When Detroit recently filed for bankruptcy protection with around $18.5 billion of long-term debt this hit the headlines around the world. There was doom and gloom, negative comment and many people were looking for the next victim of the US economic downturn. However, while one of the largest municipal bankruptcies in US history it seems that Detroit property is back on the menu and investors are testing the water.
There are many factors to take into consideration when looking at the Detroit property market but perhaps one which is overlooked by many people is the fact that the ongoing bankruptcy situation has been impacting services and the Detroit economy for many years now. Is this filing for bankruptcy protection a means of obtaining a fresh start for Detroit?
Living in Detroit
We can throw many facts and figures at you with regards to life in Detroit such as murder rates are now touching a 40 year high, it is regularly stated as one of the worst places for business and careers in the US and despite the fact it once had a population of 1.8 million during the 1950s this has now fallen to just 700,000. As a consequence there are over 100,000 homes vacant and approaching 80,000 commercial buildings remain empty. Foreclosure sales average around one per 764 homes which is around double the national rate.
Against this background, where on earth do property investors see any potential recovery?
Despite the fact that the bankruptcy filing by the Detroit authorities caught many people by surprise, those who have followed the situation are adamant that the state has been on the verge of bankruptcy for many years now. Indeed the quality of public services in Detroit has fallen to a record low of late and this is not really conducive to creating a vibrant and prosperous local economy.
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Property prices in Detroit where a massive 35% below their housing peak values in April according to the S&P/Case-Shiller Home Price Index. Against this backdrop you may be surprised to learn that property sales have netted around 20% profits over the last 12 months for brave investors. There is a general feeling that perhaps the link between property values and average income in Detroit, a relatively low $27,862, has been detached for some time now. When you also take into account inflation there is a growing feeling among some investors that now may be the time to take a chance.
Public services in Detroit
If the Detroit authorities are successful in their bankruptcy filing, and this is by no means certain at this moment in time, while there would be concerns among some in the investment market, it does give the authorities the chance to start again with a clean slate. It would take some years for the authorities to get back on their feet, they would probably need financial assistance from not only investors but also the US government but finally we could see more focus upon the Detroit economy which, if successful, would eventually filter through into the Detroit property market.
History shows that a number of other US states which have filed for bankruptcy protection have seen an improvement in property prices ahead of the actual filing and this has on the whole continued after the legal process has been completed. The idea is that once a state files for bankruptcy, and has little or no means of settling its debts, this could in theory draw a line under the situation and allow for a “fresh start”. While creditors will obviously have something to say about writing off $18.5 billion of long-term debt the fact is that if the Detroit authorities are not able to pay then what else can they do?
An investment in Detroit property is looking more and more attractive for some people although the reality is that if the bankruptcy filing fails then we are thrown back into a very difficult and uncertain situation. Many prominent property investors are now looking towards Detroit to pick up foreclosure deals which have on the whole gone unnoticed over the years. Slowly but surely, as foreclosure properties are picked up, this will breathe further life into the overall property market and indeed investors may well see interesting returns in the short to medium term.
This is a market for the brave, there are still many risks associated with Detroit and it will be a long haul to rebuild an economy and a state which has been neglected and mismanaged for many years. On the upside, if the authorities are successful with the bankruptcy filing, all debts are written off and they are allowed to start again, then perhaps, just possibly, we could be on the verge of a new and more prosperous period for Detroit.