Case-Shiller: Chicago Prices down 9.3% from Apr 2007
The S&P/Case-Shiller Home Price Index for April was released this morning. Prices in the top-20 metro areas were down 15.3% from April 2007.
Chicago saw less of a drop. From the Tribune:
Most of the 20 metro areas posted annual declines, though Chicago managed a slight gain to 150.44, from 150.33. However, Chicago prices are down 9.3 percent from April 2007, according to the index.
The top-10 city index fell 16.3%- the largest in 20 years.
And of course the newest Case-Shiller was released today: Chicago saw the 1st month-over month increase since area declines started back in July of 2007.
Are we at bottom? It will take a couple more months of data to know for sure but activity has picked up.
Let the doom and gloom begin. Who is 1st with their spin on how this is not good news for Chicago? This data (for Chicago) is positive compared to March’s data.
Anyone disagree?
Wow, activity picks up in Chicago the month the worst Winter in 10+ years thaws out, have they scheduled the parade yet?
…
How’d I do?
John
Average at best JKD!
I don’t know if I would call a 0.07% increase month over month good news. You probably have 5%-points or more noise on such data, so only really big jumps and long-term trends have any meaning. Let’s check back in 6 months before thinking about even chilling the champagne bottle…
March was down 10% YOY. April was down 9.3% YOY.
That is still a negative.
Any support for the claim that “activity has picked up?”
What are the futures for Chicago trading at?
Well G – We already knew prices were down YOY from previous reports. What the report suggests is the decline stabilized in April after 9 months of consecutive declines. I did say now we have to wait until we see May & June before starting the celebration, but it is a step in the right direction.
Will you agree the bottom is in if we see May & June come in above April?
G – I will have my 2nd q data a couple of days after June 30th. The data I collect shows direct supply and demand in several neighborhoods.
Dead cat bounce. Nothing to see here folks, keep moving along.
Homedelete – Ignore the data and listen to a guy renting a stuido? That is how to make money…
Like most cities Chicago housing prices grew well above trend for many years. That has to be corrected sooner or later and we’re not done correcting yet.
The housing bear in me is humbled with this number. One data point does not make a trend however this can be seen as nothing but encouraging news for the non-bears.
Thanks Bob – I agree 100%
Sounds like the typical time of year when people who have to move, move, and buy places.
We are still in the same boat we were in, either wages need to increase, or prices need to come down. You’ve dried up the capitol pool, next you have to dry up the extra inventory and reconcile with the forclosures.
anecdotal: I know two people who recently bought 2 flats, they were excited since they hadnt seen two flats, in North Cneter / lincoln square in the 500K range for years. The problem. at 585K, 20% down, 6.5% and 1200 month per unit, its still, and will now always be a money loser that not only costs per month, but wont ever see any capitol appreciation
Single family repeat sales only. This does not include condos or new homes. It also says nothing about volume of sales. Seems to me we are at a bottom 🙂 (Those consumer confidence numbers and richmond fed surveys were so encouraging…)
North Center is one of those areas that was heavily developed over the past 5 years right? Check the appreciation levels in the area and if they were more than 5 – 6% per year it is in need of a correction.
“Homedelete – Ignore the data and listen to a guy renting a stuido? That is how to make money…”
For the 30th fricken time I don’t live in a studio.
With the way the market is, maybe you can move into your Lexus! That way you can skip on the mortgage and you are always one step ahead of the repo man. The car title lenders won’t be able to track you down either. With homes prices dropping like a rock and no clients to drive around – you are soon to be in a world of hurt, financially speaking, of course. We know you’re feeling the pain right now because sales are down over 30% since ’05 by your own admission.
I don’t think someone understands YOY decreases. Here they are for Chicago since the Case-Shiller YOY went negative.
May 2007 165.68 -0.56%
June 2007 165.94 -0.69%
July 2007 166.13 -0.86%
August 2007 165.77 -1.32%
September 2007 164.42 -2.48%
October 2007 163.12 -3.24%
November 2007 161.61 -3.91%
December 2007 160.03 -4.55%
January 2008 156.42 -6.63%
February 2008 153.29 -8.48%
March 2008 150.33 -10.00%
April 2008 150.44 -9.30%
We should be seeing our first compounded YOY decrease for May.
