Taxpayer money is not the solution for North Minneapolis’ vacant lots
The city of Minneapolis owns about 500 empty lots, 400 of these on the city’s North Side. Since February, the city has offered financial incentives – up to $75,000 to developers and up to $25,000 to individuals – to build new housing on these vacant residential lots. It is hoped that this will “add properties back to the tax rolls, cut city maintenance expenses and spruce up some neighborhoods that have languished while the rest of the city has recovered”.
This program has drawn an angry response in the Star Tribune today from Neeraj Mehta, director of community programs at the University of Minnesota’s Center for Urban and Regional Affairs, in an article titled ‘North Minneapolis needs public initiative, not private incentives’. But Mr Mehta’s ‘solutions’ will only make any problem worse.
Predatory lending or redlining?
Mr Mehta writes that it is “essential to note how the city came to own so many vacant lots in the first place”. He blames “predatory lending and subprime loans, coupled with the economic downturn”. He also complains about the “history of institutional and structural racism that began with the practice of redlining communities of color in the 1930s.”
How can these communities have suffered from both “predatory lending” and “redlining”? It is true that lax lending was a factor in the subprime mortgage crisis. Under the Clinton administration the Department of Housing and Urban Development adopted the National Homeownership Strategy. This advocated a general loosening of lending standards, particularly for Fannie Mae and Freddie Mac. That administration also made significant changes to 1977’s Community Reinvestment Act. Following these changes lenders would be evaluated “based on the number and amount of loans issued within their assessment areas, the geographical distribution of those loans, the distribution of loans based on borrower characteristics, the number and amount of community development loans, and the amount of innovation and flexibility they used when approving loans”. This too served to loosen lending standards.
But the problem here is too much lending and redlining is the exact opposite. It is, according to Investopedia, “the unethical practice where financial institutions make it extremely difficult or impossible for residents of poor inner-city neighborhoods to borrow money, gain approval for a mortgage, take out insurance or gain access to other financial services because of a history of high default rates. In this case, the rejection does not take the individual’s qualifications and creditworthiness into account”. In the name of combating redlining, the government encouraged lenders to ignore the individual’s qualifications and creditworthiness. This was the reality of ‘predatory lending’.
The problem was either “predatory lending” or “redlining”. Mr Mehta cannot have it both ways.
Mr Mehta’s parochial outlook
Mr Mehta writes that “In nearly every other industrialized nation in the world, governments understand that purely private land markets will not meet the needs of the low-and moderate-income households in their cities”.
This is simply an appeal to numbers rather than an argument in its own right. It also raises questions about just how much Mr Mehta actually knows about housing markets in other industrialized nations. The truth is that many of these countries do very much worse than the United States, with its supposed “purely private land markets”, in providing affordable housing. According to data from the Organization for Economic Cooperation and Development, the ratio of house prices to disposable income per head for the United States was 95.5 at the end of 2016, which puts it 20th in the sample of 24 countries. In my home country, the United Kingdom, it is 130.4. According to Global Property Guide, in terms of the buying price per square meter, the United States – the third most populous nation on earth – has just one city, New York, among the world’s 92 most expensive.
“We know what works”, Mr Mehta writes. In fact, a look around the world shows that we also know what doesn’t work.
When you have a hammer, every problem looks like a nail
Mr Mehta speaks approvingly of a number of schemes in operation elsewhere in the United States. He recommends programs such as Oakland’s $600 million bond to cover “infrastructure improvements and affordable housing programs” and a scheme in Portland, Oregon, which “authorized a $258 million general obligation bond to finance affordable-housing programs”.
This suggests that Mr Mehta doesn’t have the firmest grasp on the problems in North Minneapolis’ housing market. According to Zillow, a property website, the median home value in Oakland is $678,800 and in Portland, Oregon, it is $430,000. But in Minneapolis that figure is $234,500. While there might be a need to tackle problems of affordability in Oakland and Portland, that need doesn’t exist to the same degree in Minneapolis.
To give another example, Mr Mehta cites a scheme in Oakland designed to “ease gentrification pressures”. Is the problem in these North Minneapolis neighborhoods a flood of well off hipsters driving up rents? Obviously not. It is quite the opposite. The problem is spare housing capacity in the shape of empty lots. This being the case, what can Minneapolis usefully learn from this scheme?
The problem in North Minneapolis is not one of a lack of supply and high prices. It is a problem of oversupply and lots that nobody wants to buy. Spending taxpayer’s money on building more housing is a solution looking for a problem. It will only worsen the situation.
People over profits
As a side note, Mr Mehta trots out the old soundbite of “people over profits”. Has he, any more than anyone else who has ever used this cliche, actually thought about what it means? Because a company that mistreated people in the pursuit of profit wouldn’t be making those profits for very long. It is only be meeting people’s demands for goods and services that a private business in a free market can make profits. But we will leave that for another day.
John Phelan is an economist at Center of the American Experiment.