Detroit housing rises from the ashes

Frank Tarala is a lifetime Detroiter. As a boy, he used to go downtown with his father to see Tigers games. They would always go directly home afterward. There was nothing downtown to keep them there.

Now, Tarala's daughter works downtown and wishes she could afford to live there.

"She's a millennial, and they absolutely have fallen in love with the city. It's something I wish my parents could have seen," said Tarala, a real estate agent and president of the board of governors of Realcomp, Detroit's regional mutli-listing service.

The current rehabilitation of Detroit's downtown is nothing short of fierce. Quicken Loans founder and mega real estate developer Dan Gilbert is behind the city's biggest residential development in half a century, Brush Park, which is slated to break ground this fall. Old buildings are being transformed into residential apartments and lofts, and new micro-units are rising.

The first downtown condominium project in decades is expected to begin construction in 2017: The Ashton Detroit will have 78 condos and five penthouses, according to Curbed Detroit. New projects are going up and prices are going up along with all of them.

"What was old is trying to be saved and renovated, and when they're done with it, the finished product is very trendy. Accessibility to technology, transportation, arts, sports," Tarala said. "It does tend to be expensive because the land cost in the city has really recovered significantly. The initial investment was much higher than it was. It jumped from distressed to expensive."

Detroit, however, is still a tale of many neighborhoods. While the downtown is growing pricey new pads for young workers, there are still thousands of distressed properties littering the rest of the Detroit landscape — neighborhoods where blight is the buzzword. But a veritable army of community bankers and nonprofit groups are fighting the good fight, and slowly but surely, seeing results.

"We've made a lot of headway, but there is a lot more work to do, so we remain optimistic," said Krysta Pate, program director at Detroit Home Mortgage, a program launched in February and designed to make home ownership more affordable and accessible to local Detroiters. "I'm born and raised Detroiter, so I understand the market conditions."

One of the biggest barriers to homebuyers in Detroit is what city officials call the appraisal gap. The city's median home price is just $24,000, according to RealComp, due to the fact that so many homes are foreclosures or have been purchased by investors using cash. Investors renovate the homes, driving up the values, but the original, low sale prices are still used as comparables for neighboring appraisals. Regular, mortgage-dependent buyers who want to rehab homes and live in them, are unable to get large enough mortgages because the homes they want to buy are appraising too low. Detroit Home Mortgage is offering an option.

"We're in this cyclical mess, so we are trying to stop that cycle and provide the financing to buyers," said Pate.

Through a combination of private funding and cooperation of five different banks, the program offers 3.5 percent down payment, fixed-rate loans to buyers with at least a 640 FICO score. They split the loan in two, with the first covering the appraised value of the home and the second loan covering the "appraisal gap," which would be the value of the home once renovated and on the open market. The second loan is held by a nonprofit.

"We understand that you're putting someone in an underwater mortgage based on standard appraisals, so we split it so we could create equity protection. We split the mortgages up based on the value. If there is a hardship, or life event, then what happens is that they would submit paperwork to the nonprofit and we would forgive the amount of the second mortgage over the appraised value," Pate said.

So far, they have looked at about 1,000 inquiries, closed 10 loans and approved 23 others.

"Nothing is going to happen overnight. No one is going to wave a magic wand," added Pate.

But rehabbing the old bones of old Detroit homes is all part of both neighborhood stabilization and revitalization. That's the foundation of another program run by another Michigan native. Detroit LISC (Local Initiatives Support Corporation) is part of national LISC, a community-based development organization that works to transform distressed communities.

"We've been working on a partnership with the City of Detroit Home Repair Program to bring capital back to neighborhoods for homeowners who have been in their home at least six months," said Tahirih Ziegler, executive director of LISC Detroit.

Through a combination of public and private funds, block grants, and $5 million from Bank of America (NYSE: BAC), the program is helping current homeowners to rehab their properties, again, adding value as well as commitment to local neighborhoods. It offers zero percent interest loans over 10 years. The program has had over 4,000 inquiries and 1,500 applications so far.

"The goal is really for the existing homeowners who have roots in the city to improve their properties. If they don't have access to capital, they become part of the issue in terms of blight and neighborhood disinvestment. It's getting people to have a personal commitment," said Ziegler.

Ziegler offers this story of one beneficiary of the home repair program:

Lillie Gibson, 76, a lifelong resident of Detroit who retired from a state job has lived in her home for over 47 years. The zero percent home loan for $18,608 has allowed Gibson to receive new vinyl siding and a new roof complete with updated roof boards, shingles, aluminum gutters and downspouts.

Gibson's main priority was to address the deteriorated roof that caused water to stream down the walls during a heavy rainfall. For over five years, she used buckets to catch the water through the leaky roof. She came across the zero percent home repair loan program through a story in the local news media. Through the program, she was also able to secure homeowners insurance that she had been denied for in the past because of her income and the location of the property. Gibson was extremely pleased with the quality of the work: "One night I woke up and it's raining. I started to get up to get the buckets but then I looked up and said, "Thank you Jesus. The work was done."

Commitment is invaluable, but so is education, which is why many of these programs require the homeowners to take extensive courses in the basics of homeownership.

"We want folks to be able to maintain the home once they're in it, so we do financial education around budgeting and saving and increase their financial literacy. In partnership with our mortgage group we've got a couple of programs," said Jason Paulateer, vice president of PNC Community Development Banking in Troy, Michigan.

PNC offers borrowers a 3 percent down payment loan with a grant of up to $1,500 toward closing costs.

"I think we're still at the early stages. As the excitement continues for what's going on in downtown and midtown, more and more of the stakeholders are starting to focus on the neighborhoods," said Paulateer.

The biggest roadblocks to homeownership in his mind are insurance and, again, appraisals. He said he expects to see more young families looking to these distressed neighborhoods as downtown prices rise. Detroit, however, is not out of the woods yet. Paulateer points to a rise in tax foreclosures and a still struggling school system that prohibits some young families from moving in.

"There is still quite a bit of blight," he added.

But there also appears to be a new energy in Detroit. Detroit-based Quicken Loans, which moved to the city in 2010, is partnering with Home Depot (NYSE: HD) and the Detroit Land Bank in a multimillion dollar home rehabilitation program. Foreign investors are seeing new possibilities in the city's real estate. More importantly, Detroiters are seeing their city in a new light. What was once the poster child for a real estate disaster is now a city with incredible financial potential.

"It's going to take a lot of hard work, but that is what Detroit is all about," said Pate.

Tune in to CNBC at 1 p.m. ET on Monday, Oct. 3, when "Power Lunch" heads to Detroit to get a read on Motown's revival, the auto industry and Michigan's economy in this election year. Quicken Loans founder and developer Dan Gilbert will be co-host.

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