Elizabeth A Duke: Addressing long-term vacant properties to support
neighborhood stabilization
Speech by Ms Elizabeth A Duke, Member of the Board of Governors of the Federal Reserve
System, at the Federal Reserve Bank of New York, New York, 5 October 2012.
* * *
Good afternoon. I want to thank the Federal Reserve Bank of New York and the Rockefeller
Institute for inviting me to participate in this important discussion of distressed residential real
estate.
The boom and bust in housing that is a hallmark of the recent economic cycle has resulted in
an unprecedented volume of foreclosures that has, in turn, left us with an extraordinary level
of vacant and distressed properties. Even after the official end of the recession, home sales
and house prices continued to decline for several years, and residential investment
languished.1 All of this has resulted in a slow recovery in housing, which is one of the primary
reasons why our overall economic recovery has been so sluggish. In order to see the robust
economic recovery we all want, we need to deal effectively with the large volume of vacant
and distressed properties throughout the country.
Our housing crisis has many dimensions and will require a full spectrum of policy actions to
restore health to the housing market, our economy, and most importantly, to neighborhoods
and communities across the country. The Federal Reserve System has been active in
studying various aspects of the crisis, bringing together community leaders and market
participants to share experiences in forums such as this, and using data to identify areas of
particular need. I have spoken in the past about credit availability, preventing foreclosures,
converting foreclosed properties to rental properties, and strategies for neighborhood
stabilization. Today, I would like to focus on the problems posed by an elevated level of
vacant properties. I plan to draw on research conducted by Federal Reserve Board staff and
would especially like to thank Raven Molloy, an economist in our macroeconomic analysis
group, for her work in this area.
As I will discuss later in my remarks, the effective use of data is a common theme among
success stories in neighborhood stabilization. In the hope that the census tract data
referenced in this speech might be helpful to others working to address vacancy problems, I
plan to post our data on the Federal Reserve website along with this speech.2
Level and distribution of vacant housing
Since the beginning of this year, there have been signs of improvement in aggregate housing
market conditions nationally. Sales of new and existing homes have risen and home prices
have turned upward. So far this year, house prices have risen sufficiently to move a
noticeable number of underwater households - that is, those who owe more on their
mortgages than the market value of their homes - from negative equity to positive equity.
However, housing markets differ greatly both across regions and within metropolitan areas,
and the positive signs in the aggregate data do not apply to all neighborhoods equally. For
example, even within those metropolitan areas that have experienced rising average prices
over the past year, one-fourth of ZIP codes saw a decrease in prices over the same period.3
Moreover, those ZIP codes with falling prices have also experienced rising vacancy rates
more often than in other ZIP codes.4 These struggling high-vacancy areas provide evidence
of the hard work that remains even as housing markets show signs of improvement.
Although many of these areas share a high level of vacancy, they differ significantly in other
characteristics: the concentration of vacancies, age of the housing stock, cause of the
problem, and even the demographics of the residents. By looking more closely at the
differences, we will gain a better understanding of these markets and of the policies or
program solutions that will address their vacancy issues most effectively.
One measure that is frequently cited when describing recent improvements in the national
housing market is the inventory of vacant homes for sale. This measure had fallen to
1.6 million units in the second quarter of 2012, substantially below its peak of about 2 million
units in 2010 and the first half of 2011.5 However, many vacant homes are not on the market
at all. These vacant units include properties that are in the foreclosure process, bank-owned
properties that are not yet for sale, as well as properties for which the cause of vacancy has
no connection to the foreclosure process. Indeed, the stock of non-seasonal homes held off
market is nearly two and a half times as large as the for-sale vacant stock.6 But unlike the
inventory of vacant homes for sale, this stock remains stubbornly elevated relative to
precrisis numbers, and has not gone down at all over the past year.
Moreover, vacant units are not evenly distributed throughout the United States. Some
neighborhoods suffer disproportionate numbers of them. Specifically, one-tenth of all census
tracts account for nearly 40 percent of the entire vacant housing stock. By comparison, the
overall housing market is only half as concentrated with only 20 percent of the aggregate
housing stock found in the 10 percent of census tracts with the largest total number of
housing units.7
Problems posed by vacant properties
Why focus on vacant homes? Vacant homes can be more than just an eye sore; they can
have substantial negative impacts on the surrounding community, impacts that are felt most
acutely by the neighbors and communities that must cope with the dangers and costs of
vacant buildings. Since vacant properties tend to be concentrated in a relatively few number
of neighborhoods, some communities are adversely affected much more than others.
