Doom-and-gloom media coverage has commonly painted a picture of Detroit as a city in peril. Investors who do their own research, however, will probably discover undervalued opportunities for investment buried beneath the city’s tarnished reputation. Some speculators have already begun to take advantage of the market’s tremendously low property prices, while other buyers are still waiting for the market to hit bottom.
Of course, investors should not overlook the serious problems faced by Detroit’s real estate market—problems such as widespread foreclosures, a weakened local economy, high rates of unemployment and rampant crime in the city. Yet remarkably, more than 99 percent of its metro population has remained intact. How is that possible?
The answer lies somewhere beyond the numbers.
“People in this region are very tough and resilient,” Michael McClure, president and CEO of Professional One Real Estate, said. “Many have roots that go back decades. Unlike other, more transient regions—[such as] the southeast, Vegas, Arizona—people live here for reasons that often transcend the economy.”
If the population’s resolve is any indicator of the outlook for the local real estate market, then perhaps Detroit isn’t so bad after all.
Sorting fact from fiction
Perhaps the most common misperception surrounding the Detroit real estate market is that a large percentage of the population has deserted it. In reality, the Detroit metro population—an estimated 4.5 million people in 2007—has declined by less than 1 percent in the last five years and is slightly greater than it was in 2000, according to Census Bureau statistics. The average population growth for all U.S. metropolitan areas in the past five years is approximately 3.9 percent.
The city of Detroit itself, however, is a different story. The city population has declined by 8 percent between 2000 and 2006, according to Census data, although the accuracy of recent numbers has been the subject of some debate. When compared with the relative stability in the overall metro area population, the numbers suggest that more residents are moving away from the center city.
“Detroit is moving into the suburbs,” Ralph Roberts, a real estate broker in metro Detroit, said. “But you’ve got to look at all cities as kind of like a mushroom. People go outside of the city and then there’s only so far you can drive from work and friends and family and then pretty soon you have to go back in.”
Investors should also keep in mind that the city “is an entirely different animal from the suburbs,” McClure said. Crime rates, for instance, show a profound difference between city and suburban markets: While an estimated 1,014 violent crimes were committed for every 100,000 residents in the city of Detroit in 2007, the outlying suburb of Sterling Heights is nearly 10 times safer, with only 107 violent crimes for every 100,000 residents, according to an article published in The Detroit News last January.
The city of Detroit still maintains one of the highest murder rates in the country, although violent crime in the overall Detroit metro area fell nearly 12 percent in 2008, according to the article.
Metro Detroit struggles with a high rate of unemployment, which was an estimated 7.9 percent in April 2008—almost three points above the national average, according to Bureau of Labor Statistics. Immediate prospects for the local economy—which has long been dependent on “big three” automakers General Motors, Ford and Chrysler—may appear bleak, but the job market is becoming increasingly diversified with the arrival of high-end casinos, tech companies and environment-related organizations, according to Rob Chubb, a real estate agent with local real estate company Real Estate One.
“We’re diversifying our work force out here,” Chubb said. “we’ve got a lot of great people out here who are capable and smart.”
Detroit real estate has been smashed by high foreclosures
It’s been an extremely difficult time for home sellers in Detroit’s real estate market. Those who are able to sell their homes may realize double-digit losses, especially if the property was acquired within the past seven years, according to local experts.
Detroit housing prices peaked in the fourth quarter of 2001 at $160,000 and dropped to $95,000 in the first quarter of 2008—a decline of nearly 40 percent over seven years, according to the NAHB/Wells Fargo Housing Opportunity Index. The market has an estimated 17.3 months' supply of inventory, according to the most recent quarterly survey of housing conditions of major U.S. metro areas by The Wall Street Journal. A three- to six-month supply is considered normal.
Competition with foreclosure sales has put sellers at an even greater disadvantage, as banks aggressively mark down prices in order to dispose of their high volume of inventory. For example, a bank-owned property that had originally been financed with a $200,000 loan might have easily sold for $175,000 to $185,000, but was put on the market at $110,000 and received four offers in less than a week, according to Roberts. Roberts has authored several books on foreclosures, including Foreclosure Self-Defense for Dummies and Foreclosure Investing for Dummies.
“The banks and the REO brokers really don’t know how to sell the properties properly,” Roberts said. “They keep lowering and lowering the prices, which keeps hurting the other people in the neighborhood. If they would price them to the market value—it wouldn’t be so painful on the resetting of the values.”