Regardless of the state of the housing market, people are more likely to go house hunting in May than in February. Perhaps this is the explaination. Besides, one month does not a trend make.
Look at the price decline of any stock that has suffered a severe downturn. It’s never a straight line from the top to the bottom of the chart. There are always false bounces along the way.
Here are the last trades for CME Chicago CS futures:
August 2008 = 148
November 2008 = 140
February 2009 = 137
Obviously a (tiny) month to month increase is relatively better news for the bulls than the precipitous month to month decreases we have seen recently (which have been larger than the largest increases on the way up).
But I would make almost nothing out of a single monthly number. Even during the “boom” there were a number of months that were flat or declining, followed by months that were increased.
Frankly, the root causes are deep enough it will take a couple of years to sort out. Don’t forget, even flat prices means you are losing money in real terms. I’d just as soon things sorted themselves out as I’d like to buy. But I’m not going to do it when there is the prospect of an immediate 10-20 percent haircut.
Hope springs eternal, eh guys? I saw a guy walking a dog in that field of dog poop (can’t really call it a park) between the Vetro and the river this morning. The sales team was on him like Jack Baur and CTU on a foreign exchange student. I think it was the first sign of life they saw in the last 9 months and they got a little over-excited.
Winter was really bad here as you all know. A tiny fraction of a percent increase in month-over-month prices does not register with me at all. I supposed IF I was invested in real estate here (literally or through my employment) and IF I was terrified of the worst, and IF I was holding my breath for a long time, then I would breath a small sigh of relief at this number. Continued declines without any bounce at all out of this Winter would spell absolute disaster. But I think I would be fooling myself in that case.
Capitulating buyers and sellers come and go in waves and prices should move the same way. One month is far too short a time frame. Overall the median price/income ratios and price/rent ratios are FAR above historical averages for Chicago, that is the bottom line for where we are headed long term. It will be corrected by higher incomes/rents and/or lower prices, that’s it. Show me some wage inflation or show me lower prices, there hasn’t been anything even remotely close to enough of either as of yet.
John
Apply a 5% return on housing since 1987 (54) and you get 150.4 for 2008. Is that high or low? Your opinion will help you determine if housing is a good investment going forward.
I’d like to buy too and I can easily afford to buy today. But I choose not to because I would be overpaying and the prospect of a 10 to 20% haircut is too great. I along with much of America is choosing to wait.
I would encourage anyone in the real estate industry (including my BIL who was just laid off his residental real estate construction job – his employer gathered all its employees into the main office about 3 weeks ago and told them that they were firing everyone, closing the business, and moving on to other careers. They said it was the worst year in the 30 years they’ve been in business) to find a new line of work until this mess sorts itself out, which is going to be at least a few years but probably more. Health care, education and retail are the three fastest growing areas.
The market may be having a breather from the last spike of ARM resets. The link to the ARM resets graph provided by homedelete indicates a new round is coming, that will probably affect higher priced properties due to the mix of ARM resets. Lincoln Park, etc. may not be as sheltered as some thought.
DD – That’s scary…
boring…wake me up when it hits 125
“Apply a 5% return on housing since 1987 (54) and you get 150.4 for 2008. Is that high or low? Your opinion will help you determine if housing is a good investment going forward.”
NSA (not seasonally adjusted) CPI was 3.2% over that same period. Is there an assumption that you should earn a real rate of return on your house?
Being long housing I am happy to see some activity but I have to believe this is the eye of the Hurricane. Nationally everything looks horrible, employment trends, lending requirements, discretionary spending, stock market retesting bottom which I doubt it holds, and worst of all is that almost every bank in this country is insolvent. If we didn’t pick up this month it would have been a trainwreck. I think that unfortunately in a few months we should be feeling those winds of the next phase of this. Kinda feels like that first bounce of the NASDAQ back in ’01 before it really hit the skids.
