Market Conditions in Streeterville: “Prices Won’t Decline”
The Chicago Tribune highlights Streeterville in its Friday Home section. (It does a different neighborhood or city every week.)
Prices in the neighborhood:
In the northern tier, with its wide array of older stock from classic to modernist, condos of all sizes sold for an average of $801,875 in the second quarter.
In the mid-section, where high-rises built from the 1960s through 1990s proliferate, the average sale price was $661,230 and in the southern tier $661,091, according to Jameson Real Estate LLC, a broker and developer.
In south Streeterville since 2000, the pace of growth has accelerated with about 3,000 new housing units completed. Other recent additions include an AMC cinema, Lucky Strike Lanes bowling, a Dominick’s supermarket, Walgreens and Fox & Obel Market Cafe.
Average asking prices in seven towers under construction range from $1,568 a square foot at the Spire to $454 a square foot at 160 E. Illinois St., according to Appraisal Research Counselors, housing consultants.
Developers are apparently not worried about the conditions of the housing market:
Although first quarter sales of 158 new and existing units fell about 20 percent from 2005, prices won’t decline, said Daniel McLean, president of MCL Cos..
“We’re here for the long term; there’s no reason to hurry,” said the developer, who has sold about two-thirds of his Park View condominiums to suburbanites seeking a second home.
Streeterville: Where tourists and homeowners mingle [Chicago Tribune, Aug 8, 2008]
It is funny how most on this board talk about how terrible the market is while us in the industry just continue on like nothing has changed. Housing prices in general are not dropping in Chicago’s best neighborhoods. Some are making money and some are losing. Do your research, buy smart, and you will be just fine…
“while us in the industry just continue on like nothing has changed.”
hahaha. that is the funniest thing I’ve read in a while.
I agree with Steve to a degree. There are good deals to be had in this market.
But dont get misguided by the words Daniel Mclean. He is in the business of selling condos, so he will do whatever it takes to pump the media with positive information. Why would he ever come out and tell the truth about the market?
It is true that real estate prices have yet to take a huge hit in certain areas, but it is only a matter of time before the owners of the condos in these areas can not bear to swallow the assessments and mortgage and dump them on the market. After all, a good portion of what fueled the real estate price growth in Chicago was speculative investments.
Real Estate is not like the Stock Market. It will take years before we realize any crash, if any. Real Estate is also Microeconomic, so as certain buildings and markets falter, others stay strong. So it is possible that one building holds its value, while the other across the street crashes.
I am not trying to gain any clients on this board so I am telling the truth. For the past year I have said that areas like the s. loop, logan square, West Loop, and other over built, newly created neighborhoods would decline. I also have said 100 times that LP, LV, GC, SV, Old Town would hold strong if you purchased intelligently.
I think Stevo has been right on from the start…
Just yesterday, I was looking for units in the foreclosure process in 60611; I was shocked at the number of lis pendens in what I thought were good, stable buildings (including some that were converted to condos years ago). Sooner or later, that will affect the market…
What if Stevo is right and prices do hold their value in some areas? Some things in life do defy logic and rational thinking. The only part I don’t understand is ‘buying smart’ I’m not quite sure what that means or how that it defined.
I’ve been in several pre construction developments in the gold coast lately and it appears as though most of the potential flippers have already walked away from their units. I think some of the newer buildings coming on line for the end of 2009 and 2010 will be more stable than the ones that had to deliver this or last year. But all of these buildings are “working” with people to get the deal done.
“The only part I don’t understand is ‘buying smart’”
HD, don’t you get it? If you can sell for more than you paid, you “bought smart”, if you can’t, it’s because YOU, the buyer, made a bad decision and “bought dumb”. It’s a post hoc analysis.
“The only part I don’t understand is ‘buying smart’ I’m not quite sure what that means or how that it defined.”
You have a lot to learn before entering the market HomeDelete. For Simplicity, let’s simply define “Buying Smart” as NOT buying a 2 bedroom, 2 bath on S. State street.
