Market Conditions: Small(er) Condo Developers Return to the Scene

They’re back!

According to Crain’s, condo developers are starting to build again- mainly 6 and 8 flats in the neighborhoods.

From Crain’s:

”For the time being, this will work in quality locations with a very limited number of units,” said Jason Vondrachek, managing broker and owner of Chicago-based Quest Realty Group.

Quest recently broke ground on a nine-unit building at 1312 W. Madison St., the second phase of a project started in March. A buyer has signed a contract for one of the condos in the building, which Mr. Vondracheck expects to complete in May.

Quest bought the land from Chicago-based Lakeside Bank last fall after the bank foreclosed on the original borrower. Quest then got a loan from Lakeside to build the first phase, which has six residential and two commercial units. The building sold out, and buyers will begin closing on their units in December, Mr. Vondrachek said.

He is starting the second phase of construction with his own money but will likely take a small loan from Lakeside once first-phase units begin closing in December, he said. The residential units will be priced from $425,000 to $490,000.

“What we’re adding to the market is really small,” Mr. Vondrachek said. “If you do anything too big, your buyers won’t be able to get financing,” he said.

This 6-unit building at 1310-1312 W. Webster is under construction in Lincoln Park and some of the units are already on the market.

Crain’s also talked to the developer of this building.

Developers also face stricter lender guidelines, with banks requiring that 70% of the units in a development be under contract before buyers can move in, said Padraic Heneghan of GLM Developers, who is building a six-unit project on the 1300 block of West Webster Avenue in Lincoln Park.

“That was always the case, but banks didn’t seem to enforce it,” he said. “If buyers are applying for loan, now they enforce it in case the developer goes bust.”

Mr. Heneghan said mortgage availability for buyers is still a concern, so he’ll often take a good contract — one where a buyer can put 30% down, for example — over the highest bidder on a particular unit.

“It’s not all about the price, it’s about the contract,” he said.

Mr. Heneghan previously built single-family homes further west of his current project, in neighborhoods such as Albany Park and Avondale. He’s now focusing only on condos, in Lincoln Park and Lakeview — neighborhoods that are still relatively strong, he said. Since 2008, he has built almost three dozen condo units in eight buildings, he said.

“I never sat on one longer than two or three months,” he said. “I still think there’s still a market here.

Here are the list prices for the three units at 1312 W. Webster:

  • #1W: 4 bedrooms, 2.5 baths: $875,000
  • #2W: 3 bedrooms, 2 baths: $599,000
  • #3W: 3 bedrooms, 2 baths: $699,000

The units have upscale finishes and millwork. You can see the pictures here (interior pics are from one of the developers other buildings.)

We have seen new construction single family homes selling well.

But with so many other townhouses and condos on the market at this similar price point, or cheaper, can new condo construction still triumph over “used”?

Condo builders tiptoe out of the woodwork [Crain’s Chicago Business, Mary E. Morrison, November 22, 2011]

71 Responses to “Market Conditions: Small(er) Condo Developers Return to the Scene”

  1. Builders build. That’s what they do. They build until they cannot build anymore. It’s not like these builders are going to return to dog grooming or burger flipping. They’re going to roll the dice and build and hope a buyer with 30% shows up and buys their product. If they can’t sell, well then, they’ll go bust and try again next year.

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  2. ““That was always the case, but banks didn’t seem to enforce it,” he said. “If buyers are applying for loan, now they enforce it in case the developer goes bust.””

    Maybe it’s just me but methinks there should be repercussions for banks that turned a blind eye to requirements to get taxpayer backed mortgages.

    Also the mere fact that they’d prefer a lower sale price but someone with a substantial downpayment should be a good indicator of the quality of people purchasing real estate with a small downpayment these days.

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  3. don’t we have enough inventory of condos and townhouses that are already lingering on the market? And what shortcuts are builders taking so they can list them at a competitive price in this market?

