit of Demolishing Dilapidated Housing: The Case of Detroit. Regional Science and Urban Economics http://dx.doi.org/10.1016/j.regsciurbeco.2017.05.009

Torrejón, C., Paredes, D., and Skidmore, M. 2017. Housing Demolition and Property Value Delinquency: Evidence from Detroit. Michigan State University Working Paper.

Acknowledgements

The authors are grateful to the Lincoln Institute of Land Policy for providing financial support to conduct this research.

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