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Location, location, location
Craig Newmark reports:
Matthew Kahn notes that one median-priced house in Westwood could be exchanged--ignoring transactions costs--for 100 median-priced houses in Detroit. Would this be a good trade? I report, you decide.
If you are skeptical, here are the data on Detroit.
Posted by Tyler Cowen on April 8, 2009 at 07:26 AM in Data Source | Permalink
Comments
mills of God grind slowly, yet they grind exceeding small
nevermind transaction costs - how about backtaxes and future municipal taxes
to say nothing of bringing those detroit homes back up to code and the security
costs....
Posted by: franko at Apr 8, 2009 8:31:56 AM
It's a good deal only if a lot of people take it.
Posted by: Scott at Apr 8, 2009 8:59:09 AM
I have 1000 igloos in Nunavut to offer you.
Posted by: Zephyrus at Apr 8, 2009 9:10:27 AM
What about property taxes and carrying costs? Stupid comparison.
Posted by: at Apr 8, 2009 9:33:36 AM
Detroit is a shrinking city with an oversupply of housing. Also, the Michigan Realtor data talks about averages, not specifically medians. If the average number is a simple mean, its much less useful - it includes a whole bunch of $1 houses.
Posted by: John Voorheis at Apr 8, 2009 9:50:51 AM
Ignoring transaction costs? In real estate, transaction costs are everything.
If these houses are a place to live, if you want to live in Detroit you just need one house, not a hundred, and you can get it more cheaply than trading a house in Westwood. If this is an investment, its probably accurately priced. Detroit's economy is based almost entirely around a dying industry. If the city recovers it will have gotten alot smaller first, meaning many of its houses will have been destroyed.
Posted by: Ed at Apr 8, 2009 10:44:08 AM
I wonder if eventually people will buy those Detroit homes for the salvage (wood, fixtures, pipes etc.)
Posted by: floccina at Apr 8, 2009 10:59:10 AM
What about cost of living differentials? Stupid comparison.
What about externalities (both positive and negative) uncaptured by the cost of living differentials as well as the home price? Surely the prices don't absolutely reflect these differences right? Stupid comparison.
Posted by: hern at Apr 8, 2009 11:39:10 AM
If you've got a very big family.
Posted by: TW Andrews at Apr 8, 2009 12:16:15 PM
"I wonder if eventually people will buy those Detroit homes for the salvage (wood, fixtures, pipes etc.)"
In urban areas, much of the value of housing is land value. Since Detroit's local economy is quite stagnant, the fall in Detroit house prices is quite appropriate and to be encouraged. If new production opportunities can be established in the area (helped by the lower cost of living) then the city will start gentrifying and housing values will pick up again.
Posted by: anon at Apr 8, 2009 12:41:46 PM
I'm skeptical that the median house price in Detroit is as high as $13000. Here is one estimate (from December 2008) at $7500: http://www.chicagotribune.com/news/nationworld/chi-detroit-housingjan29,0,5435392.story
Posted by: David Smith at Apr 8, 2009 12:47:21 PM
I believe you need to get permits and such to salvage and gut and demolish a home.
Posted by: DocMerlin at Apr 8, 2009 1:10:16 PM
If you can get them all in one area and get security provided so you can renovate or rebuild without everything getting stolen or vandalized.
Posted by: aaron at Apr 8, 2009 1:16:03 PM
Nice. I love the Fox reference.
Posted by: Chris at Apr 8, 2009 1:40:58 PM
Well, I would rather have a house in Detroit and the cash difference, than a house in Westwood. However, I don't have much use for 100 houses. Aren't markets supposed to eliminate barter?
Posted by: Rex Rhino at Apr 8, 2009 2:15:42 PM
Some of Detroit's residential areas are said to be reverting back to nature. Prairie vegetation is reclaiming the areas.
Posted by: Peter at Apr 8, 2009 4:20:34 PM
Does anyone know why market forces didn't work in Detroit? I would think that a city with that much unused residential and commercial real-estate and an idle labor force would have presented opportunities for new businesses, which would have rushed in to take advantage of the lower costs.
I saw a picture of Detroit, taken this year, which showed the old Packard plant still standing - all rusted out and boarded, but occupying prime real estate for decades. Why was this? In my city, old factories that close are torn down and new enterprises seem to spring up almost overnight. What happened in Detroit? Was it government regulation? High taxes? Zoning laws? Social factors? It doesn't seem to make sense that such a prime area with such depressed costs would remain idle for so long, through several large economic booms.
Posted by: Dan H. at Apr 8, 2009 6:40:48 PM
Dan,
My somewhat informed guess is a combination of taxes and unionization has scared off many potential businesses. Image is important.
Secondary to those are "social" factors like crime and demographics (both age and race distributions).
Keep in mind a lot of the current issues are fairly recent and very few companies are looking to expand right now, irrespective of price.
