An auction sign sits in the front yard of a foreclosed home in Cleveland on Jan. 14, 2008.

In 2003, the Community Development Committee of the Cleveland City Council was holding hearings on the annual Community Development Block Grant (CDBG) allocation. Included in the proposed legislation was a line item to contract with a housing advocacy group to provide foreclosure counseling for the growing number of victims of predatory lending. The hearing room was filled with the staff and directors of the city’s community development corporations (CDCs). But they weren’t there to support predatory-lending counseling. They’d come to protest the diversion of funds from their housing-production activities to counseling assistance.

The protesting CDC practitioners believed that the best way to deal with neighborhood problems was to produce housing that would be attractive to outsiders. Even in Cleveland, which has been a canary in the coal mine of subprime meltdown, CDCs have stuck with their old methods, continuing to view physical development as the appropriate tool for community revitalization. Many hope the foreclosure crisis will be brief and provide an opportunity to acquire developable land.

In fact, the foreclosure crisis has hit Cleveland especially hard, and the real-estate market in the city has frozen as prices reset dramatically lower—not because of intervention or its absence, but because the real-estate market is doing what markets do. Just as the relative recovery of Cleveland’s neighborhoods was not simply the result of CDCs creating market activity where there otherwise wouldn’t be any, the emerging neighborhood crisis is not the fault of CDC activity. Over the past two decades, the community-development system worked because community developers were able to swiftly and effectively adopt themselves to a moment when market revitalization, through physical development, had many positive effects and few negative ones. That moment has passed.

The Cleveland meeting illustrates the degree to which some community developers have become so invested in physical development that it prevents them from seeing other needs and opportunities. Their faith in the power of market activity rests on forgetting that community development has its origins in dealing with localized problems of market failure. Once, community developers around the country used a holistic model that emphasized human wellbeing and nurturing community social ties. But for the past 20 years, the community-development industry regarded housing production as a cure-all.

The current structural organization of the community-development industry amounts to a sustained bet on the positive benefits of higher real-estate values and the use of market mechanisms. Organizations have become development engines, funders assess success in terms of unit production, and staff members are more likely to have financial skills than community-building ones. In a context of expensive credit and the collapse of the real-estate market, this bet is unlikely to pay off either for the industry or the communities they serve.

The neighborhood crisis of the 1970s was central to the formation of the community-development industry. Government and private investment transferred investment from poor, urban neighborhoods in the North where it would yield low returns, while concentrating loans, infrastructure, and capital investment in the new suburbs of the South and West. In neighborhoods that were starved for these resources, community development naturally came to be about rebuilding and revitalizing communities through the use of available resources, including the social, human, cultural, and economic capital of neighborhood residents.