Does this help or do you need me to go into detail.
Anon & HD should rent long-term.
Anyone else want to chime in on this?
Developers cannot decrease prices or their earlier customers will revolt. Developers often add extras such as parking or better interior finishes to increase sales in slow periods or do not complete parts of projects such as landscaping, health club, etc. Prices on new developments are usually set unless the developer goes bankrupt. Developers must answer to the banks that lent the money as per the pro forma. Price drops will be more apparent in older buildings (without the expected amenities) that rose in value due to the new construction. Bargains can be had at any time, but the number of bargains will increase in a year. Cash is king in this environment.
I am renting long term and buying up cheap foreclosed condos/homes across the chicagoland area that cashflow. There is nothing wrong with renting, especially in this market!
AD – You just completely contradicted yourself. If their are plenty of properties out their that cash-flow why would you be renting. Technically if a property cash flows then the renter is over paying.
Hey Homedelete – another example of smart buying!
AD – I am not disagreeing with you. There are a lot of properties out their that pay for themselves. The question is why would you not be living in one and taking advantage of the tax savings? Again, the rent you are paying might be cash flowing your landlord…
Steve, note the description of the properties I was buying “CHEAP”. The properties that I am buying are located in the suburbs and the fringe areas of Chicago. They are not properties that I would want to live in due to area and amenities. I have tried buying in areas that I like to live in Chicago, but I have found in EVERY situation that renting blows buying out of the water in every single instance once you take into consideration the amenities and real estate taxes. I run real estate financial analysis all day every day. Thats my job. Show me a property in Streeterville that you could cashflow? Prove me wrong Steve.
I agree with AD here. Current selling prices would not allow ANY property in a nice neighborhood to cash-flow as a rental.
I agree with both sides on this… a unique unit in a good building in a good neighborhood will be fine and may even be smart to buy for tax reasons and huge tax advantages of not having to pay capital gains on the first 250 or 500(if you are married) if you are planning on living there for a number of years. You have to make a lot of money on other investments to make up for not having to give the government 40%… because if you are buying one of these you are probably in the highest tac bracket anyway. There are also other things that go into a buy vs rent decision… like wanting something that is your own that you can change how you want to change it and feel at home. With that said, on a purely cash flow basis, and especially in the short term, a lot of these units are not even close to a rent vs buy break even. If it is a cooker cutter unit in just an ok building some of these prices are outrageous even in the best neighborhoods. Nonetheless… we could argue all day… no one really knows… that’s why there is a market. At least we can maybe agree on that?
It’s interesting that MCL is saying prices won’t drop, and yet people who bought in their 505 N McClurg building are unable to even get out at where they purchased 2+ years ago.
PS I spoke to someone from MCL and they said under no circumstances will they drop their prices at 505 N McClurg. We will see.
In the long run rationality always prevails. I don’t believe that the strong neighborhoods can stay elevated forever. Sooner or later people realize that they can cross the street and save a bit of money. Right now the fringe areas and the lower priced properties are being pulled down but sooner or later that problem has to creep into the nicer neighborhoods. You can’t maintain disparities forever.
HI, if you are in the highest tax bracket–or even the second-highest–you do not get the advantage of the tax credit for interest paid. It phases out. Surprisingly quickly. The tax advantage is realized for middle income tax payers, and thus for mid-level homes. Low income buyers with mortgages don’t itemize; high income buyers with mortgages don’t get the benefit.
AD – In a perfect market you should not be able to cash flow a property the day you buy it. If you were, investors would buy up everything right? There is a theoretical 20% premium on buying over breakeven cash flow from renting. This premium is rationalized by tax savings and leveraged appreciation gains from owning the property.
So in a perfect market there is no such thing as finding a property that cash flows on day 1. However, look to the short sale and bank owned properties and they more then cash flow. Do you want me to find you a couple?
Try 345 N LaSalle. There is a 2 bed, 2 bath on a high floor for $319k. It rents for $2,600 per month
Steve – that’s not true. If you take a value-added approach to investing you can find properties which, with minor cosmetic work, can get you cash flow positive immediately. That’s what smarter RE developers and investors do. They look for unrealized potential.
