Tribune: A Record 6,000 Units To Close in 2008 Downtown
Continuing on with the Crain’s discussion- this Tribune article appeared in May 2008. (I’m sure we already chattered about it.) But they too give the 6,000 units figure for new condos and townhouses in the downtown. From the Tribune:
Nearly 6,000 condos, by far a record number, are expected to come on the market in downtown Chicago this year at a time when mortgages are tougher to get and sales have slowed dramatically, according to a report.
That adds up to a big worry about the Loop-area market, which has seen explosive growth in recent years.
“It’s tremendously serious,” said Steven Hovany, president of Strategy Planning Associates Inc., a planning and real estate consulting firm. “What you are going to see are buildings going into foreclosure.”
Hovany predicts developers will cancel downtown projects for several years to come, until the excess housing is absorbed.
In May, the developers were NOT discounting pricing much. That may change going forward however.
Gail Lissner, vice president of Appraisal Research Counselors, said 2008 is the biggest year so far for downtown condos. Her firm says 5,984 units will come on the market this year. That compares with 4,794 last year and a projected 4,160 next year.
Yet buyers are not showing up.
Sales of newly built downtown condominiums plummeted by about 83 percent during the first quarter, to 201 units from 1,207 units a year earlier, according to a report to be released Wednesday by Appraisal Research Counselors.
“There’s more risk in the South Loop than in other neighborhoods because of the quantity of new deliveries,” Lissner said.
Lissner said there is no widespread discounting on downtown condos, but developers are willing to deal on price under specific circumstances. A developer with only a few units remaining in a building might discount the sales price just to end involvement with the project, for example.
In a recent report, Appraisal Research Counselors cited a number of factors that are hindering sales, including economic uncertainty and a concern that the housing market has yet to hit bottom.
Record condo numbers to saturate downtown [May 14, 2008 Chicago Tribune]
I can’t wait to start renting one of these luxury places for pennies on the dollar in 2 years.
As a fence sitter I can say that nobody is forcing developers to discount prices and nobody should. Similarly nobody is forcing me to buy any time soon. We can both wait. I’d bet that I can wait longer than most developers.
“In a recent report, Appraisal Research Counselors cited a number of factors that are hindering sales, including economic uncertainty and a concern that the housing market has yet to hit bottom.”
Here, let me save you a pile of research dollars. The answer is incredibly simple. The homeownership/investment brainwashing of the public to a large degree has worn off, and at the same time the asset-backed security Ponzi scheme that lenders and Wall street have been running has collapsed.
Years of sales were borrowed from the future. Sure there are some buyers on the sidelines, but these are by and large the same people who sat out the bubble in the first place (never drank the Kool Aid). Who really believes they will ever begin rushing into the market? They will sit on bids and wait out price declines as they have for years, slowly picking up the leftover pieces of so many broken property ladders. They are easily outnumbered by all the accidental landlords and soon-to-be REO (or REO not on the market yet), IMO.
John
John, you’re on point. I am one of those who didn’t bite during the bubble, and with prices not budging much with ever increasing inventory, it doesn’t seem like I will bite anytime soon.
It reminds me of when I went on the south loop trolley tour and the developers at the x/o building kept on insisting that the market in Chicago is doing just great in order to justify offering absolutely no incentives on their horrendously overpriced units.
Like Mick Jagger sang, “Time is on my side.”
“Years of sales were borrowed from the future.”
Absolutely true JKD.
My concern is that once the Fed Reserve figures the banks are out of trouble they will jack the rates Volker-style! The banks will then require 20%+ d/p. The Greedy Sellers do not care now and will not care later what your problems are they will still think it is 2005 and their 1000 sq ft shoebox is worth $450,000 still refusing to lower their prices. We shall see. This whole thing stinks.
yeah, im not interested in catching the falling knife but when the bottom falls out in some of the newer buildings in 60601 ill be looking closely. On a side note, it would not surprise me to see some new Chicago zip codes enter the forbes most expensive zip list on this data.
Guys – Interest rates are not headed higher over the longer term. The inflation we are experiencing today was caused by fake money being created through easy lending practices. The spending from this fake money accounted for over half of GDP in the past 5 years. This money (EQUITY ATM) is gone and growth will slow to a crawl in the coming quarters. Watch oil fall and inflation will turn to deflation over night.
Just my 2 cents…
Steve,
I actually agree with you on most points but capital has turned extremely scarce and even if rates drop on gov’t bonds I can easily see the risk premium on consumer lending increasing by plenty to offset that. The entire move down the past few months was offset in exactly that manner. If we are going into deflation, which i agree with, it will be because money is unavailable.
