According to The Detroit News, foreclosures have surged in the metro Detroit area, three times what they were last year. Michigan and other "rust belt" states (MI,OH, IN,) where economies were dependent on automobile production and steel, have been bleeding jobs for years, and new businesses aren't moving in to take advantage of the available workforce.

"The Detroit auto market has been on decline for many years but especially since 9/11," says Patrick Parrott. "When the rest of the country started to rebound after the stock crash in 2000, many pulled what was left of their portfolio and invested in real estate, which created a surge in appreciation in the more desirable states to live in (FL, CA, NV, AZ). Rates being low, there was a ton of investment in states where there was a high move-in rate. Meanwhile, I've heard that Michigan has the second highest move-out ratio in the US and was 49th or second worst in the economic climate of all states."

It's true that Michigan is dead last in home appreciation for the year, per U.S. government figures.

"The real trouble has been the high priced, low productivity union labor that the U.S. automotive companies have employed for decades," says Parrott. "As competition has become fierce, the auto companies made only minor moves to deal with the high-priced labor. As their stocks continued to spiral down, it forced many of the companies to press the unions on the pay issues (including wages and benefits, mostly health) and this has created the layoffs that are crippling Michigan and driving people out of the state."

One client of Parrott's was a third-shift worker at Chrysler, making $107,000 a year, working about two to three hours a day. "Even if the workers received buyouts, which is happening still today at Ford, they are only receiving anywhere from $35,000 to $120,000 depending on longevity," explains Parrott. "But as we all know, once taxed, this gets sliced pretty badly and within one or two years, those people who were living check to check will be broke without any skill sets that will pay them anywhere close to what they used to make."

The trickle down effect is corrosive. "These people, in turn, will stop making their payments on their homes which leads to the huge inventory of Michigan foreclosures," says Parrott. "Even worse, because of all the layoffs, all the spin-off automotive suppliers are now being crippled and going bankrupt because the Ford and GMs of the world can't give them the orders they need to survive."

The "Mom and Pop shops and consumer service sector businesses crumble next. The auto workers have no money, the supplier workers have no money and everyone is leaving the state," he says. "This movement places a monstrous inventory of homes of the market for sale, which in turns, pushes prices down. Once prices go so low, below what people owe the mortgages, the foreclosure glut continues to thicken."

"I've seen homes in the $600K range back off to $400K, $300's are selling for $225K. High end $700K to $1 Million homes are just not selling without taking a major beating," he says. "Low-end homes have even become stagnant in the $50,000-150,000 range. All the buyers who can buy seemed to have been tapped."

Because of the abundance of bad loans in certain areas, anti-predatory lending counseling for buyers is required, as it is in some parts of Illinois. "I would think there will be lawsuits here," says Parrott. "I personally have about 40 listings or pre-foreclosures where the lenders are going to take a serious beating when they sell. And these numbers will only continue to grow in Michigan."

Aside from job loss, another issue borrowers are dealing with is rate adjustments on their loans. "I was recently at the REO Fivestar conference in Dallas where many national lenders converge," says Parrott, "and in the keynote, the big issue is that many of the adjustable rate mortgages are resetting and with the new mortgage rates being so high, many of the homeowners are either going to be making bigger payments on the refinanced home mortgages or they simply won't qualify, which leads to other problems in securing financing to keep the home."

And the problems don't seem to have a solution. According to Governor Jennifer Granholm, the office has brought 107,000 jobs to Michigan and is working to diversify the economy. However, that's insignificant in a state of 8,000,000 people, where layoffs are happening at a much faster clip. Last November, Kwame Kilpatrick, ranked as the 3rd worst mayor in the U.S. by Time Magazine, was re-elected in Detroit last November. Local community leaders, says Parrott, are working to repeal the Single Business Tax in Michigan, a tax on businesses with gross receipts over $350,000. The tax brings in $1.9 billion to state coffers and is set to be repealed in 2007.

"It's the number one reason most large corporations don't want to move here," says Parrott. "Oakland's County's CEO L. Brooks Patterson is leading the charge."

The Michigan Economic Growth Authority is supposed to be offering incentives to companies to move to Michigan, but some are wondering -- where is the money coming from?

Bad for Realtors is the solution that is being proposed -- a 7 percent service sales tax. "They would reduce everyone who is in a service business," says Parrott. "The list is endless, but includes Realtors, title companies, lenders, etc. And we're all getting beat up already!"

Where will home buyers come from? "Good question. I don't know. Since no one can sell their current homes because of price depreciation, that eliminates a large block of buyers who might have been upsizing or downsizing," says Parrott. "No one seems to be moving in to the state. With the headlines in the newspapers about price depreciation and foreclosure, it scares other buyers (possibly renters) away. The interest rates are so high now in Michigan it seems to be better to rent than to buy even with the tax write off on mortgage interest."

"Besides the natural movement of the employed population, those with equity, who still buy to accommodate lifestyle and job changes, the only people I know who might buy are major REITs who may buy at pennies on the dollar once the homes go into foreclosure."

Published: September 27, 2006

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