A Lost Decade for Housing? Back to the 1990s for this Bank Owned 1-Bedroom: 1221 N. Dearborn
We chattered about this 1-bedroom duplex unit at 1221 N. Dearborn in the Gold Coast in February 2010.
See our prior chatter here.
It was bank owned and the price had already been reduced several times.
Yet it sat on the market.
It finally recently closed for just $11,900 above the 1998 purchase price.
The building is popular with renters because of its location and its rooftop indoor pool.
The media talks about a lost decade for stocks. But what about for housing?
Rosario Terracciano at Resurrecting Real Estate had the listing.
Unit 1001S: 1 bedroom, 1 bath
- Sold in April 1989 for $62,000
- Sold in June 1993 for $71,500
- Sold in November 1998 for $113,000
- Sold in November 2002 for $175,000
- Sold in July 2005 for $203,000
- Sold in July 2006 for $220,000
- Lis pendens filed in May 2008
- Bank owned in November 2009
- Originally listed in December 2009 for $174,900
- Reduced twice
- Was listed in February 2010 for $154,500
- Reduced
- Sold in July 2010 for $124,900
- Assessments of $350 a month (includes cable, pool, doorman)
- Taxes of $1601
- No central air- wall units
- No in-unit washer/dryer
- Rental parking for $175 to $250 a month
- Living room: 22×13
- Bedroom: 16×13
- Kitchen: 8×6
Eyesore of a building.
1) So the unit seems to be pretty dated and is probably beat up. Add in another discount for the fact that it was bank owned and that’s how you get 1998 pricing. But overall the city is back to 2002 pricing anyway.
2) At this price the assessments and taxes are about as much as the mortgage payment. It’s like renting.
3) In the last 6 months 3 out of 7 sales in the building were short sales or foreclosures
“In the last 6 months 3 out of 7 sales in the building were short sales or foreclosures.”
There’s no doubt distress sales have made up the bulk of the sales in this building recently. But these sales ARE the market. If this unit was such a great deal from the bank, it would have sold months ago but it didn’t.
In my opinion, the rest of the city may be at 2002 prices- but it’s the foreclosures which are telling the true tale and those prices are much lower than 2002. The banks are just getting to the “true” market much faster.
This is getting fun to watch. However, prices still have a huge bid-ask spread in many areas around the green zone. Look for more decreases come September, especially for 3 bedroom condos.
When you factor in inflation the current sales price is actually closer to the 1993 price (somewhere in the $110K range – 2010 dollars) than the 1998 price (~$150K – 2010 dollars).
One bedrooms really shouldn’t be condos, especially this unit.
Well, I was actually surprised that in June foreclosures were only a bit over 15% of the sales – and I think that includes short sales, since they are usually in default. While they definitely put pressure on pricing I don’t think they “are” the market. As soon as the bank is involved a property gets a stigma – some buyers and agents just avoid them. Not to mention that banks work really hard at not selling properties – not because they are strategizing but because they are incompetent. So short sales and foreclosures will go at a discount to the rest of the market.
Nevertheless, the market sucks right now (for sellers). There will be downward pressure on prices, regardless of what the Case Shiller index has been showing recently.
“This is getting fun to watch.”
its fun to watch for you. I on the other hand have to live with the fact that all i have done to improve my house and block will not have a monetary value.
“This is getting fun to watch.” – Ignorant statement: people are getting hurt, losing their life savings, etc. It is akin to a doctor salivating as he/she passes a terrible accident.
“Look for more decreases come September,”….. I think the market completely is dependent on the rest of the economy. If the rest of the economy really starts to pick up (decreased unemployment, stronger markets, etc.) you will see the housing market come back fast (people LOVE their homes). Also, remember that foreclosures/short sales only make up a VERY VERY small percentage of available inventory. While they are shocking and detrimental b/c of their psychological impact, they do NOT set the market price of housing.
This is a rental apartment and is priced as such
“Look for more decreases come September, especially for 3 bedroom condos.”
Why September and why 3-bedrooms? Odd statement. I think it’s the 2 bedroom condos that have flooded the market. Places with 3 legitimate bedrooms (i.e., not master + 2 tiny bedrooms that should be one) are not all that easy to find IMO.
“It is akin to a doctor salivating as he/she passes a terrible accident. ”
It’s the lawyers who do that.
Historically, I have bashed prices on here. However, there is definetly some value in the market place now and I don’t think this is particullarly a bad deal for somebody. Break it down this way:
Scenario 1) The purchaser is a mid-to late twenty something young professional or couple. In five years time if he/she/they are diligent they could pay this property off. This roll’s into scenario 2:
Scenario 2) People talk about prices coming lower, how much lower could this property go? 1 Bedrooms Rent in this building for around 1,300, if you “own” this property after taxes and assesments you will clear around $900, which is pretty close to an 8% ROI. Take into consideration that rents are not going to come down anytime soon and I think this makes this property a good deal.
