In the third quarter of 2006, Detroit real estate suffered more foreclosures than other states; in fact, bank foreclosed on four times as many homes there as compared with the national average.
RealtyTrac is an online foreclosure resource, which documented that Detroit’s mortgage failures were up 43% since 2005. Some contributing factors have been the steadily rising home prices, as well as the resetting of variable mortgage rates.
Two other cities suffering similar rates of foreclosures were Fort Lauderdale, FL and Denver, Colorado.
During the same time period, among metropolitan cities, Bethesda, Maryland, boasted the lowest foreclosure rate – about one in 5,500 homes, or roughly 1/68th of what was reported for Detroit.
Among cities with high foreclosure rates, only Indianapolis achieved any recovery during that same quarter, slowing just fewer than 3%.
Local dynamics of Detroit economics
The Detroit real estate landscape has been exacerbated by specific regional challenges, such as the local employment market. Detroit foreclosures followed auto industry layoffs, which continue to be prevalent.
In early 2007, Michigan’s unemployment rate was 7 percent, the highest in the country, as documented by the Bureau of Labor Statistics. That rate of joblessness was began around 2003, when Ford made considerable cost cuts and eliminated jobs in its efforts to meet Japanese competition.
Loans carried by “solid” borrowers
Ironically, a higher percentage of Detroit area mortgages are prime loans, made to the most credit-worthy borrowers. Nearly 80 percent of the loans originated in 2006 were “A paper,” a few points higher than the national average.
Even those homeowners in Detroit who are making timely mortgage payments are feeling the impact of the high foreclosure rate. As neighbors’ loans default and Detroit REOs rise, prices quickly dropped 10 to 20 percent. This kind of decline in value can leave homeowners upside down, owing more than the property is worth.
There is a type of “guilt by association.” A whole neighborhood is stigmatized when auction signs and bank foreclosures appear. The good neighbor, who meets his payments and maintains his property, is nonetheless negatively impacted.
Even on Wildemere Street, an upscale Northwest Detroit neighborhood, there is some adversity. The two-car garage, Tudor homes sell for twice the city’s median price, yet one fourth of the houses are vacant. Many of the unoccupied properties display auction or foreclosure signs.
Taking profitable advantage of Detroit foreclosures
While the statistics regarding Detroit real estate seem a bit depressing, from an investor’s point of view, there may be ample opportunity. The 30th Street area, a couple of miles from City Center, is nearly gutted, with the majority of row houses empty and dilapidated. To some savvy investors, this bottomed out market phase can be the raw material for rebirth and even capital growth.
In Delray Beach, Florida, for example, builder Frank McKinney bought an entire block of similarly derelict homes on what is now called “Bankers Row.” Many of the small bungalow style homes were vacant and unsecured. McKinney applied his skills to renovate and beautify the block with municipal cooperation. Buying the properties for back taxes, he created a new look to the block, which was then dual-zoned. Today, Bankers Row is fully occupied by a mix of residential and commercial occupants. Colorful paint schemes suggest Caribbean charm, and pretty awnings make the little structures seem just a bit larger, with a hint of whimsy. Similar neighborhood uplifts followed the Bankers Row success story in Delray Beach, converting what were considered dangerous neighborhoods to communities. Delray does not have an auto industry. The major source of jobs is hospitality, mainly restaurant and bar services. But in the case of that Florida city, perhaps the homes brought the people and the jobs.
Can Detroit be the next such revival? With the severely discounted foreclosures and ample profitable opportunity, the answer may indeed be a resounding yes.
