The $5000 House - Fact or Fiction?

Late August's news that sales of previously owned homes in the United States fell 27.2% from June to July brought sales to the lowest level since the National Association of Realtors started keeping records in 1999. This has stoked fears of renewed weakness in the national housing market. Despite the recent drop in mortgage rates which has pushed rates to 50 year lows, buyers are reluctant to enter the market because of weaknesses in employment.

This story reminded me of something that I recalled reading a year ago about the Detroit housing market. I seemed to remember reading about houses that were selling for well less than a thousand dollars; I thought perhaps it was worth another look to see if the market had improved so I took a quick look through listings for Detroit on the National Association of Realtors website. At one time, Detroit had one of the highest owner-occupied housing rates in the United States. As well, single family dwellings dominated the city's housing market rather than high-rise apartment buildings commonly found in other major American cities. Home ownership is no longer the case; data now shows that Detroit has the lowest ownership rate for single detached homes in the 20 largest American cities.

I went through the listings and picked out a couple of houses that didn't look too shabby. I tried to pick houses that had photographs of the interior of the house; quite a number of homes have only a photo of the exterior and a surprising number of them are described as "fire damaged" so I skipped right past those and selected some respectable looking dwellings. I can't speak for the neighbourhood or the quality of the neighbours but this will give you an idea of the physical appearance of the houses for sale. I did have additional screen caps and views from Google Street View but I'm pretty sure Google took them off for me. You'd wonder why - my posting might have sold a couple of houses for a Detroit-based realtor!

Here they are in order of price:

1.) 14433 Promenade Street

2.) 14289 Cherrylawn Street

There are over 1200 Detroit properties listed at a selling price of less than $10,000 on the realtor.com website (a few of the really cheap ones are rentals so my number is a bit off) . Many of the listings are HUD (U.S. Housing and Urban Development) homes and bank-owned foreclosures and some of the really low-priced homes have been fire damaged. What is surprising is that some of the houses look quite acceptable. Here's an example of a nicer home located at 18233 Winston - again, I can't speak for the neighbourhood other than a brief look at the Google Earth Street View but the house itself looks well maintained from the interior photos supplied. It's not like there was tumbleweed blowing down the streets and from what I can see, the neighbouring houses look respectable as well.

Detroit's real estate market has been on a downward spiral for several years. The drop in the population of Detroit has markedly affected the housing market. Detroit's population peaked at 1.849 million residents in the early 1950's and dropped to 871,121 by 2006 according to theUnited States Census Bureau. As a reflection of the change in population and demand for housing, HUD home prices have dropped from an average of $46,702 in 2003 to $6,035 in the first month of 2009 With HUD having 3992 properties in Detroit, apparently they own a lot of cheap real estate. According to a study entitled the "6th Annual Demographia International Housing Affordability Survey 2010" completed by Demographia using data from the third quarter of 2009, metropolitan Detroit, Michigan has the most affordable housing market for home buyers in the United States, Canada, Australia, New Zealand, Ireland and the United Kingdom. In fact, houses in Detroit are the most affordable in the six year history of the survey. For your information, Demographia calculates affordability by using the median house price divided by gross annual median household income. Incidentally, the city with the least affordable housing in the countries surveyed is Vancouver, Canada with a median multiple of 9.3 compared to Detroit's 1.6. Here's a chart showing the affordability of the top 85 markets in the nations examined by Demographia:

Apparently, this affordability has not gone unnoticed. Investors from around the world are buying multiple dwellings in single transactions; some are buying as many as 100 or more houses at one time. Some city officials are concerned about the concentration of housing in the hands of absentee landlords. Many feel that today's problems exist because of the 1960's exodus of white homeowners to the suburbs prior to and following the 1967 riot. These homeowners often bought new houses in suburban Detroit but kept their properties in the city and rented them out. As well, a HUD program that allowed purchasers to buy homes with no down payment certainly made it easier for the purchaser to walk away when the value of their mortgage exceeded the value of their property. With many houses selling for well less than $10,000, that is not hard to understand.

While the reasons for Detroit's real estate market collapse are most likely unique to the city itself, it is still very sad and disturbing when one considers that each of these homes was, at one time, a family's pride and joy.

Update: September 13th, 2010

Detroit city officials are planning to hold a series of meetings that will assist urban planners in their efforts to move the city forward. As it stands now, up to 10,000 homes will be demolished by 2013 starting with 3000 this year. Currently, the city does not plan to demolish entire neighbourhoods, rather, portions of the streets affected by demolition could be used to establish green spaces.

References:

http://www.msnbc.msn.com/id/29585340/

http://www.nationalpost.com/news/Reinventing+Detroit+road+from+ruin/3515689/story.html