People in the city continue to buy $40-$50K cars, but won’t throw there money into something that actually has value. Even if this property were to go down to a $100K valuation, if you own it in cash, so what, I will take the $10,000 Cash Flow that this spits of an annual basis any day of the week.
“Even if this property were to go down to a $100K valuation, if you own it in cash, so what, I will take the $10,000 Cash Flow that this spits of an annual basis any day of the week.”
The wildcards are the condition of the unit and the condition of the building. Fixing damage and paying special assessments can really erode your ROI.
“But overall the city is back to 2002 pricing anyway.”
In terms of transaction prices it would appear so. But my impression is that for the majority of listings, probably the vast majority, the list price is not close to (say within 5 percent of) the 2002 price, when the 2002 or so price is knowable. If they were, there would be a lot more activity.
Anon – Valid points. I don’t know much about this building. Yes it is older, but it seems like it is pretty popular from a rental standpoint, with those two things combined, I am assuming that a decent reserve has been built up, but obvioulsy something to check into.
With respect to the unit itself, how much does it really cost to fix up a 750 sq ft. 1 bedroom apt? Standard Carpet, Appliances, Paint, probably not a deal breaker.
“Also, remember that foreclosures/short sales only make up a VERY VERY small percentage of available inventory. While they are shocking and detrimental b/c of their psychological impact, they do NOT set the market price of housing.”
Clio,
yes when you look at chicagoland as a whole, but drill down and look by neighborhood. some of these hoods the foreclosed shortsales ARE setting the market.
my area is a huge example of that.
“But overall the city is back to 2002 pricing anyway.”
I have heard people say that, but I feel like I see a ton of places that are still asking at or above their previous sale prices. The prices of small multi-units seems utterly rediculous as well
Check out 3837 N GREENVIEW Ave, CHICAGO, IL 60613 as an example
“Check out 3837 N GREENVIEW Ave, CHICAGO, IL 60613 as an example”
If the rents are legit and repeatable and the maintenance is as up to date as the listing implies (doubtful, sure), that’s not really so ridiculous–it’s a 5.5 cap (net of taxes only). Not a good deal by any means, but not completely absurd, either–should be under $800k.
What was teh last sales price.
Does anyone know the owner occupancy % of this building? This factor also seems to be a reason for excessively dropping values in some buildings.
People who have lived through the other real estate depressions will tell you that the “doom-and-gloom” sentiment has always been prevalent. However, mark my words, in 3-5 years, we all will be amazed that prices have rebounded and, in 5-10 years we will be kicking ourselves for not buying in 2010. That being said, you have to be careful as to where you buy. Unestablished neighborhoods, “up and coming neighborhoods” are a little risky. However, you can’t hardly ever go wrong buying in a well established area. This building, though “ugly” and a bit dated, is in a very good location that WILL not go down in value over the long haul. Other ares (uptown, WP, Logan Square, etc.) that were just starting to become expensive in the late 2000s are a bit more risky.
Those used to be “up and coming neighborhoods” have been hit pretty hard. Uptown is below 2002 prices.
Apologies for the unrelated question but…..
Gary did you attend the Riverside auction or hear what it sold for?
Rando thoughts:
Wicker Park is NOT in the same boat as Uptown or Logan Square.
Wicker Park has been 100% gentrified for about 5 years and is firmly green zone.
Uptown and Logan are both at about 30%-50%.
The green zone overall is as nice as I have ever seen it.
I don’t feel like people here have really started to walk away like they have on the west coast. Every single person I know on the west coast that bought in the last 5 years has already walked away. It’s not like that here. Yet.
I get the feeling that 1 BRs in old buildings that need tons of work and face s. assessments are going to start going for 100K. Even then they will probably be a liability. I don’t know what the market for those units is going to be. College kids have 2x-3x the debt they did 15 years ago and they earn less than they did once they get out, that’s if they can even get a job at all. As was stated before, the chance of getting hit with a $25k s.assesment destroys this as a viable investment. The suckers that would normally be the market here are all broke. We took all their money already.
There are at least 50,000 office jobs in this city that will not exist in ten years due to offshoring. I fear we may face a second wave of urban declination. The first being the death of the blue collar worker, the second being the death of the white collar worker. Chicago, more than any city I can think of is extremely vulnerable in that regard…
I just don’t see the point of owning this place for anything other than as an investment property. It is a cheap rental unit.
“Chicago, more than any city I can think of is extremely vulnerable in that regard”
What’s your list of Chicago-specific white collar jobs that are especially susceptible to offshoring? With an emphasis on Loop-located jobs.
Worse than DC, LA, SF, maybe NYC, I can see, but worse than Dallas/Cleveland/Boston/Atlanta/Charlotte why, exactly?
The pontification in this thread is excellent
I say Chicago more than the Cle/Dallas/ATL/etc just because Chicago probably has more office jobs than those cities combined.
