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Uncle Sam: Louisiana's Next Real Estate Baron?

Federal land grab no solution to Louisiana's redevelopment needs

February 16, 2006

Given the furor over the federal government's response to Hurricanes Katrina and Rita, you'd think that any plan to give the feds ultimate control over the rebuilding effort would be laughed off the table. Unfortunately, Rep. Richard Baker (R-LA) is pushing just that — a federal land grab of massive proportions that would jeopardize Louisiana's economic recovery.

A Baker-sponsored bill, H.R. 4100, would create a new federal agency — the Louisiana Recovery Corporation (LRC) — that would purchase up to 200,000 homes and commercial properties throughout the state that were damaged or destroyed by the 2004 hurricanes. The acquisitions would be funded by the issuance of $30 billion in U.S. Treasury bonds. The LRC would compensate owners at 60 percent of their home or business's pre-hurricane value, and banks would receive 60 percent of each property's remaining mortgage. The LRC would then make infrastructure improvements to prepare these properties for redevelopment and auction them off to private developers for rebuilding and resale, with previous owners having right of first refusal.

Baker's proposal is backed by the entire Louisiana legislative delegation and has a great deal of popular support. But, there are several glaring downsides to the plan.

First, history is littered with examples of the government's poor track record in large-scale property development. Failed urban renewal efforts of the post-WWII era like those in Pittsburg and Chicago displaced tens of thousands of poor and minority residents and resulted in the isolation or destruction of previously vibrant neighborhoods. Similarly, ambitious federal public housing projects like St. Louis' Pruitt-Igoe and Chicago's Cabrini-Green led to the concentration of poverty and crime in economically depressed neighborhoods and suffered from poor maintenance and bureaucratic mismanagement. As we've seen so far in Louisiana, the agencies involved in the post-hurricane recovery effort are already mired in a messy stew of red tape, poor oversight, and bureaucratic inertia.

Next, given that state and local officials will be steering the planning process in New Orleans, there's a danger that an LRC-led recovery effort will be based on rebuilding the city as it was, rather than recognizing the reality of an uncertain future for a radically altered city. There are already clear indications that political pressure is mounting to redevelop New Orleans in a manner consistent with its previous social and demographic makeup.

However, New Orleans is unlikely to return anytime soon to its pre-Katrina population level. The New Orleans-based Bureau of Governmental Research estimates that the city's population will be between 250,000 and 275,000 in three years (just over half the pre-Katrina level), and no one can accurately predict what the future population demographics will be. Recovery planners and bureaucrats don't have a crystal ball to tell them what New Orleans will look like, but that's what they would need to effectively plan for the right balance of housing types for a city likely to be in transition for some time.

Also, the Baker bill would make the LRC what The Wall Street Journal described as "the Donald Trump of New Orleans" for the foreseeable future. Giving the federal government control over such a massive amount of land would severely undercut the private real estate market. Lacking any significant local real estate expertise, the feds are in no position to determine if pre-Katrina property values were reasonable in the first place. Further, giving them broad power to determine future land prices would effectively allow the feds to artificially establish the new market price level and thwart the natural evolution of a dramatically changed real estate market.

Finally, the plan would set some dangerous precedents. As USA Today recently pointed out, Baker's bill would force taxpayers to bail out mortgage lenders, even those that skirted federal rules mandating insurance for homes in designated flood plains as a pre-condition to mortgage approval. Also, it's reasonable to assume that victims of future disasters would certainly expect the federal government to come to the rescue with similar aid. Once the bureaucratic genie is out of the bottle, it will be almost impossible to rein it in.

The feds need to take a lesson from previous disasters, such as the San Francisco earthquake of 1906. Over half of the city's population of 400,000 was left homeless as a result of that disaster, and property damages totaled over $8.2 billion (in 2005 dollars). But the city rebuilt itself largely through private sector efforts, without the guiding hand of a benevolent federal agency. Even more impressive is that a century ago, we didn't have anywhere near the sophistication of the capital markets that we do now. We also lacked the transportation infrastructure to efficiently move people in and out of the area and keep businesses in place. Despite the grand scale of property devastation, Louisiana is in a far better position now to rebuild itself using private sector initiative.

Instead of a federal land grab, a far better solution would be to offer grants to individual property owners to rebuild their homes and businesses themselves. Combined with a limited-scale buyout of those neighborhoods deemed unfit for redevelopment, this approach would allow citizens to quickly begin work on repairs or new construction and would provide a needed jolt to the local economy. Entrepreneurial property owners are already starting to do this on their own, as well as numerous nonprofit organizations like Rebuilding Together and ReJazz New Orleans that are on the ground helping residents and businesses rebuild.

It is clear that rebuilding New Orleans and other storm-damaged areas in Louisiana is a national priority. But to maximize the region's chances of future success, the best path would be to let it rebuild itself in an incremental, organic fashion through private initiative. Louisiana citizens and businesses are in the best position to lead the rebuilding effort. Let's keep government from getting in their way.

Leonard Gilroy is a certified planner and policy analyst at the Reason Foundation



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