Steve i like having a positive outlook but not about to raise the pom poms yet by any means.
SA – If a particular area has seen an increase in demand then you should see an increased return over inflation. Do you think the CPI is an accurate measure of expenses in our daily lives? Do you think Chicago has seen increased or decreased demand over the past 15 years? Now Detroit has seen decreased demand and prices have come down to 1999 levels. Would you say Detroit’s market is a great investment because it appreciated below CPI? Would you say Chicago is a bad investment because prices have come up at a faster pace than CPI? Your view is way to general as housing is localized.
Just my thoughts…
““Apply a 5% return on housing since 1987 (54) and you get 150.4 for 2008. Is that high or low? Your opinion will help you determine if housing is a good investment going forward.””
And apply a 4% RoR and you get 123.05. Using the 3.2% CPI (understating real inflation), you get 104.63. So an overshoot on the downside might get to 105 (2008 prices), but IF things stabilize somewhat, somewhere in the 120s should be a reliable floor. Probably about 15% to go.
Anon – Please comment on my messgae to SA. Using you calculation Detroit’s market should be very attractive to purchase in. How come it is not?
Oh please. Wake up guys.
The C/S increase was marginal at best and ONLY fueled by a 9.3% price drop. Every forecast I’ve seen moving forward predicts a further Chicago (urban) price drop of 4.7% moving into next year. Compound these two drops alone and you’re looking at a 15% price drop over only a 24 month period. And still at such price cuts, there remain a record backlog of inventory.
Now look forward at lending. The Fed will absolutely have to begin raising rates after the election if oil doesn’t begin to ease. The Reserve has made it very clear, they will defend the dollar’s value and with that attempt to get a lid on energy prices. Yes, mortgage rates are based on the ten year note, but still the psychology in lending will be an anticipation of higher interest rates moving forward.
So, the perfect storm rains on. This market has not corrected yet. Developers still view these price drops as temporary and are either waiting it out or capitalizing our resultant hot rental market. It’s a temporary shelter at best. Until lenders begin to ease on the down payments and developers begin to price realistically, this is our sad status quo for the foreseeable future I’m afraid.
How’s that for optimism?
Does the CPI reflect the cost of building a house? Lumber, copper, ect? Just checking your opinion?
I bet if you ask a builder they will tell you it does not. How does that change your calculations.
What are your opinions on real costs to build and changes in real demand and supply? You can’t slap the cpi number on the entire country and expect to find FMV. It does not work that way…
It doesn’t work on hope, either.
Your way either…
Steve,
I think you are getting carried away on this one. I don’t think that is what he meant. I think he was just asking philosophically if you believe housing is a return generating asset (or place to live) in the first place. If yes then you can make assumptions about risk/reward and place it on an SML curve against other assets. Secondly from experience asset values and cost often disengage for very long periods. Oil costs $20 to pull out and is $140 now. Housing cost much less to build than what it recently sold for, now we might see less. The cost of an asset does not set a ceiling or bottom, markets are much more multidimensional than that.
Now off to enjoy Chicago’s great lake on my bike. Too bad the weather can’t be like this all year!
Let’s take a swing at dealing with the seasonality in the C-S data. How does this April’s month-to-month increase compare with years past?
The C-S index has been reported since 1987, which gives us 22 data points:
Year AprilMoM
1987 0.0015
1988 0.0119
1989 0.0107
1990 0.0109
1991 0.0065
1992 -0.0073
1993 0.0022
1994 0.0019
1995 0.0012
1996 0.0104
1997 0.0024
1998 0.0014
1999 0.0134
2000 0.0123
2001 0.0114
2002 0.0111
2003 0.0062
2004 0.0085
2005 0.0094
2006 0.0042
2007 -0.0070
2008 0.0007
The 2008 number (7 bps, basis points) is the 3rd worst in the index (beaten only by 1992 and 2007), and is growing at half of the mid-1990s rate (12-24 bps for 1993-5 and 1997-8).
2008 is also far below the average (63bps) or median (56bps) growth for April over March. (Standard deviation is 60bps, so you could argue that this is a 17th percentile result.)