What kinds of jobs are going to go? Any tech/systems/operations job can and probably will be outsourced. Anyone at a large/mid-sized company is well aware that back/middle office operations make up the bulk of jobs at those companies.
It’s too easy and cheap *not* to move those jobs. Its only going to get easier and cheaper. I’m speaking as someone who just “helped” move a division of over 100 people offshore.
Let’s just say the cat’s out of the bag.
wages will catch up i.e. china recent need to up wages. it will then begin to slosh back and forth; but there will always be jobs that can’t be shipped anywhere. manufacturing/white collar can’t always chase lowest cost/labor areas as it will change more frequently.
IMO, this time is different. But your gut feelings are totally legit. Talking your book has nothing to do with it.
“People who have lived through the other real estate depressions will tell you that the “doom-and-gloom” sentiment has always been prevalent. However, mark my words, in 3-5 years, we all will be amazed that prices have rebounded and, in 5-10 years we will be kicking ourselves for not buying in 2010.”
“I say Chicago more than the Cle/Dallas/ATL/etc just because Chicago probably has more office jobs than those cities combined.”
But it’s not about aggregate number, it’s about %age. If Chicago loses 100,000 jobs, that’s X% of jobs, if Atlanta loses 2X% of its jobs, that’s still not 100k. Which city is worse off?
Besides, haven’t true “back office” jobs been migrating from Chicago (and other northern/eastern/Cali cities) to Dallas/Atlanta/other sun belt cities for *decades* b/c real estate, taxes and employees have been cheaper in the South?
neo, RE: Riverside,
No, we did not attend so we have no information. Sorry.
clio on July 29th, 2010 at 9:19 am said
However, you can’t hardly ever go wrong buying in a well established area.
This is not at all true. I bought s a studio in the Gold Coast in 2002, in a lovely building. It has been on the market for 23 months, and the price is 12-15% below what I paid for it in 2002.
But I cannot give it away. My investment was not a good one, as it turns out, and NO ONE would have said that 8 years ago.
“But I cannot give it away.”
Are you being literal at this point?
Studios have been hit harder than the rest of the market. We had this debate the other day. It seems to be the bulk of the foreclosures.
“IMO, this time is different. But your gut feelings are totally legit. Talking your book has nothing to do with it.”
I agree. What is the couple in their mid-thirties who bought a house for $500K that is not worth $350K going to do? Even if they put 20% down, they are still upside down in the thing. How can they now go buy that $750K house? They cant. Even if the $750K house came down to $500K, they still have to save another $100K and lets face it for generations people have relied on the sale of their previous house to fund the purchase of their next house. That cannot happen now. So either people become landlords or they don’t move. Not a great scenario. Either way allot more people (particullarly those coming out of College and in their mid-twenties) will be renting for much longer periods of time. That is why in the right building, in the right neighborhood, a one bedroom for $125K is a steal. Perhaps, RE prices won’t go up over the next 5-10 years, but I think the floor is in on rental prices and they can only go up from here.
“Studios have been hit harder than the rest of the market. We had this debate the other day. It seems to be the bulk of the foreclosures.”
I still say you’re looking at Realtytrac’s info too uncritically.
anon, I’m not really talking about offshoring the help desk/customer service/basic account servicing jobs. Yes, those went south (hate puns) years ago.
I’m talking about the jobs that we typically associate Big10/decent-liberal-arts-college grads with. Account managers/analysts/project managers and all the management teams that it takes to run those divisions are on the way out right now. They will not be here in five-ten years.
Sure, the former low cost center of Bangalore has been replaced by China, and yes it’s slightly more expensive than it was five years ago. But we can still get 8 to 10 offshore employees for the price of 1 here. And the scale, the scalability is truly something to behold. We are nowhere near capacity over there. We’re at like .5%.
Shareholders everywhere are going to *demand* we offshore as much as possible. The cost savings is much too powerful.
I wasn’t around then, but I imagine this is what it was like in the late 60’s and early 70’s when people said there was no way we could offshore all our manufacturing. We proved them wrong.
Commercial real estate is going to get slaughtered. I have no idea what is going to hold up residential prices. Yes, there will always be jobs for dynamic presenters, creative geniuses, and rain makers. But those people are like 1% of the workforce. There will also be many companies that outsourcing is not a viable option due to their size. The bulk of jobs will be gone though.
““This is getting fun to watch.” – Ignorant statement: people are getting hurt, losing their life savings, etc. It is akin to a doctor salivating as he/she passes a terrible accident. ”
Sorry Ms. Clio but I never took a hippocratic oath. And honestly who doesn’t like watching a terrible accident–have you ever seen how traffic slows down even after the lanes are cleared but the scene is still up due to rubbernecking?
Ignorant statement my arse–I never fell for the RE ponzi scheme during the heady bubble years. Those that did chose poorly.
