When Good Real Estate Goes Bad

For a variety of reasons, once-prosperous neighborhoods can go bust. Sometimes they struggle to hang on. Sometimes they can't

While the national median home price made zero gain from $222,000 in December, 2005, to December, 2006, luxury home sales chugged along. Home prices in the 10 wealthiest zip codes appreciated 6.55% from the third quarter of 2005 to the third quarter of 2006. While many sellers despair, the rich get richer—or at least the owner of a home in a prime real estate market only sees the property become more valuable.

But that's not the case in suburbs outlying the struggling car capital, Detroit, where some high-end homeowners in places like Bloomfield Hills, West Bloomfield, and Birmingham are getting nervous. For decades this area was a choice locale for automotive industry executives and top engineers, who bought well-appointed estates nestled inside gated communities and sprinkled among the hills and ponds of Oakland County, only some 25 miles from downtown.

Collapsing Detroit Luxury Market

Recent rounds of massive layoffs at the Big Three carmakers have stifled a long period of unwavering confidence in these communities. Since 2002, there have been an unusually high number of homes on the market, and sales have averaged a 4.1% decline over a four-year period, according to data provided by Michigan Multiple-Listing Search (MLS) service Realcomp II. New constructions, once brisk in this area, have stopped altogether.

Laid-off executives appear to be fleeing the suburbs of Detroit to take early retirement or seek employment in other cities. "A lot of people are relocating, and many of them are accepting a buyout," says Joyce Beverly, a broker on the Detroit Realtors Assn.'s board of directors.

Beverly recently helped an early-to-retire auto veteran close his home for $150,000—about half of what she estimated it to be worth. Facing a scarcity of buyers, some of these owners are even leasing their homes.

Mortgage debt has also set in for the suburbanites. In 2006, one in every 92 households in the U.S. filed for foreclosure, while the whole of Detroit claimed one foreclosure for every 21 households—the highest rate of any metro area (see BusinessWeek.com, 2/5/07, "Highest U.S. Foreclosure Rates"). A surprising number of these were high-end homes. In West Bloomfield about one in every 126 households is under foreclosure, according to RealtyTrac's online database.

Beverly places the blame on high-end lenders and overeager buyers. "A lot of people bought these more expensive houses [when they] couldn't afford them," she says, adding that many were lured in by tax incentives.

This is not the first time a luxury neighborhood has felt the effects of a decline in local industry. For centuries areas in many cities that had once been the most desirable parts of town were eventually abandoned by their well-to-do inhabitants for greener pastures.

Single-Industry Towns Get Hit Hardest

In Pittsburgh, elite classes began to take up residence in northeastern Highland Park in the 1880s, developing blocks lined with elegant Queen Ann-style homes. With the addition of the Pittsburgh Zoo in 1896 and a streetcar system in 1898, the area exploded in growth.

Development continued during the first half of the 20th century, but as Pittsburgh's steel industry slowly declined from its World War II peak, residents of Highland Park flocked elsewhere, leaving grand turreted houses to be divided up into multiple rental units. The area is still quiet and attractive, but the wealthiest families have long left for suburbs like Sewickley Heights, in northwestern Allegheny County.

Now the outposts of wealth in Detroit will try to avoid the same fate. And in Hartford, Detroit has a peer in misfortune

The insurance capital of the word, home to CIGNA (CI), Aetna AET) and Hartford Financial Services Group (HIG), Hartford’s wealthy executives long ago fled to surrounding suburbs such as Avon, Glastonbury, and Farmington. But in recent years major insurance employers MetLife (MET) and Lincoln National Life Insurance, a subsidiary of Lincoln Massachusetts Mutual Life Insurance, relocated out of the city.

The Nook Farm area, where one of the city's most famous residents, Samuel Clemens (Mark Twain), lived in the 19th century, has all but disappeared, and the Asylum Hill area, located right near the big insurance headquarters, once one of the grandest neighborhoods in the city, is now, according to The Hartford Courant, home to "the bombed-out Capitol West building, with its boarded-up windows and graffiti-splashed walls."

Economic Diversity Could Be the Answer

The high-end markets near Detroit and Hartford are, according to National Association of Realtors spokesperson Walter Maloney, just going through natural correction. "Most luxury neighborhoods continue to maintain the highest prices in a given area…they tend to maintain their status," he says. "That doesn't mean they can't go through temporary price declines, just like any other market segment subject to shifts in supply and demand."

Yet when any market becomes so dependent on one local industry, it can take many years to recover when things go bad. The light at the end of this tunnel for Detroit, many believe, could be the establishment of a more diverse local economy.

If Michigan legislators moved to provide more incentives to lure in new businesses, suggests broker Merrilee Anderson of Real Estate One, more ex-execs would stick around, and home prices would find some footing. She says: "Somebody in Lansing has to get the idea that we need more diversity in business."

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