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.