Save Detroit by Knocking Half of It Down? Sounds Crazy, but It Might Work

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A home with a court ordered eviction notice taped in the window on Mackay Street in Detroit, Michigan, U.S., on Thursday, February 21, 2013. Photographer: Jeff Kowalsky/Bloomberg *** Local Caption ***
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"In 1930, Detroit was the fastest growing city in the world. Today, it is the fastest shrinking city in the United States." -- "Detropia"

Detroit is in crisis.

Kevyn Orr, Detroit emergency financial manager, responds to a reporters question while being interviewed on Wednesday, March 20, 2013, in Detroit. The newly appointed emergency manager charged with getting Detroit's finances back on track is welcoming input from city officials as he begins his job next week. (AP Photo/Duane Burleson)
Duane Burleson, APKevyn Orr, Detroit emergency financial manager.
That's not just me talking. That's Kevyn Orr, the state-appointed financial manager charged with salvaging the Motor City from the junkyard.

Detroit's population is down two-thirds from where it once was, and 18 percent of the population is unemployed -- that's more than twice the national rate.

It doesn't take a master's degree in mathematics to tell you that when you're trying to run a city with only one-third of its former population present and accounted for, and only four-fifths of those folks employed and able to pay taxes, well... 73 percent of your tax base just went "poof!"

Now, throw in $15.7 billion in bond debt, pension liabilities, and other long-term obligations all loaded on top of the barely one-quarter of the population still sticking it out -- and things get very hairy indeed, financially speaking.

As Orr explains, it all adds up to a city administration that is quite literally "insolvent on a cash basis." And to emphasize the point, Orr adds: "No one should underestimate the severity of the financial crisis."

General Motors world headquarters in the Renaissance Center in in Detroit, Michigan on Monday, April. 27, 2009. Photographer: Jeff Kowalsky/Bloomberg News.
Jeff Kowalsky/Bloomberg NewsGeneral Motors world headquarters in the Renaissance Center in in Detroit, Michigan.
Hello, AAA? This Is Motor City, and We Need a Tow

So how is Detroit supposed to drive itself out of this economic ditch it's driven into?

One solution being bandied about up in Michigan these days is to default on the debt. That would put an end to the bankruptcy issue, but it won't fix the longer-term problem of how to get Detroit growing again.

So how do you fix that? One guy has an idea.

Bill Pulte says the only way to truly save Detroit and get the housing market functioning properly again is to destroy large swaths of the city as quickly as possible.
BloombergBill Pulte
Meet the Homebuilder Who Wants to Knock Down Homes

The man: Bill Pulte, a grandson of William Pulte, who built PulteGroup (PHM) up from a humble start in Detroit into the biggest homebuilder in the nation.

In an interview with Bloomberg last week, Pulte suggested that the first step to get Detroit growing again is to knock half of it down.

Pulte worries that streets lined with abandoned houses, alternately torched by arsonists or looted by copper-pipe thieves -- or both -- scare away folks who might otherwise move into the area and start it growing again. (Go figure.) Illustrating the truth of this theory, housing data service RealtyTrac says that in all of Detroit last year, only 578 mortgages were taken out for home purchases.

Another problem that needs addressing is the cost of servicing an underpopulated city that sprawls across 139 square miles of land, its few inhabitants scattered hither and yon.



Those dispersed holdouts all require water, gas, and electricity supply lines (which cost money to maintain), garbage collection, fire trucks, and ambulance service (which burn gas driving from house to distant still-inhabited house), police cruisers patrolling deserted streets, and on and on.

Pulte's solution to both problems is to "go into one area and take down everything," and start fresh. To right-size the city, concentrate the population within a smaller, cheaper-to-service footprint, and raze the rest.

He's already begun, leveling 10 city blocks in Detroit's Southeast in an urban-blight-elimination project. A further 15 blocks could be razed this month, and Pulte wants to ramp up and start knocking down houses at the rate of 13,000 vacant homes per year.


Collateral Benefits

Not everyone loves the idea. Indeed, in the Detropia film referenced above, longtime Detroit residents were spitting-mad when asked to move from their homes to somewhere more centralized -- and ridiculed suggestions that leveled house lots could be used to grow tomatoes, for example.

But some studies suggest the idea has merit.

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A 2005 study by the Wharton business school found that knocking down abandoned houses in one Philadelphia neighborhood resulted in adjacent homes gaining 30 percent in market value.

That alone should win Pulte's idea some serious consideration. But the folks being asked to move, however, rather than staying and enjoying the benefit of the "creative destruction" next door, might need additional motivation.

One modest suggestion: After the bankruptcy thing's out of the way (and you know it's going to happen), and Detroit has some breathing room to think about how to start growing again, try giving residents a choice. Raise taxes, raise utility rates, raise rates on city services to a point that actually covers the city's costs. Let residents stay where they are and pay the premium -- or move to more centralized locations (leveling their houses as they leave), and give them a tax break as a reward for playing ball.

Spread around the benefits of right-sizing Detroit like that, and residents might start thinking Pulte's plan is the right one after all.

Motley Fool contributor Rich Smith has no position in any stocks mentioned.

14 PHOTOS
13 Major Suburbs Where Poverty Is Soaring
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Save Detroit by Knocking Half of It Down? Sounds Crazy, but It Might Work

The number of poor households in the suburbs of Dayton, Ohio increased 109% to 97,581 from 2000 to 2011.

The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Dallas increased 111% to 474,023 from 2000 to 2011.

Dallas metro area includes Fort Worth and Arlington. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Charlotte, N.C. increased 113% to 140,760 from 2000 to 2011.

Charlotte metro area also includes Gastonia and Rock Hill. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Detroit, Mich. increased 115% to 453,784 from 2000 to 2011.

Detroit metro area also includes Warren and Livonia. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Minneapolis, Minn. increased 128% to 204,901 from 2000 to 2011.

Minneapolis metro area also includes St. Paul and Bloomington. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Provo, Utah increased 129% to 39,784 from 2000 to 2011.

Provo metro area also includes Orem. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

Photo: Michael.Jolley, Flickr.com

The number of poor households in Boise City, Idaho increased 130% to 62,459 from 2000 to 2011.

The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Phoenix, Ariz. increased 134% to 275,085 from 2000 to 2011.

Phoenix metro area also includes Mesa and Glendale. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Denver, Colo. increased 138% to 163,434 from 2000 to 2011.

Denver metro area also includes Aurora and Broomfield. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Las Vegas increased 139% to 214,883 from 2000 to 2011.

The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Salt Lake City, Utah increased 142% to 115,109 from 2000 to 2011.

The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

The number of poor households in Austin, Texas ballooned 143% to 103,248 from 2000 to 2011.

Austin metro area also includes Round Rock and San Marcos. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."

Photo: heatheronhertravels, Flickr.com

Atlanta suburban poverty rose 159% to 780,078 from 2000 to 2011 –– by far the fastest growth in suburban poverty in the nation.

Atlanta metro area also includes Sandy Springs and Marietta. The increase in poverty was tracked by the Brookings Institute in "Confronting Suburban Poverty in America."
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