STL Develops

I want to start off by saying that I believe the United States is an amazing place to live.  After traveling to 10 different countries in Europe, North America, and the Middle East, I think the US is actually one of the least prejudice places I have been in the world.  However, we do have a history of institutionalized racism, and I think it is important to remind ourselves of this from time to time.  In fact, even after years of studying this, I’m still amazed at information I find.  Looking at our history is important to understand why our region looks the way it does and plan for a stronger future.  The implications of public policy decisions in the past affect all people in St. Louis.  Public Policies have particularly influenced housing decisions greatly, and were as much or more a reason for flight from cities as the racial motivations that many attribute to this phenomenon.  So I’ll explain briefly why I think government policy made moving to the suburbs financially appealing, and how this was racially motivated, but even non-racist people would have been induced to move.

The reason this is so important, is that many people claim that the suburbanization of America was a result of personal choice, and therefore unavoidable and “just the way it is.”  However, this is not true, the federal government clearly influenced this phenomenon, as explained in City Politics: Private Power and Public Policy by Dennis R. Judd and Todd Swanstrom were the data for this post comes from unless otherwise noted.  The housing market in the United States prior to 1934 was basically completely market driven, banks in essence loaned money to consumers and typically charged high down payments, often 30%-50%, and had short amortization terms, often 6-10 years.  FHA insurance insured loans given by banks that followed certain criteria and allowed consumers to use 20% down payment and amortize the loan over 25 or 30 years.  This program overwhelmingly benefited the suburbs, between 1935 and 1975 over 75% of the of the FHA insured mortgages insured new housing.  About 33% of all homes bought in the 1950’s were VA or FHA insured.  You may say, so just because people moved to suburbs with their loans, doesn’t mean there was anything malicious going on?  Well Examine this excerpt from the 1938 FHA underwriting manual:

“Areas surrounding a location are [to be] investigated to determine whether incompatible racial and social groups are present, for the purpose of making a prediction regarding the probability of the location being invaded by such groups.  If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes.  A change in social or racial occupancy generally contributes to instability and a decline in values.”

Notice the word “invaded”, if certain incompatible groups move into a white area it is considered an invasion by the FHA.  Here are the definitions of invade from Websters Dictionary online:

1: to enter for conquest or plunder

2: to encroach upon : infringe

3 a: to spread over or into as if invading : permeate <doubts invade his mind> b: to affect injuriously and progressively <gangrene invades healthy tissue>

Is it really fair to say that when someone moves into a neighborhood, they are invading.  So far none of this really shocked me, what shocked me was the ranking of favorable races that was submitted by Homer Hoyt in 1933 when he was an FHA advisor advisor.  He later became the principal housing economist for the FHA from 1934-1940 which obviously includes the period when the 1938 underwriting manual was written.  In his report Hoyt said:

“While the ranking may be scientifically wrong from the standpoint of inherent racial characteristics, it registers an opinion or prejudice that is reflected in land values; it is the ranking of races and nationalities with respect to their beneficial effect upon land values; Those having the most favorable effect come first in the list and those exerting the most detrimental effect appear last:

1. English, Germans, Scotch, Irish, Scandinavians

2. North Italians

3. Bohemians or Czechoslovakians

4. Poles

5. Lithuanians

6. Greeks

7. Russian Jews of lower class

8. South Italians

9. Negroes

10. Mexicans”

Apparently, which part of Italy you come from matters, probably because those from the south have darker skin color.  I think the above information is substantial evidence that the federal government intentionally promoted segregation and provided “favorable” groups with much more favorable financing which allowed these people to greatly benefit from the greatest engine of wealth building for the average American, home equity.

This Old House Magazine recently rated the Shaw neighborhood as one of the top places to buy an old home in the Midwest.  They site the Victorian era neighborhood’s beautiful homes, wide streets, and proximity to Tower Grove Park and the Botanical Garden as aesthetically pleasing features that make the neighborhood a pleasant place to be.  In addition, they mention the growth of local cafes, pubs, galleries and restaurants as an appealing features.  The homes in the neighborhood were built between 1880 and 1940 and feature a mix of Victorian-era, Queen Anne, and Second Empire homes and also some Arts and Crafts, Georgian, and English Tudor.  The prices of course are also appealing.  They say you can buy an unrestored Victorian era home for as little as $125,000 or double if it is restored. 

This is a neighborhood that I am very familiar with and it is one of my favorites for many of the reasons mentioned in the article.  The homes are beautiful and the neighborhood becomes more vibrant each year as more people move in and businesses open.  One of the great features of this neighborhood is the diversity of the people.  There is a mix of income levels and races in the neighborhood, which gives it a good feel.  The article mentions that homes could be bought for $125,000, but this would most likely be an unlivable home.  Victorian homes that are livable cost $200,000 and above with a nicely restored home costing $300,000 and up.  This neighborhood is still rough in some parts, as there are some bad land lords who don’t screen their tenants well.  However, I think the Shaw neighborhood is well on its way to revival and I don’t see it turning for the worse.  The new Biotech corridor along Forest Park Parkway is nearby, and this neighborhood provides great housing stock for future employees of this corridor.  This is a neighborhood that I personally am interested in investing in, and there are some great investment opportunities here.

While we’ve all seen the doom and gloom news reports about the state of the real estate market , it is a fact that St. Louis is really better off than most metropolitan areas according to Forbes . While I can tell you as a real estate professional that this year has been slow, we are actually doing better than most cities. St. Louis developers have struggled as evidenced by the shut down of Taylor Morley and Pyramid Companies, as well as the public troubles of Saaman Realty. However, St. Louis has a reasonably low inventory of vacant new construction compared to cities in the West and South that have thousands of speculative neighborhoods sitting empty, especially in the city and near by suburbs. Downtown St. Louis has been overbuilt, but developers have responded. Properties originally planned to be condos or lofts are being developed as rental housing, like The Lawrence Groups Park Pacific development, or commercial space. Also, projects that were proposed have been cancelled or put on hold like Pyramids COs Leather Trades Build. If you buy a property today are you going to be able to sell it for a huge profit next year of the year after? Probably not. But I do think that St. Louis property values will begin to rise significantly sooner than most of the country. Right now prices are favorable and interest rates are low, so I think that there are definitely some great long term deals to be made.

     As 100% financing options are becoming a thing of the past in the conventional financing market, FHA is becoming a more prominent financing mechanism for people buying a home in the St. Louis Real Estate Market.  Some of the reasons people typically do not want to use HUD financing is they believe there are extra inspections, more paper work, they must invest 3% for a down payment, FHA loans are only for first time home buyers, and all borrowers must occupy the property.  These concerns are unfounded. First of all, HUD requires an appraisal not a special inspection, if the appraiser finds issues that concern the possible safety or habitablility of the property then they can ask for an inspection.  However, almost everyone buying a home should have a qualified ASHI inspector inspect the property. In addition to no special inspections, there is no additional paper work, it is simply different paper work.  Also, buyers do not need to spend their own money on the down payment. They can receive their down payment from other sources such as: gifts, grants, and seller funded down payment programs.  The FHA loan limit in St. Louis is $281, 250 so most home buyers can use FHA financing not just first time buyers.  All borrowers do not need to occupy the residence, only one.  So a buyer can in effect have a co-signer on the loan if for example parents want to help a child buy their first home.  Its a good time to learn about FHA, its projected that 48% of all home loans will be FHA financed in 2008 compare to 2% in 2007.