In fact, Detroit registered the highest foreclosure rate among the nation’s 100 largest metro areas in 2007, with close to 5 percent of its households entering some stage of foreclosure during the year—4.8 times the national average, according to a report by RealtyTrac. More recently, Wayne County has been ranked the sixth-highest foreclosure rate in the first quarter of 2008, with approximately one filing for every 68 households, a decrease of 22.1 percent from the previous quarter.
Some homeowners are deciding to upgrade their homes in order to make up for their home’s loss in value. McClure’s next door neighbor, for instance, resides in a $250,000 house that should be worth $350,000 to $400,000; he has decided to sell the home and absorb the loss, but expects to make a gain on his purchase of a $500,000 home for $350,000.
“The bigger dollar value homes have come down relatively the same percentage,” McClure Said. “You gain on the tradeup.”
Buyer confidence seems to be returning to some areas of Detroit
Low-priced opportunities abound for investors who wish to buy property in Detroit, but how soon can they expect to realize profits? Some local experts believe that a recovery is near, while others hold a more conservative outlook for the property market.
It appears that buyer confidence, an important indicator of future sales, could be returning to the area, according to Chubb.
“We’re seeing a lot more buyer confidence in the marketplace this year, more than the past three or four years, which gives us a lot of positive thought that things are turning around,” he said. “We expect based on our research here at Real Estate One that the market should show a definite turnaround in 2009.”
Buyer activity within the city of Detroit has increased dramatically and may spread to surrounding areas. For the first four months of this year, home sales in the city increased by 48 percent from last year, according to residential sales statistics released by the Michigan Association of Realtors. The average price dropped 56 percent to just $20,514, as many of the sales “involve decrepit homes in neighborhoods with few jobs,” according to a report on hard-hit areas by The Wall Street Journal last month.
Much of the buyer activity in the city has been based on speculation as investors snap up entire street blocks of underpriced properties and wait “for things to get better,” Chubb said. The overall market has also attracted the interest of first-time buyers, who have typically delayed their plans to purchase homes until recently.
The high rate of foreclosures, however, has been an issue of concern for Detroit’s real estate market, and may continue to depress the market. Homeowners with bad mortgages are struggling to stay afloat with homes they can no longer afford to keep but can’t sell, according to Russ Ravary, licensed real estate agent and Realtor for local real estate company Remerica Hometown One. Costly life crises such as divorce, health problems or job loss have forced many to walk away from their homes, eventually leading to foreclosure.
“I get probably a call a week from somebody that’s in a situation [where they] can’t afford the house and can’t sell it, and they’re in the process of planning to let the house foreclose,” Ravary said. “And that’s what scares me the most—until the market turns, people [who are] getting divorced or trying to get rid of the house...have no alternative but to let it go, and that just fuels the downward spiral.”
But opinions among local experts differ. According to McClure, the plethora of upside-down mortgages, although unfortunate, has created a “captive population” of homeowners who are forced to remain in the Detroit area, and will ultimately contribute to the overall market recovery.
“Every day that these people stay local, we’re one day closer to recovery,” he said.
Investors who try to perfectly time the market turnaround may miss out
Pent-up buyer demand is “enormous,” according to McClure. Buyers have been sitting on the sidelines, waiting for the market to hit the bottom; however, those who try to time the market perfectly may miss the turnaround point.
“Even if we haven’t hit the absolute bottom yet, the worst-case scenario is that we look like we’re darn close to it,” McClure said. “It’s much better to get in now than to wait for the true bottom to be hit, because I believe prices will bounce up quickly.”
Although property prices may not return to pre-crash price levels for maybe another seven to 10 years, a “stabilization spike” will see prices jump up 15 percent or more, he said.
Investors may want to search for properties with positive cash flow, as Detroit’s rental market has become increasingly active. Renter demand can be attributed to the influx of individuals who have lost their homes to foreclosure; individuals who have relocated to the area but may not know where they want to live; and individuals who do not have adequate credit to qualify for mortgages in today’s tight lending environment, according to Eleanor Caddell, a local real estate agent with RE/MAX Classic.
Furthermore, “this is a market to buy and hold onto the property,” she said.
Investors who wish to avoid the problems of the inner city might also consider undervalued property in the relative safety of surrounding neighborhoods.
“I would say most of the suburbs are great areas,” Ravary said.
Investors also need to understand the importance of working with trustworthy local real estate agents, especially in the state of Michigan, which ranked third among top 10 mortgage fraud hotspots in the U.S. in 2007, according to research by the Mortgage Asset Research Institute.
“Be very careful of all the different schemes that are out there,” Roberts said. “Go to brick and mortar, [and] Google everybody before you deal with them. You want to do your research.”
