Recent media reports about the debt crisis facing American cities outlines the problems that could bring many American cities to their knees. Meredith Whitney, a United States-based research analyst describes the ticking time bomb of both municipal and state debt as the next big problem threatening the United States' economy. Michigan's economy seems particularly hard-hit with massive job losses; in November of 2010, Michigan's unemployment rate stood at 12.4 percent, 2.6 percentage points over the national average as shown in this chart:
Notice that Michigan's unemployment rate ranges from 2.6 percent to 4.5 percent above the national average and that it has dropped 2 percentage points over the past 12 months bringing it closer to the national average.
In light of that, I thought I'd take a brief look at the real estate market in another American city. Flint Michigan is a city located 65 miles northwest of Detroit and is the seventh largest city in Michigan. Flint is best known as the birthplace of General Motors. Flint is also renowned as the birthplace of filmmaker Michael Moore, the director and producer of movies like Fahrenheit 9/11, Bowling for Columbine and Capitalism: A Love Story. The city has a population of 117,068 (2006 estimate from the United States Census Bureau), down from 124,943 in the year 2000, a drop of 6.3 percent. In 2008, Flint ranked third in the state of Michigan for the greatest number of residents lost. In 1999, 26.4 percent of Flint's population was living below the poverty line compared to a state-wide average of 10.5 percent. In the year 2000, the median home value was pegged at $49,700 and 58.8 percent of residents owned their homes.
As I stated, Flint was the birthplace of General Motors with the founding of the Buick Motor Division in 1904 and the Chevrolet Motor Division in 1913. General Motors was the main employer in Flint for decades; at one time, the company employed 82,000 workers in Flint (out of a peak population of nearly 200,000 people in the 1960s and 1970s). By 2008, the 100th Anniversary of General Motors, the company had downsized to the point where only 14,500 workers in Flint were employed by GM. The drop in the number of employees by the "only show in town" and the de-industrialization of the heartland of America defines the issues facing the city today.
Now, on to Flint's real estate market. I'm using the Realtor.com website to search for properties. As an introduction, of the 1365 homes listed on the website, nearly 250 homes have an asking price of $10,000 or less. The Demographia "6th Annual International Housing Affordability Survey: 2010" ranks metropolitan real estate markets in Australia, Canada, the Republic of Ireland, New Zealand, the United Kingdom and the United States by their respective median house price as a multiple of their median household income. Severely unaffordable housing has a median multiple of 5.1 or more and affordable cities have a median multiple of 3.0 or less. Flint, Michigan comes in sixth place with a multiple of 1.8 as shown on this chart:
Like Detroit, there are a lot of houses listed at fire-sale prices. There are houses for as little as $900 like this one located at 2539 Mount Elliot Avenue:
It's a two story, 1188 square foot single family dwelling with 3 bedrooms. There are no interior photos so we have no idea what condition the house is in. It is interesting to click on the property history tab; for the years 2009 and 2010, the home is assessed at $14,300 for property tax purposes and the $942 taxes assessed for the property were more than the asking price of the house.
Here's one for sale at 1383 Cleveland Drive - its asking price is $2900. It's a foreclosure but from what we can see on the photos of the interior it looks reasonably well cared for other than the rather hideous paint in the bedrooms:
One last listing. This two bedroom, 1185 square foot home is located at 1630 Dupont Street. From the photos, it looks very well cared for and it appears to be occupied. Its asking price is $11,000 and it has been listed for 385 days. This two bedroom home is assessed at $9931 in 2010 and the property taxes were $409:
What is particularly heart-breaking about Flint, Michigan is seeing what happens to a city when it is de-industrialized. With property values plummeting and many homes being unoccupied simply because the mortgage is worth way more than the value of the property to any buyer, revenues from property taxes drop making it more and more difficult for the city to provide programs necessary to keep its population from dropping even further. A drop in revenue from business taxes accompanies the drop in residential taxes compounding the fiscal issues facing any city undergoing urban devastation. Despite the fact that Flint has dropped its spending from $66.3 million last year to $57.1 million this year, it still needs to borrow between $13 million and $18 million to pay off its general fund deficit that reached $10.1 million in fiscal 2009.
The coming year will be an interesting one for municipal bond holders. Many American cities are facing debt crises that will result in them begging for help from their state governments. With both state and federal governments already heavily indebted, it will be interesting to see if anyone can come to the rescue of America's municipal governments.