Housing market datapoint of the day

By Felix Salmon
April 8, 2009
What was it that caused home prices in Detroit to double between 1996 and 2003? ... We've seen how relatively small changes in supply and demand can have enormous effects on the oil price -- you don't need to explain it away by blaming speculators. " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

It’s a familiar story, but it’s told well:

If ever a city stood as a symbol of the dynamic U.S. economy, it was Detroit… Detroit cared less about how it looked than about what it did—and it did plenty. In two world wars, it served as an arsenal of democracy. In the auto boom after World War II, Detroit put the U.S. on wheels as it had never been before. Prosperity seemed bound to go on forever—but it didn’t, and Detroit is now in trouble.

Detroit’s decline has been going on for a long while… In the past seven years, Chrysler, the city’s biggest employer, has dropped from 130,000 to 50,000 workers.

The story is from Time magazine, and it’s dated Oct. 27, 1961. Which is why it’s not the right-hand side of this chart which shocks me, so much as the left-hand side:


What was it that caused home prices in Detroit to double between 1996 and 2003? It wasn’t an explosion in subprime loans: those came later, after Detroit house prices had already started declining. And I don’t think it was US monetary policy, either. In any case, Detroit has been on a steady decline for a good 50 years now. Why then have the past five years in particular seen such an enormous decline in house prices?

We’ve seen how relatively small changes in supply and demand can have enormous effects on the oil price — you don’t need to explain it away by blaming speculators. Maybe the same is true of the housing market too. But what’s clear is that this chart should be very sobering for anybody elsewhere in the world who thinks that property prices might be bottoming out. They probably thought that in Detroit, too, in 2005.


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4 comments so far

“What was it that caused home prices in Detroit to double between 1996 and 2003?”

Two things: (1) Housing demand within any city is sensitive to prices in the surrounding areas; as the ‘burbs get more expensive a few people who would have liked to buy there find the city attractive. I don’t have data but as a resident I have the sense that housing prices across SE Michigan exploded during this period. (2) There was a sense of hope and optimism about Detroit during this period. The first new commercial building in the city in decades went up sometime in the mid 90s (I think a Walgreens) and there was a gathering sense of forward momentum. Why? Who knows; there was lots of public works investment, esp. the stadia, but more important, I’d guess, was that Detroit became a little trendy. (An incredible techno music and club scene, for example; and where the youth go….)

Posted by David T | Report as abusive

Go here: http://data.bls.gov/PDQ/outside.jsp?surv ey=sm

and look up manufacturing employment in Michigan from 1992 to 2009 for your answer to this mystery. Population data on the Detroit area from the census might help too.

Posted by Anon | Report as abusive

For one thing, they didn’t double. Don’t trust averages, medians or anything other than a repeat-sales index for residential prices. From June 1996 to June 2003, house prices per Case-Shiller were up 54% in Detroit. This was, true, above rust-belt Cleveland’s 31%, but below the national house-price change. To see the move as implausible, you had to expect people to see over ten years into the future. We humans don’t do that very well.

I think it’s related to oppurtunities available around the area in terms of jobs & prosperity..

Decline in jobs, leads to flight of consumers and sub-prime just added fuel to the fire…

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