SITC? Why are sellers GREEDY for wanting as much as they can get for their assets, realistic or not. Isn’t a buyer lowballing doing the same thing.
“My concern is that once the Fed Reserve figures the banks are out of trouble they will jack the rates Volker-style! The banks will then require 20%+ d/p.”
I actually hope this happens. Maybe not 18% interest rates of the 1980’s but rates around 8-10% would thin out the pool of buyers even more and put greater downward pressure on prices. I’d rather buy a home at a lower price and a higher rate than vice versa. I can always renegotiate the rate when they go back down (can’t do that with the purchase price after the fact) and the interest is a tax write off.
Ken,
My sentiments exactly! Economists have done studies and believe it or not real estate is payment based (surprise!). Just like when buying a car most people don’t understand finance much beyond “whats my monthly payment?”. Higher interest rates will lead to lower prices.
Deflation doesn’t necessarily lead to lower interest rates. The Fed can do whatever it likes with the discount window, but the mortgage rates are not tied to it–they aren’t even well correlated with it. Mortgage interest rates are determined by perceived risk. Right now, risk has been artificially low because the wholesale and insurance market has been robust, and Fannie/Freddie were propping the market by reliably buying mortgages. As that picture changes, interest rates should go up. They’ve already been creeping up; I personally expect that to accelerate, sharply, and I’m not alone in that expectation–for well or ill.
The government will do what it has to keep mortgage rates affordable. Let’s not forget that the 80’s experienced 15% interest rates combined with 15% growth in salaries and income. Look at Japan over the past 20 years. They were giving money away for free, including mortgages. If we do see deflation, the fed will load us up with all the money we need.
I am not saying it will be pretty but money will be available.
I think the bottom line is that you should not buy 1 condo but go ahead and buy 2.
Makes sense…
“The government will do what it has to keep mortgage rates affordable.”
8-10% is affordable. That’s the historic average.
Ken – If CPI and PPI are flat we will not see 10% interest rates. That is crazy talk.
You’re right Steve. You’re always right. We should all listen to you. Rates won’t go up (I seem to remember a realtor telling me that in 2004) CPI & PPI are flat (nevermind the fact that for the average person trying to put food on the table, gas in their car and heat & cool their home inflation is a reality right now, no worries flat screen TV prices are stable) and real estate is fairly priced (why do homes languish on the market?).
Hey everybody, quit your bitchin’ and go spend some money already!
Steve is right! Everything is kosher! Move along.
Ken – The conversation was about defaltion and the resulting interest rates adjustement. You are talking about inflation and it it continues then we will have higher rates.
I just don’t think it will…
Ken actually mortgage rates are extremely well correlated to the 10yr TNX, look at both just this last week.Any disengagement is a tendency for risk premium which has been increasing significantly lately. And the fed can not artificially keep rates anywhere they please truth is they follow the broader bond market to a very surprising degree although that is circular to an extent as bond traders follow the expectation of the fed. One of the rare times I am with Steve on this one.
“…mortgage rates are extremely well correlated to the 10yr TNX, look at both just this last week.Any disengagement is a tendency for risk premium which has been increasing significantly lately. And the fed can not artificially keep rates anywhere they please…”
So what you’re telling me is that the record low rates in 2004 correlated to the market and did not create a “risk premium”? Because, IMO, those rates, along with other factors to be sure, created the situation we have now which is banks failing and a pending $25B Fannie/Freddie bailout. That seems like a risk to me.
I’m only asking IB, educate me on this.
What about me? Can’t I educate you?
Educate yourself first
Oh Ken!!
Ken,
maybe we have a different definition of risk premium which first needs to be navigated. To me risk premium is the amount of premium necessitated to be added to something to compensate for risk, not the actual risk it creates.
So if TNX is 4% in a highly risky market I might want 2% risk premium and require 6% return. If I see risk as low or know I am not responsible for the risk then I might only want 1% and even assume it all as profit right away and only ask 5%. This is kind of what happened in 2003-04 when the TNX hit really low levels at the same time risk premiums collapsed so the normal margin of error banks needed compressed (hell we don’t own the loan so no risk to us, write as many as you can). Now risk premium has exploded even as rates went down as banks have to hold their own Jumbos they won;t even write them. Wells is asking 8.5% plus a point today. this is why people look at rates as a spread to risk free (treasuries) All those spreads have exploded but the market moves as a spread to the underlying TNX nonetheless. So now with expanding risk premiums if the TNX rises as it has drastically the past two weeks you will see rates rise across the board.
