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 dane.hahn@gmail.com
See him on the web at www.danesellsflorida.com
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