And there is no such thing as a perfect market, of any type of asset class.
Investor – I agree but I was referring to move in ready units. Finding properties (as is) is difficult to cash flow. A good investor can make the necessary changes and find the intrinsic value of a property to create cash flows.
” In a perfect market you should not be able to cash flow a property the day you buy it. If you were, investors would buy up everything right?”
Absolutely wrong. If people have an expectation of a neighborhood decline – say no infrastructure improvements, no other developments in the pipeline, increase in crime, retail leaving the area – this will be factored into the sales price today even though it won’t affect rent today (renters aren’t long on the property, all they care about is the condition of the neighborhood today).
In such a situation the seller would be wise to sell to someone who can rent it with cash flow positive today, since likely the rents and property values will decline in the near future.
I’m sorry, but you gave among the worst advice I have read in a long time. CLEARLY you have not done serious investing.
I know that I “rent smart” and bank account thinks so too!
Investor – We are again talking about 2 different things. We were posting about Streeterville, Gold Coast, and Lincoln Park. You are referring to a slum lord situation. Positive cash flows do not exist in nice neighborhoods. If you think they do please show me one?
Steve –
Nice try to qualify, but the principle still holds.
When purchasing a rental investment property you can’t simply look at cash flow today, you MUST have a view on the future direction of rent levels in the area. Even the best of neighborhoods have rents that drop.
“Try 345 N LaSalle. There is a 2 bed, 2 bath on a high floor for $319k. It rents for $2,600 per month”
Not quite. Assessments are $580/month and taxes are $7500. I figure a 5.2% return on assets which would not cash flow.
“Positive cash flows do not exist in nice neighborhoods.”
Then the market would dicate that there are no rentals in nice neighborhoods. Landlord wouldn’t own in nice areas because they would consistently lose money…and goes into business, especially as a landlord, to lose money?
“I lose money on every rental but I make up for it with volume.”
Incidentally, my argument cuts both ways.
Given you have the funds available, it can make sense to buy a rental property that is even deeply cash flow negative. This if the investor expects a spike in rents.
Homedelte – Take a class..
“Although first quarter sales of 158 new and existing units fell about 20 percent from 2005, prices won’t decline, said Daniel McLean, president of MCL Cos..”
Yep, Demand is falling, supply increasing and credit harder to obtain, but prices won’t fall, since real estate works off a ‘totally’ new economic paradigm.
On another note, there were posters here arguing that oil prices were based in fundamentals and demand driven. What happened? Did the demand collapse 25% in a month?
The degree by which a commodity falls with a decrease in demand is not linear. It has to do with elasticity of demand and supply. In the short run demand and supply for oil are fairly inelastic.
Hey sartre, I know you’re being sarcastic, but it is true that part of the slip in oil price is partly due to the decrease in marginal demand. It’s also partly due to some traders/funds deciding that oil had diverged too much from gold (i.e., too far from 10:1).
So, maybe everyone was partly right!
Gary, my point exactly. So a 700% run up in oil prices since 2000 seems a tad overdone. As dollar strengthens (and it will) and hedge funds unwind we will see more. Things don’t get more expensive during deflation (and we are seeing massive deflation, specific sectors not withstanding)
Anon,
of course worlwide demand has increased since 2000. But the increase would justify approx ~50/bbl add to that dollar weakness since 2000 and I would think 65-70/bbl.
HD–See, I was right. Stevo makes an unsupported statement and when challenged resorts to insults. His “smart” v. “not smart” analysis is all post hoc.
345 N LaSalle is The Sterling, i.e. Foreclosure Central. Although the prices appear cheap, I’d argue that there is huge uncertainty as to what the actual costs will be. How much will assessments have to increase to cover the shortfall from all the foreclosed units? Will important maintenance be sacrificed due to lack of money? You may run the numbers and find the gamble to be worth taking, but it would be a huge mistake to not factor this in.
