Michigan: On a Collision Course with Reality


Recently the Detroit News ran a series on Michigan’s extraordinary net out-migration problem.

Collision between two engines, Bay of Quinte R...Net migration is the difference between the number of people moving into a place from other equivalent places, and the number of people moving out.  In this case, it refers to movement from state to state within the US.

109,000 more people left Michigan for other states last year than came in from other states.  What’s more, the people who left tended to be better educated and have higher incomes than the people who came in.  In fact, 39 percent of Michigan emigrants have a college degree; only 25 percent of those who stay do.  The average income of emigrants is nearly $50,000; the average income of people coming in, just $40,000.

Essentially, hard-working and educated people are leaving for better opportunities elsewhere.  They are being replaced by people who are not as hard working or educated.  In many cases the new residents have come to take advantage of Michigan’s generous social network.  They have not come primarily to work.

Net migration is a far better indication of a state’s success than population growth, because population growth contains two other factors; natural population growth (the difference between the birth and death rates) and immigration from or emigration to other countries.

The scariest thing is that the net out-migration would be a lot higher if many Michigan residents weren’t underwater in their houses.  The Detroit News profiled one woman who had to give up a job out of state because she couldn’t afford to sell her Michigan home – there are many like her.

Is it all because of the carmakers?

The auto industry is typically cited as the reason why Michigan is in trouble.  Of course we all know about the auto industry’s long, sad decline.  Hundreds of thousands of jobs have been lost in Michigan as a result of layoffs and plant closings at GM, Ford, Chrysler and their partners.  As Michigan’s unemployment rises about 12 percent, however, two points are almost never heard.

First, there are 11 other car and truck manufacturers in the United States.  Almost all of these have chosen to build their plants in other states, even though Michigan has several advantages for a car maker building a new plant.  Those advantages included proximity of suppliers and availability of skilled workers.  Second, other “rust belt” states have been able to replace declining industries with new ones.  Why not Michigan?

What to do about it?

That’s an easy question for those of us reading this blog: don’t invest in Michigan.  (If you are currently invested in Michigan, I sympathize.)

The rest of this prescription is written for the Michigan state government, starting with Governor Jennifer Granholm.

First, stop obsesssing about the auto industry.

Many Michiganders are convinced that the auto industry will come back to Michigan, and are concentrating on ways to make that happen.  Michigan residents really do have a wealth of knowledge about building cars.  But that isn’t nearly enough to attract auto jobs by itself.  Foreign automakers want non-UAW plants in right-to-work states.

Michigan did score a “win” with the GM announcement that it would build its next-generation small car at a plant in Orion Township.   The state government is putting up more than $900 million to make this happen, however.  This amounts to about $750,000 per new job, over 20 years.  Essentially, Michigan will be providing sharply discounted labor.  But who’s going to pay for the subsidy?

States can have great success in areas they might not expect.  Who would have expected Utah to become a leader in software development?

Second, get to the root causes.

Smart people are leaving Michigan because they can’t get jobs in your state.  Smart entrepreneurial people are leaving because they find it easier to start businesses elsewhere.

Turning to my old friend, the Economic Freedom Index, I see that Michigan is ranked 43rd out of 50 states.  All seven below it (with the possible exception of Alaska, which has unique challenges and opportunities) are also dealing with declining industries and relatively high unemployment.  The only difference: they don’t have the auto industry to blame for their troubles.

A state with a low score on the EFI is really in trouble if its neighboring states score higher, because it’s so easy for a business to just move across the border.  Every state that borders Michigan scores higher except for Ohio.

Michigan ranks 40th out of all states for size of government (1 being the state with the smallest government) and 45th for welfare spending (1 being the state that spends the least.)  Huge government chokes innovation and opportunity.  Overly generous welfare benefits attract unproductive people.

Herbert Stein’s Law says “If something cannot go on forever, it will stop.”  Michigan’s state government has a $1.3 billion budget deficit.  This is the result of bad government choices, which encourage productive people to leave the state and unproductive people to come in.  The good news is that eventually it will stop, and maybe at that time the state will learn some valuable, if hard-earned, lessons.

