The Real Implications of Detroit’s $500 Houses

Perhaps you’ve heard of the mythical $500 Detroit house. Plagued by years of blight, desolation, and grim economic deterioration, the story goes, Motor City homes have become nearly worthless—poverty porn for coastal snobs, or fodder for urban yuppie real estate fixer-upper fantasies. One could see how this kind of deal might seem pretty enviable from cramped quarters in San Francisco or Brooklyn, but it’s important to understand what a price tag that low symbolizes.

It’s always wise to bear in mind that if something sounds too good to be true, it probably is. Houses being sold for a pittance are very likely more of a liability than an asset. In cities like Detroit, residences like these often come with plumbing torn out through the drywall, tens of thousands of dollars in necessary repairs, and tax liens worth twice the house’s value. The $500 house is a special kind of market failure.

Housing affordability is a hot issue right now, as high housing values exert gentrification pressures in a few magnetic coastal cities. But the rarely considered flip side of the issue is that, in places like Detroit and Cleveland, excessively low housing values can be just as much of a problem. This problem generally manifests itself most clearly in the form of vacancy.

Here’s why very cheap can mean very big trouble: Houses, in addition to the land they occupy, are the sum of their parts. That key threshold where “affordability” turns into market collapse is when housing becomes so cheap that the cost to repair the structure is more than someone is willing to pay for the house. Just because houses might sell for peanuts in Detroit, doesn’t make, say, roofing materials or lumber any less costly. In other words, if your home is worth less than it costs to fix the roof, there’s strong incentive to walk away. And that’s what thousands of people have done in cities like Detroit, Youngstown, Ohio, and Buffalo, New York.

Ironically, even though housing is relatively very cheap, there is still a housing “affordability” problem in places like Detroit and Cleveland. The cheap houses in these cities require large investments of time and money, and thus do not make good options for the working poor who, to live a sustainable lifestyle, need residencies that use up a third or less of their monthly income. So, even where there might be demand on the low end of the housing market, economic forces discourage the kind of investment needed to bring available housing up to rentable or move-in ready standards. Without the promise of certain minimum returns, private investment in developing this kind of real estate is sidelined, and existing housing subsides just aren’t enough to close the gap.

That means—in contrast with Washington, D.C. or Boston, in which affordable housing is in short supply—cities like Detroit and Cleveland actually need more expensive housing overall, and should be actively pursuing policies to this end.

This may seem counterintuitive at first, but it’s a simple supply-and-demand issue. In cities like Detroit, there’s just too much housing. Of course there are plenty of other interconnected, influencing economic factors—the collapse of the area’s industry and low population growth, for example—but currently these are coupled with a simply disproportionate number of new homes being constructed. This oversupply, in effect, means every new house added in the region reduces the value of the rest of the market a tiny bit, further compounding the existing problem.

Unless some unforeseen leap in demand for Detroit real estate occurs, it seems that there might just have to be less supply. One potential solution for the Detroit region would require the demolition of one house for every new home built. This would happen naturally if houses were built on the location of old houses and, better yet, they’d already be equipped with sewers and sidewalks, a savings that might offset demolition costs. But even if the new homes were built in undeveloped locations, a one-for-one demolition policy observed by the city and its suburbs could help shore up prices and make housing investment throughout the region far less risky. That kind of policy would make the whole region wealthier by helping maintain a floor on, and promote the health of, one of a community’s greatest assets: the value of their residential real estate.

Photo by Angie Linder