“Yes, there will always be jobs for dynamic presenters, creative geniuses, and rain makers. But those people are like 1% of the workforce. There will also be many companies that outsourcing is not a viable option due to their size. The bulk of jobs will be gone though.”
If you’re right, then we’re mostly all f’d. Not just in Chicago, in the US generally.
ps:
I’m weary (not wary, as so many misspell; tired of that, too) of all the doom and gloom on the intertubez. If things get that bad, well, that’s for future me to muddle thru, not for me to ruin my life over now.
So go ahead and stock up on your (again, not anyone in particular) gold and ammo and spend your life in fear of what’s coming, you doom&gloomers–if it actually gets as bad as you expect, it will be a whole lot worse than you planned for.
I don’t really mean to spread the g&d. I just can’t let the cheerleaders remarks go unanswered.
“I’m weary (not wary, as so many misspell; tired of that, too) of all the doom and gloom on the intertubez. If things get that bad, well, that’s for future me to muddle thru, not for me to ruin my life over now.”
“I don’t really mean to spread the g&d. I just can’t let the cheerleaders remarks go unanswered.”
I don’t consider “real estate ain’t coming back for a decade” doom and gloom. The US economy could do *well* for the next decade, and that could remain true. Sub-4 cap rates aren’t sustainable or smart. And, even if RE recovers, thru inflation (simplest way to a RE recovery), *real* dollar returns are hardly certain.
Bob,
We all see 20/20 in hindsight. Almost no one buying in 2003 saw this coming. By 2005/2006 there were signs of a future crash.
Clio,
You will be better off waiting til next year to buy unless you find the right foreclosure. The banks are holding a lot of properties off the market but over the next year or so more properties should be available for reduced prices.
The loosening of the credit standards signaled a problem to many, they just didn’t have the voice of the main stream media. Zero interest rate loans started in 2003. Some people started getting worried then.
“We all see 20/20 in hindsight. Almost no one buying in 2003 saw this coming. By 2005/2006 there were signs of a future crash.”
Iirc I’ve showed ultra low down payment loans as far back and 2000. I think you needed good credit in 2000 but buy 03 all you needed was a FICO above 560.
“What kinds of jobs are going to go? Any tech/systems/operations job can and probably will be outsourced. Anyone at a large/mid-sized company is well aware that back/middle office operations make up the bulk of jobs at those companies.”
Did you just enroll for your Lake Forest MBA, still reading the textbook from 1998? You’re about a decade behind the curve. Outsourcing has peaked and in some cases reversed (e.g., call centers where service levels cratered).
Oh, guess what? Wages are growing too — about 2% on an annualized basis (seasonally adjusted):
http://www.bls.gov/news.release/eci.nr0.htm
What about CPI? 1.1% annualized. Wages are growing double the rate of inflation. How can that be?
http://www.bls.gov/news.release/cpi.nr0.htm
Bottom line: the most negative posters here are the ones that are MOST screwed if what they say comes true.
“And, even if RE recovers, thru inflation (simplest way to a RE recovery), *real* dollar returns are hardly certain.”
Yes, but when your liabilities are fixed (30 year mortgage) and your assets float, you don’t need real dollar returns to make out well. It is perhaps the best “trade” an average Joe can put on in an inflationary environment.
Not saying there were not signs, even by 2000 that this was not sustainable, but virtually no one saw this crash coming. Otherwise, no one would have bought since 2000 to own long-term.
I admit that I should not have bought my 2006 purchase at the height of the market but my 2003 purchase while not the best is still not the worst, being worth slightly more than I paid for it based upon comparable sale (townhome with less finishes) 2 weeks ago for $250K. I paid $215K for mine in 2003. Not a great investment but certainly better than the one I bought in 2006 at the height of the market.
If I were to do it again, I would have just kept 2003 property and bought foreclosure this year or next instead of buying 4-flat in 2006. As it stands, I am still looking to buy foreclosure later this year or next but have less cash and debt/income to do so. So instead of buying $600K in property I am more limited to $350K, based upon my income and 2 existing mortgages (I have 805 FICO and good income as commercial banker). Not the worst scenario. Still, I wish I hadn’t bought in 2006, though I do value the knowledge I have gained as a result.
Homedelete,
Didn’t you recently buy a place near Irving or am I mixing you up with someone else on this board? Do you think you bought it for a good price or that prices are headed lower? You are certainly better off if you did for buying this year than 2006 like me.
“Yes, but when your liabilities are fixed (30 year mortgage) and your assets float, you don’t need real dollar returns to make out well. It is perhaps the best “trade” an average Joe can put on in an inflationary environment.”
Agree completely.
But if you want to actually “make money” on real estate, you need real $ returns. But not losing money on your home is a really good longterm trade for averageJoe.