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  4. The ‘shortcut’ is that they were able to buy the land or partially completed projects for far less than developers 5 years ago.

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  5. boi_in_boystown on November 23rd, 2011 at 9:07 am

    Good point dahliachi. I don’t think most chatters realize that land, especially in the city, makes up a big chunk of the overall price of a unit.

    “don’t we have enough inventory of condos and townhouses that are already lingering on the market?”
    Of course we do, but the inventory of ‘new’ has been much reduced. And people will always prefer new.

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  6. The lure of new construction; some buyers think that “quality” requires new construction, not realizing that well-maintained older construction is both a better value and better quality construction all-round. Highest quality residential construction is often found in Depression-era single-family upper-market houses – plaster wall finishes, tile and/or copper roofs/gutters, hardwood floors, cement-set tile, often steel framing, and usually masonry construction.

    We’ve friends who bought a new-construction vinyl-sided big builder-box colonial in north suburbs a little more than a decade ago. Their house is aging badly, with many readily visible problems, yet it makes little sense financially for them to do any major repairs or upgrades. House is worth about as much as their purchase price 13 years ago.

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  7. Bob, banks didn’t turn a blind eye to anything. Fannie/Freddie set the guidelines and the banks followed them. With condominiums, there are two levels of review – full and limited. Full reviews require all the minutae on the condo association while the limited reviews are just that, limited. Typically, the larger down payments usually get limited reviews which is how buyers get around the issues that kill deals that require full reviews.

    This is why they prefer a lower sales price with the larger down payment. There is less likelihood a bank is going to kill the deal over some out of left field BS like they do with lower down payments. Most of the lower down payment deals don’t die because of the borrowers, they die because of stuff related to the condo. Borrower quality is higher than it has ever been

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  8. “kill the deal over some out of left field BS like they do with lower down payments”

    Aww, how cute, the debtsellers are upset that the lenders want to get paid back.

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  9. “I don’t think most chatters realize that land, especially in the city, makes up a big chunk of the overall price of a unit.”

    Over the years, that has been discussed at tedious length here. So, those chatters are either new to chatting or incredibly thick.

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  10. “The lure of new construction; some buyers think that “quality” requires new construction, not realizing that well-maintained older construction is both a better value and better quality construction all-round. Highest quality residential construction is often found in Depression-era single-family upper-market houses – plaster wall finishes, tile and/or copper roofs/gutters, hardwood floors, cement-set tile, often steel framing, and usually masonry construction.”

    Nothing more true can be said. I see new construction and think crap.

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  11. Go look at those new construction homes in Plainfield. They won’t last more than 20 yrs.

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  12. G, sorry, but the world isn’t as simple as you like to make it out to be. Deals die all the time over very small and often inconsequential issues. It doesn’t matter how qualified the borrower happens to be. The problem is the developers can’t keep up with what is acceptable and what isn’t, nor can borrowers. So regardless of someone’s FICO score, down payment, etc; a very large number of deals die due to very technical underwriting guideline problems. I’ve seen a bank demand the font be changed on an insurance policy declaration page. I’ve seen a bank deny a loan because a high rise condo’s reserves were short $800. Or a deal killed over a $1000 mechanic’s lien. It didn’t matter the borrower’s had a 10% DTI, 40% down payment, and 800 FICO scores.

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  13. Architect: wood framed recent (post 1963) houses require a lot of maintenance, even vinyl sided ones. That is why it is important for buyers to ensure that the previous owner was diligent in their upkeep or bake a discount into the price to account for that. For the first 6-10 years or so generally smooth sailing. So if your friends paid the price of a well maintained 10yr old home but got a poorly maintained one its on them. And I suspect a LOT of new homeowners make this mistake as most issues are easy to hide or do a cheap/qwik fix just to get through visual inspection.

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  14. The price of the land is usually between a quarter or a third of the price of the final product, so I would not characterize that as a ‘big chunk’ but rather a significant portion. The sky is often the limit when it comes to finishes unless it is home despot quality.

