Areas of Michigan that are dependent on manufacturing are seeing declines in home sales and home prices that, because they are driven by underlying economic fundamentals like job losses and outmigration, may prove to be more long lasting than slowdowns in other parts of the nation.

Areas of Michigan that are dependent on manufacturing are seeing declines in home sales and home prices that, because they are driven by underlying economic fundamentals like job losses and outmigration, may prove to be more long lasting than slowdowns in other parts of the nation.

Home sales in Michigan are down 12.9 percent from January through July compared to the same period in 2005, the Michigan Association of Realtors reported, while the average home price for the first seven months of the year is about 0.78 percent below the average price for the same period in 2005.

The Detroit Board of Realtors reported a 7.4 percent drop in the average home price and an 8.9 percent rise in home sales from January to July this year compared to the same period in 2005. The Flint Area Association of Realtors reported an 8.87 percent decline in average home price and a 16 percent drop in sales for the first seven months of the year compared to the same period in 2005.

The average sales price of a Michigan home so far this year is 11.9 percent higher than the average price of a home in the state in 2001. Nationwide, the median price of existing single-family homes grew about 56.7 percent from 2001 to July 2006, while the average price rose about 23.4 percent from 2003 through July 2006, according to National Association of Realtors data.

Nationwide, the average existing-home price in July was $277,700, which is about 85.1 percent higher than the average home price in Detroit for the first seven months of this year.

Dave O’Toole, a real estate agent for Ron James & Associates, who works in Flint, Mich., and surrounding communities, said that the inventory of for-sale homes has almost doubled this year. “We have a surplus of homes for sale and it’s getting worse. It’s been gradually happening all year and getting worse as the year progresses.”

“People are really afraid to buy right now. There are a record number of foreclosures and it’s getting worse. Banks have really made a lot of bad loans over the last few years. People are getting in over their head and a lot of houses are being lost. There are distressed houses all over the place, mainly in the city of Flint — that’s where the majority of them are.” The combination of job losses and problems related to refinancing has contributed to a rise in foreclosures, he said. The numerous foreclosure sales have made it “a great time to buy and invest in a lot of homes,” O’Toole said.

Investors and first-time buyers seem to be the most active market segments these days, he said, while high-end homes are particularly slow to sell in his market area.

“My investors are really keeping me the busiest. They’re looking at the foreclosures — HUD homes and bank-owned homes,” O’Toole said. The low cost of homes in the area has attracted amateur investors, too. “There are a lot of ridiculous offers out there, a lot of wannabe investors who watched too many late-night infomercials on real estate, thinking they can make offers of half-price. There is some serious lowballing going on. I don’t deal with those people.”

Once a home enters the foreclosure process, it seems that those homes “will usually go the distance” and wind up in a foreclosure sale. “Very seldom have I seen a case where they are going to recover.”

Though the housing market has slowed nationally, O’Toole said that the state’s sagging economy has exacerbated the real estate slump. “Michigan is one of the worst states right now as far as real estate. We’ve lost so many manufacturing jobs, and the state has been so reliant on those jobs. People are afraid. People are moving out of Michigan. Michigan needs to get out of manufacturing jobs — we need to be reliant on other things. It’s going to take time.” College towns such as Ann Arbor and Lansing have been somewhat resilient, he said, and Grand Rapids and Traverse City are also faring better than other parts of the state during this real estate and economic downturn, too, he said.

This is the first major real estate slump that O’Toole has seen in his six years in the business, and he said he expects it will take at least a couple of years for the market to fully recover. “I hope it turns around … sooner than later.”

Freddie Mac Deputy Chief Economist Amy Crews Cutts said Michigan, Ohio and Indiana “are all very much in the same boat” in that they have been losing manufacturing jobs for decades.

“It’s definitely the employment situation, but it’s been a long time coming,” Cutts said. “It’s not the last round of layoffs. What’s happened in the last five years is a very steep decline” in manufacturing jobs, which is not confined to the auto industry.

According to a recent report by Moody’s Economy.com, Detroit has lost about 100,000 jobs in the last five years, and total employment is expected to continue to decline until the end of the decade to 788,500 in 2010, down from 912,000 at the turn of the century.

“The manufacturing jobs are not going to come back,” Cutts said. “That does not mean all of them will stay away, but we (the United States) are never going to be an industrial manufacturing powerhouse the way we were.” The loss of manufacturing jobs poses similar challenges to housing markets in Western Massachusetts and parts of Texas and North Carolina, Cutts said. 

Although a larger proportion of Detroit’s population is employed in manufacturing (12.7 percent) than in the nation as a whole (10.7 percent), it’s not the city’s leading employer, according to Economy.com’s June 2006 Precis METRO report on the city. More Detroit residents work in professional and business services (16.3 percent), government (14.4 percent), and education and health services (14.1 percent), than in manufacturing, the report said.

So while manufacturing jobs may be disappearing, workers in other professions — some of which are more highly paid — are still in demand. That can create a two-tiered housing market, Cutts said, in which prices may remain stable for housing that’s sought after by white-collar professionals, while lower-priced homes more often owned by blue-collar workers decline in value.

“You end up in a situation where low-income families do poorly, while people at or above the median income do pretty well,” Cutts said. “There ends up being almost two markets. The higher-end homes $200,000 and up — not $1 million mansions — tend to do well. Homes priced $100,000 or below will be very soft. You can end up with a very bifurcated market.”

