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

"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.

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."

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.

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.

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