Detroit home Prices outperform the suburbs again

[313WX]

I'm not shilling for Detroit real estate, but all these numbers are wrong. Wesley omits the fact that you still owe close to 60K on your mortgage when you sell, so you are only up 40K on the deal. Your numbers are not even vaguely reasonable either. How could an 80K 30 year mortgage at current interest rates require that 50K be paid back in 5 years? Probably less than 25K...

There are 360 payments for a 30-year mortgage. If the mortgage is $60K after the $20K down payment, you're looking at a monthly payment of $166 per month. Multiply that by 60 months [[5 years worth of payments) and you would have only paid $10K towards the mortgage. So that means you would owe $50K towards it before you can pocket the remaining proceeds if you sold the house.

Not sure where you got the $60K owed from?

[mwilbert]

There are 360 payments for a 30-year mortgage. If the mortgage is $60K after the $20K down payment, you're looking at a monthly payment of $166 per month. Multiply that by 60 months [[5 years worth of payments) and you would have only paid $10K towards the mortgage. So that means you would owe $50K towards it before you can pocket the remaining proceeds if you sold the house.

Not sure where you got the $60K owed from?

It was postulated to be a 60K mortgage [[80K purchase price with 25% down). You would still owe almost all of that after 5 years as mortgage principle payments are not linear at all, which is why I misunderstood your comment about 50K going back to the mortgage.

[SammyS]

I'm not shilling for Detroit real estate, but all these numbers are wrong. Wesley omits the fact that you still owe close to 60K on your mortgage when you sell, so you are only up 40K on the deal. Your numbers are not even vaguely reasonable either. How could an 80K 30 year mortgage at current interest rates require that 50K be paid back in 5 years? Probably less than 25K. And you aren't giving the owner credit for avoided rent. On the other hand, you are completely right that there are potentially a lot of other costs that you could incur living in Detroit that you might be able to avoid living someplace else. If you have the taste for it, I suspect being a landlord in Detroit is more profitable than being a live-in owner. Of course, that is definitely not for everyone.

Let’s run that calculation again. Please feel free to correct me if I’m wrong.

Purchase price = $80k
Down payment = $20k [[25%)
Interest rate = 5% [[30 yr)
Property taxes ~$6k/year at 67 mil
Monthly payments = ~$900/month [[$877 to be exact)

After 5 years,
~$15,500 payed in interest
~$1.200 in principal [[$58,700 still owed)
~$5,000 in insurance
~$30,000 in taxes [[what a rip)

If the house appreciates by 10% pa, then the value after 5 years is $80,000 x [[110%)^5 = ~$129k
Subtracting downpayment, balance owed, interest paid, insurance and taxes respectively = $129k - $20k - $59k - $15.5k - $12k -$30k = -$8k
Let’s now subtract the RE costs for selling:
-$8k - $129 x 6% = -$16k

So on a $20k investment, you walk away with -$16k after 5 years. That’s an actual loss since the interest and taxes are ~12% every year.

But......
Compare that to renting an $80k house. Let’s assume $900 per month + $300/year in renters insurance:

Total after 5 years of renting = $57k

Total delta = -$16k + $57 = ~ $41k

So Wesley Mouch is sort of correct. On a $20k investment and assuming the original scenario, you’d be up 100% as apposed to renting.

[Wesley Mouch]

Let’s run that calculation again. Please feel free to correct me if I’m wrong.

Purchase price = $80k
Down payment = $20k [[25%)
Interest rate = 5% [[30 yr)
Property taxes ~$6k/year at 67 mil
Monthly payments = ~$900/month [[$877 to be exact)

After 5 years,
~$15,500 payed in interest
~$1.200 in principal [[$58,700 still owed)
~$5,000 in insurance
~$30,000 in taxes [[what a rip)

If the house appreciates by 10% pa, then the value after 5 years is $80,000 x [[110%)^5 = ~$129k
Subtracting downpayment, balance owed, interest paid, insurance and taxes respectively = $129k - $20k - $59k - $15.5k - $12k -$30k = -$8k
Let’s now subtract the RE costs for selling:
-$8k - $129 x 6% = -$16k

So on a $20k investment, you walk away with -$16k after 5 years. That’s an actual loss since the interest and taxes are ~12% every year.

But......
Compare that to renting an $80k house. Let’s assume $900 per month + $300/year in renters insurance:

Total after 5 years of renting = $57k

Total delta = -$16k + $57 = ~ $41k

So Wesley Mouch is sort of correct. On a $20k investment and assuming the original scenario, you’d be up 100% as apposed to renting.

I'm happy to be 'sort of correct'.

And I used 10% to be conservative. Given Detroit's relative valuation, one might see much more. [[After all, a 43% increase in 'median' was the basis).

So you might for 'fun' run again with 20% annual increase. Rent indexed for inflation. And see what the result would be at 30 years [[wealth for kids).

[313WX]

It was postulated to be a 60K mortgage [[80K purchase price with 25% down). You would still owe almost all of that after 5 years as mortgage principle payments are not linear at all, which is why I misunderstood your comment about 50K going back to the mortgage.

Fair enough.