DD,
I agree with the reasons behind what is holding developer pricing stable. However, eventually some developers will be forced with two choices: sell the remaining units deeply discounted or go insolvent. They developers know they lose their reputation if they deeply discount units and would make potential buyers leery of buying into their projects in the future. However the developers also have a fiduciary duty to their creditors to try whatever means necessary to to try to repay them.
So I think as some start to near financial distress they will have two options: go insolvent immediately or try to defer insolvency by cutting prices (and hurting their reputation).
Sartre,
But I do think the price changes were caused by demand changes in addition to dollar depreciation. There is no other explanation. The fact of the matter is that the rest of the world is starting to buy their share of the resources. This is just the beginning.
“However the developers also have a fiduciary duty to their creditors to try whatever means necessary to to try to repay them.”
Not quite. And even to the extent they do, creditors rarely seek to enforce their rights unless there is clear evidence of fraud or self-dealing.
sartre:
I don’t disagree on the substance. But (assumed future) marginal demand did play a significant role in the run-up, if nothing else as a justification for staying long thru a doubling in price.
“On another note, there were posters here arguing that oil prices were based in fundamentals and demand driven. What happened? Did the demand collapse 25% in a month?”
Oil is demand driven. Demand did not collapse 25% but is did decline substantially. Also remember demand did not increase 300% over the past year either. Oil got ahead of itself but will increase over the next 5 years.
Kenworthy, I understand that in upper tax brackets the interest deduction gets phased out quickly… I am referring primarily to the capital gains tax break when you sell which is a much larger benefit than any other break.
Also, I don’t know which of you are in the trading world or not… probably a lot considering how many posts this site gets (we are maybe the only ones with the time to post this much)… but any person intimately involved in these energy markets knows that they are largely controlled by large hedge funds these days. Fundamentals have very little to do with the market anymore… especially on a shorter time horizon (i.e. these last couple of weeks) These guys are pushing the market lower and blowing other funds out of their positions ($2.5 billion dollar loss over the last couple of weeks by just one fund in Nat Gas) When they get their fills where they want they will run it back up until they blow more people out… it is how it works now. The biggest hedge funds are getting more and more powerful at the expense of the banks, the government (with all these bailouts), and the smaller hedge funds. Over the long term no one fund can control it, but with easier and easier access to the markets further out the curves and with the ability to buy up and store any physical product they might get hung with, these funds are redefining ‘long term.’ When it stops working they blow out… but every day up to that day they can control the market more and more. That is what is driving these changes… any other news is just an excuse they use to get into or out of their positions (exactly why the energy markets often do the opposite of what the fundamental news would suggest, they are blowing the shorter term out). So the point is of arguing demand numbers doesn’t matter and is trivial at best to explaining the $30 sell off over the last couple of weeks.
HI,
At the end of the day I doubt even the big hedge funds can buy up and take delivery and store any physical product they might get stuck with. I remember reading a few years about how Morgan Stanley in the past was trying to get involved in tankers but never heard much more than that. Probably the same predictable result when finance guys try to get involved in tangible industries and goods they really aren’t experienced in: disaster.
They don’t usually get stuck with much, they damage is already done… yes, there is opportunity around the rolls of these contracts… and absolutely, there is no doubt this leads to disaster eventually… If the government was serious about curbing the volatility they would regulate the hedge funds more… the problem is other countries already have exchanges set up that if the government tries to regulate too much the volume will move to another exchange in another country virtually overnight.
Don’t know about 5 years but short term watch oil go down a lot more as dollar strengthens. Inflation will be the least of our problems and that includes all asset classes (real estate, commodities, gold…). Money is running out of the system at a much faster rate than its creation (bailouts notwithstanding).
Unless there is a worldwide depression, long-term oil has nowhere to go but up. Demand from China and India is ever increasing. China creates in excess of 1 million jobs a month, and there is a growing middle class. Currently the mentality in China is to save… save… save. The youth of China is adopting the American mindset of consuming, everyone wants a car. The average chinese consumes 2 barrels of oil per year, while the typical american consumes 44 barrels. India is in the process of building a car for $3,000.00 for the masses.