Homes that have been vacant for a long time tend to fall into severe disrepair. Such physical
blight can invite more property crime, as vacant houses are an appealing hide-out and target
for criminals, and the absence of residents can mean fewer eyes in the neighborhood to look
out for suspicious activity. In fact, counties that experience a large increase in the number of
long-term vacant homes tend to see an increase in burglary in the following year. This
correlation holds even after controlling for other county characteristics, such as changes in
unemployment, changes in population, and changes in violent crime.8
In turn, blight and crime make these neighborhoods less attractive to potential buyers,
renters, and businesses. Calculations by Board staff indicate that ZIP codes with a larger
increase in long-term vacancy experience smaller increases - or larger decreases - in house
prices in the next year.9 Falling home prices can harm both neighboring homeowners as well
as local municipalities that are dependent on property tax revenue.
Research conducted by the Federal Reserve Bank of Cleveland has shown that a home that
is simply foreclosed, but not vacant, lowers neighboring property values by up to 3.9 percent.
However, if a home is foreclosed, tax delinquent, and vacant, it can lower neighboring
property values by nearly two and a half times that amount.10 Moreover, properties that have
been vacant for a substantial period of time can impose even larger costs on the community,
and all too often, the private market is not likely to solve the problem on its own. In such
cases, government authorities and public resources may be required.
Of course, not all vacant properties pose a problem for the local community, as some homes
become briefly vacant during the usual process of changes in ownership. But the longer a
home stands vacant, the greater likelihood that poor maintenance and the associated
problems that result can become serious issues for the surrounding community. Statistics
from the American Housing Survey show that properties that have been vacant for longer
than two years are much more likely to have severe problems, such as cracked floors or
walls, broken or boarded up windows, and a roof or foundation in disrepair, that make these
properties harder to rehabilitate and less appealing to prospective buyers.
Segmenting the inventory of long-term vacancies
Analysis by Federal Reserve Board staff has calculated the fraction of housing units in each
census tract that has been vacant for at least two years - which I will refer to as "long-term"
vacancy - and categorized tracts that appear in the top 10 percent of this distribution into
three types.11
The first category of high long-term vacancy census tract is an area where a large
percentage of housing units were built post-2000, and that therefore can be thought of as
"housing boom" tracts. These locations also have a higher median income, higher median
house value, and a larger fraction of residents with at least a college degree than other high
long-term vacancy census tracts. Examples of metropolitan areas with a large number of
tracts in this category are Denver, Colorado; Orlando, Florida; Las Vegas, Nevada; and
Phoenix, Arizona.
The second category of high long-term vacancy census tract has a large share of older
housing stock built before 1960, low median income, a high poverty rate, a high
unemployment rate, and a large share of residents with less than a high school degree.
These tracts can be called "low demand" locations because these characteristics are
frequently associated with areas suffering from persistent job loss and a decline in housing
demand. Metropolitan areas with a large number of tracts in this category include Detroit,
Michigan; Cleveland, Ohio; St. Louis, Missouri; and Baltimore, Maryland.
The third and final category of high long-term vacancy census tract has a low density of
housing units per square mile, high shares of owner-occupied and single-family housing
units, and a high fraction of white non-Hispanic residents. We can think of these
neighborhoods as "traditional suburban" areas. Examples of metropolitan areas with a large
number of tracts in this category are Charleston, West Virginia; Des Moines, Iowa; Peoria,
Illinois; and Oklahoma City, Oklahoma - locations not often mentioned in national media
coverage about the housing crisis.
Matching solutions to neighborhood characteristics
As I mentioned earlier, we should endeavor to achieve full recovery in all of the many diverse
housing markets around the country. The private market will likely drive recovery in many
locations and, in those locations, the appropriate role of government may be to monitor local
activity and ensure that the actions of the private markets improve neighborhoods and
provide opportunity for all families, regardless of income, race, ethnicity, or housing tenure.
However, some neighborhoods likely will not recover without the assistance of government,
and in this time of scarce resources, it is critical that the public sector has the information and
tools necessary to ensure that any assistance that is provided is effective and efficient.