Hope that makes sense. If not ask what doesn’t and I will do my best to clarify.
Oh and if you believe that 25 bil number… I have a war in Iraq i can sell you for less than 50bil… best part is we will be seen as liberators… I have a very nefarious theory on this one… this is going to be really ugly.
Well said IB
gracias!
“that 25 bil number”
It’s supposedly a probability weighted average. So, some smart guy decided that there’s a 97.5% chance it will cost zero and a 2.5% chance it will cost $1T–wahlah–$25B estimated cost.
Of course those are made up probablities and costs, but that’s fundamentally how that $25B number was calculated.
IB,
Thanks for education. I guess were I was coming from is risk created. Which the Fed has to consider and, IMO, they didn’t or underestimated back when they bottomed rates out. I’m not going to tell you I foretold everything that is happening now but I remember thinking as far back as 2003 that I didn’t like where housing was going. To me, the Fed helped create that risk and then it was compounded when Fan & Fred had the green light to buy mortgage product that they normally stayed away from. Voila, housing bubble which led directly to where we’re at now. The Fed needs to try to manage risk such as that and if they thought of it in terms as you explained may I humbly say that they over thought it.
“… I have a very nefarious theory on this one…”
I’d love to hear it.
“Oh Ken!!”
Oh Steve!! Keep in mind what IB said, “One of the rare times I am with Steve…”
Not exactly a ringing endorsement of you.
Anon,
There was once a great taxi episode in which Louie was trying to sell Jims wealthy father something and he goes through this whole scene trying to pick a price which sounds best to make the sale… my bet is that is how the $25 bil came about. The CEO where I worked had an economist working for him once, he told him the result he wanted and then the econ guy made the parameters, of a very complicated multi variable model, fit the result. Then i would go apeshit every time. Nonetheless those numbers were always produced for the top guy.
“The Fed needs to try to manage risk such as that”
No, no the Fed does not need to try to manage such risk. That’s not the Fed’s job.
Fannie and Freddie shouldn’t have been allowed to do what they did, but that’s the fault of GWB and Congress, not the Fed.
Still, Greenspan should have kept his trap shut about how “great” ARMs were and on such related topics. But that’s just an example of Greenspan overstepping rather than related to something the Fed should be doing.
“he told him the result he wanted”
Yeah, probably. I bet they did still do a probability weighted analysis, they just used probabilties based on history rather than present reality (and then massaged the probabilities a little more). Hopefully it doesn’t turn out as badly as the rating of 2d lien ABS (and CDO-squared of same) did.
Ken,
Who created the risk and the feds responsibility is a whole different issue which we should talk about some time. I personally think it occured at a uch lower level.
My off the wall theory in our current land of everything I never thought could happen has been happening… I recently read it best in someone else’s words “I have never believed in the crazy ideas I read but I do take note of them and lately crazy seems to be batting 1,000”
My thought is that gov’t takes these housing mortgage contracts over into receivership, this may be unconstitutional but what hasn’t been the past few years, remember you can breach a contract by not paying your mortgage but that breach does not have to be called upon you. So you are title holder and unless that breach is enforced you will remain as such. So don’t foreclose on anyone and enforce breach and force the responsibilities of the borrower upon the borrower, remove extinguishing mortgage debt from bankruptcy since that law changes regularly enough anyway, accrue unpaid interest which is now due to uncle sam, raise penalties on non-payment of property tax and make them garnishable against wages to further encumber you to the property and there you have it. Feudalism back at it’s finest. Best part is the whole time gov’t tells you they are going to help the people and not foreclose on them, yahoo!!! yeah!!
Read Atlas shrugged this week…. it is almost funny…
and by title holder i mean holder of the mortgage.. my bad…
anon,
I have gotten by a long time more concerned with catastrophic risk as opposed to regressive probabilities. All that we need to be paying attention to here is catastrophic risk. It is only looking at past probabilities that got us to where we are. Housing has gone up for 50 years so there is no downside. Risk of defaulting has been 2% for years so let’s assume 2% going forward, gear up leverage 50 to 1 and neglect absolute downside.
Doing that as a risk manager will make for a very short career.
anon,
I swear the basis of the model was a 15% built in return. You knew the answer before it was run. It was amazing.
“No, no the Fed does not need to try to manage such risk. That’s not the Fed’s job.”
Anon, you can believe that all you want but the Fed attempts to manage risk to the economy every day by manipulating rates and the money supply. The risk the usually try to manage is near term (infaltion, deflation, recession etc) but they need to be thinking long term with their decisions also.
