Friday, May 30th, 2014

Priced Out of Downtown Detroit

A recent article called “I’ve Been Priced Out of Downtown Detroit” shows us an interesting microcosm of the urban housing problem. Per the piece:

Five-year resident Andrew Kopietz moved out of his one-bedroom in the downtown Lafayette Park neighborhood late last year after his rent was hiked to $1,100 from $840 a month.

“I work downtown and have never loved living somewhere as much as I do here,” said Kopietz, a design director for D:Hive, which provides information about living in Detroit. But, “it seemed unfair to be forced to pay more.”

For those who haven’t been following it, there’s been a bit of a debate between Jim Russell and Daniel Hertz about the cause of rising urban housing prices the resulting unaffordability.

Hertz, like Matt Yglesias, Ryan Avent, and most other urbanists these days, puts the blame squarely on inelastic supply. Demand has gone up, but building restrictions make it difficult if not impossible to build more units, ergo housing prices go up.

Russell doesn’t discount that supply constraints affect price, but he zeros in on demand. He notes that many places have restricted supply but only some of them feature skyrocketing prices because demand is uneven and heavily concentrated in places with a large global workforce. He believes more attention should be paid to the demand side of the equation in explaining housing prices.

Detroit is an interesting lab to show this at work. This is a city that simultaneously has a tight housing market with rising prices in Downtown at Midtown at the same time the city is proposing to spend almost $2 billion dollars to demolish about a quarter of its housing stock. There would appear to be ample housing and land available for almost free in Detroit, even in urban Detroit, but the differences in the markets are stark. Why is this?

In 2009 I wrote a piece called “Migration: Geographies in Conflict” in which I explore this issue. In the age of globalization there are really two types of labor markets, global and local. People who work in global labor markets can command significant wage premiums over those in local ones. The modern globalized economy is been very good to those with top level global skills, while more traditionally local markets have been exposed to new, low-wage from offshore and crushed.

The problem is that those two economic and labor market geographies can exist in the same physical geography. In those cases, the global market workers are able to outbid local market workers for housing and other goods and services, leading to rising prices and displacement. Read the whole piece as I talk about this in much more depth, especially with regards to California.

Now Detroit doesn’t really have a large workforce in global labor markets. But what we see is several thousand people who work for Dan Gilbert’s business empire and other downtown businesses who are being handed a $20,000 check if they move downtown. This, along with their general status as corporate white collar employees, simulates a global worker wage premium. Per the article:

One program, called Live Downtown, has attracted as many as 15,000 new residents to the downtown area, according to the mayor’s office.

Under the program, local companies, including Quicken Loans and Blue Cross Blue Shield, give employees $20,000 loans that will be completely forgiven if they buy and stay in a home downtown for five years. Renters there receive $2,500 their first year and $1,000 the second.

I strongly doubt there are 15,000 new residents in downtown Detroit. Nevertheless, this shows that putting two separate groups with a structural wage differential in a small physical geography can result in rising prices and displacement.

Now, what about supply? Is the city of Detroit telling people they can’t build downtown? Is there a governmentally imposed supply constraint in any meaningful sense? Not that I’m aware of. I’m sure Detroit has planning and zoning laws and that they are baroque, but that’s true everywhere, including places that are building a lot of new supply.

What we would appear to have here instead is a lag issue. Real estate development isn’t like ramping production up or down in a factory. It takes time to do. This creates inevitable lags, and given the history of various overbuilding scenarios, developers will clearly want to make sure downtown Detroit demand is sustainable before committing capital to a project.

Additionally, with higher income demand in the market, new units are going to be built to serve that market, not lower income people. If you own land and have a market that gives you the choice of either building a higher profit building or a lower profit building, which one will you choose? It’s obvious what developers are choosing in Detroit:

In February, a couple dozen artists were evicted from their loft spaces in a building on Griswold Street after it had been bought by Bedrock Real Estate Services. The original plan was to keep the tenants in the building, according to Aaron Emerson, a spokesman for Quicken Loans, Bedrock’s parent company. But, he said, the building was deemed unsafe by the fire inspector and needed major renovations, necessitating the evictions.

A couple of months ago, another building on Griswold was emptied of its mostly low-income senior residents. The residents had received notices a year earlier notifying them that their Section 8 subsidized housing vouchers were going to expire and the building was going to be renovated. Donna Fontana, a spokeswoman for developer Broder & Sachse, said residents were found new places to live, with their relocation costs covered.

