The year was 1993. Jurassic Park was #1 at the box office. The New Kids On the Block were breaking up. And home prices in Detroit were … basically the same as they are right now.
Many cities across America saw a drop in home values after the housing crash of 2008. In most areas, home prices were “rolled back” to pre-bubble levels, circa 2002 – 2003. But home values in Detroit have fallen to levels last seen in 1993. It’s a homeowner’s nightmare, and it doesn’t bode well for the broader economy either.
Looking at the 20 metro areas tracked by the S&P / Case-Shiller Home Price Index, the average decline from peak home prices was 33 percent. But in Detroit, home prices have fallen 51 percent from their housing-bubble peak. Call it a half-price sale. If a Motor City home was worth $300,000 in 2006 or 2007, it would be worth closer to $147,000 in the current market.
Foreclosure Inventories: The Real Home-Price Killer
You could cite a dozen causes for the home-value declines in Detroit. The unemployment rate is higher than most cities. The city isn’t doing enough to attract businesses and create jobs. Demand is soft. Mortgage lenders are too tight with credit. These are all valid points. But the biggest challenge of all, from a pricing perspective, is the inventory situation.
Detroit was one of the cities hit hardest by the housing crash. At that time, the city’s foreclosure rate rivaled any of the so-called sand states (Arizona, Nevada, California and Florida). Today, the Detroit housing market is still being weighed down by unusually high foreclosure inventories.
According to data from RealtyTrac, foreclosure activity in the Detroit metro area rose in May. This bucked the national trend, which saw a decline in foreclosure activity during the same month.
In Detroit, the “REO saturation” is one of the highest in the country. This is a measurement that shows the percentage of bank-owned (REO) homes sold in relation to the total number of sales. According to real estate valuation firm Clear Capital, Detroit’s REO saturation was 58 percent in May. That means that more than half of all home sales were bank-owned homes.
As far as home prices go, Detroit was the worst-performing market in Clear Capital’s latest report. It has held that “title” for the last five months. Data collected by Clear Capital showed a 13.2-percent decline in prices, quarter-over-quarter.
REO properties are often sold at a discount. The banks want to offload them as quickly as possible, so they are generally more willing to entertain low offers than a homeowner might be. With such a large number of homes being sold below market value, it’s likely that Detroit home prices will fall even further in the months ahead.
Granted, all of these things are connected. Price declines make would-be home buyers more reluctant to buy. This decreases the “absorption rate” and keeps homes on the market longer. But housing inventory in general, and foreclosures in particular, is the core issue affecting home values in Detroit.
Major Population Decline in Detroit
Population trends aren’t helping much, either. According to Census Bureau data, Detroit’s population has declined 25 percent over the last ten years. In fact, Michigan is the only state that has registered a net population loss in the last decade. So the number of homes for sale has increased, while the pool of potential buyers has shrunk. You don’t need to be an economist to understand how this affects the Detroit housing market.