“by title holder i mean holder of the mortgage”
Nah, you got it right the first time. You’re suggesting that the Gov’t will be the holder of the mortgage, and elect to enforce non-foreclosure remedies. That won’t happen, for lots of reasons (mostly that Congress likes to be re-elected). What could happen is that laws are changed to make it probable FNMA/FMLC would do so on the mortgages they hold (including garnishing power) and also more likely that banks would also use non-foreclosure remedies (but excluding garnishment).
“Doing that as a risk manager will make for a very short career.”
Yeah, but do you think that any capable risk manager currently draws salary from the Fed?
And what good would it do to publicize the worst case scenario? As wrong as Phil Gramm was in general, he was right that the public psyche is making things worse right now–putting out there that a FNMA/FMLC bailout MIGHT cost $2T would be a bad idea–anyone who can do something to avoid the catastrophe can figure this out for themselves and everyone else is better off thinking that $25B is a genuine number.
IB–I quoted just to tie together–I’m sure you’re right about your former co-workers. I was refering to the calc to get $25B.
ken,
Too nice outside so last post and then I am going on the lake for a nice ride.
The fed is responsible for handling macro risks and probably blew it badly keeping rates so low but up until now they have not been chartered to control mortgage lending risks and that is out of their scope and has been maintained in the private sector. Truth is whether it is good or bad I have differing opinions but have moved more towards regulating since I don’t believe loans should be issued at less than 20% down pmt and with some kind of monthly percent of debt level as a floor. Of course when that is imposed the same people screaming about gov’t bailout for bad loans would be screaming bad loans aren’t being written because of racism.
Truth is this country is in big trouble, the populace is a bunch of whining self entitled fatties, and I am packing up and leaving.
“Anon, you can believe that all you want but the Fed attempts to manage risk to the economy every day by manipulating rates and the money supply. The risk the usually try to manage is near term (infaltion, deflation, recession etc) but they need to be thinking long term with their decisions also.”
I didn’t read “such risk” as you posted to mean “long term risk to the economy”. In the context of the post, I read it much more narrowly as risk that people would take advantage of the interest rate environment and cause a bubble. I’m not sure what you would have had the Fed do–an extended recession starting in 2002 might have caused worse long term consequences than what we face today.
Yeah, but do you think that any capable risk manager currently draws salary from the Fed?
Hilarious!! Great point!
As for allowing the people to know their catastrophic risk, it is a nice thing to know. Full disclosure is my way. Actually worst case is always where I start.
I would ask people during interviews a simple question on probability about rolling a die and picking a number and say for every dollar you bet you get 7 back if you are correct, do you play the game. The answer of course is yes. Expected return significantly exceeds expected probability.
Then i ask but you only get to roll once and it is for everything you own. Theoretically, from a mathematical perspective, the answer should still be yes but that is no longer the correct answer as there is now an 83.4% chance of you being wiped out despite the odds being in your favor.
“As for allowing the people to know their catastrophic risk, it is a nice thing to know. Full disclosure is my way. Actually worst case is always where I start.”
Sure, whenever there’s a decision to be made. What’s the decision point for your typical US citizen on the FNMA situation?
“…an extended recession starting in 2002 might have caused worse long term consequences than what we face today.”
Worse than failing banks, rampant foreclosures and govt bailouts? I can’t imagine a whole lot worse but anyhting is possible I guess.
I’m sure if they let things get worse in 2002 that it could have deepeded the recession and we could have seen a strong up tick in foreclosures but were not even in a recession now, techincally speaking, and foreclosures are skyrocketing. What happens if we can’t avoid a recession and layoffs start to rising sharply? That will extend this out a number of years.
I’m not suggesting they shouldn’t have done anything in 2002 but maybe just be more measured so the pendulum doesn’t swing to far in either direction.
To jump back to the initial subject of this thread and some of the sit on the fence, wait them out, yada, yada. In the South Loop if you want to wait, you better pack a lunch. Housing prices in any market are based as a whole on one major factor – Supply v. Demand. Go up into a tall non-lake view building in S.Loop and look around…all I see besides a bunch of new buidings is a lot of land waiting for someone else to build more new buildings. There’s your supply. Pretty much unlimited for the next couple decades. So unless oil is struck down there, it’s going to be a long, long time before demand meets the supply. Add all the mortgage mess and fence sitters and demand goes down even more… bad.
