Real Estate

Detroit housing market remains mystery after bankruptcy

City services to fight blight may be most affected

With its Chapter 9 bankruptcy filing on Thursday, Detroit officially filed the largest municipal bankruptcy in the history of the United States. The purpose of Chapter 9 is to provide a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts, according to data provided by the U.S. federal court system.

The city's downfall began as early as the turn of the century. From 2000 to 2010, the city population fell from 951,270 residents to 713,777, according to Census data from 2000, 2010 and the American Community Survey. 

During the housing crisis, Detroit struggled more than most housing markets. In fact, just a little over a year ago, foreclosure sales in Detroit made up 64% of total sales.

However, toward the beginning of 2013, Detroit housing started to make a turnaround. In the first month of the year, all multiple-listing service sales rose by 9.4% from a year earlier, data from Realcomp revealed. And that trend has only continued halfway through the year. 

According to the Zillow (Z) Q2 Real Estate Market Reports, set to release next week, the Detroit metro began its turnaround in November 2011, after falling 52% from its peak. In June, the median home value was up 14.3% year-over-year and 72% of the homes sold during the month were sold for a gain. In the second quarter, values were up a whopping 3.3%. 

So what does the city’s bankruptcy mean for housing? Just because the housing market had started to turn around, doesn’t mean it wasn’t still behind the rest of the country. In June, RealtyTrac named Detroit the No. 1 city for buying a fixer-upper. At the time of the report, the city had 3,773 bank-owned homes built before 1960 and valued under $100,000. 

"Unlike some other recent municipal bankruptcies, the Detroit bankruptcy is rooted in long-term economic and financial challenges. Detroit’s housing market reflects those long-term challenges: home prices are far below the national average, and vacancies are much more widespread. But it’s too soon to tell how the bankruptcy will affect the housing market," Jed Kolko, chief economist at Trulia (TRLA) told HousingWire. 

"Bankruptcy can lead to reductions in city services and a loss of public confidence," added Kolko, "but if it results in a solid financial plan for the future then it could boost confidence longer-term and encourage investment in housing and the local economy." 

According to Kolko, it won’t do much good to read into other cities’ experiences to try and foresee what will happen to Detroit. Municipal bankruptcies in the U.S. are very rare. Kolko noted that Detroit’s housing market is unique: Detroit was the only metro outside of the Sunbelt to have huge price declines during the crash and a strong rebound afterward, even though prices remain much lower than in all other large metros.

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