Doubtless there will be costs associated with solving these problems, but it is important to
also consider the costs of doing nothing. For example, it costs local taxpayers to let vacant
buildings decline, it costs money to tear them down, and it costs money to convert them to a
better use. Ultimately, a policy of neglect will be just as - or even more - costly than finding
and implementing constructive solutions to the vacancy issue. We must ask ourselves, can
we create policies that fairly distribute those costs? What are the limitations? What
innovations can create more effective, scalable solutions? With funding scarce, how can we
identify solutions that will ultimately be most cost effective?
To begin to answer some of these questions, I return to the typology of vacant properties
introduced earlier.
"Housing Boom" locations
The first type, "housing boom" areas, has relatively high median incomes and new housing
stock. These characteristics are attractive to investors, and many investors are reportedly
purchasing vacant homes and converting them to rental. Given the recent tightening of the
rental market, such a strategy could be a win-win scenario for communities that need more
affordable rental homes and suffer from an excess of single-family vacant units. In fact, in
January, the Federal Reserve released a staff paper on housing issues12 that went into some
detail about the potential benefits of converting foreclosed properties to rental, and in April,
the Board released a policy statement that outlines supervisory expectations for residential
rental activities for certain banking organizations.13
Phoenix, Arizona, is a good example of an area with many census tracts that fit into the
"housing boom" typology. Phoenix was one of the areas hit hard during the housing bust,
with a peak-to-trough decline in prices of more than 50 percent.14 More recently, however,
prices in Phoenix have rebounded with a double-digit increase over the 12 months ending in
July.15 Reportedly, much of this demand is driven by investors who are converting vacant
homes into rental properties. Direct statistical evidence on investor activity at the local level is
not available. However, since investors tend to finance their purchases with cash or other
non-mortgage financing, the level of cash purchases can provide an indicator of investor
activity. In the past two years, the fraction of home purchases financed with cash in the
Phoenix area was much higher than the national average.16 This is an example of the private
market stepping in to purchase vacant units and in turn increasing housing values.
As encouraging as this trend may be, it is not a panacea. For example, it is possible that
aggressive investor activity could crowd out potential homeowners, especially low- to
moderate-income households. In addition, investors are not interested in all markets;
therefore, there will still be some areas where private investment will not step in to curb the
problems associated with vacant properties.
The problem of investors crowding out local homebuyers could be addressed through "first
look" programs that provide a window, usually 15 days, during which time only prospective
homebuyers and nonprofits may bid on a property. In Phoenix, non-profit organizations and
local government officials used Neighborhood Stabilization Program (NSP) funding and
enlisted local real estate professionals to match vacant homes with eligible homebuyers.
These are important programs. Community leaders, banks, and real estate professionals
should continue to collaborate to ensure that prospective homeowners are given a fair
chance to bid on available properties.
However, most prospective homebuyers and local nonprofits cannot bid on a property if they
cannot access mortgage credit. Results from the Federal Reserve's Senior Loan Officer
Opinion Survey suggest that banks are less willing to provide mortgage credit now than in
2006 to borrowers with lower credit scores or smaller down payments.17 We hear much the
same story from community groups and housing counselors who report that low- and
moderate- income and first-time homebuyers, especially, are finding it increasingly difficult to
meet the requirements for a home purchase loan due to limited funds for a down payment or
weaker credit scores. While prudent lending may warrant tighter underwriting standards
relative to pre-crisis levels, it is also important to ensure that tight credit does not
unnecessarily dampen the housing recovery and disproportionately affect creditworthy
lowincome and minority homebuyers. And without the participation of owner-occupants, it will be
difficult for many housing markets to recover.
Like Phoenix, Oakland, California is also reportedly experiencing a significant amount of
investor activity that may be crowding out purchases by prospective homebuyers and
nonprofits. We hear complaints that many of these investors are not based in Oakland,
causing residents to express concern about external ownership of their neighborhoods and
the long-term implications of absentee landlords. In an attempt to address these concerns
and provide more homeownership opportunities to low- and moderate-income Oakland
residents, a national nonprofit, Enterprise Community Partners, is working with a private real
estate fund to direct some of the private dollars seeking investment properties in Oakland.
The nonprofit partnership is using a complex data-driven platform to identify targeted low-
and moderate-income neighborhoods in the city, purchasing vacant properties, rehabilitating
them through a local workforce development program, and converting them to rental. The
ultimate goal is to ensure that the properties remain local neighborhood assets. To achieve
this, the partnership is prioritizing rentals and sales to qualified local residents or nonprofits.
