Sunday, July 21, 2013

Detroit Goes Down the Drain

The governor of Michigan appeared on the Sunday news shows with his comments on the proposed bankruptcy of Detroit. I knew the city was a mess—but I never dreamed they had $18,000,000,000 in debt and 78,000 abandoned structures throughout the city. This is a city that today has only 700,000 residents—but once had 2 million.

Today's story goes back 60 years, when Detroit was the job center for manual labor. 60 years ago life in the United States was quite different than it is today. Back in the early 1950's the baby boom was on, the soldiers were home from WWII, and were starting families. America was THE powerhouse in the world. Thousands of suburbs were springing up, there were not enough houses for all the families that the war had created. And the new houses came with 2-car garages. Young families went for Sunday drives. Gas was cheap. I remember being on a Sunday drive with my parents and we came to an intersection where there were four gas stations, one on each corner, these stations were in a gas-war. Their prices were 11 cents a gallon, I'd say that was probably 1952.

Detroit was the only city in the world that was building cars. Really. The US had recently decimated Japan and Germany in WWII, and bombed their factories to eliminate their ability to build much of anything. All the world's other countries were basically third world nations when it came to building cars. Germany managed to develop the VW, but compared to American cars, it was tiny and slow and who cared about gas economy when gas was so cheap. My dad used to say, “if you were going to be in an accident, would you rather be in a VW or a big strong American car?” It made sense.

And so Detroit was the clear winner, that's where the jobs were. Especially if you were a recently discharged soldier looking for a good paying job—or if you were without a high school diploma, maybe a child of parents who were farmers, or a child of coal miners, or just without much in the way of job prospects near where you had grown up. The jobs were in Detroit, all the roads went there, and the unions wanted you to come on up and join both the company (and the union). And so the move to Michigan was on.

If you fast forward 30 years, (think the 1980's) there was trouble in paradise. Japan's Toyota and Honda were eating Detroit's lunch, Germany was churning out VW's, Mercedes and BMW's, and the world noticed that the European and Japanese cars were DEPENDABLE and didn't rattle like American cars. Older Americans (like my dad) thought that Consumer Reports Magazine was anti-American by picking Toyota as their car of the year back then.

And still, Detroit didn't really notice. The overall market for cars had gotten bigger, so who even noticed market-share, The planned obsolescence built into the American cars meant that they were on the road for only a half dozen years and then they were “retire” to a junkyard, and Detroit would sell a new one. And then the consumer's mindset began to mature, Volvo began advertising that 95% of the cars they had sold over the last 15 years were still on the road, and people listened. VW advertised that the “bug” made your garage seem bigger, and people paid attention.

But in Detroit, the music kept on playing. Jobs there paid 3 or 4 times as much as elsewhere, and came with health and life insurance and big retirement benefits. Life was good. If you needed more money, tell the shop steward you need some overtime, and you would consider working weekends and holidays. Meanwhile, Nero fiddled as Detroit burned. Market share was dwindling and the core business was in decay. Those who might have dealt with that issue just kicked the can down the road. Americans were blindsided by Corvettes and T-birds and Mustangs and mini-vans. But the workers weren't blindsided, they did what workers do, they kept going to work and demanding raises--even when there were fewer cars to build and less to do. After all, you may as well take what you can while the music was playing.

But this week the music stopped. The city filed for bankruptcy. 60 years after the boom, Detroit is busted. This will be a huge issue for holders of Detroit's municipal bonds and for the retirees who are living on a monthly check from the city, for them the future is cloudy. A true bankruptcy will freeze the city's books and review the sources of income the city actually can depend on (taxes, tolls, fees, sales of assets etc.) and based on that, the court will restructure who gets paid first, who gets paid next and so on, until all the money is spent. Probably current employees (police and fire, transit and maintenance) will get paid first, but their retirement plans will likely go underfunded. City infra-structure will be somewhere in the middle with a probable cut or buy-out of retirees benefits. My guess,  bondholders are probably going to be out of luck. This is a painful process, but it is the best way to start over, and it's time for Detroit possibly Los Angeles and maybe some other American cities to take this step.

So when we look around Sarasota and Charlotte counties and see some abandoned buildings, think for a minute about how good we have it. Detroit has 78,000 empty buildings. So many that the city, state and Federal government are considering creating a partnership to knock them down. 2/3 of the residents have left, and the city is $18 Billion in debt. I see lots of Michigan license plates around Englewood too, so I know this topic is closer to home than the map might indicate.

Dane Hahn is a real estate professional serving Sarasota and Charlotte counties. He can be reached at 941-681-0312 or by email at See him on the web at

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