Housing Market Datapoint of the Day

It’s a familiar story, but it’s told well:

If ever a city stood as a symbol of the dynamic U.S. economy, it was Detroit… Detroit cared less about how it looked than about what it did—and it did plenty. In two world wars, it served as an arsenal of democracy. In the auto boom after World War II, Detroit put the U.S. on wheels as it had never been before. Prosperity seemed bound to go on forever—but it didn’t, and Detroit is now in trouble.

Detroit’s decline has been going on for a long while… In the past seven years, Chrysler, the city’s biggest employer, has dropped from 130,000 to 50,000 workers.

The story is from Time magazine, and it’s dated Oct. 27, 1961. Which is why it’s not the right-hand side of this chart which shocks me, so much as the left-hand side:

What was it that caused home prices in Detroit to double between 1996 and 2003? It wasn’t an explosion in subprime loans: those came later, after Detroit house prices had already started declining. And I don’t think it was US monetary policy, either. In any case, Detroit has been on a steady decline for a good 50 years now. Why then have the past five years in particular seen such an enormous decline in house prices?

We’ve seen how relatively small changes in supply and demand can have enormous effects on the oil price — you don’t need to explain it away by blaming speculators. Maybe the same is true of the housing market too. But what’s clear is that this chart should be very sobering for anybody elsewhere in the world who thinks that property prices might be bottoming out. They probably thought that in Detroit, too, in 2005.

(HT: SAR)

Comments

[Ricard:]

Very interesting, thank you. Perhaps the main question to ask is 'how much of the rest of American industry resembles Detroit?' I think the answer is 'not much'.

Apr 08 02:04 PM

[herbert hoover:]

Dude, home prices just dropped 23% in Manhatten. You have no idea what you are talking about. Do you work for the Treasury Department by any chance?


On Apr 08 01:55 PM Cetin Hakimoglu wrote:

> Thankfully the US housing market encompasses more than Detroit. Home
> prices in Manhattan, Bay Area, and Aspen keep rising. The future
> of employment is in high tech, government, and service jobs. Silicon
> Valley, for example, is the epicenter of this revolution which is
> why home prices in that region keep rising.

Apr 08 03:05 PM

[jimmy46:]

1993 Republican contract with assmerica:

Yet one more tax benny for housing,
up to 250k/500k tax free profit from a personal home.
use to be able to do that every 2 years.

This benny was cut back a little this last year
for people owning more than one house.

Apr 08 03:56 PM

[Tony Petroski:]

The city of Minneapolis would show a similar chart to the one above in Detroit. The city proper was in decline as people moved out of the city (by choice or by death/old age) and that reduced demand for city real estate while increasing demand for real estate in the first and second-ring suburbs. This decline started well before 1994. As the prices for homes in the suburbs shot up, the prices in the city stayed flat causing a larger and larger gap in city vs. suburban prices. Eventually, like a slinky, the prices in the city started attracting buyers/speculators as the gap was large and the movement in pricing caused more buying and speculation. The Frank/Dodd push to finance low-income homeowners who occupy these cities put financing into areas that formerly were untenable. A mini-boom followed by a bust. On the other hand, at $13,000, I would buy those Detroit buildings to dismantle and recycle the wood/fixtures/copper, etc. I predict the prices in Detroit will not drop below zero.

Apr 08 07:59 PM

[Radardoc:]

Time to see the optometrist. It looks to me like the bay area, at least the counties tracked in the case-schiller index, has tanked
-32.4% year over year and -42.25% since the peak. If that's a "rise" then your monitor (or head) is upside-down.

Good luck with that...


On Apr 08 01:55 PM Cetin Hakimoglu wrote:

> Thankfully the US housing market encompasses more than Detroit. Home
> prices in Manhattan, Bay Area, and Aspen keep rising. The future
> of employment is in high tech, government, and service jobs. Silicon
> Valley, for example, is the epicenter of this revolution which is
> why home prices in that region keep rising.

Apr 08 08:04 PM

[Dave Wrixon:]

Bloody hell you would still struggle to buy a beach hut in the UK for $97850?

What kind of Third World Joint is the USA?

And that was at the height of the Bubble?

There are garages in London that have changed hands for many times that amount. You wouldn't be able to acquire a space for your trash can for $13,638, even on contaminated land!

Apr 09 08:16 AM

[User 353732:]

You may wish to consider that once( within living memory for some) Pittsburgh, and Detroit were the "Silicon Valleys" of their day, Baltimore was a hub of culture, trade, and technology, and Cleveland the "epicenter" of the new oil industry....and people, once, even thought that Manhattan was the enduring global epicenter of the new ,long, planetary boom based based on financial engineering.
Is it not likely that the future of employment is in energy, agriculture and new kinds of manufacturing( robotics, nano-engineering, desk top fabrication, bio-informatic control systems) rather than the familiar industries you cite? Also given the vast internal demographic shifts underway in the US , it seems to me that the future loci of growth and innovation will be where people are moving to--- for many reasons-----: the South, Southwest, Texas, rather than Manhattan , the Bay Area, Boston etc?
I expect you know more about this than i do. I am not quarreling; just offering another view. Do not take umbrage.


On Apr 08 01:55 PM Cetin Hakimoglu wrote:

> Thankfully the US housing market encompasses more than Detroit. Home
> prices in Manhattan, Bay Area, and Aspen keep rising. The future
> of employment is in high tech, government, and service jobs. Silicon
> Valley, for example, is the epicenter of this revolution which is
> why home prices in that region keep rising.