Now take Lincoln Park, Wicker Park, East Lakeview, etc. If you have a decent home, condo, whatever. You’d like to sell but you don’t HAVE to sell. You’re fine. Ya you have to take a 2-3% less than 2 years ago and yes it may take 3x’s as long to get a buyer. But you will. There’s a large supply yes, but it’s limited and for the most part, unique. Unlike the new construction in S.L. that is mostly just variations on the same tower, these established areas have property the varies quite a bit. So if you bought something that was a solid and wise buy (good examples of not wise buys-any garden unit/a 1000 sq ft 3 bed 1 bath, any, any unit on the EL) but if you bought a normal non-worst unit in the building, unit. You’ve kept it to date and or/improved it a little. You’re fine. And vise-versa on the buying side. When buying just ask yourself-If there is dropping demand-and increased supply- how will I fair? Who are will be my competition, normal folks or deep pocketed developers. You think your mad that the developers are not dropping prices-go talk to a unit owner in a new development who gets transferred and must sell and the developer keeps dropping their price to 10’s of thousands less than the poor guy trying to sell paid 2 years earlier…. that’s not pretty. Anyway, if you just think in terms of supply and demand you’ll be fine.
The truth in real estate is you make money when you buy it, not when you sell it. When you buy real estate you make two decisions: (1) Do I want to participate in real estate now? (2) What price do I pay? When you sell you most likely will not have control over when to sell let alone what the market is at the time. Hence, don’t get in if you can’t get a good price. Just a little pearl of wisdom. There is very little reason to buy right now since prices are continuing to decline and probably will through at least 2009.
http://www.chicagobusiness.com/cgi-bin/news.pl?id=30627
“Sales of new homes downtown are grinding to a halt, casting doubts over when the market for trendy condominiums and townhouses will begin to recover.
New-home sales plummeted 73% to a record-low 685 units during the first six months of this year, compared with 2,443 units in the first half of 2007, according to a report by Chicago-based residential consulting firm Appraisal Research Counselors. The dismal results would have been even worse without the proposed 150-story Chicago Spire, which accounted for more than half the total.”
Keep in mind that the article is refering to contracts and not closings. Here’s a recap of some of the downtown condo/TH contract numbers (excluding Spire) from the article:
201 = contracts in 1st Q 2008
126 = contracts in 2nd Q 2008 (-37%)
2,443 = total contracts 1st half 2007
327 = total contracts 1st half 2008 (-87%)
1,200 = total contracts 2008 (“estimate”)
3,258 = total contracts 1998 (“previous low recorded”)
9,528 = “units scheduled to be finished by the end of next year”
33% = “of those remain unsold”
3,144 = unsold units
Once again, keep in mind that these numbers are for contracts and not closings.
Current absorption of the unsold “units scheduled to be finished by the end of next year” based on 2nd Q contracts is 42 contracts per month, which indicates a 6+ year inventory. As long as none fall out of contract, that is.
notice DB and Heitman are comspicuously absent from these facts
The architects have stopped work on the Spire; would not be surprised to see this project die.
Jeff,
Nice try trying to lump in Wicker Park with Lincoln Park and East Lakeview, they’re not the same. No way in hell would I pay the same $/sf to live in WP vs those other areas. Newly ‘transitioned’ neighborhoods will be the first to drop.
Also Waterview Tower construction has stopped as well.
CLARIFICATION:
I posted this above, which was not an apples to apples comparison:
1,200 = total contracts 2008 (”estimate”)
3,258 = total contracts 1998 (”previous low recorded”)
The 2008 estimate includes the Spire. The following is a more apples to apples comparison based on the Spire representing 50% of the estimate. The Spire accounted for 52% in 1st H 2008 (358/685.)
600 = total contracts 2008 (”estimate”)
3,258 = total contracts 1998 (”previous low recorded”)
I don’t think this market is moving sideways with an 80% drop from the “previous low recorded.” AND THESE ARE JUST CONTRACTS.
Sorry SA, I conspicuously have a job. Maybe if you guys actually worked for a living instead of wasting all day on an internet message board, you’d be able to afford to live in any of these homes.
G, you are just talking about NEW CONSTRUCTION! Of course new construction sales are down, what does that have to do with the prices of currently completed units? Obviously there is going to be several years before lots of new buildings go to market, but that has nothing to do with existing homes.
Jeff makes a lot of good points. I think lumping the south loop in with the good neighborhoods it silly, the SL is clearly going to be a mess because it’s a crappy area. How many new buildings are going to be completed this year in SV, GC, LP and LV? There are a few in the GC like the Elysian and Walton on the Park. Pretty much everything in SV has been delivered at this time so there won’t be anything new there. LP and LV don’t have any new high rises completely this year either. Outside of the farther west part of River North and a few GC buildings, most of the stuff in the good areas has already been delivered. I’d like to see these numbers ex-SL.
D