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Thursday, February 25, 2010

Has Detroit over shot the market on the downside?


The Final S&P Case-Shiller report for 2009 was released on Wednesday of this week (click here to read the whole report) and it shows a national market that is perhaps cautiously probing for a bottom to the current housing mess. It certainly appears to show the positive impact of some of the Federal programs, especially the tax credit programs for first-time buyers. But, it also shows another downturn as we exited 2009; so, all is not well, yet.

One of the things that I noticed when reading through the report is how far the Detroit metro area has overshot the mark in terms of our losses against the national index average and against other major metro areas. Even places like Las Vegas and Atlanta and Phoenix and Dallas and most of the cities that are reported in California and Florida have not turned back the clock as much as Detroit, in terms of home values.

According to the report, the average for the reported metro areas is now down to about 140 on the Index – the level that the index was at in 2003. The CS Index uses January 2000 has it’s 100% anchor point, so a 140 index would still indicate that the property is worth 140% of what it was worth in January 2000. Keep in mind that the peak was in 2006 when the index got to almost 190%. It’s been all down hill since then.

So places like Atlanta at 108 on the index or Las Vegas at 104% or Dallas at 119% have “lost” a lot of value from their peak in 2006, but they are still worth more than they were at the turn of the century. Then there’s Detroit. Our current index number is 73% (rounded up)! That means that homes in the Detroit Metro area have not only lost value off the peak, they’ve shot right on thru the 2000 average and now are lurking somewhere around what their values were in the mid to late 1990’s (it’s hard to tell exactly where they’d be, but it definitely looks like the values are pre-1996. Wow! No wonder so many investors have swooped into the Detroit area buying up foreclosed and distressed homes. And no wonder our assessors have been making such huge drops in assessed values – leading to huge drops in local government revenues.

It is also discouraging that there’s no one near us in this position. We are so clear of the field on value loss that the closest competitor to us for this value loss “honor” would be Cleveland at they are at 104% in the index. In car racing terms they’d be a lap or two down to us in this race. Atlanta is nipping at Cleveland’s keels at 109%. They’re pikers compared to Detroit! Come on guys, you’rte not trying - let’s get out there and lose some value!

What this means for our local homeowners is that if you have owned your home for less than a decade and a half, you are probably under water. In fact, given the cost of a sale, it is safe to say that if you have owned your home for less than two decades you will be lucky to break even on a sale. If you bought your home for $300,000 at the start of the new decade, it is now likely to be worth about $220,000 in today’s market. That is very consistent with what I have been finding as I do Comparative Marketing Analyses (CMA) for clients.
Unfortunately, what I’m seeing way too much of are the people who bought that same home, that was priced at $300,000 when it was built in 2000, at it’s peak value of over $500,000 in 2006 and now it’s value is back down below $300,000. Ouch!

Hopefully, when things turn around in the general market, Detroit will find it’s way back to being closer to the index average. In the short term the Detroit metro area appears to be one of the best places in America to buy a house, in terms of the value that you’ll get for the money. Nowhere else in America offers what is essentially a 48% discount (compared to the index average) on housing values. So sell of your expensive Los Angeles (171 on the Index) or New York (172 on the Index) homes and come buy in Detroit. You could probably comfortably retire on all the money you’ll have left over.

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