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  15. Bob, isn’t that what Architect said?

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  16. STOP IT ALREADY!!!!!!!

    STOP BUILDING THESE DANG CONDOS…..ITS GETTING ABSOLUTELY RIDICULOUS!!!!

    HOW ABOUT BUILDING SOMETHING SUBSTANTIAL THAT YOU CAN BE PROUD OF AND THE COMMUNITY CAN HAVE PRIDE IN.

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  17. “The price of the land is usually between a quarter or a third of the price of the final product, so I would not characterize that as a ‘big chunk’ but rather a significant portion.”

    Not in the GZ in the last decade, when it’s been more like 50% in many, many cases.

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  18. “Not in the GZ in the last decade, when it’s been more like 50% in many, many cases.”

    Right, I can’t believe what they say my vacant double lot would be worth. And I’m probably not in the GZ.

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  19. So what’s the time frame estimate before these cinderblock junkers start looking like 4+1s?

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  20. The problem with Depression-era quality construction: puny bathrooms and closets, smallish bedrooms, unneeded dining rooms–all things that don’t lend themselves well to modern life. So people would rather have the footprint they want without the expense and hassle of reno. Do you want to recover a fine couch from Grandma or buy a new one from C&B if the costs are the same? Most choose the latter because it’s faster and I can see the results now.
    That said, these places are over-priced, whether they are crap construction or not.

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  21. Yea-that’s the portion between profit and loss……

    homedelete (November 23, 2011, 10:45 am)
    “The price of the land is usually between a quarter or a third of the price of the final product, so I would not characterize that as a ‘big chunk’ but rather a significant portion.”

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  22. “It didn’t matter the borrower’s had a 10% DTI, 40% down payment, and 800 FICO scores.”

    I assume you meant “borrowers.” I also assume you are full of shit if you expect us to believe those were the profiles in each of your examples. Sounds like you don’t want to do the actual work required to meet lender reqs. Maybe you can lend your own money, you must have a pile after pushing all those no down loans.

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  23. New construction does not age well at all. Just look at some of the early 90s stuff. Vintage may not have the most perfect floor plans for a modern family, but at least vintage doesn’t destroy the street facade as it gets older which is my problem with new construction. Just like the 4+1s, decades from now entire streets are going be scarred with crumbling, souless architecture with no redeeming value bringing down values of all the surrounding properties that have to look at these eye sores.

    I highly doubt anyone is going to be looking to restore some cheap new construction six flat or McMansion to is glory 50 years from now.

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  24. New construction is just like a car. As soon as you buy it, it’s no longer new. Way to go paying the premium.

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  25. Whatever G. That is your problem you assume too much and let your all knowing arrogance get in the way. I don’t need your approval and could careless if you don’t believe me or not. I am just sharing facts as someone originating mortgages daily. Do you think that No Lend list was pulled out of the air? It doesn’t matter how qualified the borrowers may be. So yes, deals get killed over bullshit all the time and it has nothing to do with quality of borrowers or down payments.

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  26. “Most choose the latter because it’s faster and I can see the results now.”

    Most people are stupid

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  27. ‘some buyers think that “quality” requires new construction, not realizing that well-maintained older construction is both a better value and better quality construction all-round.’

    So true. I’ve always been partial to old buildings (well maintained naturally) for that reason, and I don’t understand people who think newer is better… we’re not talking about cars here. My house has original brick molding, floors, stairs, woodwork, joists (all old growth lumber), 12″ solid masonry walls (no insulation), fireplaces… all 140 years old. Sure you have to maintain and at times it seems never ending, but considering the *brutal* climate the we live in, the ‘box’ or the structure itself, holds up far better than what you’d think.