You generalize when you assume that because “some” people bought post-2000 (NOT ME!) nobody saw the signs. You’re wrong. Lots of people saw the signs and stayed on the sidelines or paid down their pre-bubble loans. I have real estate, all bought prior to 1995, all paid off, and never thought of any of it as an investment. I had no urge to participate in trading real estate during the bubble.
“Not saying there were not signs, even by 2000 that this was not sustainable, but virtually no one saw this crash coming. Otherwise, no one would have bought since 2000 to own long-term.”
One thing that really bothers me about real estate junkies is that they fundamentally miss the concept of depreciation. Existing single family home prices don’t take this into account either.
So I buy a SFH in 2003 for 500k. Say that land is worth $200k and the building is worth 300k. I put 30k in sprucing it up (capital improvement) and fix anything that absolutely breaks (not capital improvement, just maintenance). When I go to sell in 2010, I get 515k and I feel like I lost 15k? Why? Because I put in 30k right?
WRONG.
As cash investor/landlords will tell you that any building will depreciate (30-40 years), and improvements even faster (7-10 years). Assuming the most aggressive (longest lived) depreciation schedules, economically you have a whopping $63k of depreciation (6 years @ 40 SL on the home and @ 10 SL on the improvements). Cost basis therefore is 200k for land (doesn’t depreciate, even with Chicago gang violence), 300k for building, 30k for improvements less $63k depreciation. Voila — $467k and you sell for $515k. You actually appreciated by $48k which is a healthy return on assets and more importantly, equity.
What is really funny is the same people often opt to buy an expensive Range Rover and are ok when they lose 60% in 3 years.
By the way, most people think “improvement” is adding their choice of blinds, flooring, cosmetic fixtures, etc.
That is pretty well devalued by your next buyer. Think mechanicals, roofs, expansions and additions, windows, doors, siding. That is what counts. Anything else is like buying clothes. Might as well expense as incurred.
Very few people expected the crash to be as severe as it turned out to be. Plenty of people saw problems, but no one saw armageddon. Most couldn’t see the entire picture.
Most people who escaped unharmed I think did so out of luck. Most who didn’t buy, didn’t because they weren’t in a position to at the time. Most who sold were just lucky they decided to sell when they did, not that they knew we were at the top. I see a lot of armchair quarterbacking. Just like how folks who didn’t get burned in the dot com bust usually didn’t because they didn’t have any money to invest in the first place, not because they were brilliant.
I knew subprime was bad and there was definitely a bubble. However, I didn’t see the depth of subprime because it wasn’t something I dealt with on a daily basis. I knew it was there and the loans were bad,, but I honestly had no idea of the depth that the loans were being used along with the pay option arms in some markets (a la CA, FL, AZ, NV).
“Assuming the most aggressive (longest lived) depreciation schedules, economically you have a whopping $63k of depreciation (6 years @ 40 SL on the home and @ 10 SL on the improvements). Cost basis therefore is 200k for land (doesn’t depreciate, even with Chicago gang violence), 300k for building, 30k for improvements less $63k depreciation. Voila — $467k and you sell for $515k. You actually appreciated by $48k which is a healthy return on assets and more importantly, equity.”
I’m wholly prepared to be schooled on this, but I just don’t understand. I don’t see how you can ignore the fact that you get less on your property than you put in (after accounting for time value of money, other costs, value of living there, etc.) in a complete economic assessment.
I’ll confess I generally tune out discussions of depreciation, viewing as an accounting convention unrelated to real economic variables (I know it affects taxes, which are real to the private party and affect actions; I also know it has real effects on business behavior for reasons unrelated to taxes; I just tune those out).
“I’m wholly prepared to be schooled on this, but I just don’t understand. I don’t see how you can ignore the fact that you get less on your property than you put in (after accounting for time value of money, other costs, value of living there, etc.) in a complete economic assessment.”
Depends on whether you consider your home solely as an economic vehicle. If you are looking at it *purely* as an investment, then you should consider the difference b/t capital and current expenses. Current expenses are sunk costs, capital expenses can be (expected to be) recovered, subject to loss of useful value.
JMM,
did you know you can capitalize closing costs over 10 years?
yep guess what i do for a living 🙂
“If you are looking at it *purely* as an investment, then you should consider the difference b/t capital and current expenses. Current expenses are sunk costs, capital expenses can be (expected to be) recovered, subject to loss of useful value.”
Ok, but to take JMM’s example (which I realize is not nec yours), suppose I don’t consider the value I get from living in or rent out the house. If I put in $500K upfront and then another $30K in expenses, and I get out $515K, that’s not a great investment, no matter what depreciation is. Maybe that’s offset by the value I get from living in or renting it out, but then I have to consider those benefits (and associated costs), and I still don’t see how depreciation factors into that.
I can see how it matters whether expenditures are expense or capital for valuing your holdings when you are still holding them. I’m not sure it matters once it’s sold. You’ve put in what you’ve put in and gotten out what you’ve gotten out, and whether you viewed an expenditure as expense/capital doesn’t really matter to how well you’ve made out. Similarly, once you have sold, what does it matter to assessing your investment whether you think there had been depreciation?
