The biggest question I hear from people that are looking at Detroit for their real estate investments is the question about the oversupply of vacant houses. This then leads to the explanation of the basic principals of supply and demand that we all learned in Economics class. You remember, don’t you? The lower the supply of some item, the higher the demand will be and conversely the higher the supply of an item, the lower the demand. For example, Comerica Park where the Detroit Tigers play has a seating capacity of about 41,000. Demand is strong (especially on a Friday or Saturday night) so just think of what would happen to prices if they all of a sudden said they had to close half the seats and that only 20,000 seats were available. Given the law of supply and demand, we would see the prices go up, which brings me back to Detroit real estate.
Recent estimates have showed that there are 44,000 plus vacant houses in Detroit and these Detroit housing statistics show slightly higher (although notice the sharp decline in the past couple of months). That’s a lot of vacant houses. You may be asking with that many vacant houses, how can we ever hope to get the supply/demand ratio to a reasonable level and fill this supply. To answer that, we have to dig into the numbers.
In a recent conversation with Yianni Kopanakis of Motor City Blight Busters, we talked about the oversupply of houses. Yianni explained that fully half of the vacant houses in Detroit right now are beyond repair to both homeowner and investor alike. In other words, these houses are so far gone that no one wants them. I guess taking out 50% of the houses fixes part of the supply/demand issue. What about the other 50%?
For the other 50%, we need to look at who is buying and occupying these houses. We have either an investor that will purchase for rent or resale, a homeowner that will purchase retail (retail sales at decent prices are still occurring. Check out the Detroit Free Press list of sales for Detroit to see 10 of 24 homes sold for $75,000 or more week ending June 21st and 13 of 38 the week before), and renters. If you’ve been involved in real estate for very long, you quickly find that retail buyers (homeowners) and renters will just not accept a house that isn’t fixed up. In my experience and the experience of the non-profit Motor City Blight Busters, Yianni Kopanakis, and other real estate investors in Detroit that I have talked to, there are very few houses that we come across that need little to no work.
Where does this leave us now? We’re left with a lot of vacant houses that is comprised of mainly houses that need to be fixed up or torn down. Where does that leave the demand? If you’ve been investing in Detroit cash flow properties, you’ve noticed the increasing demand for quality rental properties. Our houses are getting rented faster for better prices because of the lack of supply of these quality rental houses. The same goes for first time home buyer houses.
This creates an incredible opportunity for the problem solving investor that wants to take the properties in the great areas that need some work and is willing to fix them up. The houses will rent well and through quality first time home buyer programs can even sell well. The demand for this limited supply is high. Also, through the City of Detroit demolition list and through non-profit organizations like Motor City Blight Busters, the properties that are beyond repair can be demolished and hauled away.
As with many answers and solutions to problems, it’s not always the surface answer that’s correct. Dig into the details and you’ll find the real answer.
Successfully Yours,
Jared Pomranky
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