Detroit, MI: 9.7% Return on Investment (2011)
Detroit is one of the most widely publicized toxic markets in the United States. Extensive financial difficulty with the auto manufacturers has crippled the primary employment base in Detroit, and plunged the market into free fall. This is compounded by burdensome taxes and regulations from the government and union organizations that are significantly impeding the new investments required to spur a fundamental economic recovery. Currently, approximately 61% of listings in Detroit are from foreclosures[1].
Values in Detroit have been significantly depressed in recent years, which have made affordability much better for residents and investors. However, the population of Detroit is steadily decreasing, due to the flight of jobs away from the city. Many people have seen repeated news stories showing extremely inexpensive properties for sale in Detroit. Unfortunately, the net flight of jobs out of the area will make it increasingly difficult for investors to find tenants and for residents to find work. This has resulted in many abandoned property and high vacancy rates for rental property. On balance, this makes Detroit an extremely dangerous place to invest since there is likely to be a sustained period of economic contraction on the horizon.
Values in Detroit have been in a perpetual downward spiral since the financial crisis of 2008. Rents in the area show reasonable strength in relation to cash flow, but this makes a fundamental assumption that an income property is occupied. With very high rates of vacancy for rental property in Detroit, it is entirely possible that vacancy could destroy the cash flow of an income property investment.
Our models indicate that values in Detroit will bottom during 2011, as a result of decreased supply from government decisions to bulldoze vacant neighborhoods in an attempt to reduce oversupply in the real estate market. Detroit is in decline, and will not be favorable for investors until its economic fundamentals improve significantly.