Why do you think the great oil man T. Boone Pickens is promoting wind technology….. long term he sees the writing on the wall.
Bob:
I agree with your analysis on developers, Developers are in a difficult position now. I suspect some will turn existing projects to rentals or even rent out remaining units that remain unsold.
If the developer doesn’t sell the units, they can’t repay the construction loans. The bank foreclosures, takes possession and dumps them on the REO market.
homedelete, which bank has taken possession of a complete building or project? 6 north Michigan is an example of a project that a bank took over from the developer, but it took years to arrive at the point it is at now. Individual units versus a complete project are very different.
dvalsko,
there is a price point beyond which an asset price doesn’t make sense no matter how essential it is. It held true for real estate and holds true for oil. Do you think chinese and indians will consume at the same pace if 40% subsidies were removed?
You don’t need a depression to unwind leveraged speculative bets, a single guy screaming fire is enough.
Leverage can be a b*tch on the way down, ask the flippers in Miami.
Every step down the housing abyss seems to convince more and more people that the bottom is in. Last week’s Case/Shiller Home Price report, which showed that real estate prices have now returned to 2004 levels, is the latest piece of such “good” news. In fact in a new national survey by real estate website Zillow found that 62 percent of U.S. homeowners believe that their home is worth as much or more than it was a year ago. Three-quarters of those surveyed expected that the value of their homes would rise or at least stay the same between now and early 2009. Talk about a field of dreams!
However, given the horrific fundamentals of the market, I would expect that before the market finds a real bottom, another four years of price increases will be similarly erased; leaving prices at 2000 levels or lower. Although this prognosis may seem dire, it is nonetheless reasonable when you consider the current supply/demand dynamics.
Despite the sentimental hope that homes are worth what they cost to build, or what the last buyer paid, in reality they are determined simply by supply and demand. In this case the supply of homes on the market, and the number and motivation of potential home buyers.
First supply: In 2008 there are more vacant and “for sale” homes on the market than there have ever been. In the last few years, despite signs of a coming real estate bust, the nation’s largest home builders kept building. As a result, hundreds of thousands of unwanted homes were added to the market. These homes, combined with the existing homes that underwater mortgage holders are desperate to sell, add up to unprecedented supply. Inventory at the current sales pace is approaching one year.
The demand side is even worse. In real estate, a buyer’s expectations for future price gains and their ability to obtain a mortgage (with as little money down as possible) largely determines demand. It is telling that the price increase optimism of current home owners does not extend to current home buyers. Also, with lending standards finally being tightened, buyers do not have access to the cash to bid up prices. Many are taking advantage of a still attractive rental market to sit on the sidelines.
These dynamics are actually much worse than what were in place in the summer of 2000 when the home price boom was still in its opening innings. All of the factors that were in place to push home prices up to unsustainable levels (unlimited lending, massive speculation, widespread belief in the indestructibility of home prices) are all gone. Prices will continue to fall until all the gains sparked by these forces have been erased.
The reckless optimism displayed by the Fed and current homeowners has proven extremely resilient. But sooner or later reality must intrude. Once the wake up call sounds, the economic effects will be severe. Once homeowners realize that their equity is gone, and not likely to return, what incentive will many have to continue making burdensome mortgage payments? With a new wave of option ARMs about to reset, this Christmas it will be the mail, not the bells, that will be doing most of the jingling.
It takes years for a commercial foreclosure like you said. I don’t know any specific development in foreclosure but I know will probably be a few in the pipeline. Banks could careless whether the bk a developer or ruin their reputation. Banks are only so patient before they attempt to repossess their security interests.
What is the price point? The world is addicted to oil everything we buy is tied is some way to this resource. There is no short term fix to this problem. I agree that short term there is speculation in the oil market and the rise was too rapid, but you can forget about $60 a barrel old. My company works is southeast asia and on my visits I see first hand what is occuring in China. The country is creating millionaires at an unpredented rate, the middle class is rapidly increasing. China is becoming a country of consumers and they will be competing for oil, steel, food, etc. This is not speculation but supply and demand.
