Continued...

Although CDCs in the 1970s attempted to revitalize local real-estate markets through physical redevelopment, limited resources ensured that redevelopment would be on a very small scale. These early physical-development success stories were the inspiration for the current community-development industry. However, unlike today, they also used a host of other tools and services to accomplish their goals, including community organizing, skills development, sweat equity, and cooperative businesses. Most important, in the 1970s there was a widespread understanding in the industry that markets were not a blanket solution to neighborhood difficulties, they were part of the problem.

Addressing the negative effects of markets in neighborhoods resulted in the passage of the Home Mortgage Disclosure Act in 1974 and the Community Reinvestment Act (CRA) in 1977—measures designed to manage the negative effects of markets, namely, the movement of liquid capital to locales where it will earn the highest return. Similar efforts were made to place controls on heating and fuel costs.

Attempting to mitigate the negative effects of markets did not prevent early community developers from leveraging their positive effects. For example, they worked to improve neighborhoods’ appearance in the hope that doing so would attract new homeowners and, in turn, lead to healthier neighborhoods. These early community developers were pragmatic and nonideological in their understanding of the value of market mechanisms. Their successes made them attractive to philanthropies and government agencies, which increasingly turned to community developers to address pressing urban problems.

The early pragmatic, holistic view of development has largely been supplanted by the idea that communities are in crisis because of the absence of market mechanisms rather than the negative effects of markets. A host of tools were developed by government, philanthropies, and intermediary organizations to leverage markets’ positive effects. The most notable of them, the Low-Income Housing Tax Credit (LIHTC) passed in 1986, has been instrumental in the creation of an efficient market for investment in the production of low-income housing. This is a stunning achievement, for which Local Initiatives Support Corporation (LISC) and the Enterprise Foundation deserve the credit (although bankers concede privately that the LIHTC would not work in the absence of the CRA, suggesting that it depends upon regulatory limitations on markets as much as their free operation).

Philanthropies figured out new ways to leverage resources to support these activities through the use of program-related investments rather than grants. States and municipalities developed land banks and housing trust funds. CDCs leveraged their hard-won development skill to branch out into market-rate housing and commercial development. The payoff of this tremendous institutional innovation has been rebuilt and unquestionably healthier neighborhoods. And because it is difficult to argue with success, the negative effects of leveraging markets, such as gentrification and displacement, are frequently debated but rarely acted upon in any serious way.

The notable success of the community-development industry over the past 25 years is unquestionably the product of tremendous innovation and imagination. It is built upon the willingness of a variety of people and organizations to figure out new ways to work together to make reinvestment and development happen. The amazing thing is that it has worked. Neighborhoods such as the South Bronx, once characterized by abandoned buildings and vacant lots, now have little available land left, and what is there is subject to speculative flipping. Investment is flowing and building is happening.

Those who considered CDCs as developers of last resort were right, but not because their one-sided analysis hit the mark. Instead, they were correct because CDCs’ physical-development efforts corresponded with a sustained economic expansion that was capped off by a wild speculative boom in real-estate markets.

Widely available credit made payments cheaper for homeowners and made tax credits attractive to investors. Combined with efficient nonprofit production and an overheated housing market, quality housing was produced efficiently and cheaply while new homeowners have benefited from real-estate values that have increased at a historically unprecedented rate. This made homeownership a temporarily attractive investment option for banks and for new, more marginal borrowers.

Without the speculative fuel, housing production is unlikely to yield the same benefits. Indeed, in cities like Cleveland, the turning of the credit market is creating a whole new round of urban social problems: increasing crime, housing abandonment, and newly strained municipal budgets.