Keep in mind that if the existing tenants are retained, either the investments to upgrade the units won’t get made, or those tenants will receive a windfall benefit of higher end units they are paying below market prices for. They will have won the lottery, in effect.

But what’s more, even if every existing resident got a new, upgraded unit with no rent increase and zero displacement, improvements to downtown Detroit resulting from the newer, higher income residents (for example, nicer retail) will create intrinsic attractiveness that will make it desirable to people who don’t currently live there today but who can’t afford the rents for new development. Perhaps a recent Millennial college grad who is underemployed and burdened with student loan debt, let’s say.

Which brings us back to the juxtaposition of high demand in Downtown/Midtown Detroit vs. the low or no demand in most of the rest of the city. Why wouldn’t the people who can’t afford downtown rents just move into one of those areas?

The answer is obvious: they want to live downtown specifically. They may in fact choose another location, but they will grouse about it.

Pete Saunders nailed the mentality in his post “The Millennial Housing Shortage Fallacy“:

Blogger Daniel Kay Hertz sheds some light on the thought process behind the growing meme: “Why are there no apartment buildings in your standard affluent single-family-home neighborhood, common in metro areas from Chicago to Kansas City to New York to Memphis? Not because people don’t want to live in them. Not because you couldn’t make money by building them. They don’t exist because they’re illegal.”

The emphasis is added because it highlights the salient point, which can be reduced to this: “why isn’t there more housing where I want it?” Because there are plenty of apartment buildings with plenty of vacancies in other parts of the city. Let’s fill those up, and then talk.

If young urbanists are serious about moving back to the city, maybe they ought to consider more of the city to live in. For every highly desirable attractive urban neighborhood, even in the most in-demand metro areas, there are just as many languishing neighborhoods that aren’t even part of the conversation. For every Lincoln Park or Lakeview in Chicago that lacks affordable housing, there is a Garfield Park or Woodlawn with tons of it.

In other words, the real complaint is that the market isn’t producing the type of housing I want, in the place I want it, at the price I can afford to pay. It’s special pleading.

I’m all in favor of Daniel Hertz’s plan to make it easier to build. Supply restrictions are a serious problem in cities like San Francisco and New York. But this isn’t the whole story. My takeaway points:

1. The two tier labor market needs to be examined as a piece of the puzzle. This is not straightahead inequality as generally talked about. The word inequality suggests unfairness because people within the same labor market get vastly different outcomes. Or it makes us think of the uber-rich. But in effect what we have is two separate labor markets. There’s a structural problem here that’s separate from the insane money accumulated by the 0.01% that is usually the focus.

2. Political and regulatory supply constraints do affect the market and need to be addressed, but there are other supply factors affecting affordability.

3. People are not entitled to a cheap apartment in the exact neighborhood they want with the exact amenities they want.

54 Comments
Topics: Demographic Analysis, Globalization, Public Policy
Cities: Detroit

54 Responses to “Priced Out of Downtown Detroit”

  1. Chris Barnett says:

    The above comment applies mostly to Lower Midwestern cities like Indy, Cincinnati, Columbus. I realize real estate markets across the country peaked and crashed at different times.

  2. Yes but “luxury condos” are not what was being built in neighborhoods like the East End. They’re certainly not cheap low-income housing, but they’re mostly mid-market townhouses and some nicer apartments/condos. The townhouses are in the $300-400K range and many of the condos are in the $200s. As you get nearer downtown, like across from Friendship Park and the Boathouse, yes those are pricier, but much of the rest of the neighborhood is cheaper. What’s telling are the abandoned buildings going for a quarter million dollars and vacant lots for more than a million dollars an acre.

  3. Chris Barnett says:

    Mid-market in cities like Columbus, Cincinnati, and Indy is more like $100-180K. $300-400K is not “mid-market” in a metro area where the median household income is $60-70K or less. Sure, it’s mid-market in upper-income suburbs, but not in a whole metro area.

  4. waitwhat says:

    I don’t know Detroit, but here in DC millenials (and sometimes others) are rapidly gentrifyiing neighborhood after neighborhood. But even there they pay more per sq ft, relative to neighborhood charecteristics (like crime) than gentrifiers did just a few years ago. So I think the Saunders critique is a tad unfair – at least in DC, NYC, SF the rent IS ‘too damn high’ and in large part due to supply constraints (though also due to lags). Its fine to tell people to “gentrify till you qualify” but I don’t think that gives complete insight into the market (and also has far different implications in DC and NYC than in a place like Detroit with lots of vacant housing)

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