So, while we are seeing slight growth (March’s $400K is now worth $400,280), we would expect that only about 1/6 or 1/7 of years would see growth this bad in April.
JanetG,
I am curious to what you mean by “capitalizing our resultant hot rental market?” Last data I saw for downtown was not good (4th Q 2007.)
Kevin, nice catch. Just another confirmation that the spring bounce in fact didn’t.
Looking at historical data emphasizes how anomalous the recent increases have been. Average annual growth from the start of the Case Shiller number in Jan 1987 to Jan 2000 was 4.9 percent annual. Growth from Jan 2000 to Jan 2006 was 8.5 percent annual, or cumulatively 23 percent higher over the period than if growth had been at the historical 4.9 percent.
The Jan 1987 start point may be anomalously low. You get a 30+ percentage point overinflation in housing prices if you take say the 1990-2000 period as the historical average.
One can play around with numbers further, but if you think history is a guide, you would have 20-35 percent bubble in housing prices in Chicago at the peak. They’ve come down 10 percent and would have another 10-25 percent to go.
You also have to credit that there should be growth at historical rates at present, so if it takes two more years to resolve, then nominal prices in 2010 should be 0-15 percent lower than current.
I don’t pretend there’s any great precision in any of this, but these are the guidelines I have in mind.
I don’t think anybody is arguing a bounce is afoot here. Just that the bleeding seems to have stopped for one month, this is what this data point indicates. Given in previous months the index was losing ~1% on average, a stabilization is significant if this turns into a trend. I was not expecting this result given the trendline.
A lot of the comments here are spot on, namely the negative ones by JanetG, DZ, and Haywood. Looking at any particular month’s data and making bets on it is a foolish game. The key things to look at are the over all price trend (clearly down), the direction of the (local) economy/ (national) inflation, and (most importantly) housing data. Well, the housing data is not good with sales very low and inventory still ridiculous.
What is scary is that there are a ton of sellers that are waiting things out (and will DEFINITELY need to sell or will be foreclosed on if prices drop more) but potentially not enough buyers that are waiting things out to buy up the current inventory and the potential inflow of new inventory.
There is some hope with this data, but like everyone else is saying many more months of data (including price, inventory, etc.) will be needed first before we can be clear that we’re out of the woods!
I am still curious if I should be buying up Detroit’s market because it has under performed the CPI? I have the car gassed up waiting on your repsonse.
Wow – lot of the comments on this board require an economics or finance degree to formulate a coherent reply. For me, the numbers help explain what I see around me everyday. It’s nice to have the case-shiller to quantify the drops. But it’s not necessary to get the sense that the market is in a near freefall.
“I don’t think anybody is arguing a bounce is afoot here.”
I think you meant to write:
“I don’t think anybody (other than Stevo) is arguing a bounce is afoot here.”
“Anon – Please comment on my messgae to SA. Using you calculation Detroit’s market should be very attractive to purchase in. How come it is not?”
Here’s my comment–Strawman. I’m not interested in fighting the strawman. You are right that you need to adjust for local variations, but you are wrong that Chicago-marketwide housing values should double every 14 years, too. Finally, as you note over and over, what’s been selling is the good stuff when priced reasonably–that will affect the CS number as the good stuff will hold its pricing better (as EVERYONE recognizes) than the oceans of dreck.
DZ is correct. I come to the same conclusion. I have the data graphed here:
http://blog.lucidrealty.com/2008/04/25/the-truth-about-chicago-area-housing-prices/
You will note that Shiller determined that in the long run house prices basically just keep up with inflation. What we have seen in the last few years was clearly anomalous.
Also, futures markets are the best predictors of the future and according to G’s data we can look forward to another 9% decline by February. If you don’t believe that you should buy the February futures and make some money.
You know if we didn’t have stevo then we’d all be preaching to the choir. I appreciate the differenting points of views, even if they’re from a jerkoff.
Obviously this is a seasonility phenomenon, and I’m surprised you’re playing up such a tiny increase WHICH IS NOT STATISTICALLY SIGNIFICANT.
