I don’t think this is a mystery. The number of HS graduates the state produces has been declining steadily due to changing demographics, mostly an aging population coupled with some out-migration. About 10% of the state’s annual crop of HS grads apply annually to the University of Michigan. I don’t know that they’re exactly the top 10% of the state’s HS grads, but I would guess most are in the top 10% at their schools, and most of the rest are close to that mark. It’s been known for decades in Michigan that you don’t have much of a chance of being admitted to the University of Michigan unless you’re in, or at least close to, the top 10% of your class. Every GC in the state knows it, and so they tend to steer most kids away from the school. This was true even way back in the Dark Ages, in the 1970s when I applied, and Michigan admissions have only become more selective since then.
I think that’s most of it; it’s simple self-selection, with an assist from HS GCs. There are some other dynamics at play, too, though I think they’re smaller factors. One is that the university’s student body skews wealthier than the state as a whole. That’s definitely true of OOS students, due to the university’s inability until recently to provide much need-based FA to OOS students, so those who enroll tend to be full-pays. But it’s also true to some extent of in-state students, a very large fraction of whom come from Oakland and Washtenaw Counties, two of the three most affluent counties in the state (the other is Livingston which has a much smaller population base). That creates a perception in some quarters in the state that Michigan is a “rich kids’ school,” with “rich” in this context meaning essentially upper middle class. Most Michigan HS grads are not upper middle class; the state is at this point well below the national average in median household income. Many of the state’s HS grads simply feel more comfortable at Michigan State, where the demographics don’t skew as affluent. The irony, of course, is that the University of Michigan meets full need for in-state students and MSU doesn’t, so for many low- and moderate-income students, Michigan might actually be the more affordable option. But perceptions can be a powerful barrier.
The other factor is geographic. The University of Michigan draws roughly 2/3 of its in-state students from just 4 Southeast Michigan counties: Oakland, Wayne, Washtenaw, and Macomb in order of raw numbers. Those counties represent less than half the state’s population. MSU also draws heavily from Oakland and Wayne, but loses most of the cross-admit battles from those places, MSU draws very few from Washtenaw (Ann Arbor & surrounding communities), but it outdraws Michigan in Macomb (n.e. suburban Detroit), which tends to skew more blue-collar. And in a broad swath of smaller cities from Port Huron through Flint, Saginaw, Bay City, Midland, Lansing, Jackson, Grand Rapids. Muskegon, Holland, and Benton Harbor, MSU rules. This is also substantially true in smaller towns and rural areas in the state. As a result, graduating HS seniors in those parts of the state are much more likely to have schoolmates, teammates, older siblings, cousins, parents, co-workers, and even teachers and GCs who attended Michigan State. Those networks matter. For some non-trivial fraction of those students, MSU is their first choice, even if they have the academic chops to be admitted to Michigan.
But I think self-selection based on likelihood of admission is the dominant factor. In 2014, only 15.9% of MSU’s enrolled freshmen had ACT Composite scores of 30+. At Michigan, the comparable figure was 67%. There’s no question that Michigan is picking off most of the state’s academically best qualified college applicants.