Depopulation

Ryan Avent on whether (eventually) falling exurban home prices will keep the exurbs populated:   

I don’t actually think that $4 gas is sufficient to render outer ring exurbs vacant and/or slum-like. I do think, however, that economists need to be more careful when casually assuring everyone that exurban home prices will simply fall to the market clearing level, keeping such places occupied and healthy. An economist in the 1950s or 1960s might have said that sustained depopulation of urban centers was an impossibility, since prices should just fall until costs in cities and suburbs equalized. That economist would have been wrong. The combination of price stickiness and feedback loops can wreak havoc in real estate markets.

All true.  Detroit is not healthy, and has not been for a long time.  About 23% of its housing stock is vacant.  But boy, oh boy do markets try to clear:

The Detroit Board of Realtors recently found that home sales in the city (excluding suburbs) in the first two months of this year jumped 48% from a year earlier, to 1,540. The average home price there sank 54% to about $22,000.

Since any structure with a toilet and kitchen sink is worth more than $22,000, Detroit sellers are now paying buyers to take the land underneath their homes.  Since $22,000 is the average home price, we can safely assume that many Detroit homes (structure plus land) have a negative value.

And that's ultimately the reason why falling home prices may not clear Detroit's market, even in the long run.  Sellers won't pay someone to take a house; they will just walk away.  The market-clearing price today is not even on the supply curve.

Comments

[john]

A lot of the urban population declines since the 1950s were the result of falling household size, static urban boundaries and auto-oriented zoning codes that would not allow for densification (low economic growth did not help).
In the coming decades it is quite possible that exurbs could see an increase in population if those McMansions filter down to poorer households who fill up all of that space with an extended family in order to pay for their utility and gas bills. Besides, a lot of those exurbs are not all that far from suburban-based jobs. I think we may see some curtailment of exurban growth under a high energy price scenario, but I don't think they will be ghost towns. Nonetheless, the future is all always full of surprises.

[AC]

Good points. Of course, the high vacancy rates also imply that demand for housing has collapsed in these cities, which is also implied by the near give-away home prices.

[john]

One more thing. It is quite rational for the housing market in Detroit to have a negative value. There is essentially zero economic value in the very small urban residential lots; the potential rental income in many Detroit neighborhoods is extremely low or entirely nonexistent (why pay rent when one can squat in an abandoned house for free), there is zero potential for future development in most inner-city Detroit neighborhoods, and there is little other economic value to the house or land aside from that derived from a kitchen garden and mining the existing structure for saleable materials (copper, old architectural details, etc.). From whatever little value the land or house has, a rational buyer must subtract the present value of future costs--most notably, property taxes.

[M1EK]

The problem in Detroit is that the market has (correctly IMO) decided that the future prospects for job growth are nil. GM is going bankrupt; Ford might survive (I hope they're the one left standing); Chrysler is a goner.