Detroit Real Estate Market – The Comeback Kid in 2012?

“Your property values may rebound soon.” How’s that for a holiday gift? This is the kind of thing homeowners in Detroit have been wishing for, for several years now. And in 2012, they just might get it.

According to some experts, the Detroit real estate market is “bouncing along the bottom” right now. You could even make an argument for steady appreciation over the next few years. I’m not making that argument — I’m just saying you could. The Detroit housing market could truly be the comeback kid in 2012.

Detroit Housing Market, Then and Now

The Motor City was devastated by the fall of the housing market and subsequent recession. But things are starting to look up. Home prices in Detroit have likely hit bottom already. In fact, the Detroit metro area could be one of the most stable real estate markets in 2012. Homeowners may enjoy some appreciation over the next three years.

A few years ago, these statements would have seemed like an impossible dream. The Detroit real estate market was one of those hit hardest by the housing crisis. In fact, it was an honorary sand state. It was right up there with California, Nevada and Arizona, in terms of foreclosures and price declines.

Housing markets in the sand states were overbuilt and overpriced, a classic bubble scenario. Detroit was different. The Motor City’s woes were brought on by massive job losses in the auto industry, resulting in one of the highest unemployment rates in the country (still hovering above 11%). As a result of these and other factors, home prices in the city have fallen by a staggering 60% since their 2006 peak.

And then there was the foreclosure bomb. When RealtyTrac released its year-end report for 2007, Detroit had one of the highest foreclosure rates in the country. It even surpassed the now-famous foreclosure cities of Stockton, California and Las Vegas, Nevada (there are those sand states again). According to that report, Detroit had the highest foreclosure rate among the nation’s 100 largest metropolitan areas, with nearly 5% of households in some stage of foreclosure.

Excess housing inventory has also stalled recovery. Between 2008 and 2010, the housing inventory in Detroit had outgrown the anemic level of demand. Too many homes for sale, and not enough buyers — a description that could be applied to many housing markets in the U.S. In Detroit, the imbalance was exceptionally bad.

But that was then, and this is now:

“Detroit and Washington DC were the only two MSAs to post positive annual [home price] rates of +3.7% and +1.0% respectively. Detroit has now recorded three consecutive months of positive annual rates … Detroit also saw an improvement in these rates compared to August.”

These statements are from the most recent Case-Shiller/S&P Home Price Index, released on November 29, 2011. The “MSAs” being referred are the 20 metropolitan cities tracked by this particular index. Between September 2010 and September 2011, 18 of the 20 MSAs experienced declining home prices. Only the Washington D.C. and Detroit real estate markets posted gains during that period.

Detroit home prices
Data from the Case-Shiller / S&P Home Price Index, published in November 2011.

The foreclosure situation is also improving. As mentioned earlier, the Motor City had one of the highest foreclosure rates in 2007. But this too is changing for the better. In October, RealtyTrac released its foreclosure report for the third quarter of 2011. Detroit no longer held the top spot (“top,” meaning the highest rate of foreclosure). In fact, there were 21 other cities with higher foreclosure rates. According to that report, one out of every 108 housing units was in foreclosure. To put this into perspective:

  • In 2007, the foreclosure rate in the Detroit metro area was nearly 5%.
  • In the third quarter of 2011, the rate had fallen to less than 1%.

You might say the housing market that falls hardest hits the bottom fastest. And that’s what we are seeing right now in the Detroit real estate market — signs of the bottom. In July, I reported that home prices in Detroit had fallen to their lowest point since 1993. You can’t fall much harder than that. The bottom comes quickly when you plummet.

Stable Home Prices in 2012?

Nobody can predict what will happen in the coming months. But when you consider the Detroit real estate market in light of recent trends, it’s easy to make a case for stable home prices in 2012.

Alex Villacorta, director of research with the housing-valuation company Clear Capital, echoed this sentiment in a recent interview with HuffPost. “All things told, this [Detroit] market has been showing some signs of stability over the last two years.” Villacorta’s comments came in the wake of a home-price study his firm conducted recently. According to that study, home prices in the area have been mostly flat for the last few months, suggesting some degree of market stability.

Mortgage rates will likely remain below 5% for most of 2012. Housing is very affordable. The Detroit housing market appears to be stabilizing. So most of the ingredients needed for housing recovery are already in place. But the pool of qualified home buyers is still very low, by historical standards. This lowers the absorption rate (the rate at which homes are selling), which slows the reduction of housing inventory.

The unemployment rate in Detroit is still above the national average — and the national average is nothing to brag about. In November, the Motor City’s jobless rate was 11.2%. This will continue to limit housing recovery in the Detroit area. Still, it seems that things are getting better, as far as home prices are concerned.

So what’s my prediction for the Detroit real estate market in 2012? Somewhere between flat and 2% appreciation. Happy holidays.