    When I see exterior cinder block walls, crapy builders fireboxes, Home Depot finishes, I can only imagine what the builder installed where you can see it. Anyone who wants a *sure* thing career in the future will get into the home repair business now. Natural aging in an old home is called character, natural aging in a new house (especially when it’s contemporary in style), is called an eye sore.

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  28. And the suburban mcshit boxes are worse.

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  29. “12? solid masonry walls ”

    Oh, that just had to be a treat to wire up, when that new fangled cable TV and internet came along. Ze had to re-do old plaster and brick walls – ran absurd amounts of empty conduit everywhere so as to never have to touch those walls again. What a mess.

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  30. I can’t believe these are selling…they are nothing special. New but there are similar units on the market for much less…they just need a little work (paint, patch, new appliances) and could save a buyer a ton.

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  31. ‘Oh, that just had to be a treat to wire up’

    What a mess indeed. But the interior walls aren’t solid masonry (old plaster and lathe), so you run the electric up from the basement through the interior, and snake over to the exterior. Needless to say, I have more outlets on the interior walls. Halogen lighting in the ceiling… ever seen a grown man cry?

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  32. I understand these McShitBoxes at the right price as they do serve a purpose. But at this price LMAO. Look at the foreclosures near wellington & sheffield to ser where valuations are headed on these.

    Also funny story about the McShitBoxes near diversey & halsted: it appears that empty lot there between the identical swathes of McShitBoxes is finally going up. Thing is as far as I can tell the new project doesn’t share the facade of all the other ones! LMFAO its gonna be like that cabrini mart building disaster smack dab in the middle of all of thosr near identical 3 flats over on division & halsted.

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  33. “ever seen a grown man cry?”
    I can feel your pain! I just had to snake 2 wires through an old run last week. Cursing, breaking shit, could hear the end of the snake about 2 ft from the other side but couldn’t get it to make the last turn. When you finish, you finally finish though, you feel like you are King of the world!
    Knock Home Depot, but a simple flat dimmer down here will cost you 200US. I brought down boxes and boxes of those Lutron one touch dimmers and remotes for 3-4 ways. Do not even exist here. I love those dimmers.

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  34. ‘ Do you want to recover a fine couch from Grandma or buy a new one from C&B if the costs are the
    same?’

    Considering the new couch from C&B was probably made in China using wood from an abandoned radiation leaking power plant, I’d probably reupholster the old one… the one most likely made in MI that allowed Grandpa to keep his job. Plus, if it weren’t for Grandma’s old couch (and a couple of drinks), you might not be here. Have a little respect.

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  35. I think this is the building that was built over a set of old train tracks. I wonder how they got that land. It also appears to now block access to alley parking, I bet those residents are in love with this place. This smells of a shady deal with shady politicians.

    http://maps.google.com/maps?q=1312+w+webster&hl=en&ll=41.921625,-87.66143&spn=0.001249,0.002068&sll=41.921639,-87.661386&layer=c&cbp=13,351.6,,0,-0.43&cbll=41.921625,-87.661319&hnear=1312+W+Webster+Ave,+Chicago,+Illinois+60614&t=m&z=19&vpsrc=0&panoid=kxezonZfSWfXAroLmW6DOQ

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  36. I totally agree with jay and Vlajos. When it comes to SFHs, I’d MUCH rather have an older property that has character and period woodwork or similar vintage worksmanship, or a property built in the last 20 years where you can see what needs to be done and have a good idea about the condition of the parts of the house you can’t see from the condition of the parts you can, than I would a new property where you won’t know about the shortcuts until several years later. Given the current cost of materials and labor, even given the slowdown in building, it is rare that a new SFH is really a good value. Unsophisticated buyers (in my opinion) and people who are afraid to coordinate some renovation on their own end up overpaying significantly for most new SFHs.

