Housing crisis comes knocking

DEARBORN HEIGHTS, Mich. -- Janet Laitis leaned on a chain-link fence in her front yard, dragged on a cigarette, and pointed to the houses on her block that lenders have seized in just the past two weeks.

"There. There. There," said Laitis, 70, pointing across the street, down the street and then to the modest ranch house next door. "This neighborhood is deteriorating before my eyes."

Within a square mile of Laitis's house in this bedroom community outside Detroit, more than half the 96 houses on the market are foreclosed properties. The situation is not uncommon in pockets of the industrial Midwest, where a record number of people are missing their mortgage payments and losing their homes.

While lax lending policies have been blamed for the unfolding home-mortgage crisis across the country, the distress in the Midwest has been exacerbated by fundamental problems with the economy. The region has been devastated by a severe drop in manufacturing jobs as the US automobile industry shrinks.

"There's a structural shift going on that's undermining the unionized, industrialized states, and Michigan is leading the way," said Donald Grimes, a senior research specialist at the University of Michigan.

The housing bubble of recent years has burst and house prices are under pressure in many parts of the country. How far they fall will be determined in large measure by the strength of the economy, analysts say, because job and income growth ultimately determine how much people can pay for housing. The US economy is growing, but the pace of growth has slowed markedly of late.

States like Michigan and Ohio, struggling with their particular economic problems, illustrate just how bad things could get in the housing sector if the national economy falls into a recession. They are, moreover, politically important swing states; rising anger there over the housing situation could help determine the outcome of the 2008 presidential election.

Michigan has lost 305,000 jobs since 2001. Economists estimate that 40 percent of the cuts came from automakers and their suppliers, who have shed jobs each of the past six years as they have tried to regain their competitive edge.

About 65,000 people moved out of Michigan from July 2005 to July 2006, the US Census Bureau reported. The migration eroded already-weak demand for houses, which in turn hurt prices. In the last three months of 2006, Michigan was the only state in the nation where home prices fell, dropping 0.4 percent from the same time in 2005.

Even during the first half of the decade, when house prices jumped in most of the country, Michigan's stagnated. Dana Johnson, chief economist at Comerica Bank, said home prices typically outpaced income in most of the nation during the housing boom. But in Michigan, income plummeted and dragged housing down with it.

Cash-strapped homeowners could no longer sell their houses or refinance their way out of trouble. Many got stuck with adjustable-rate mortgages offering low teaser rates that spiked in later years. Now many borrowers are struggling.

Brian Minjares, 40, is living that recession first-hand. His story is proof that no one in Michigan is immune to the state's financial woes.

Three years ago, he left his job at a financial services firm to start his own practice with a partner in the Detroit suburb of Southfield. Minjares took out a home equity line of credit to finance the business. At the time, his house was appraised at $350,000 and he owed $275,000, he said. The bank gave him a loan equal to 100 percent of his equity.

As the housing crisis worsened, the value of his house dropped to $260,000. Minjares could not afford to sell it because he owed more than it was worth. He could not afford to keep it because, as the rates on his loans adjusted, his monthly payments jumped to $3,000 from $2,100.

Meanwhile, his client roster was drying up. With the auto industry in decline, many of his customers' businesses crumbled.

He fell behind on his payments and the bank foreclosed on his Colonial in Flat Rock, not far from Detroit. Minjares shut down his business and now sells cleaning products. He rents a condominium from his brother.

Ralph Newkirk, an agent with the Michigan brokerage Real Estate One, hears similar stories every day. The foreclosure situation is so extreme that his firm created a division two years ago with 25 agents who sell only foreclosed homes; Newkirk heads it.

Back then, the average sales price on foreclosed homes was about $70,000. Since then, the price has more than doubled, suggesting the problem is no longer confined to low-income neighborhoods in Detroit.

"The problem is moving out to the suburbs," Newkirk said. "It's spreading like a cancer."