Let’s see where things turn this fall.
Realtors in January: Buy now because we’re at bottom!
Realtors in February: Buy now because we’re at bottom!
Realtors in March: Buy now because we’re at bottom!
Realtors in April: Buy now because we’re at bottom!
Realtors in May: Buy now because we’re at bottom!
Realtors in June: Buy now because we’re at bottom!
Anyone see a pattern?
“Does the CPI reflect the cost of building a house? Lumber, copper, ect? Just checking your opinion?
I bet if you ask a builder they will tell you it does not. How does that change your calculations.”
Yeah, I know it’s a strawman but work is slow this afternoon…
First of all, lumber, by FAR the largest material cost in residential construction, just passed across my screen at 25410 (CME contract). This is back down to a price first reached in June of 1991. So anyone complaining about lumber costs doesn’t have a clue what they are talking about. The high print in the last 5 years was in May of 2004, at 46400. LUMBER PRICES HAVE COLLAPSED!
Copper prices are much higher than they have been but you are still talking about a small fraction of construction costs compared to lumber. Land prices and labor (fat margins for the subs included) are the biggest reasons for increases in new home construction costs, as well as the MASSIVE increase in contractor margins that went along with the residential construction bubble. Bottom line, costs are only too high if the builder paid too much for the land during the craze and he doesn’t want to give up the fat margins he was making for a few years there.
Anyhow, my main point is this… houses are wasting assets, they should go DOWN in vaule every year, not up. And certainly not at the rate of inflation. Land is an asset that one would expect to go up roughly with inflation but only after adjusting (as you suggest) for changes in supply/demand for a given location. The more specific the location, the less price changes will correlate with overall inflation and the more supply/demand changes rule the value. Obviously Detroit is a specific and unique location with factors that supercede the national economy.
So take your 1987 value and break out land/structure proportions. Inflate ‘land value’ at the national inflation rate and adjust for any factors that deviate from the nation averages (population growth much faster/slower, local GDP calculation faster/slower, maybe use tax receipt data). Then depreciate the ‘structure’ on a 30-50 year basis adjustind for maintenance and improvements. If a house is well maintained it should, at best, mimic the inflation in ‘true’ construction costs (not the construction costs that will make up for the builder paying way too much for the land and peak market profit margins (not to mention all the subs living in McMansions themselves and driving brand new $40k trucks every two years)).
You can do all this and I would gamble, for the Chicago area, inflation at 3.2% is pretty fair. Personally I am not interested in this math because it is not necessary, there is a much easier way.
You can just look at the median home price/median income ratio, as well as the home price/rent ratio as I mentioned earlier. They will revert to their means. Anyone claiming they won’t is making an outrageous* claim and it is incumbent upon them to provide the evidence and arguments to support such a claim. Not the other way around. Hey, anything is possible, I don’t know the future, but big claims require big evidence, that’s all.
*[The median greater-Chicago-area home was never priced at more than 3.4 times the median greater-Chicago-area income between 1980-2000, never (it went up and down quite a bit in this time between 2.4 and 3.4 times). At the end of 2006 it was priced at 4.9 times (sorry, I don’t have 2007 handy). It is outrageous to claim this number is permanently higher, show me the evidence.]
John
Steve,
Your low IQ and cheerleading are both very annoying. Give it a rest, enjoy the down cycle that is normal to a free market.
anyone checked bankrate for mortgage rates lately? exactly the same as they were an year ago (30 yr fixed– 6.30%). This is inspite of massive rate cutting from fed. Who thinks that the rates here have further downside? anyone? and if rates are heading up, what does that do to prices? anyone?
Also check out the option arm reset calendar for next year, if anyone thinks this credit crisis thingy is over they need to turn of cnbc cheerleaders and do some own research.