Such an innovative strategy seeks to complement local government and investor activity so
that residents can share in the benefits of a housing recovery.
"Low Demand" locations
Not all markets are equally attractive to private investors, so some governments are
developing programs to attract private capital to "low demand," high-vacancy neighborhoods.
The city of Baltimore, Maryland provides a good example of such a program. Baltimore is
burdened with approximately 16,000 vacant and abandoned buildings, about a quarter of
which are owned by the city. Much of this vacancy has been caused by population loss and
suburban flight - Baltimore City has lost nearly one-third of its population over the last
50 years.18 However, not all parts of Baltimore have a significant number of vacant
properties. In fact, only 5 percent of census tracts in the Baltimore metropolitan area have a
long-term vacancy rate in the top decile of the national distribution.19 The city of Baltimore
has recognized these micro-market distinctions and initiated an innovative data-driven
program to identify areas with a high concentration of vacant properties and turn these
properties into valuable assets.
This initiative, called "Vacants to Value," uses data and targeted housing code enforcement
to foster redevelopment in areas where there is modest private investment interest. Using a
variety of real-time data sources, this program has developed market typologies down to the
census block-group level so that it can accurately determine the needs of specific
neighborhoods and apply targeted programs to best meet those needs. For example, the city
is targeting approximately 700 vacant properties in weak market areas where large-scale
investment - encompassing at least a city block - is necessary to catalyze private
investment. In healthier neighborhoods, the city believes that increased code enforcement
and homebuyer or developer incentives should be enough to reduce vacancy and stabilize
neighborhoods. Lastly, in Baltimore's hardest hit neighborhoods, the city is demolishing,
holding, or maintaining properties that are unlikely to attract any private investment in the
near future.20
Unfortunately, in some cases, vacant homes are beyond repair and will never be habitable
again. In these instances, demolition is often the best solution, and land banks can be a good
way to hold the property until it can be converted to a better use. A land bank is a
governmental or nongovernmental nonprofit entity established, at least in part, to assemble,
temporarily manage, and dispose of vacant land for the purpose of stabilizing neighborhoods
and encouraging re-use or redevelopment of urban property. Land banks have been around
since the early 1970s, but the recent foreclosure crisis has stimulated the creation of several
new land banking programs, including in New York State and Kansas City, Missouri. A key
characteristic of the new generation of land banks is that they often include mechanisms to
self-finance over time, including the ability to recapture a portion of the property taxes for a
fixed period of time after the property is put back to productive use.
As encouraging as these new self-financing features are, land banks and municipalities are
still struggling with the high costs of demolition. For example, in Cuyahoga County, home to
Cleveland, Ohio, about 80 percent of the approximately 100 properties per month that the
land bank acquires need demolition, but at $10,000 in average costs per demolition, the
Cuyahoga Land Bank is struggling to find the resources to fund this activity.21 The state of
Ohio recently dedicated $75 million of its direct payments from the Attorneys' General (AG)
National Mortgage Settlement to fund a new grant program for demolition of abandoned and
vacant properties statewide.22 This $75 million still will not solve all of Ohio's demolition
needs, but leveraging public and private funds like the AG settlement or developing new
national sources of bond financing could help address this local problem.23
"Traditional Suburban" locations
The last category of high-vacancy areas in the typology that I discussed earlier is "traditional
suburban" neighborhoods. In contrast to the other two types of high-vacancy census tracts,
these neighborhoods are more evenly spread across many metropolitan areas, illustrating
that vacancy can be a problem in any community. Furthermore, ZIP codes in the "traditional
suburban" tracts do not tend to have a higher share of property vacancies resulting from
foreclosure than other ZIP codes, which demonstrates that some neighborhoods are
struggling with long-term vacancy issues even though they did not experience large numbers
of foreclosures. While the vacancies faced by these suburban areas might not have been
caused by foreclosure problems, the costs to neighborhoods are every bit as real. Such
areas represent additional opportunities to use the lessons of the recent crisis as local
leaders strive to better understand the root cause of high vacancy levels and to target limited
resources. Consider the situation faced by Oklahoma City.
