Real Estate

On the canvas

Detroit is in a fight for survival following bankruptcy -- but are there signs of life for housing in the city?

Detroit has long been known as one of the housing markets that was hit the hardest during the housing crisis. Even recently, RealtyTrac deemed the city the best place to find a fixer-upper based solely on the number of homes available for under $100,000, an indicator that home price appreciation has yet to catch up in the city.

Little wonder: The state of Michigan’s most populous city began to see a downfall as early as the turn of the century, its population falling from 951,270 residents to 713,177 from 2000 to 2010, 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 home sales.

Yet, toward the beginning of 2013, Detroit housing started to make a turnaround. In the first month of the year, all multiplelisting service sales rose by 9.4% from a year earlier, data from Realcomp revealed. And that trend only continued going into the second half of 2013.

According to the Zillow Q2 Real Estate Market Reports, the Detroit metro began its turnaround as far back as 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 3.3%.

But then things took a turn for the worse. The city was forced to file for Chapter 9 bankruptcy in July — the largest municipal bankruptcy in the history of the United States.

The calamity left many wondering what this means for the distressed market in Detroit. Will the bankruptcy have any impact on foreclosure activity?

Opinions differ. According to RealtyTrac Vice President Daren Blomquist, foreclosure activity may not be affected by the filed bankruptcy at all.

“We have seen foreclosure activity in the city trending down for the last several years, with 32 consecutive months of annual decreases in foreclosure activity in Wayne County, through June (when foreclosure activity was down 51% from a year ago),” he told HousingWire.

Blomquist believes that the bankruptcy could very well mean more vacant, abandoned foreclosures that are not maintained and contribute to blight throughout many of the city’s neighborhoods.

“With limited resources, the city may not be able to perform adequate code enforcement and needed maintenance on these homes,” Blomquist added.

Data from RealtyTrac shows 9,331 foreclosed homes in Wayne County, the sixth highest total of any county nationwide.

Additionally, 30% of the homes in Wayne County that are in the foreclosure process — meaning that they are in foreclosure but have not yet been repossessed by the bank — are vacant. This is significantly above the national average of 20%.

Ken VanNorwick, supervising bankruptcy attorney at Potestivo & Associates, thinks the city’s bankruptcy may lead to significant delays in the foreclosure process moving forward. “The challenges raised by Detroit’s Chapter 9 filing are hard to pin down. However, there are numerous potential issues that could be problematic,” said VanNorwick. “The first issue is a foreclosure action, which cannot take place, due to the imposition of the automatic stay under 11 U.S.C. 922. Lenders will not be able to foreclose on properties where the City of Detroit has an interest in the property,” he added.

According to VanNorwick, Detroit’s hardest hit neighborhoods actually have the possibility of improving with this Chapter 9, as it successfully addresses the debt and other structural problems that the city faces.

“In the short term, the foreclosure process can proceed, so long as Detroit is not a lienholder or otherwise interested party in the foreclosure,” said VanNorwick.

For the foreclosures stayed by the Chapter 9 filing, it will delay the potential return of that property to an interested and committed owner, who wishes to either operate the property as a rental or live in as their principle residence, according to VanNorwick. “This will necessarily delay the neighborhood’s improvement.”

“This case is unprecedented in its scale and complexity. It will be quite some time before all of the issues are dealt with,” he added.

But life goes on in the Detroit housing market. Although sales dropped in June, the median sales price for all Detroit MLS sales increased, according to data from Realcomp.

Detroit sales fell 2.8% month-over-month in June, dropping from 6,491 units to 6,308. Conversely, the median sales price in Detroit rose to $123,000, a 44.7% increase from last year. Despite rising home prices, the average time spent on the market dropped 15 days from 81 to 66. Perhaps the rush on home purchases comes from the corresponding 28.4% year-over-year drop in inventory, with levels falling from 27,191 to 19,459 homes.

Of the 6,308 closed sales last month, 6.7% were identified as short sales and 39% were identified as cash sales. This amounts to 423 short sales and 2,454 cash sales.

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 longterm 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,” said Jed Kolko, chief economist of Trulia.

“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 Sun Belt 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.

However, Professor David Skeel of the University of Pennsylvania Law School believes the housing market effect will depend on whether the bankruptcy is successful or not. “Obviously, the market couldn’t get a great deal worse. If Detroit comes up with a compelling plan for addressing its problems in and after bankruptcy, the housing market surely will benefit,” he said.

But Detroit doesn’t seem to be the last city to potentially deal with a municipal bankruptcy.

“There are a lot of cities that are in significant financial trouble. I don’t think any is as troubled as Detroit, but many have similar pension problems. Philadelphia has severe pension problems, for instance, though it’s not on the verge of bankruptcy,” said Skeel.

An estimated one of every 1,668 eligible general-purpose local governments filed for bankruptcy protection over the past five years, according to a Governing analysis. That’s only 0.06%. When excluding filings later dismissed, only one of every 2,710 eligible localities filed since 2008, the same analysis reported.

Most filings have not been submitted by cities that have gone bankrupt, but by lesser-known utility authorities and other narrowly defined special districts throughout the country, making the Detroit bankruptcy even more dramatic.

Since January 2010, there have been 36 municipal bankruptcy filings, with eight general- purpose local government bankruptcy filings. These include the city of Detroit; city of San Bernardino, Calif.; town of Mammoth Lakes, Calif. (dismissed); city of Stockton, Calif. (dismissed); Jefferson County, Ala.; city of Harrisburg, Pa. (dismissed); city of Central Falls, R.I.; and Boise County, Idaho (dismissed).

It is worth comparing how significant Detroit’s bankruptcy was when compared to the next four largest municipal bankruptcies in U.S. history, as put together by data from Capital Economics.

Three California locals filled the list of the top-five largest municipal bankruptcies: San Bernardino came in fifth with a $500 million bankruptcy back in 2012; Stockton, Calif., takes the fourth spot with a filing of $1 billion back in 2012; and Orange County, Calif. filed a $2 billion bankruptcy in 1994, putting it in the thirdplaced position.

Jefferson County, Ala., is the second largest municipal bankruptcy at $4 billion, filed in 2011. But even $4 billion seems like chump change when compared to Detroit’s $18 billion black hole.

Despite a recent turnaround in housing, the city will continue facing many issues related to employment and struggles without city funding, both of which will inevitably have an impact on the housing market.

Whether or not the market has recovered sufficiently in order to hold on its own, only time will tell.

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