[SammyS]

I'm happy to be 'sort of correct'.

And I used 10% to be conservative. Given Detroit's relative valuation, one might see much more. [[After all, a 43% increase in 'median' was the basis).

So you might for 'fun' run again with 20% annual increase. Rent indexed for inflation. And see what the result would be at 30 years [[wealth for kids).

At 20% pa appreciation, you’re at $200k after 5 years, that is $80,000x[[120%)^5

You now walk away with +$50k after subtracting everything above including RE costs.

Assuming inflation is 3%, rent after 5 years is ~$58k. Adding renters insurance totals it to ~$60k.

Total now is $110k on a $20k investment. Now you’re talking

Just for the hell of it, if Detroit keeps performing like it has over the past few years [[+40% pa), then you’ll be up ~$350k assuming the landlord does not adjust the rent to market rate. Good luck with that. I’ve adjusted my rent >40% over a 3 year period.

PS. None of these calculations include the tax benefits of writing off interest and taxes as homesteaded. It could only make your investment look better.

[O3H]

Can we see a rendering of the project ?

[archfan]

The increases are significant if you are investing in multiple units and renting them, and maybe unloading them when they appreciate. That's not most people, unless you're advocating that everyone should invest in high risk real estate. I've seen that show.

If you are living in the house short term, you're faced with the dilemma of a rising market - sell, and you'll pay the increased price for another house.

If you're living in the house long term, then if you're lucky, your house will have appreciated more than inflation. Of course, many in Detroit lost that bet.

[Danny]

OH! So that explains about a $300,000 converted brick family flat into a single family home in the west side black ghetto in Detroit. And it's being sold right away.

bravo bravo clap clap clap

[313WX]

The increases are significant if you are investing in multiple units and renting them, and maybe unloading them when they appreciate. That's not most people, unless you're advocating that everyone should invest in high risk real estate. I've seen that show.

If you are living in the house short term, you're faced with the dilemma of a rising market - sell, and you'll pay the increased price for another house.

If you're living in the house long term, then if you're lucky, your house will have appreciated more than inflation. Of course, many in Detroit lost that bet.

All good points.

[SammyS]

The increases are significant if you are investing in multiple units and renting them, and maybe unloading them when they appreciate. That's not most people, unless you're advocating that everyone should invest in high risk real estate. I've seen that show.

If you are living in the house short term, you're faced with the dilemma of a rising market - sell, and you'll pay the increased price for another house.

If you're living in the house long term, then if you're lucky, your house will have appreciated more than inflation. Of course, many in Detroit lost that bet.

About 10 years ago, Robert Schiller, from Case-Schiller, said that housing was never a good investment due to maintenance costs and its historic [[>200 year time frame) performance [[inflation +2 or 3%) UNLESS there’s population increase and/or economic windfall. This came after the GFC fallout when national home prices collapsed by ~50%. Since 2012, most of the nation has recovered but Detroit has seen more in the last 2 years than the index [[20 city composite) has seen in 6. This suggests to me that there are other forces at play here but let’s address those two metrics for now.

1. Detroit is going through a generational transformation. This is what I mean when I say there’s a reversal between the city and the suburbs. Maybe this translates to population increase, or at least stability, but I wouldn’t call it an explosion.

2. $Billions are pouring into the city and inner ring to meet demands of new residents and companies. For Detroit, it’s a financial BOOM but it doesn’t explain RE price increase across the entire city.

So what could be the driving force behind Detroit’s RE boom?

1. Upside potential.
As some have already mentioned in this thread, Detroit prices have been severely depressed for decades and disproportionately low compared to other cities and the suburbs. This tips the risk/reward scale in favor of investors.

2. We no longer have a crisis of confidence.
The relationship between Detroit and the wealthier suburbs has historical been regarded divisive and uncooperative. Call it corruption, racism or even reverse racism, whether justified or not, the money spoke and it exited hard. Since Duggan's administration and the expungement of legacy costs, the money is finding a “friendlier” more trusting place to invest in. Money needs yield like humans need oxygen so if it has found its way into Detroit RE at the expense of endless other market sectors, then that’s speaks volume for confidence and stability.

[Johnnny5]

One thing to keep in mind when comparing median sale prices in Detroit to those in the suburbs is the type of home sales happening in the city. Due to years of neglect in Detroit, many of the homes being sold now are recently completed rehabilitations [[Such as the example of someone buying a home for 20k, putting 100k into it and then selling for 250k). While it's great that this is occurring, and people are finally investing in the city these types of sales are going to tremendously distort the meaning of median sales price increases as the labor and material costs aren't accounted for in the increase.

I think it's great that home prices in Detroit are finally appreciating, but I worry for those buying at current market prices and hoping for a good return [[Over the medium to long term). Interest rates are low, inventory of move in ready homes is low, unemployment rates are at record lows and wages are going up. All of these things are helping real estate prices, but what is the driving force to push them up from here? The only one that can get much better is wages, but if we see significant wage inflation the Fed is all but certain to significantly increase interest rates. Everything out there is pointing to a nationwide peak in real estate prices, and getting in near the top often ends badly.