    With condos, I would prefer to either see the buildout prior to drywall going up, or for it to be at least 15 years since it was built so you can have some data about the long term condition and maintenance needs. Unfortunately, for condos that usually means crappy finishes unless they have been smartly renovated. Water intrusion, insulation and similar issues are very important for masonry building or mixes of materials. That said, I find the whole split face block concerns about exterior condo construction overblown. As long as they get tuckpointed and sealed at a minimum every ten years (with a good inspection every year between years 5 and 10), it’s not a problem. It’s just ignoring the necessary maintenance that gets to be a problem.

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  37. I’ve been picking up some amazing antique and vintage stuff at country auctions. I recognize quality and function and am accumulating a bit. We have no animals, so our barn has become a bit of a warehouse. Not sure how or when we will use or sell some of it, but it beats having my customer segregated funds at risk of being raided by broker dealers in the risky markets.

    “Considering the new couch from C&B was probably made in China using wood from an abandoned radiation leaking power plant, I’d probably reupholster the old one”

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  38. “Do you think that No Lend list was pulled out of the air? It doesn’t matter how qualified the borrowers may be. So yes, deals get killed over bullshit all the time and it has nothing to do with quality of borrowers or down payments.”

    I believe the no lend lists were put together based on problems with the potential collateral, not for bullshit reasons that kill your “deals”.

    “It is difficult to get a man to understand something when his salary depends on his not understanding it.” – Upton Sinclair

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  39. IPO’s are new, too. How’s that Groupon price looking today?

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  40. It’s true, basic acumen will tell you that investing furniture in your barn is safer than any investment in a company, bond, commodity or other instrument traded in financial markets. This is due to the strong protections offered by the Barn Investor Protection Corporation.

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  41. No, this is because in an economy that looks the other way on all sorts of fraud, including off balance sheet accounting tricks, there is no safe way to determine the safety of stock investments. Control fraud is like a ponzi in many ways. IMO, the Corzine mess is the tip of the iceburg. We’ll see.
    As far as protection goes, what protection do commodity futures investors have? Mann showed us that the answer is none. What protections do you have other than deposit accounts or Treasury securities? Is the SIPC liquid enough to deal with large scale fraud? Even with these super safe investment choice you have the valuation risk on our currency. Seems to me the bargain basement priced antiques are a better choice.
    But you go ahead with your risk on. Hope it works out for ya, player. Or maybe I misread the snark?

    “This is due to the strong protections offered by the Barn Investor Protection Corporation.”

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  42. You have 500k coverage via SIPC. God help us if that won’t be honored but methinks you might be caring about water, ammo & food more than your brokerage statement at that point juliana.

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  43. Russ: what kind of environmental study is required by construction lenders these days on a SFH or 3-condo lot? I know on commercial deals a “Phase I” used to be required, but that seems like overkill for a 25×125 lot. But who knows what’s in the soils of some of them? Chibuilder brings up a good point.

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  44. check, check & check. just hedging my bets, or course.
    “water, ammo & food”

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  45. In a city like Chicago, buyers are realistic. Majority of them prioritize, rightfully so in this city, more objective factors like, needs such as sqft. #BR’s, price, etc. rather than cosmetics. So, what usually sells a product for this upper middle B+/A segment will most likely have nothing to do with what I am going to say here.

    As a believer in free market economy, I’m really scratching my head when I see ugly stuff like this. Why is the free market system not working properly in a way that will lead the developers design and build more carefully in terms of aesthetics so that they can make a differentiation and have more competitiveness. Is it because of how the leverage system is build up? What can be done to address this problem?

    I am not requesting some fancy contemporary design with costly materials. But, at least don’t do damage, and if you’re building relatively neutral building in style due to cost restrictions at least don’t do this. I am not an architect or a designer, but I would be curious to see how this building could look better with the same construction budget.

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  46. Does it appear that Lincoln Park 2520 by Lucien Lagrange is going to be yet another pukey-mustard yellow colored building? (like that other high-rise that holds the Park Hyatt at Chicago Ave. and Michigan Ave.?)

