Buffalo spent $30 million over the past quarter century to help people buy homes they couldn't otherwise afford as part of the city's attempt to rebuild blighted communities.

Giving homeowners $25,000 toward their mortgage has, in many instances, changed the landscape of some of the city's poorest neighborhoods.

But foreclosures — one for every four homes in some of these developments — ravaged the program, already marred by many houses depreciating from the outset, a Buffalo News analysis found.

These 1,500 homes — spread throughout 157 streets, many on the outskirts of downtown — are now assessed 12 percent below their initial $123 million pricetag.

And homes that later went back on the market sold for an average 24 percent below their original price, The News found.

In comparison, housing values citywide were flat in the 1990s and have steadily increased this decade — up 40 percent from 2000 to 2008, according to local real estate data.

The new homes that City Hall subsidized did not do as well.

"Foreclosures weakened the effort, but overall, not all the housing that was put up was well thought out," said Michael K. Clarke, head of the Buffalo office for Local Initiatives Support Corp., a nonprofit agency that promotes community development. "There was insufficient coordination with the need for rental housing, and not enough emphasis on target areas that might demonstrate a more stable return. You can't sell new homes next to vacant ones, or sell houses to people who only qualify for financing by the skin of their teeth, and expect to have much success."

"We played musical houses with the housing in Buffalo," added Joseph E. Ryan, the former strategic planning director under former Mayor Anthony M. Masiello. "We have more houses than we need. People are coming from existing neighborhoods. It's not like they've been coming from out of town. It helps to destabilize neighborhoods."

And the same game continues today, some say, with people moving out of the Kensington- Bailey neighborhood, for example, and into new houses being built off Broadway, Sycamore Street or Michigan Avenue.

Some steps have been taken in recent years to slow down foreclosures, which average 15 percent among all 1,500 houses but struck some streets harder. Along three blocks of Welker Street near Jefferson Avenue, six of the seven homebuyers lost their homes to foreclosure.

But now, the questions go beyond foreclosures and the impact new houses have on older neighborhoods. The skyrocketing cost is the latest issue. Newly built houses are getting subsidies that sometimes rival the amount homeowners themselves pay for their new homes.

The Buffalo News analyzed the city's subsidized housing program as part of its review of how the city spends federal money, distributed by the Buffalo Urban Renewal Agency.

The analysis comes as the Brown administration proposes merging the city's Buffalo Economic Renaissance Corp., the city's main economic development agency, into BURA, the city's key housing development agency.

The News analysis found:

• The assessed value for subsidized homes fell 12 percent overall, but the outcome varies from development to development, with location a key just as it is for traditional housing. Homes in distinct developments tended to do the best. Those scattered and not part of a development fared the worst.

• Of the 431 subsidized homes that resold among the 1,500 built, more than half — 231 — were foreclosed upon, with most — 184 — involving the original subsidized owner. These foreclosures basically wiped out the $4 million in publicly funded subsidies the 184 foreclosed owners received.

• Three out of every four homes resold for less than their original prices. The average loss was nearly $30,000. Overall, homes that resold lost 24 percent of their original value, but houses that were foreclosed took the biggest hit, selling for 31 percent less than their original prices. And the foreclosed homes generally continued losing value for years in subsequent sales, dropping by 42 percent from their original value.

Homes that sold without foreclosure lost, on average, 2 percent of their initial value.

• With the $30 million in buyer subsidies, homeowners could build equity despite the falling value of their homes. Among homes sold by original owners without foreclosure, nine of every 10 homes sold for, on average, $15,800 above the buyer's price, representing a profit for the seller — even when the sale wasn't close to the original purchase price.

• The biggest winner when it comes to resales is Rebecca Park off Military Road in Northwest Buffalo. Walden Heights in Schiller Park, the city's first market-rate housing project, also does well. Two other developments — Adamski Village off William Street and Pratt Willard, built on eights blocks on both sides of Broadway — do well as long as the houses aren't foreclosed upon.

• The biggest losers include St. Nicholas Place, on several streets off Jefferson Avenue in the Masten Council District, where 10 of 11 homes were foreclosed upon; and Fruitbelt II, with 30 homes scattered in the Masten and Ellicott districts. Ten of the homes resold — eight after foreclosure — and lost half their value.

