Real Estate Economics in Detroit
I've been looking to buy a house in the Detroit recently. It's been a fun search: stalking houses on various real-estate sites, google maps, and in person. There seems to be a peculiar mix of investment properties, foreclosures, and flipped houses. By all metrics, it's definitely a hot market for investment, which in some cases can be a good and bad thing at the same time. There's legitimate concern and evidence of the occurrence of gentrification in many neighborhoods here in the city; the fight for an equal-housing downtown is all but lost to the likes of Bedrock Real Estate, and Southwest Neighborhoods are feeling the flow of new residents to the city who have been priced out of Corktown and Midtown. Even in my neighborhood, Woodbridge (a neighborhood that has always been fairly diverse for decades), is starting to see long-term residents be pushed out as rent prices rise and property managers like Larry John of liveinwoodbridge.com fame and Dr.Seuss-themed houses begin to see returns on investment.
And while the noisy renovation of the house behind my apartment has annoyed me nearly every morning for the past year; I'm not entirely opposed to the real-estate speculators and the home flippers. It's good to see less houses boarded up, and more people makes a neighborhood stronger. However, the market right now is not a level playing field, and nor is it designed to be one. As a white male from Northern Michigan with a steady income, I've personally benefitted from the system at hand. I have a cheaper rent than I could have ever imagined, but it still is more than most would pay in this city, thus driving the prices in the neighborhood higher by what people like me are willing to pay. Due to the demand for certain neighborhoods, supply and demand curves have shifted areas into accelerated rent increases, which do not negatively impact residents with more disposable income, but instead drives existing residents to less desirable neighborhoods even though they have not done anything to make themselves less competitive in the market. The fact that changing nothing hurts individuals is easily dismissed as the result of changing times and changing economies, but it's less a problem of if it occurs (it undoubtably does), but more about how damaging it can be for the lives and livelihoods of people here in the city.
Lending a lot, but only to a little
One of the most shocking discovery I made while home hunting was the absurd amount of money was to be loaned if I decided to by a house. During the pre-qualification process, I was told that I could easily have been loaned up to $150,000 and the potential for more given a larger down payment. For a 23-year-old, this amount was huge, even considering my sizable student loan debt that I had tallied up over four years at a public university (Thanks UofM!) Knowing this, I found myself looking at two classes of properties: the typical Detroit fixer-uppers (listed under $13,000 or cheaper on the auction, but always completely gutted), and the move-in-ready houses ($50k-$100k+). I found houses like this in nearly every neighborhood, and in a variety of different conditions, but with one constant, they were all valued far higher than they would ever assess. A great example of this imbalance between assessed value and listed value is is in the CPA building on Michigan Avenue. It's a gutted building with no windows that's been abandoned for years, but due to it's proximity to everyone's favorite Ruin Porn scenic view and apparently the only restaurant anyone from out of town knows, it's listing price has jumped from between $500k to $1.4 million depending on the mood of the ~~real-estate speculator~~ owner. Despite it's unreasonable price tag, it was assessed at around $120k back in 1998 when it last sold, an number that is likely to go down as over a decade of vacancy can wreck havoc on a building.
With a huge disparity between assessed value and listing prices, but with a high demand for property across the city, it means that properties are likely to sell quickly, and for close to asking price. I've requested for information on properties on the day they've listed only to find them under contract already. You don't see a lot of properties that sit unsold for more than a week unless there's something definitely wrong with them. The environment of high demand, high supply, and low valuation creates an odd factor not covered by a basic supply and demand curve. It means one thing: you can only get in this game if you have money to do so. And this isn't the normal "You don't have money so it's hard to start things", this housing market is effectively and totally inaccessible for anyone with a bad credit score or a working class or lower income. I'll dive into the effects of this later, but let's start with why.
Let's start with the first of two options: the $500 house everyone likes to talk about in Detroit. If you know anything about houses, you'll know that you're no getting much for $500. Most of these houses are little more than four walls, a hole-filled roof, no plumbing, no electrical, no heat, tons of asbestos, and lead paint. Considering most of them have gone a winter or two without heat, you'll likely have to replace most of the plaster and a good portion of the joists. We're taking tens of thousands of dollars to even get this close to a livable state. So considering you bought a $500 house, you're likely only going to get it assessed for it's value in firewood. This also means that there's no way a bank is going to loan you any money to buy or remodel it, considering that the collateral that you put against it (the house itself) is worthless in its present state. If you have a good deal of cash sitting in a bank account, you have rich relatives, or a good relationship with a bank, this option is for you. If your disposable income after your current rent, food, transportation, and other expenses is less than a couple thousand a month, good luck trying to rehab a house.