Given Detroit's proximity to Canada, fresh water, education, and industry real-estate I can definitely see it making a comeback if those in control (Detroit and State) can get their act together. Given Detroit's geographic advantages my gut tells me the human factor is causing most of its problems.
Posted by: David J at Apr 8, 2009 7:09:14 PM
Dan H. -- let me quibble. an old Packard plant in Detroit can't be occupying prime real estate by definition as it is in Detroit. For the plant in question, I'm not sure if that real estate was ever prime.
Posted by: former michigander at Apr 8, 2009 7:09:57 PM
NBR had a segment on this tonight, and the people who are snapping up the homes and refurbing them for sale to investors who will rent them are finding that the homes they can buy today are well maintained and in good condition.
They didn't go into the details of refurb, but they were pulling out the carpet which is typical, and it looked like they were replacing the central heating. Why replace the heating? Well, as a landlord, you don't want to have to replace the 20 year old heating system with tenants occupying it, and there may be some significant incentives for replacing with a high efficiency system, besides the lower utility bills.
One question I have is what is the insurance replacement value for the typical Detroit home? My guess is that you might buy a home and property for $100,000 and then need to insure the structure for $150,000 based on the cost of $30,000 to clean up the debris and prepare for construction, and then $120,000 to rebuild an equivalent structure. And that is without higher code standards - a rider is required if the replacement cost is going to include upgrades to the structure required by more stringent building standards.
So, if you need to insure the property for more than what you paid for the structure, what does that say about the price?
Posted by: mulp at Apr 8, 2009 7:13:01 PM
"I wonder if eventually people will buy those Detroit homes for the salvage (wood, fixtures, pipes etc.)"
No. The reason is simple enough; why buy when you can steal? It isn't new, salvage companies have been stealing raw materials from Detroit's abandoned buildings for decades.
http://www.detroityes.com/webisodes/2001/09-rapeofdetroit/01-3rodleefacadeDet.htm
Empty houses in Detroit are also mined. Of course the first thing to go in an empty house are the appliances: AC unit, central heating, water heater, oven, etc.
For outsiders looking into Detroit's miasma, often one wonders how a one dollar home isn't sold? At some point the value of the building materials are higher than the value of the home itself. At that point isn't it undervalued?
The answer is no. Detroit is a modern day ghost town in the making. Ghost towns lost value, but the homes still stand in the old west. It is an odd relic of our cultural values. America is a strange place.
Posted by: James at Apr 8, 2009 9:17:21 PM
I went to www.zillow.com to see about houses for sale
in Detroit to see if there were truly houses for sale
at the average price, or if it were one of those lies
of statistics that Robert Reich goes on about, adding
his height together with some MBA player to make a
point about wealth or something...
I asked for 3+ bedrooms, and looked for the average price,
plus or minus four grand, and in a square from Roseville
to Belleville, I found over a thousand homes. The
same search in Mpls/St. Paul brought derisive laughter
from the website. Actually, it brought me 27 hits.
If I were given a government position, a lot of money,
and no additional information, I would buy up large swathes
of these homes, do an eminent domain buyout on the
neighbors, and turn the areas into wetlands. This would
partially fix the housing glut, eliminate blight, and reduce
the future risk of flooding due to overdeveloping land close
to rivers and streams. I mean, if we're going to throw money
at a problem, we could do worse...
Posted by: jcpederson at Apr 8, 2009 9:23:30 PM
Dan H.,
To answer your question, you must first understand why Detroit came to exist as a manufacturing mecca in the first place. The answer is that Detroit was the perfect intersection of Lake Superior iron, Appalachian coal, and access to shipping lanes via the St. Lawrence seaway.
The Lake Superior iron mines closed in the 60s. Coal has been less essential to running a factory for a while now, and the St. Lawrence is too narrow for most modern shipping vessels. Therefore, there are no comparative advantages to industrial production in Detroit, or other industrial cities of the Middle-West, who also rode that convergence of iron, coal, and shipping.
As to Detroit itself, you should probably look more closely at the demographic numbers. The city of Detroit has been shrinking for over 50 years. But metropolitan Detroit has never lost population. If you are to believe that Detroit's woes are to job losses because of the declining US auto industry you'd be mistaken. After all, how can metro Detroit grow in population with a waning auto industry?
Posted by: James at Apr 8, 2009 9:30:29 PM
jcpederson,
Funny suggestion, however the free market is taking care of this housing oversupply of its own. In the 80s it was called "Devil's night".
Though your inclusion of metro-Detroit homes is probably inflating the value somewhat. For a more interesting perspective, you should try searching REO properties only in Detroit. Dollars go a long way in the D.
Posted by: James at Apr 8, 2009 9:33:57 PM
Here is a 6 bedroom in one of the city of Detroit's best neighborhoods. http://www.zillow.com/homedetails/3465-Burns-St-Detroit-MI-48214/62323414_zpid/
The misgovernment in the city county and state the last forty years are truly breathtaking.
Posted by: JimS at Apr 9, 2009 2:41:35 PM