• Subsidized homes make up 4 percent of the city's single-family housing, but as much as one-third of the single-family homes in some parts of the East Side. More than half of the houses are in the Ellicott Council District. Masten and Fillmore share much of the rest.

Penman sees results

Numerous requests by The News to interview Mayor Byron W. Brown, BURA's chairman, were not answered.

But Dennis M. Penman, interim president of BERC, reviewed the Buffalo News analysis and said he found much of it reflected positively on the city. Penman is also executive vice president of M.J. Peterson Corp., the first developer to build the homes under the subsidized housing program when it began in the early 1980s.

The new housing, Penman said, has lifted the overall value of the city's East Side — even if the homes aren't worth today what they initially cost to build.

When M.J. Peterson started building new homes on some East Side streets, the average assessment of existing houses was $6,500, he said. The new homes, he said, are worth $65,000 — bringing up the overall value of the street and also paying property taxes on that value.

"Think about what it was like without new housing," Penman said.

What's more, he said, even if the homes sell for less than their full original prices, those that sell for at least what the buyers paid for them are creating wealth among homeowners.

Consider four dozen Pratt Willert homes, the first M.J. Peterson homes, located on eight streets close to where the Kensington Expressway funnels traffic into downtown. Each homebuyer received a $25,000 subsidy.

Today, the assessed value of these homes, as a group, is 4 percent less than the initial overall price when the houses were first bought in the early 1980s.

But, given the subsidies, the assessed value is 41 percent higher than what the buyers' paid for the homes.

Sixteen of the homes were eventually put back on the market, half under foreclosure proceedings. Those selling without a foreclosure proceeding got 54 percent more, on average, than what the homeowners themselves paid for the houses.

Penman acknowledged problems with the way some later developers operated when government subsidies for developments reached their height. And he also said he thinks changes are needed in the way the program is run now.

After decades of relying on private developers to build homes — with private money as well as federal subsidies — the Brown administration has expanded upon a policy begun under Masiello to instead rely on nonprofit organizations, especially those headed by East Side pastors. The nonprofits develop, build and subsidize the homes exclusively with federal funds.

Today, the new houses are sometimes too expensive for this market, Penman said, and they're still not always built in concentrated areas, like the five-block-by-five-block zones his company preferred.

City Hall recently, for instance, gave the Rev. Darius G. Pridgen's development organization more than $700,000 in federal funds to build three houses near his True Bethel Baptist Church on East Ferry Street.

Floodgates opened by '92

Construction of subsidized single-family homes in Buffalo began in 1983 and exploded in the early 1990s, when then-Mayor James D. Griffin broke with tradition and used federal anti- poverty money to support subsidized housing, rather than just downtown commercial development.

At the onset, M.J. Peterson worked with the Griffin administration to build the Pratt Willert homes, beginning in 1983.

Rebecca Park followed four years later in Northwest Buffalo, built by Rebecca Park Development.

And then, it was as if the floodgates opened, with as many as 14 different developers building subsidized housing in Buffalo by 1992.

Eventually, housing advocates said, the program got out of hand, with some developers building houses before finding owners and then feeling pressured to sell quickly.

"I don't believe we had the market for the homes that were being built," said Ryan from the Masiello administration. "It wasn't as large as originally anticipated. The result was the subsidies had to be extended to people who may have had a questionable ability [to afford homeownership.]"

Some developers had "a hell of a time finding people to qualify" for even the subsidized mortgages, Clarke added. "In some neighborhoods, the idea of homeownership is a marginal opportunity. You can't put people in a situation where they are on the margin.

Foreclosures began piling up.

The largest numbers occurred in 1994 and 1995, the years when more than 100 homes a year were being sold, but also in 2000, a year with more moderate sales.

For Penman's organization, M.J. Peterson, the foreclosure rate was about 10 percent since 1990, when 75 percent of the company's homes were built, according to city and county records.

Penman said Peterson built in a concentrated area, carefully selected homeowners, and offered financial counseling to first-time homebuyers. Some of the other developers weren't as careful, according to Penman.

"We did homeowner education," he said. "They were just building houses. They were the precursors to the mortgage crisis."

Some developers had foreclosure rates as high as 25 percent. Among them was Burke Brothers Construction, which built 152 subsidized homes, including the six that foreclosed on Welker Street.