"But Dylan, I'm handy, I can install drywall."
Really? Well unless you can make permits, inspections, and certified electricians happen for free, you're in luck. Otherwise, know that there are many parts of the renovation process that you cannot do yourself, and will end up costing you lots money.
"But Dylan, aren't their grants and tax-incentives available?"
While there are potentials for HUD grants, homesteading credits, and a variety of local home grants. They're all still pretty limited, and only cover a small portion of the overall costs. They basically work out to small cost-savings and incentives for homebuyers who are already committed to some work.
Let's move on to the section option: the move-in-ready house. Now, realizing that buying a renovation project is going to be hard work and require lots of disposable income which I don't have, I feel like buying a house I can just move into will save me time, and I'll be getting a property that assess closer to the listing price. However, when your house isn't worth exactly what you're paying for it, the bank might ask you to put more money down, to show that you're willing to take on more of the risk due to the difference in value. For some, this can be rather difficult; a 20% down payment (which is becoming standard with many lenders) can amount to tens of thousands of dollars. Some banks won't even lend out amounts lower than $50k (or at least not without exorbitantly high interest rates).
You see, in this market, cash is king. Closing on a house is much faster and far preferred by sellers if you can buy a piece of property without a bank. For those who live and work in the city, homes in their own neighborhoods are being priced out of their range because the increased value due to high demand is raising prices to levels that are only affordable with people who might have some money already.
Class Mobility and Credit
So we've seen the problem: prices are inflated relative to actual value of the house, which means people without capital already cannot access credit in order to purchase the house. You might ask yourself, "Credit? Isn't that what got us into this big mess in 2008?" True, overuse of credit without ability to repay caused the downfall of the dreaded Mortgage-Backed Security that is always talked about, but lending itself isn't the problem. In fact, lending is one of the primary drivers of upwards mobility in an economy. It boils down to this: when you lend someone money, you are investing in someone, with the hopes that they can turn the lent money into more value, something that both the lender and the borrower will share. When you rent a house or apartment, you're virtually burning your money; you end up paying your landlord without gaining any additional value in return (other than a roof over your head). But when you pay your mortgage, that money goes into regaining a stake of the value of your home. Over time, after you pay off your mortgage you've accomplished two things: you've had a place to live and you've gained a valuable asset that you can resell or borrow more against. This allows people to have greater available assets as well as being seen as less risky by banks. The lessening of perceived risk matched with greater held assets is the basic combination that allows for class mobility. We saw it after WWII, as new GIs moved to the suburbs, bought houses and built a life for them. The access to the lending resources (as well as a strong economy, of course) caused great upwards class mobility. People started businesses by lending against their homes and created new jobs and calue for the economy along the way.
Now, after the great recession, banks are incredibly bearish. They're afraid of lending out money to those who haven't already proven their value: those with money and good credit scores. Due to the gross negligence of the financial sector prior to 2008, we have effectively cut off huge portions of our population from access to credit. Without credit, people will be stuck renting, and therefore loose out on the opportunity to create value for themselves though lending institutions.
The game you're not invited to
Effectively, we've created a market that bars people from entry due to their social class, and created a market where the well-off are the only ones who can benefit from the so-called revitalization of Detroit. People are quick to point out that blight reduction and rises in home value will end up helping everyone financially in the city. However, most of the effects are limited to those who already own their home and are able to create more value by selling it. More money being spent in the local economy might seem like it will trickle out to everyone in the city, but let's be clear: most of the desirable jobs available are skilled jobs made for people who went to college. What's left for lower- and working-class Detroiters are typically jobs that are low-paying, low-skilled, and high-turnover. The two things for residents that made Detroit the prosperous city it once was: high-paying jobs and access to credit, do not exist here anymore, or at least not unless you had the money to begin with.
We're excited to see a city trying to get back on its feet. We see possibility in the renovation and revitalization of businesses and neighborhoods. And we're excited to see what the new era in Detroit's history looks like. But unless we attempt to level the playing field and allow everyone with a chance to invest and be invested in, we're created a two-tiered city: the low- and working-class Detroiters that will stay where they are, and the well-off who will continue to see more returns from a rising city.