    Couldn’t they get some true limestone from Indiana or something?

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  47. 3909 N Kedvale in Old Irving was knocked down today and the permit says “2 story sfh per arch plans with detached garage” on a double lot 175 feet long. 125 feet from 6 lanes of 90/94 expressway, the metra AND the el. And smack dab between two nasty 60’s era pink colored condo buildings with only one other sfh on the short block. This home will sell for over a million dollars new.

    http://www.cookcountyassessor.com/Property_Search/Property_Large_Image.aspx?transfer_string1=http://www.cookcountyassessor.com/Property_Search/Property_Large_images_Output/13222060030000_AA.JPG

    Granted what existed until 8 am today was putrid and horrific, but that’s why they built equally as nasty dumpy condo 50 years ago.

    Builders build. Taht’s what they do. As long as they can get the financing to build (and in this particular case 80% of the purchase price of the lot and probably the rest of the project too) this builder has $56,000 in to his million dollar home. ANd if it doesn’t sell, well, he’ll just give it back to bank, and find another bank to lend him the money to build somewhere else.

    Builders build. It has nothing to do wiht the market and everything to do with the financing to do the build. give them as mcuh financing as they want and you get the ghost towns in China.

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  48. I think the same thing whenever I see one of these abortions Spinoza, I just *can’t* wrap my mind around the fact that someone will spend big money to call this home. I’d get it if this was being built in a blighted neighborhood where they’d be happy to have any type of new construction, but this has me scratching my head too. This isn’t unique to Chicago, anywhere you go in the US is filled with the same new crap; ever taken an architectural tour of LA? Of course not, as nothing built in the last 50 years is worth visiting… a few exceptions naturally.

    IMHO I think it boils down to the fact that we accept low standards as the new norm in this country. From education, buildings/design, food, dress, culture, politics, on and on, every week brings us some type of new low that the sane are forced to trip over. It’s not that the Jennifer Lopez has a new clothing line that bothers me for example, it’s that people will start lining up at midnight tomorrow night at some suburban mall to actually buy it. Sad times.

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  49. juliana, I agree with you that a single, isolated event involving criminal accounting fraud at an obviously teetering BD, most of which may still be covered by insurance, is a reason to avoid investing in financial instruments. It’s that exact same line of reasoning that has led me to avoid buying gasoline, because every once in a way someone will spray you in the face with gasoline at a gas station.

    jay and spinoza, I agree that these properties are overpriced and not what I’m looking for, but I think that you are quite exaggerating how bad they are. Save that for that place on Lincoln. These are at least halfway decent.

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  50. If that’s how you evaluate risk, more power to you. All I can say is, buyer beware.
    And what “insurance” is covering the commodities accounts?
    “juliana, I agree with you that a single, isolated event involving criminal accounting fraud at an obviously teetering BD, most of which may still be covered by insurance, is a reason to avoid investing in financial instruments. It’s that exact same line of reasoning that has led me to avoid buying gasoline, because every once in a way someone will spray you in the face with gasoline at a gas station.”

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  51. “You have 500k coverage via SIPC”

    SIPC has around $600 million in assets going up against a potential loss of up to $1.2 billion with MF. I think the CME has stepped up with a lot of cash to cover a shortfall and I bet that a lot of customers get made whole without resorting to SIPC funds. It will survive the MF failure, but if there is another all bets are off.

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  52. No worries, I’m sure the regulators are on high alert, right? We’ll see how much sympathy the commodity speculators get with regards to bailout, since they have no insurance. Here is one loser’s take on it. Okay, its posted to zerohedge, so don’t bother with the ad hominems sonies. I’ve heard them. IMO, ZH has more than their share of future fascist thugs posting comments, and I waste too much time arguing with them, but I continue to be amused by the website posts.

    http://www.zerohedge.com/news/guest-post-mf-global-was-it-hit

    “SIPC has around $600 million in assets going up against a potential loss of up to $1.2 billion with MF. I think the CME has stepped up with a lot of cash to cover a shortfall and I bet that a lot of customers get made whole without resorting to SIPC funds. It will survive the MF failure, but if there is another all bets are off.”