Oklahoma City estimates that 8,000 urban properties have been vacant for more than three
years, and that the number of vacancies is increasing.24 The city's historically high housing
vacancies mostly stem from cultural and demographic changes that have occurred over
decades, as well as inadequate building code laws and enforcement. Interestingly, the area
did not experience the housing boom and bust that occurred in much of the nation. Whereas
national house prices rose by 89 percent between 2000 and 2006, prices in Oklahoma City
rose by only 35 percent. In addition, house prices in Oklahoma City have been flat since
2006, a sharp contrast to the large drop in national home prices.
But even though the vacancy rates in Oklahoma City are not a direct result of the housing
boom and bust, it may be that newer solutions developed for "housing boom" and "low
demand" areas can be combined with traditional community development policy tools to help
solve a problem that developed over decades. Indeed, city planners recently concluded that
the city could not tackle neighborhood revitalization without addressing vacancies. Increasing
costs for needed city services, reduced revenues, and barriers to growth resulting from
deteriorating infrastructure all combined to lend urgency to these efforts. As has been the
case in other cities, officials in Oklahoma City realized that gathering data was a necessary
first step. Starting earlier this year, they embarked on an ambitious study to determine the
total cost resulting from vacancies. The city will then use the findings from the study to
support enactment of tougher code enforcement to recover lost revenue, including
assessment of fines against owners who fail to maintain their properties. This combination of
new measurements and old tools to develop solutions should serve as an example to many
"traditional suburban" areas around the country that have experienced, and will continue to
experience, vacancy issues.
Conclusion
The potential fallout of high rates of vacancy - blight, crime, lowered home values, and
decreased property tax revenue - is the same for every neighborhood and community. But
there is no one-size-fits-all solution to the vacancy problem. I've used some examples of
communities around the country that are facing high vacancy rates in order to illustrate their
different characteristics and the different origins of their vacancy problems. Taking account of
such differences will be important in crafting solutions to the problems caused by those
vacancies. Hopefully, these examples and other ideas that have been shared throughout this
conference will inspire new and creative solutions to the difficult issues faced by
communities. Certainly, different housing markets will recover in different ways and at
different paces. In some areas, the private market will lead the way, while in others,
government will have to use precious resources wisely to catalyze recovery.
The examples I've discussed also illustrate the value of using data to understand vacancy
issues, to determine which neighborhoods are experiencing which challenges, and to design
appropriate policy solutions. Solving the problems of long-term vacancies will require the
best efforts of public, private, and non-profit leaders locally and across the country. I can
assure you the Federal Reserve System will continue to support recovery through the use of
all its policy tools and research capacity.
Thank you.
Appendix
Summary of Long-Term Vacant Typologies
Below is a description of the three typologies of census tracts with high long-term vacancy
rates that are described in Governor Elizabeth Duke's October 5 speech entitled "Addressing
Long-Term Vacant Properties to Support Neighborhood Stabilization" and demonstrated by
the attached data. These tracts are defined as tracts in the top 10 percent of the national
distribution of long-term vacancy rates, where the long-term vacancy rate is the fraction of
residential addresses that have been vacant for longer than two years. More details on the
methodology can be found in the Background on Analysis section.
Background on Analysis
The analysis of long-term vacancy by neighborhood is based on data collected by the U.S.
Postal Service (USPS). The Department of Housing and Urban Development (HUD)
processes the data and makes statistics by census tract available to researchers at
government and non-profit institutions. Details can be found at
www.huduser.org/portal/datasets/usps.html.
The first step is to identify census tracts with a large fraction of long-term vacant housing
units. Because an address could appear to be vacant if it is seasonally occupied, we drop
census tracts with a share of seasonal housing units greater than 10 percent (data on
seasonal housing units by census tract are from the 2006-10 American Community Survey).
Then, we calculate the fraction of all residential addresses in each tract that have been
vacant for two years or more; we call this the "long-term vacancy rate."1 We identify tracts in
the top decile of the national distribution as those with a high long-term vacancy rate.
To create a typology of these high-vacancy tracts, we merge in data on tract characteristics
from the 2006-10 American Community Survey and estimate a factor model. Factor analysis
is designed to combine a set of variables in a way that summarizes common elements. The
analysis identifies three factors that account for a meaningful fraction of the variance of the
characteristics in the model.2 Table 1 reports the census tract characteristics used in the
model and weights that each factor places on each characteristic. Using these weights, we
predict the value of each factor for each census tract. Then, we assign each tract to a
category based on its largest predicted factor. Table 2 reports the average value of each
characteristic for tracts that are assigned to each of the three types.
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