Despite Bankruptcy, Detroit’s Housing Market Thrives

Despite Bankruptcy, Detroit’s Housing Market Thrives

11/04/2013 BY: KRISTA FRANKS BROCK

The city that previously made national headlines for its failing economy and bankruptcy filing is now in the spotlight for its rapidly rebounding housing market. Detroit topped two lists of highest-performing housing markets in the past week—one from Realtor.com and one from Clear Capital.

Last week, Realtor.com named the city the top turnaround town in its quarterly “Turnaround Towns Report” based on median list price, inventory, and median age of inventory.

Monday, Clear Capital ranked Detroit at the top of its Home Data Index Market Report for October, based on its quarterly price growth.

“Once the poster child for America’s ailing auto industry, Detroit has turned around its housing markets,” Realtor.com stated. “Instead of sinking when the city of Detroit had just filed for bankruptcy, its housing markets took on a quiet resurgence.”

Home prices in the Motor City fell 4.8 percent over the third quarter but leapt 44.3 percent for the 12 months ending in September, according to Realtor.com’s report.

Clear Capital observes home prices on a rolling quarter and revealed a 7.8 percent home price increase in Detroit over the three-month period ending in October, accompanied by a 31.6 percent annual increase.

Realtor.com also revealed falling inventory and inventory age in the bankrupt city. Detroit’s housing inventory in the third quarter of this year was 24.5 percent below inventory levels in the third quarter of last year.

The median age of inventory in Detroit’s housing market declined 22.9 percent over the same period, according to Realtor.com.

Clear Capital analysts are quick to point out that “[r]elatively small price gains will more heavily influence

percentage gains in Detroit than in higher priced markets.”

Detroit’s median home price is currently $120,000, a little more than half the national median home price, which stands at $210,000, according to Clear Capital.

Looking to the root of Detroit’s sudden housing market turnaround, Clear Capital points to declining REO saturation, while Realtor.com emphasizes investor activity.

While Detroit continues to rank No. 1 in the nation for REO saturation with a current rate of 29.9 percent, Clear Capital says this ratio is down significantly from 64.6 percent in 2009—a 34.7 percentage point decline.

When asked what is driving Detroit’s strong housing recovery, Realtor.com President Errol Samuelson responded, however, that investors have “made a notable play in Detroit.”

“We’ve seen reports of significant international investment in Detroit over the past several months, and before the bankruptcy, so these are sophisticated investors—willing to take bigger risks and move quickly in markets that have not yet stabilized,” Samuelson said.

Rapid price gains often lead to bubble fears, but both Samuelson and Alex Villacorta, VP of research and analytics at Clear Capital, concur Detroit is not headed for a bubble.

“While it has seen more than 30 percent growth over the year, the market would need to see another 262 percent growth to hit peak prices,” Villacorta explained.

Villacorta says Detroit home prices have fallen in line with its pre-2006 historical trends. “Following 2006, prices fell nearly 77 percent, so what we’re seeing is a response to a severe price correction,” he said.

Both economists also point to Detroit’s still-struggling economy, which may tamper improvement in the housing market moving forward.

The bankrupt city still stands on shaky legs, suffering with unemployment above 9 percent and median incomes at “nearly half of national median incomes,” according to Clear Capital.

“Another factor to watch is how the city of Detroit manages its fiscal recovery over the next several months,” Samuelson said, pointing to the city council’s past recovery plan rejections, most recently the Barclays loan. “Uncertainty around recovery plans could cause investor sentiment to wane,” he warned.

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