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Half-Filled Housing Developments: 21st-Century Ghost Towns?

John GalloThe real estate market is slowly righting itself, but America’s landscape is still dotted with thousands of partially completed housing developments that might be called ghost towns except that to call something a "ghost" implies it was once alive to begin with.

These were the suburban tracts filled with McMansions that were never sold or wound up in foreclosure; the exurban developments that never even had any homes constructed so they look like aliens plucked away the houses but left the roads and street lights; and the big city downtown condo towers that are 35 stories of empty living space.

They are flies in the amber of the heady days before the real estate collapse that began in late 2006, when the market was awash in easy money and people convinced themselves housing prices never drop. These places will likely lag behind as the economic recovery picks up steam, still toxic for their association with the collapse and subsequent recession, according to John Gallo, a real estate analyst on the finance faculty of the University of Iowa’s Tippie College of Business.

“It’s going to take a long time to absorb those places into the market,” Gallo says. “Nobody wants to buy houses in those developments or build new houses because so many of the properties have or will become rental properties and you don’t know who your neighbors will be.”

Eventually, he expects most of them to fill up, but it will take time and lots of money and other incentives from local governments.

“The cities will have to pursue something with those developments, otherwise they're going to become blighted and drag down real estate values across the board,” he says. “They’ll cut deals with developers, and someone will get a sweetheart deal.”

He says governments and developers will also likely need to offer incentives to buyers to bring them back into the failed developments instead of moving into the hip and shiny new post-recession development further down the road.

“If you can offer the right incentives and get the seeds planted, you can get things going again,” he says.

Homeowners associations (HOA) have also proven a hurdle to redevelopment in some partly completed neighborhoods because they continue to strictly enforce covenants, Gallo says. Unfortunately, he says that kind of strict enforcement winds up hurting the development.

“Many of these developments were targeted for affluent homeowners whose living standards were addressed by covenants in their contracts and enforced by strong homeowners associations,” he says. “A lot of these homes are now being purchased at fire-sale prices by investors who rent the properties. Since renters do not have a strong maintenance incentive, many prospective homeowners are dissuaded from buying in the developments. Thus, the original intended 'culture' of these developments will not be retained.”

He wouldn’t be surprised to see lengthy legal battles over HOA covenants and homeowner rights in the coming years as these developments are absorbed into the market.

Gallo says it’s also likely that some of these developments will never be completed, especially those in the exurbs, far from the jobs in metro areas that were once easier to access when gas was cheaper and two-hour commutes more tolerable. Those developments, he said, might be better off being returned to farmland or other commercial uses.

“There is not much funding available for any new real estate development of any type with the excess supply of properties currently on the market right now,” he says. “For in-process single-family developments, I suspect their fate depends on how close the project is to completion. Those in the later stages will likely find funding to close; those in the early stages may remain eyesores for the foreseeable future. Eventually, the land for the latter projects may be designated to alternative uses."

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