That was me making the comment, sorry about the name mistype 🙂
No problem Valasko, we will both be here and watching 🙂 Good Luck!
‘suburbanites seeking a second home’
This phrase should set off alarm bells. The most expensive luxury good has to be second homes. It doesn’t take an economist to figure out what the first things cut back on are in a recession. Daniel’s target market is evaporating.
When I sold my condo (year ago), it was bought by a suburban couple for their college going kids. I figured their monthly would work out to atleast 25% higher than a dorm room and comparable condos in that building are now going for 10% less. (so they have already taken approx 40 k hit).
Since their own kids had only couple of years of college left, the long term (meaning 4-5 year, since thats long term now a days….) plan was to flip or rent to other college kids. Sweet Jeebus!
My 2 cents… I had 2 properties to get rid of in Streeterville this year, what I noticed is if you had the right view in the right building it held up well (in this market flat or slightly higher is great-but means you bled monthly). Anything facing the wrong way.. not so good. There has definitely been more weakening lately and things like 80-10-10 just disappeared about a week ago which along with the coming weather change i don’t think will be very good.
Fannie & Freddie will continue to pull back in the market. This article notes that interest rates are likely to be higher by year end due to surging defaults regardless of what moves the fed makes.
Also Fannie will stop buying Alt-A loans entirely by years end (Freddie can’t be far behind).
http://online.wsj.com/article/SB121818529773923803.html?mod=yahoo_hs&ru=yahoo
The funny money loans seem to be becoming history. Now we just have to wait for the crap thats out there to shake itself out.
The shake out can’t come soon enough.
Pete S. – You sound just like me! Great post. The fundamentals that drove the housing bubble are gone gone gone….and aren’t returning, period. This thing has a ways to go before it all shakes out…. FDIC insurance limits are something every prudent person with cash should understand.
“The shake out can’t come soon enough.”
Why is that, do you want this downturn to get significantly worse? Wouldn’t an extended sideways period be better than a collapse? Plus, it would give you time to save up a down payment to buy that studio in Uptown you can’t currently afford.
D
“Wouldn’t an extended sideways period be better than a collapse?”
First of all, this is a collapse but the kool-aid has blinded yoru ability to recognize it as such.
Secondly, high home prices combined with loose lending has caused this country so much harm. The quicker we as a nation can get people into homes they can actually afford the better off we’ll be in the long run. The invisible hand will eventually price homes at a point where buying no longer a financial perilous proposition. If you think an extended sideways period is somehow better than an extended downturn – then you must be directly involved in the industry.
Stop drinking the kool-aid and find some other way to earn a living. RE is toast and only the strongest will survive this downturn – and from the look of things – that ain’t you, Deaconblue.
Harper College has a great nursing assistants program – you can change bedpans for a living. The boomers are getting older and they’re not buying second homes because they’re gonna be moving into nursing homes.
re: “which bank has taken possession of a complete building or project?”
The first lender doesn’t often get stuck, but Mezz Lenders often have to take over–Lehman took over the last 30% or so of Riverbend, and got stuck with all of CityFront Plaza. There are lots of other examples of that.
those who want to read about the mortgage mess from a perspective the MSM won’t touch should take a look here. It’s our government that allowed Freddie and Fannie to do what they have, all in the name of “diversity” and encouraging “affordable housing” which is code for more diversity, to swell the voter roles?
http://cribchatter.com/?p=4950
PS I also wonder if we’ll see upside-down condo development projects go “deed in lieu” instead of foreclosure?
Corus Bank is public, and 75% of their loans are for condo development. If one were to review their SEC filings in detail, one might find out what’s happening in market vis-a-vis borrowers and construction lenders.
oops sorry, meant this link to article about Freddie and Fannie: http://www.vdare.com/sailer/080810_loans.htm