Burke hired a consultant to find qualified buyers but, in the end, it was the lender, not the developer, that approved the mortgage, said Burke owner David Burke.

"For the most part, all these homeowners were hardworking people, all employed, all trying to make it happen," Burke said.

He also said it was the city, not the developer, who selected the lots being used. Burke agreed with Penman that clustered housing retains value more than scattered housing

But for those who eventually lost their homes to foreclosure, Burke said, "It wasn't a problem with location, but a problem with their employment."

Overall, 15 percent of homes were foreclosed upon. There is a 12 percent foreclosure rate for initial buyers who got a subsidy, The News found.

For the homeowners, foreclosure meant losing their dream house.

For taxpayers, it meant $4 million in housing subsidies down the drain.

"The taxpayer loses," Clarke said.

And for the neighborhood, it usually meant a vacant bargain-priced home, and with so many of them, a threat to property values on the street.

Foreclosures can affect value

Foreclosures are not considered market rate sales, so are not used for setting assessments of that home, or others on the block, said Martin F. Kennedy, the city's assessment and taxation commissioner.

Studies have shown, however, that foreclosures can affect property values.

"If you have one or two foreclosures, I don't think that would affect evaluation of a neighborhood," Kennedy said. "But if you have a whole gross amount, it may have an effect because of other factors — if it's a distressed neighborhood, if people are not paying their mortgage, are they not keeping up their house?"

Kennedy added that the city's subsidized-housing efforts aren't just about dollars and cents, but about revitalizing neighborhoods that needed it the most.

"Look at the development down Clinton Street. That at one time was a war zone. Now it's gorgeous," Kennedy said.

The 35 vinyl-sided homes built on Clinton Street from 1990 to 1996, without question, are an improvement upon the blight that had welcomed people to the area before these houses were built.

And residents — which include Erie County Legislature Chairwoman Barbara Miller-Williams and former county legislator George A. Holt Jr. — talk with pride about the nice neighborhood they live in.

Still, 20 years after these houses were constructed, they are worth less than when first constructed.

Initially, the homes carried an average $80,246 price tag, although most residents received $21,500 subsidies bringing their total out-of-pocket costs to about $58,700.

Today, the average assessment for the 35 homes is $73,271 — a 9 percent drop from their initial selling price.

And none of the eight that have resold fetched their initial selling price.

In fact, given all the foreclosures, half didn't even resell for the price that was paid after the subsidy was factored in.

A shift to nonprofits

With concerns over foreclosure, shoddy workmanship among some developers, and critical audits from HUD, Buffalo's subsidized-housing program made an abrupt change toward the end of the Masiello administration. Rather than working with private developers, the city turned to nonprofit agencies to develop subsidized housing in Buffalo.

The Brown administration embraced that policy, and took it a step further, largely relying on East Side pastors and City Hall to develop housing.

While questions are now being raised about the increasing cost of subsidized homes, some community housing officials nonetheless say using nonprofits, rather than for-profit developers, should reduce foreclosures, because the nonprofits would feel less pressure to sell quickly for a profit.

In recent years, the city has also adopted anti-predatory laws, putting restrictions on the types of mortgages permitted in the city's subsidized-housing program, and also requiring homebuyer mortgage counseling.

Foreclosure rates, in fact, have dropped in recent years. But given that it typically takes seven years from the time a home is purchased until a foreclosure occurs, only time will tell how effective the new policies are.

What's more, Commissioner Kennedy said that housing values throughout the city are currently on an upswing, and that includes subsidized housing. But assessment officials also say subsidized housing in distinct developments, or clusters, does much better than individual subsidized homes dotting a neighborhood.

Also, they say, the real estate adage of "location, location, location," is as true with subsidized housing as it is with traditional housing.

Buffalo's East Side is not a real estate hot spot.

The average price of a home on the city's East Side was $25,758 in 2000 compared with $29,389 in 2008. In comparison, the average home sold on the city's Upper West Side went from $95,684 in 2000 to $147,548 in 2008.

But perhaps the bigger question is whether it makes sense to continue building houses in a city with declining population.

"Look at the area of University Heights east of Main Street," Ryan said. "Many of these neighborhoods, right between Bailey and Main, those are the neighborhoods that would probably be the last residence of most of the people that moved in [to new housing.]"  

sschulman@buffnews.com; plakamp@buffnews.comnull