Also, a nit: capital investments may generate value in the future, but they are still a sunk cost aren’t they?
JMM:
Generally, most people won’t pay for structural/capital type improvements.
You can have a house that isn’t updated with the latest granite, SS, etc but could be solid as a rock with mechanicals, electrical, roof, etc but folks will overlook that house for the Home Depot special where none of the underlying stucture has been really updated.
that’s a great post Russ. I recently saw this book at a thrift store, bought it for $1, and read it hoping to glean some insight in the rearview mirror. http://amzn.to/9bCclH This book was published in 1999, so there were a few people out there who knew.
Russ wrote: “Most people who escaped unharmed I think did so out of luck. Most who didn’t buy, didn’t because they weren’t in a position to at the time. Most who sold were just lucky they decided to sell when they did, not that they knew we were at the top. I see a lot of armchair quarterbacking. Just like how folks who didn’t get burned in the dot com bust usually didn’t because they didn’t have any money to invest in the first place, not because they were brilliant.”
are we in a Gold bubble now?
“Maybe that’s offset by the value I get from living in or renting it out, but then I have to consider those benefits (and associated costs), and I still don’t see how depreciation factors into that.”
Of course it is part of the cost of living there. Just like milage on a car. You house wears out from the elements, just over a longer time period. Roof, siding, mechanicals, etc. The cash costs associated with this stuff is real it just comes in waves — people complain about it because they forget the house is depreciating little by little every day, but the reality is it was always there. When you pay the cost, you are typically just gettinge even if you are replacing. You add value when you improve.
“You can have a house that isn’t updated with the latest granite, SS, etc but could be solid as a rock with mechanicals, electrical, roof, etc but folks will overlook that house for the Home Depot special where none of the underlying stucture has been really updated.”
For mid and higher end homes, I don’t think this is true at all, especially in the era of green building. Maybe at the low end. Otherwise, high end homebuilders wouldn’t public insulation R values in their listings. In any event, that is a very cynical view. Mangan wouldn’t sell a home if this were the case.
“Also, a nit: capital investments may generate value in the future, but they are still a sunk cost aren’t they?”
I guess I wasn’t sticking with a strict definition; I think of a sunk cost as the cost of acquiring something that has, at best, nominal value on resale of the item. Which doesn’t really work for home improvements.
Tomaso,
You got lucky, nothing more by not buying after 2000. You said you stopped buying in 1995. Had you bought property in 1995-2000, it would most likely still be worth more than you paid.
You may be a smart guy and know real estate, but timing in everything. Your timing was good. My timing and many others was not so good.
I am now 32 years old and much wiser than when I bought my first place at 25 and 2nd place at 28 but it is still better to be lucky than good, especially in real estate.
You are also much older obviously if you have not bought real estate in 15 years. I was still in high school in 1995 and in no position to be buying real estate, much less before then.
Did you see this crash coming in 1995 as well? I doubt it. You may have just had your fill for buying and managing property and decided to stop buying. Had you bought property after 1995 and sold it before 2005 you would have made alot of money. Some people were able to do this but made money because they had to sell due to downsizing or moving to take a job. Very few people (except of course the geniuses on this board) had the foresight to buy and sell between 1995 and 2005 without taking on additional properties that are now worth less than they paid for them.
Those who bought in 2000 and sold by 2006 made good money. Even those with property bought in 2000 are mostly break-even or ahead even in Summer 2010.
“Of course it is part of the cost of living there.”
My first instinct is to say, yes you could certainly say it’s part of cost of living there, but that cost is reflected in how much you get for the house when you sell it. That tells you how much your property has appreciated or depreciated in the time you’ve live there (after accounting for how much you’ve put in).
But I think that’s going to get us down a circular path. My larger point is I don’t see how you can assess the quality of the investment without considering the benefits and costs from living there. E.g., if there was massive depreciation (to take an extreme example, your house burned down w/o being covered by insurance), and you treated that as depreciation, your calculation would still say that’s a good investment.
If I tally up all the costs I’ve incurred and the gains (including when I sell the house at the end), doesn’t that tell my how good an investment my house was? I can do all of that without worrying about depreciation schedules. And I don’t see how I can assess the investment w/o including the costs and benefits from living there.
It seems arbitrary to apply a depreciation schedule and say that that portion of it is the cost of living there and to then say it’s a good investment because it has appreciated relative to that depreciation schedule.
“Cost basis therefore is 200k for land (doesn’t depreciate, even with Chicago gang violence), 300k for building, 30k for improvements less $63k depreciation”
So why JMM, would anyone buy a condo then? All you ‘own’ is a depreciating structure within a depreciating structure; you don’t actually own the non-depreciating land it sits on. That’s alaways been an issue with me when I see high priced condos: when did a fraction become more valued than the whole?
