Rustbelt and Rustbelt – Detroit vs Buffalo

Written by Alan Findlay on . Posted in Investor Insight

I’ve seen a number of ‘investment’ websites touting Detroit as a great place to invest for cash flow. While emotionally I do feel for the city, it is actually a much nicer place than its been given credit for, and I have good friends there. But when I’m investing I like to look at the numbers, and more importantly the cold hard facts behind those numbers. After some in depth look at Detroit, I decided to focus on Buffalo instead.

Here are a few points I’d like to see investors look at when making those investment decisions, and which are the reasons behind my own choice.

1. House prices history
Despite falls across the USA, Buffalo average prices have risen 9% over the past 5 years, with an upward trend and in Detroit have fallen 36% with a downward trend. While this in itself isn’t a reason to invest or not, it does merit further enquiry as to why the trends are so different.

Here are a few underlying reasons I’ve found when comparing the two cities.

2. Population trends
The rustbelt populations have generally stagnated over the past 10 years (Buffalo down 34,602 from 2000-2010, Detroit down 156,307 from 2000-2010) But the more important statistic for me is which direction is this statistic heading? I want to be in a city where the population is either stabilised or beginning to improve. In order to find this out, I want to look at some other related stats – i.e. the following

3. Unemployment
Unemployment in Detroit estimates range from12.5% to over 28% and has begun to rise again. This is notably different from Buffalo, which had a spike in 2009 and has been on a downward trend ever since, now to 7.5% well below the national average of 9.3%.

Unemployment in Detroit
Unemployment in Buffalo

But why is there such a difference? Aren’t both cities dying industrial cities? No- there are key differences between the two cities in terms of employment.

4. Employment mix
Buffalo has a broad mixed economy – the main sectors are in Healthcare, Banking and the Universities based there, as well as the traditional engineering companies that made Buffalo famous While Detroit is a much larger city, the economy is still overwhelmingly based on the Auto industry and affiliated businesses.

5. Foreclosure numbers
House prices in USA have been affected greatly by foreclosure levels in the markets. Eirie county, which contains Buffalo had in August a tiny 1 in 17,661 housing units in foreclosure (24 houses – almost none) compared to Brooklyn in the same state with over 10 ten times the % and Wayne county – which is essentially Detroit, with a massive 1 in 250 houses receiving a foreclosure notice in August 2011. This is one of the highest in the country and an enormous reason for concern.

My conclusion? When looking at the macro elements to choose your investment focus – look a bit closer than what the glossy brochures and ‘investment reports’ tell you. They have their own reasons for recommending certain cities (usually called a finders fee!) Look at the underlying economic stats. Is the city on the up or on its uppers? And If so why? If not why not?

And finally, remember that its not only house prices that are affected by a blighted economy – rental levels are also vulnerable to both increased void times and lower rent levels.

 

Happy Investing!

Alan Findlay

Author Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment. You can contact Alan by E-mail: alan@abbotsinchcapital.com or by phone: +44 (0) 20 7193 2079.

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