Apr 09 09:10 AM

[John Preston:]

A couple of other observations:

1. the chart does suggest that the "Real Estate is local" may be valid....

2. the chart may also suggest that the concept echoed byu many in housing blogs that home prices have to equal rent may not be valid....payments on the average home is this market would be around $107+TI....sounds like very low rent....there should be a stampede to buy....

Apr 09 10:08 AM

[urbanexus:]

It looks like the data in the chart is for the City of Detroit by itself. If you look at the Case/Shiller (CS) data for the metropolitan area, the peak in values came later than for the city. In November 2005 the CS Index for the Detroit metro area was 126.68 and declined to 77.56 by January 2009--a decrease of about 39%.

If you look at CS index data for other metropolitan areas, the percentage decline for Detroit seems rather modest by comparison. For example, consider the same numbers for Phoenix, Los Angeles, Chicago and Minneapolis (peak index number and date, January 2009 index number and percentage decline):

Phoenix -- 227.42 in June '06, down to 117.11, a 49% decline

Los Angeles -- 273.94 in September '06, down to 166.54, a 39% decline

San Francisco -- 218.37 in May '06, down to 124.33, a 43% decline

Chicago -- 168.60 in September '06, down to 130.80, a 22% decline

Minneapolis -- 170.90 in June '06 down to 120.18, a 30% decline.

When looking at data for the broader metropolitan area, there may be cause to wonder about both the left and right hand side of the chart.

Apr 09 10:31 AM

[Rhett:]

Anecdotal, but in my Florida hometown, prices on some houses have been cut in half during the past year. There is simply no market for many of them.

Apr 09 04:27 PM

[Dave_O:]

I see Cetin Hakimoglu has an interesting blog: seekingalpha.com/autho...

Apr 10 11:30 AM

[Found Omega:]

The decline of the City of Detroit is in no way useful a a barometer of the housing market, and is not related to the loss of jobs in the auto industry, because the first thing alot of Detroiters do when they get a decent job is move to the suburbs. The better times are, the worse Detroit gets. Taken as a whole, the Detroit "metro area" is still one of the top half dozen areas in the country in terms of wealth (though we have slipped a notch or two for obvious reasons). Detroit has a lot of issues with race, but the main thing about houses in the worse parts of Detroit (and there are large areas within the city limits that are doing fine) is the age of the houses. Detroit's population exploded in the 1920's, and those jumbo brick McMansions of their day are now falling apart, and the cheaper "low income" houses of the forties and fifties are also starting to show their age (as they are in most cities). But to attach some sort of moral or systemic reason for these developments is ridiculous.

Apr 10 12:19 PM

[HardwoodFlo...:]

Give Detroit to Canada. Think of the billions we would save proping that place up.

By the way Omega is right on. Detroit has been a mess since 1968.

Apr 10 04:37 PM

[HardwoodFlo...:]

WakeUp- go back to sleep. Real Estate is still moving in lost of places. turn off the bald guy on CNN who just got a new set they have dubbed "the fincail crisis center". What a joke.

There are four new houses being built in our neighborhood. All being built by small local builders. First, no banker is going to let a builder build on spec. So there is someone who got the loan and is building the house! Amazing- you would think that with "shadow inventories and prices plummeting" that this could never happen. Well, wake up America it is. Sorry to disappoint CNN and their new "financial crisis" set they built for the bald guy- you might have to scrap it before that $5MM set pays off. Sorry to the guys telling us to buy guns, stockpile gold and go get a generator because civil unrest is coming.

It's like if you never had heard of Y2K would it have existed? Not to be too blithe- there was a financial melt down mainly do to CDOs and complex derivatives which were then leveraged to take world wide lending north of 50 trillion- but in the real world things are still relatively normal to sucking. In some areas- so will real estate- but it's regional.

Values are going to drop as long as the purchases look like this: Bottom feeders seeping up foreclosed homes.

So what.

Prices won't go back up until you can off set that with higher priced homes. Well people who don't have to sell aren't going to in a market they perceive as week (unless they can sell a home in a good market and buy a better home cheaper in a perceived lesser market). Higher priced homes are particularly difficult right now for a number of reasons. One of the biggest reason is that JUMBOs are relatively speaking (compared to FHA) expensive. They are also hard to get- because the FHA won't back them.

So you have cheap homes being bought on distressed sales. The top end isn't moving. What does that make for cascading prices. So what? does that mean that the whole market has dropped 50-60% with another 30% to go? Of course not.

Apr 10 04:41 PM

[HardwoodFlo...:]

Dave from the UK- You said it man!

Apr 10 04:44 PM

[HardwoodFlo...:]

Hey Tony check me if I'm wrong on Minneapolis but wasn't the North and NE part of Minneapolis hit hard by mortage fraud? Aren't areas in the high end of Minneapolis fine? Sure prices in some of the suburbs like Blaine (1MM for a house in that dumpy suburb) were over priced but Wayzata is holding up.

Isn't this whole thing made up of regions and even within the regions sub regions. If you buy a house in a lousy area and over pay for it shouldn't it go down. What's the first prinicple of Real Esate- Location. Or some stupid thing like that. I wonder why that is- oh yeah because it's less prone to devalue less in a downturn.

Apr 10 04:49 PM