“E.g., if there was massive depreciation (to take an extreme example, your house burned down w/o being covered by insurance), and you treated that as depreciation”
That isn’t depreciation. That is a loss. Very different. But if you routinely trash your place, yes, that costs money.
“you don’t actually own the non-depreciating land it sits on”
That is not correct as a matter of fact. Each condo owner has a percentage common element ownership of the land. Who else would own the land if it wasn’t owned by the unit owners? Condo associations don’t actually own anything, they administer.
jay, you own a percentage of a larger piece of land + percentage of the common areas
I expect we will continue to have people posting “told you so” on here.
Total cliche but even a broken clock is right 2 times a day.
Same is true for real estate forecasters. I have no doubt there are books written in the 1990s forecasting future declines in real estate.
It is like the guy who correctly predicated 1987 earthquake in San Francisco. After that, he became an “expert” and predicted earthquake along New Madrid fault in Missouri. When they had 5.8 quake, everyone freaked out and we even had earthquake drills in Southeast Indiana. For an earthquake drill, everyone goes outside or is told to stand under door if you can’t get out. Such a joke.
Of course, this great earthquake never happened and this “expert” was discredited.
Experts are usually wrong more times than they are right and so we take everything they say with a grain of salt.
Nostradamus was so vague in his predictions that in hindsight we can point to things he may have predicted.
Just because some obscure economist wrote a book 15 years ago predicting the downturn in RE does not mean most people read the book or agreed with their conclusions.
If you give me 100 predictions, some of them are bound to come to pass. Most will not, depending on how out there they are.
Virtually no one (absent a few people on this board) saw a massive decline in real estate coming 15 years in advance.
“correctly predicated 1987 earthquake in San Francisco”
1989.
“Virtually no one (absent a few people on this board) saw a massive decline in real estate coming 15 years in advance.”
*everyone* who pays attention can predict some future bubble and collapse. No issue with that–it’s the timing and the magnitude that are important. Just like the New Madrid fault–sometime in the future there will be a large quake on the fault–“the future” is both tomorrow and 100,000 years from now and “large” is both 6.2 and 9.6; both “sometime in the next 100,000 years there will be a quake b/t 6.2 and 9.6 magnitude” is as useful as “sometime in the future real estate values will go down for at least several months in a row”–in other words, not very.
Well you can probably tell I’m not a condo owner, but I find it interesting the notion of land remaining constant of sorts. I assumed that each owner had a piece of the land, but what I don’t *get* is why people would find it alarming that this apartment for example would be worth much more than it is now… a depreciating unit within a depreciating unit (repairs within repairs). Ok, I give you that they own what, a 200th of the land, but apartments like this one are only as market strong as the weakest unit(s); they have no total land ownership value like a sfh has. And that’s fine for a place/price like this, as it serves it’s function as a roof over the owners head. But, when I see condos in the $700k plus range, and there are many out there, I’m thrown for a loop.
Take 410 Webster, chatted here, that sold for $700k and change last year. Say the new owner lets the fall into disrepair and it depreciates rapidly. They still own the *entire* piece of land it sits on… and that land has real value regardless of the depreciating structure. I don’t know, maybe too many tales here from my depression era grandparents to actually own the land on which your place sits.
Yes depreciation makes things worth less in the future. New capital improvements offset that. People forget about depreciation and just focus on “what I spent since I bought it” forgetting that they are running to stand still in part.
700k condos are like 100k cars. Brand value, impression value, etc. They are worth what someone is willing to pay. The roof over head utility is a small part of the puzzle.
Anon,
You are correct about 1989, not 1987. Ridiculous having us do earthquake drills in middle school in Indiana.
“What is the couple in their mid-thirties who bought a house for $500K that is not worth $350K going to do? Even if they put 20% down, they are still upside down in the thing. How can they now go buy that $750K house? They cant. Even if the $750K house came down to $500K, they still have to save another $100K and lets face it for generations people have relied on the sale of their previous house to fund the purchase of their next house.”
but this begs the question; “why does their next house have to be a $750k house in the first place?” or this one: “why cant they sit tight another few years?” I have to admit that I NEVER EVER thought to live in any home for anything less than 7 years at the very least. Moving sucks, and I’m basically a “put down some roots, I hate change” kinda gal. This obsession with upsizing all the time (every 3-5 years) is ridiculous, wasteful and frankly, kind of stupid, IMO.
Humboldt1, my parents were born during the depression and raised me to be afraid of credit. I use it as a convenience but would never think of taking on a large amount of debt. When I saw the bubble forming, I could have traded up, hoping to make some quick profits, but I had a lot to lose and wasn’t interested in gambling. When I was 25 I was still saving up for my first piece of real estate. I rented for 10 years after graduating college before I was ready to buy, and put 20% down. A lot of people have come to think of credit as a good thing, a chance to live the life they think they deserve. I always thought of it as a necessary evil to be avoided if possible.