Image by Musée McCord Museum via Flickr

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  1. Your article is more than misguided. It’s irresponsible.

    As a real estate investor you of all people should know that where there are people there needs to be housing. And when there’s housing then real estate investing can be profitable.

    And let me guess – you have never in your life set foot in the state. Shame on you.

    By the way – I found your long-distance armchair quarterback advice to the state most humorous. I’m sure that we had our top people on it immediately.

    Dennis Fassett

  2. Dennis –
    Your comments don’t address any points raised by Brendan within the article. What is “irresponsible” about what Mr. O’Brien wrote? Are his facts incorrect? It looks like that info came from the Detroit News. Please clarify what on earth you’re so mad at.

  3. Hi Dennis. Thanks for reading even though you disagreed. That being said, real estate investing is not magic. Prices go up on a macro level, faster than inflation, because of population increase. That is the only reason. A net population decline is a huge drag on real estate prices. That makes Michigan a worse state than other, in general, to invest in real estate, although I’m sure there are still many opportunities.

    I did take all of my facts from the Detroit News. I wish the people of Michigan the very best of luck, of course. It also seems to me unlikely that the “top people” would ever have read my advice, let alone taken it. Maybe they should!

  4. Brendan, you said it yourself in the article that if something cannot go on forever it will stop. I agree with that. Our state cannot continue to attract and support non-productive people while chasing away the opposite. However, you make it sound like someone making $40K per year is somehow lazy and unproductive. As a matter of fact, those are exactly the type of people who prefer to rent, rather than own property. The fact that they migrated here would indicate that they may, at some point, migrate to some place else. Why would they want to tie themselves to a mortgage when they can rent a beautiful home?

    This is the PERFECT STORM for real estate investors in the state of Michigan. Home prices have never been so low while at the same time having access to very affordable financing since mortgage interest rates are at historical lows. Never in the history of Michigan, as I know Dennis has pointed out several times in his blog posts, have you been able to buy beautiful brick homes in areas with the most desireable school systems at low enough prices that they will throw off a positive cash flow day one. And, when the economy does rebound (and make no mistake, it will everywhere, including Michigan, as business and economic cycles have existed since the dawn of time – ups and downs) the value of the homes in the more desireable neighborhoods will be in higher demand causing their value to rise at a higher rate than those rat nests in undesireable neighborhoods that some investors mistakenly buy in.

    I agree that the majority of the problems Michigan faces are a result of poor government decisions combined with the poor business decisions made by the auto companies bowing to the demands of organized labor through collective bargaining; however, there will come a time when that approach will reach its end. At which point, those who had the foresight to purchase real estate when it was cheap will look like geniuses.

    My question to you, Brendan, what was the ultimate purpose of the article? Are you trying to prevent people from investing in Michigan and, instead, invest with you elsewhere?

  5. This has caused a lot of angst for which I apologize. First let me make it clear, my only real estate interests are in New Hampshire; I am not selling my properties, not buying others at this time, and not representing anyone else.

    Occasionally I write articles about other parts of the country to give others who may be interested in long-distance landlording a heads-up.

    David’s argument has some merit. Michigan is indeed in an untenable situation and eventually the business climate must improve, based on simple reality. However, nobody has any idea when this will happen. The current federal administration and US Congress have a great deal of interest in “saving” Michigan by mandating that certain car models be built there, funneling in huge amounts of federal money, and so on.

    I believe these moves will enable the state to survive on life support for a while longer. They are not substitutes for making serious structural changes to improve the business climate. Nobody knows when things really will improve.

    It is certainly possible to make money in Michigan right now.. But it is harder to do so because people are leaving the state more than they are coming in, and the people coming in are less financially sound than the people leaving.

    It is not enough to know that some day your property will be worth more. You must also be able to predict when that will happen. If you buy a property for $80,000 now and sell it for $90,000 down the road, you made money. But if you cannot sell it for that amount until 2029, was it a good investment?

  6. I should add – obviously nobody can accurately predict when a specific property will sell for XXX amount. But it is possible to make general predictions – e.g. properties in this town or state will rise faster than properties in that town or state. This predictive power is one of the few advantages the savviest investors have over the “all property eventually rises” lemmings.

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