29 August 2007

Like Katrina But Without The Wind and Water

Will it ever look up in Detroit? Its taken decades, but Detroit has lost as much population on a percentage basis as New Orleans did in Hurricane Katrina. Other problems have accompanied this decline.

The price of a house there is down 11% from a year ago, the largest percentage of the top twenty metropolitan areas. Detroit real estate prices are now about where they were in the period from January 2001 to April 2001. In inflation adjusted terms, Detroit real estate prices are now at levels they were last at sometime in 1998. The price of a house in the Detroit metro area is down 15.2% from its December 2005 peak. Detroit housing prices rose on the national loose credit binge and fell on the subprime mortgage market collapse.

Housing prices weren't that high in Detroit to start with either. At the start of the year, the median housing price in the metro area was about $131,000, and there are allegedly "more than 3,000 homes listed for sale alone in Detroit under $30,000." Of the top 25 metro areas, Cleveland, Pittsburgh and St. Louis started the year with even lower housing prices, but they aren't seeing their housing prices fall as fast as Detroit.

This is logical -- Detroit probably has lots of subprime mortgages which have gone bad which have driven down prices. And, the American automobile industry, which still defines the city, has continued to contract. I also wouldn't be surprised if the jumbo mortgage crunch that followed in the wake of the subprime mortgage collapse has also disproportionately hurt the Detroit metropolitan area -- it exemplifies American in having not only an underclass that is losing ground, but also a superwealthy executive elite in the suburbs.

Indeed, over the longer haul, Detroit could have done worse.
The have risen about 85% since January of 1991. In the same time period, inflation (measured by the national consumer price index for urban consumers) has been 54%. So, since 1991, metro Detroit real estate has had a real rate of return of 31%.

The annualized real return of 1.8% is nothing to write home about. But, when you consider that most home owners are leveraged at 5:1 to 20:1 rates when they start out (and leverage acts on nominal and not real appreciation), this is competitive with a great many financial investments. The benefits are particularly great because returns on home equity are generally tax free, and that it is generally possible to defer capital gains taxes on investment real estate as long as you stay in the investment real estate market with a 1031 exchange, in theory, until your death when all unrealized capital gains tax liability is forgiven.

The trouble is, that if you go into the Detroit real estate market in 1998 or later, you haven't gained anything, and tax breaks only mean something if you are making a profit. If, you had anything less than a conventional loan's 20% equity in the Denver real estate market at its peak in late 2005, you are upside down now. If you have a conventional 20% down payment, you have lost 75% of your investment, and you would be upside down after realtor's commissions and closing costs if you tried to sell today. There is also no reason to think that housing prices in Detroit have hit bottom yet. They declined significantly from June to July, for instance.

The data don't break down the trends within particular housing markets. But, it is also possible to make some safe inferences. In Colorado, and in many other markets, the housing price collapse has been driven by the bottom of the market, and to a lesser extent by the top of the market, while the middle market which has not experienced the same financing distress, is relatively stable.

This means that suburban starter homes and small urban homes, the latter largely in Wayne County which is home to Detroit, have probably been hit hardest.

1 comment:

Anonymous said...

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