With “young people tending to want to go to warmer places with nicer climates,” outmigration can exacerbate the effects the loss of manufacturing jobs has on housing markets, Cutts said.

Moody’s Economy.com’s Precis METRO report puts Detroit’s population loss during this century at more than 20,000 people per year, and anticipates that trend will accelerate. Economy.com projects Detroit will shrink by 41,100 residents next year and by 30,800 people in 2008.

The Economy.com report predicts mortgage originations will dwindle from $10.2 billion in 2005 to $5.8 billion in 2009, and that existing-home prices will stay essentially flat at $118,000 through 2009.

Cutts said that while developers are good at creating new housing stock to meet demand, it’s much harder to get rid of homes that are no longer wanted or needed when people leave a region.

“If you can’t keep the people you’ve already got, that puts pressures on housing supply,” the Freddie Mac economist said. “There are homes that need to go out of the housing supply. I’m not talking about a fixer upper — I’m talking about a house where if you lean on it, it will fall down. Those homes need to go away.”

Local planners and elected officials can encourage the redevelopment of neighborhoods into parks or office space, she said, but often face political or economic obstacles.

The Midwest’s climate and unionized work force can drive up the cost of doing business, so one way to attract companies that offer high-paying jobs would be to offer tax incentives. But many cities that relied heavily on manufacturing are struggling to provide services to residents, making tax incentives a difficult step to take.

“The problem is they don’t have a lot of money,” Cutts said. “If I say we’ll cut taxes by a quarter, where am I going to get the money to pay the snowplow driver?”

O’Toole, the Flint-based real estate agent who says the current slump is the worst he’s seen, is frank with his clients about how long it may take to sell their homes, and the price that may be required to attract buyers. O’Toole said he has been working to sell his own home, and he has already dropped the price to $13,000 below the appraised price. “I’m being realistic, telling them they have to price competitively. If (sellers) have room they are lowering the price. There is only so far people can go. (Some people are) leveraged out to the hilt on these properties; they can’t afford to go any (lower).”

O’Toole also works as a mortgage officer, and he said there have been some questionable lending practices that have contributed to the shaky real estate market. Loose lending practices, he said, “made it really easy for anyone to get a home. And I think they’re paying for that now.” Banks are taking a big hit as they are selling foreclosed homes for less than the original value of the mortgage, he said. “

There is an easy solution to the real estate problems in the state, he said: “Jobs. Plain and simple. If people get jobs, they are not going to be afraid anymore. Money will start flowing again. The money has to be there in order to spend it.”

Stefan J. Scholl, broker-owner at Buyer’s Broker of Northern Michigan in Petoskey, Mich., works in a resort market that is still active despite the statewide slowdown. “I’m starting to see some light at the end of the tunnel as far as the market goes,” he said, with statistics from August suggesting a slight improvement compared to last year in his market area.

Scholl said that the local market has been stagnant for the past three or four years, which has kept prices in check. “We are seeing buying interest from people who are or have drawn equity out of some … highly inflated markets. I actually have two closing this week. Just because valuations have become attractive we have seen some people stepping in, trying to take advantage of the deals that have been available. It’s a good time to be a buyer’s agent.”

Almost all of the real estate activity in the local market is driven by second-home purchases, he said, and baby boomers are a big part of that. Inventory is up about 20 percent compared to last year, and job cuts in the auto industry have hurt the real estate market throughout the state, he said.

“We have definitely been impacted by the struggling automobile industry. That generally is our bread and butter as far as demand for second homes and vacation homes for automobile and related industry employees.” The area, popular for its golf and skiing, draws some buyers from other states, too, as well as people from such large metro areas as Chicago, Detroit and Cincinnati, Scholl said.

The local real estate market slowed substantially last summer, “which is our busy season up here,” and the first half of the summer this year was also slow, though he said it seems to be turning around again. “I think that we’re starting to see the beginnings of some recovery in our market. We may have seen the worst,” with interest rates staying low. As for the auto industry, “I don’t know that that could get any worse,” he added.

Wynne Achatz, associate broker for Real Estate One in Marine City, Mich., a suburban area of Detroit, said she has never seen a real estate market like this during her nearly 30 years in the business. Every real estate cycle presents its challenges, though — it’s just a matter of adjusting to the market conditions, she said. Achatz, for example, works with some distressed properties and has investors as clients.

In the past two weeks she has sold 12 houses, and Achatz said pricing is the key. She said she informs sellers that they need to set a price that reflects market conditions. “It’s a very soft market right now,” she said. “It’s very sad that sellers are not getting the (price) appreciation they deserve for all of the sweat equity.”

Bank-owned foreclosures are selling at low prices these days, she said, and that has driven down overall home prices as sellers compete for buyers. No matter the market conditions, Achatz said there will always be some first-time buyers. And first-time buyers now seem more willing to buy a small house than a large house. “Five years ago they had to have everything. Buyers are willing to settle for less to keep it in the price range they want.”

There are many families in the area, she said, in which the couple works several jobs to keep up with house payments. “The wife works one shift, the husband works the other shift, so they don’t have to pay a babysitter,” she said.

As for the future of the real estate market in the region, “I don’t know where it’s going to go,” she said. “Like everyone else I’m waiting for the day that prices go up and things are booming.”

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