“You got lucky, nothing more by not buying after 2000. You said you stopped buying in 1995. Had you bought property in 1995-2000, it would most likely still be worth more than you paid.”
when everyone else is usuing credit to live the dream you’re competing against them on price despite using cold hard cash.
The idea of depreciating your primary residence is sort of ridiculous. Unless you can do it on your taxes, which iirc, from my 2002 federal tax law class, you cannot, and any comparsion to the same is an entiirely academic exercise.
You’re right. When I was buying real estate credit standards were much tighter. Reckless lenders and irresponsible borrowers, encouraged by the fed, changed that. And the repeal of Glass-Steagall by our incompetent or corrupt legislature made it possible for the banksters to come up with new ways to exploit weaknesses and extract wealth. Of course we can’t leave out the cheerleaders in main stream media and elsewhere, who still think its all about confidence, nothing to do with credit.
“when everyone else is usuing credit to live the dream you’re competing against them on price despite using cold hard cash.”
Oh, and who could forget the prime enablers of the crisis, the ratings agencies, who continue to sell their ratings to the highest bidder.
Tomaso,
Our life experiences differ in that my grandparents grew up during the depression. My parents are excellent savers and my father is fairly risk averse, with no debt (500k business line he does not use, 300k heloc that is unused). He would actually be ahead due to interest arbitrage on his heloc (prime less 100bps) but he doesn’t want to deal with debt.
My brother and I have realized that debt can be good if used properly. My grandfather figured this out in the 1950s and 1960s as he leveraged existing farmland to buy more (my dad is against this and puts 40 percent down from cash on land purchases, no loans now).
I goofed buying in 2006 but I will more than make up for it with my next purchases. Time will tell if I am successful.
Good luck with that. Take your time, the bargains will just get better.
“I goofed buying in 2006 but I will more than make up for it with my next purchases. Time will tell if I am successful.”
Tomaso,
I also put 20 percent down on both of my purchases. My timing was just not the best, particularly on the 2006 purchase and I was naïve to how dishonest the RE and mortgage industries are.
Thanks for the kind words. I will be more patient on my next purchase, with thorough inspection by my contractor and thorough knowledge of the areas I am looking to buy into, having lived in Humboldt Park for several years and intimately knowing the streets.
When will you be looking to buy? I have looked at several places but they all went to bank insiders.
When there are very positive cash flows that provide income.
“When will you be looking to buy? I have looked at several places but they all went to bank insiders.”
I almost bought a place at 1449 springfield with 2600 rents. Taxes are 300 and place went for 204k to insider at B of A. This has a real nice cashflow with existing tenants.
Tomaso,
I may also look at miami in a few years as prices continue to fall.
Long-term I plan to buy more farmland in Indiana by my family but land is too costly (6-8k per acre).
Anyone know how these ‘insider’ deals work? How does a place go from distress/foreclosure to purchased by a b of a insider for
Significantly less than market rate? Two friends of mine looked for months and literally found nothing close to this cap rate.
hey humbolt, that sucks they should not have the ability to purchase properties from their employer as it is unethical; similar to contests where employees&their families are not eligible.
Does the fact that the property is not located near a train hurt the value?
Being far from the train absolutely hurts values.
I work for a bank and have considered getting a list of our properties but most of the RE group people are gone. I may still try to get ahold of a list of stuff for sale, but have only been at the bank 1 year, coming from another bank, so I just have not explored this option. The system is definitely rigged in favor of insiders. That building that sold for $204K was worth at least $250K based on cashflows, probably more.
The bank and the new owner screwed up though and let good tenants leave and let these tenants live rent-free for 1 year because of the foreclosure. Instead of getting rents which would have more than covered the lost loan payments they pushed a short sale and then ultimately foreclosure and sold to an insider. The bank lost out too. They should have just collected their $2600/mth rents on $405K mortgage and paid management company a fee to manage it. They screwed up in this regard.
Looks like these keep dropping in value. I just saw that Penthouse 12, a 1/1 with a renovated kitchen sold for $90,000.
Wow.
One bedrooms are getting killed! In this market people don’t want to buy a home they can only live in for a few years and not many people see a 1 bedroom condo as a long-term living situation.
Yeah- someone just asked on here but it got lost in the thread about buying one of the foreclosed one bedrooms in that high rise on Clark in Lincoln Park where all the investors are being foreclosed on. He is currently renting one of the units.
And all I could think of is “why?”
Who would buy a smallish one bedroom now???
“Who would buy a smallish one bedroom now???”
Not someone that is going to live in it, but investors for sure. We’ve been looking at buying a 1 bedroom to rent out, but every time they get cheap enough they disappear in a heartbeat or there are multiple offers.
We may have finally found one, but I only think it has sat long enough because it was overpriced originally and definitely does not show well. However, if you are going to rent the place, it is amazing what a fresh coat of paint and appliances can do…..