Well, according to some real-estate speculators, paradise is in Detroit.

Neal wants family homes with a market value of up to $90,000 and will pay up to $15,000 for them.

Newsflash: If the house has a market value of anything more than $90,000 – you will not be able to buy it for $15,000. Why? Because I would pay $30,000 for it. And someone else would outbid me, to the tune of $50,000 – and so on, with the final sales price approaching or approximating the best-guess market value of the property, excepting sometimes the “winner’s curse,” something I’d be very wary of in this market – it’s possible that even at $15,000 you’re getting a raw deal.

This is where economic misery meets business opportunity, as investors look to snap up properties for a fraction of their value while the housing market is in a slump. The auction room in Dearborn is full of people seeking bargains.

Houses do not sell at a “fraction of their value[s]”. Unless that fraction is something very much like 90/100. Or unless you’re receiving a gift of equity in a private transaction. The sentence should correctly indicate that “investors look to snap up properties for a fraction of what they believe they’ll be worth (less a discount rate) at a certain point in the future…” Why such qualifiers, you ask? Let me explain, using the following quote as segue:

“The homes I am looking at should be worth up to $300,000, but I’m going to steal them for around $100,000,” he said.”

Should? According to whom? The house is worth $100,000 – if you’re the highest bidder, and that’s what you paid to acquire it. No more, no less. Economics doesn’t deal with ought statements. Perhaps, you speculate that the house will be worth more than $100,000 in the future, and that the profit you can make if your guess is right exceeds the opportunity cost of the funds (be they borrowed or cash) used to acquire the properties. But right now, in the real world, if the house sells for $100,000 – that’s precisely what it’s worth at that moment in time.

But some people just don’t understand the writing that’s been on the wall for the last 2+ years locally:

“In five years of doing this I’ve never seen prices so good,” Ehrlichman said waiting to bid on a house.”

And in five years of doing this, you’ve never seen credit so tight, either. Nobody wants to move to a $40,000 house in Detroit, except for people who already live in an even shittier house in Detroit. And if they live in a shittier house, it’s extremely unlikely that they’ll be approved for a loan in this market. Furthermore, the market in the city has been through several staggering and peculiar depressions in the housing market – the house my Grandparents bought in 1950-something for $14,000 was sold in 1985 for $17,000. Ten years earlier, it was appraised somewhere close to $35,000. Last week, I saw it listed on Realtor.com for $19,000. It has lost 50% of its value, twice. And remember that a 50% reduction in value can only be offset by a subsequent 100% appreciation. In five years, ten years, it might be worth $40,000 again. But there are far less risky ways to spend $19,000 – and ways which don’t involve renting your house to people who have $6/hour jobs and pay you in food stamps, or buying and holding in a neighborhood that’s been falling apart at the seams for the better part of 40 years.

Some of the suburbs, probably not a terrible time to buy – except for the fact that you’ll be able to scoop the same (or similar property down the street) in January or March for even less.

A fool and his money…