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  53. I dont think sipc coves the futures side. only the 400 securities accounts. most of the loss is in the 38,000 futures accts.

    that said I think i saw something about sipc contributing to the 60% they are returning. it’s a clusterfuck.

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  54. And CME gets a state tax break. MF/CME fiasco has me reading the survivalist blogs again – anyone read “Surviving in Argentina” or Rawles’ Survivalist blog? Gingrich named EMF attack as his “number-one serious but undiscussed issue” yesterday.

    Bob: our friends bought a NEW new construction suburban McMansion which is now about 13 years old. We tried to discourage them, but it’s difficult not to be perceived as “raining on their parade”. Husband was adamant about buying new construction.

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  55. I haven’t closely followed how much of the shortfall was from commodities accounts, but I still don’t have a lot of sympathy. It was obvious for the last year or two that MF was distressed. If you are trading commodities, you should be aware of the different types of risk to which your capital is exposed. The underlying point that the sky is falling and no investment can be trusted is still absurd.

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  56. So go ahead with risk on, I’ll stick with my risk off, thank you. You can always say hoocoodanode.
    “The underlying point that the sky is falling and no investment can be trusted is still absurd.”

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  57. SIPC will get bailed out if they need it. The last thing the govt wants is causing the mother of all financial panics since 1870s by not standing behind FDIC or SIPC, get real. Also pretty sure SIPC covers futures accounts up to 500k as well. The coverage is not asset class specific. The MFG clients that are fvcked are those with over 500k in an account. Tough tits.

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  58. right. and the derivatives problem with the eurozone debt is all good too. central banks and imf got it covered. s’all good. the thing about control fraud is the only way for it to work is for all the players to keep believing, so I see where you are coming from.
    “The last thing the govt wants is causing the mother of all financial panics since 1870s by not standing behind FDIC or SIPC, get real.”

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  59. Bob: nope, the sipc only covers equities and cash accounts. The vast majority oc MF accounts are screwed.

    http://www.sipc.org/how/covers.cfm

    Also, the CME is only offering about 300 mil against a 1.2, billion shortfall. Who’s going to get that money? This entire episode calls into question the idea of a “self-regulating” exchange. It simply doesn’t work.

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  60. Wow. Well if by some miracle Corzine avoids prison he’ll die a pauper then–I think MF’s corporate veil is about to get pierced more than a pilsen hipster.

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  61. Chicago’s Karl Denninger has been on fire lately over the MF Global stuff at http://market-ticker.org

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  62. gringozecarioca on November 24th, 2011 at 4:47 am

    “juliana, I agree with you that a single, isolated event involving criminal accounting fraud at an obviously teetering BD, most of which may still be covered by insurance, is a reason to avoid investing in financial instruments. ”

    It is more endemic than you think. Fraud was seemingly decriminalized a few years ago, what do you expect? If Corzine does not go down.. Welcome to the new Brasil. Great place here, rich people and those politically connected (usually same thing) can not go to jail. Does not happen!!

    “This entire episode calls into question the idea of a “self-regulating” exchange.”

    I was always under the impression that the exchanges were pretty damn regulated.

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  63. “but I still don’t have a lot of sympathy. It was obvious for the last year or two that MF was distressed.”

    many financial firms have been distressed the last few years, if this becomes an excuse for stealing account holder funds then we are probably more f-ed than even Juliana thinks. lack of outrage/sympathy is a big part of the problem. no outrage equals no prison time for mfg execs equals no reason for other firms to pull the same thing.

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  64. “not to pull”

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  65. Ze: “I was always under the impression that the exchanges were pretty damn regulated.”