[swingline]

The "Detroit RE Boom" is limited to a rather small total area of the city, even though it has gingerly expanded into areas once unthinkable, e.g., North End, Core City. Continued modest population growth with thte attendant investment seems sustainable but there will be no massive reversal from the suburbs. Unless resolved, concentrated poverty and the failing schools caused by that poverty will always form a "cap" on the potential of many Detroit neighborhoods. But properly nurtured, the current growth may slowly transform many neighborhoods [[mostly within 5 miles of downtown) to an extent that owners won't always have to worry about a real estate collapse wiping them out.

[iheartthed]

Unless resolved, concentrated poverty and the failing schools caused by that poverty will always form a "cap" on the potential of many Detroit neighborhoods. But properly nurtured, the current growth may slowly transform many neighborhoods [[mostly within 5 miles of downtown) to an extent that owners won't always have to worry about a real estate collapse wiping them out.

C'mon guys, this broken record sounding theory has been disproven. The areas of Detroit experiencing a rebound now are some of the most impoverished areas that ever existed in Detroit.

[DetroiterOnTheWestCoast]

One thing to keep in mind when comparing median sale prices in Detroit to those in the suburbs is the type of home sales happening in the city. Due to years of neglect in Detroit, many of the homes being sold now are recently completed rehabilitations [[Such as the example of someone buying a home for 20k, putting 100k into it and then selling for 250k). While it's great that this is occurring, and people are finally investing in the city these types of sales are going to tremendously distort the meaning of median sales price increases as the labor and material costs aren't accounted for in the increase.

Not really, as median simply means that half of the sales are above that point and half are below. A sale at $250,000 would skew the average sales price; but that's why median is a much better measure than is the average price. If the median is now $40,000, a sale at $250,000 doesn't impact the median any more than one at $45,000; they are both above the median and by how much does not impact the median.

[Johnnny5]

I understand the difference. I also agree that using the median sales price increase is a much better indicator of the overall price increases of property city wide. That said, whether we look at the mean or median the sales price increases do not account for how much was invested into physical improvements to the homes prior to sale. While I can't be certain, I would have to assume that those costs are much higher on average in previously blighted areas in Detroit than in the suburbs. If a large number of homes are being rehabbed prior to sale, that would affect the meaning of the median price increases as well.

[ABetterDetroit]

C'mon guys, this broken record sounding theory has been disproven. The areas of Detroit experiencing a rebound now are some of the most impoverished areas that ever existed in Detroit.

Excellent point.

[Wesley Mouch]

Not really, as median simply means that half of the sales are above that point and half are below. A sale at $250,000 would skew the average sales price; but that's why median is a much better measure than is the average price. If the median is now $40,000, a sale at $250,000 doesn't impact the median any more than one at $45,000; they are both above the median and by how much does not impact the median.

Most important thing to bear in mind is that both average and median sales prices are NOT for the same home. Not even for similar homes.

Assume for a moment that every home in Detroit sells for exactly the same price that an identical home sold for last year...

If there are more sales of better homes, the median and average will both go up.

But every single sale was for the same price paid a year ago for an identical price.

Be very careful before assuming an increase in average or median prices means anything for the home you bought, or might consider buying.

[[That said, if the mix of homes sold each year is basically the same, then an increase in average and/or median prices would also mean an increase in expected sale price. But beware of real estate stats in changing markets. Invest with caution. Don't bet your entire future on your Enron stock or Amazon stock, or Detroit rental home inventory.)

[Detroitdave]

Words of caution, beareful what you wish for.
although there are many areas in the city that are truly coming back strong.
You often hear “ when are they going to get to the neighborhoods”
many people are now complaining “ I can’t afford to live, downtown, midtown ect.
when “they” get to your neighborhood you might not be able to shop, dine,live in your neighborhood the way you once did, it’s reaching my northwest neighborhood now.
Now before you all start , I’m not advocating keep the neighborhoods the way they are ,but no would ever believe the starting ask price in corktown would be $400,000 !
i had a conversation on the phone ,with an aunt that moved to Atlanta some years ago, and she said “IN DETROIT “ !?”
She still doesn’t believe me

https://www.zillow.com/community/towns-at-corner/7157317_plid/

https://www.robertsonhomes.com/communities/detroit/the-towns-at-the-corner?utm_campaign=Condos+For+Sale&utm_source=goo gle&utm_medium=ppc&utm_term=%2Bcorktown%20%2Bapart ments&utm_content=2118789xCjwKCAjw-4_mBRBuEiwA5xnFIPDUmiI8tIVuIcMsAR3wG5oXdEXpc2fAUwL OcflMVt45-B1zcmWMdRoC7z4QAvD_BwE

[SammyS]

^^
If a resident decided not to buy in CT for $20k only a few years ago, then I can’t have sympathy for them complaining about being out priced. It’s the same mentality that still wouldn’t buy if prices miraculously dropped back to $20k. Perpetual pessimists and nay sayers. I also think they are the loudest voices against Detroit’s turnaround. They are just as bad as the middle aged suburbanite who has all of Detroit’s woes ingrained in thier psyche.