Last week, the FBI and the Detroit police ended what had been a mysterious four-day excavation at a local lumberyard. Law enforcement officials were vague about for what they were digging; maybe it was the area’s housing industry, which has been in hiding for nearly four years. Metro Detroit, with its 17% unemployment rate, has become a wasteland for builders, and you can literally count on two hands those companies that are building anything residential in this metro area's four counties. Builders pulled fewer than 750 single-family building permits, and only 924 total residential permits, this year through August, according to the Southeast Michigan Council of Governments.

That compares to 3,074 permits for all of 2008 and the market’s pre-recession 40-year average of about 16,000 permits per year. And builders can’t know what demand really is because banks have all but shut off the vertical financing needed to replenish new-home inventory that is nearly nonexistent, says Byrne Benson, owner of Housing Consultants, a research and consulting firm based in Clarkson, Mich.

PulteGroup, the market’s largest builder and one of the few that are currently active there, recently gave what some observers interpreted as an ambivalent commitment to its home state when a spokesperson told the Detroit News that while Pulte has no intention of leaving Michigan, it wasn’t planning to bring its entry-level Centex brand there, either. (A Pulte spokesman declined an interview request from BUILDER.)

But “entry level” has little meaning when houses in the city of Detroit are selling for under $10,000, and when there are some parts of the city that are radioactive for even the boldest investor, regardless of how low home or land prices fall.

However, local builders and market watchers remain optimistic about the long-range prospects for metro Detroit, which still has close to five million residents and where certain sectors—such as healthcare, education, IT, and environmental—have been relatively immune to the economic blight that has otherwise laid this region low.

While almost no one expects metro Detroit’s housing market to bottom before mid-2010 at the earliest, encouraging signs are evident in the area’s August home sales, which rose by 11.5% over a year ago to 4,572, according to Realcomp II, a multiple listing service.

Granted, foreclosures account for the majority of purchases and continue to drag down median sales prices in many neighborhoods. “But sales have been increasing every month this year,” says Fran Green, Realcomp’s marketing manager. And real estate agents and builders take solace in the fact that unsold standing inventory continues to drop. Multiple listings in August were down 27.2% from a year ago, to 47,753.

Timing the recovery

Right now, residential construction in metro Detroit is at its lowest level in four decades, says Michael Stoskopf, CEO of the BIA of Southeastern Michigan. He could cite only eight of the BIA’s 350 builder members—Pulte, Toll Brothers, Lombardo Homes, Pinnacle Homes, Superb Homes, Silverado Homes, Soave Homes. and Infinity Homes—that are actually building. He thinks the market is beginning to recover, albeit “on a small scale in limited subdivisions where the price of land is not a factor in the total price of the home.”

Stoskopf has devised a forecasting model that uses four factors—oil prices, North American auto production, employment in Detroit-Livonia, and the average sales prices of homes in metro Detroit’s four counties—to predict permits. He’s plugged in data going back to 1998, and the model’s historical accuracy is 91%. Using this model, Stoskopf believes metro Detroit could start coming out of its black hole next month, and pick up “slightly” in the months that follow.

Learn more about markets featured in this article: Detroit, MI.