    That’s exactly what the industry wants you to believe. The SEC oversees mostly equity markets and the CFTC oversees most derivative activity. But for the most part, they only make sure that the contracts being traded are reasonable, properly advertised and sold, are transparent in terms of reporting of the underlying asset and are traded in a “fair” way. So, in other words, an exchange just can’t list a product that they make up with little or no information available about it. Or, the exchange must report activity to all members in a fair way and allow access in a fair way (for instance every trade done is available to everyone at roughly the same time and when you submit a trade, it is entered in the market in the order the exchange receives it). These entities also handle disputes between parties and exchanges.

    So there are some pretty glaring things that these agencies don’t cover. For instance, these agencies have very limited oversight for non-exchange trading. OTC products and call-around markets are a great place to go for parties who want to trade outside of government oversight.

    The bigger problem, though, is that the exchanges are the ones that dictate how their customers must operate. In the MF case, for example, the CME deems MF worthy of clearing customer’s trades, which offloads managing customer risk to MF. The CME has requirements as to how clearing firms must operate (for instance keeping customer money in separate accounts that shouldn’t be touched) and they do audit their clearing firms. But the bottom line is that the clearing firms are supposed to mitigate the risk that customers would make egregiously bad trades and blow up. So the clearing firms police the customers, the CME polices the clearing firms and the CFTC doesn’t really police the CME besides the aforementioned protections.

    In the MF case, this policing broke down. MF dipped into customer funds and the CME didn’t catch it until it was too late. Rules such as customer account segregation should ensure there isn’t a “run” on a clearing firm. Customer money should be there, no matter how many other customers pull their money. But because the policing broke down, the protections broke down.

    This might help explain how customers had faith that MF’s problems wouldn’t effect their money (it shouldn’t, had the “rules” been followed). It also might help explain why a lot of people are starting to question whether letting exchanges police themselves is a good idea.

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  66. “If Corzine does not go down.. Welcome to the new Brasil.”

    Yep. Where’s the money????

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  67. Just announced today: the CME is putting up another 250 mil for MF customers. IMO, the CME has the most to lose in this fiasco, long term. If customers can’t trust the exchange/clearing firm model, they’ll start looking for alternatives. That will hurt the CME’s volume and make their non-exchange competition seem more attractive. To be honest, i’m not sure why they haven’t promised to make their customers whole and more aggressively defend their business model. Maybe it’s because their current CEO is a lawyer…their response has been way too cautious.

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  68. ” If Corzine does not go down.. Welcome to the new Brasil. Great place here, rich people and those politically connected (usually same thing) can not go to jail. Does not happen!!”

    Fascinating comment. This is exactly what Ferfal says about the Kirchners in Argentina.

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  69. One of the $700,000 top floor units in this building is already under contract. Who says expensive new construction (even in far west Lincoln Park) isn’t selling?

    Everyone wants “new”!

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  70. And for the MF Global update, the bankruptcy trustee is claiming attorney-client privilege in an effort to keep records away from regulators. To quote: “To the extent that the authorities express concerns to us that the effort to preserve the attorney-client privilege is hampering their investigations, we, of course, would be willing to discuss the issue with them and would be inclined to waive” the privilege, the spokesman for Mr. Freeh’s office said. The WSJ continues: “[Freeh] is focused on the interests of the MF Global parent company, and one of his main constituents is the firm’s bondholders.”

    I guess embezzlement is covered under attorney-client privilege and if nobody questions the assertion, its all good. The new bankruptcy code apparently gives the leveraged players a collateral grab before the rubes split up whats left.

    http://online.wsj.com/article/SB10001424052970204331304577143133017776526.html#articleTabs%3Darticle

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  71. btw, I successfully read WSJ links without a subscription by googling the article. If you try to use an embedded link (like mine), you may get the first couple paragraphs only, with an offer to see more if you subscribe. In that case, you google the title (“Trustee Tussles With Regulators” in this case) and click on the WSJ link in the search results.

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