Thanks to Calculated Risk…
http://bp3.blogger.com/_pMscxxELHEg/SGEvq-VRRXI/AAAAAAAACMQ/HMwTAKlcLzg/s1600-h/HarvardMedianRatio.jpg
See you in the 3-3.5 range in a few years…
John
I’m not exactly sure what this number means. I’m taking the next 2 to 3 years to save for a decent (20%) down payment. I’m hoping that the market will still be kind to buyers at that time. But either prices need to come way down or salaries are going to have to go way up for me to even think about being able to afford a house…AND health insurance…AND fund my retirement. I’m not willing to sacrifice the second two for the first.
workingclass,
even after the housing hits bottom (which is going to be slow decline over a number of years), the madness we witnessed in the last few years is not going to repeat itself. Housing usually tracks median incomes (as it should), so I think you will be in good shape in a few years. Good Luck!
Small point…housing usually tracks median incomes (I’ll take this as a given), but that doesn’t necessarily mean that changes in the median income result in changes in the housing price (since changes in the housing price could fuel changes in median income and we’d have no way of knowing which comes first). In other words…correlation does not imply causation.
For what it’s worth, I wouldn’t sacrifice health insurance or retirement contributions in order to buy a house either. But I would adivse putting aside a nominal sum from each paycheck ($50, $20…whatever works) on a regular basis for long period of time. If you can swing $100 per month, you’ll have $10,000 in about 7 years if you invest it at 5%.
Take a look at the link…..
http://www.msnbc.msn.com/id/25290355/
Why does it show 2007 foreclosures in Chi higher than 2008? Are we recovering?
Median incomes vs. prices need to take into account interest rates. You can justify a higher ratio if rates are at historic lows as they’ve been over the past few years. Sartre, the fed rates cuts only affect short term rates, not the 10-year note that mortgages are based on. They affect ARM’s, but not 30-year fixed rates.
D
Very Interesting Graphic valasko!
G, I was referring to what I understood to be a hot rental market right now. Granted I very likely could be working off old data as I haven’t read much on it lately. What are you reading?
I do hold to a personal theory which seems to work in our downtown Chicago market in every recession we endure: Since downtown is relatively an expensive area to live in, most people will first ditch their housing or rental lease if they are subsequently laid off, have no reason to stay downtown, and need to downsize. I don’t think the same phenomena necessarily occurs in the suburbs since they’re cost of living there is much lower. It’s just my hunch, but i think the layoffs in Chicago will start to make an impression on the market from here on out.
JanetG-
“Every forecast I’ve seen moving forward predicts a further Chicago (urban) price drop of 4.7% moving into next year.”
Really? You’ve read multiple forecasts and every one comes up with the same 4.7% number? Really? Show me two reports please.
“The Fed will absolutely have to begin raising rates after the election if oil doesn’t begin to ease.”
That makes zero sense, a rise in rates will do nothing to lower oil prices. You have no idea what you are talking about.
D
Workingclass,
Excellent plan. I have a very similar one. You get an instant rate of return on the 20% down on a property as you avoid PMI (0.5% the cost of a property / 20% = 2.5%). Tack that 2.5% onto your ~4% mortgage rate (after tax benefits) and thats a guaranteed after tax rate of return of around 6.5% on that money. A great return for a low risk investment.
Of course this is peanuts in a declining market which is why its not a risk free investment, but in 2-3 years time hopefully enough of the institutions who brought us here will be out of business and the remaining ones will understand risk controls and the market will have stabilized.
Wow – too many posts to read here. But if you do read this post, know that a slight lull doesn’t not mean anything. The fundamentals all point to continued price declines in the bubble markets (CA, FL, NV, AZ) and the inflated markets too such as Chicago. The Alt-A resets are just about to start and like the analogy of a hurricane, we just saw the eye of the storm…the real damage comes from the second part. By the way, the “price increases” Steven Heitman was claiming … like most Realtors® … fails to capture the full holding costs. Bottom line, never buy a home as an “investment” esp. today…a place to live in and preserve wealth maybe, but to grow wealth (in real dollar terms) nope! If you’re selling real estate it is time to loss the investment sales pitch…it is a lie. The second half to the housing crisis is JUST beginning. Stay tuned…and wait this sucker out.
Another interesting point is if Obama gets elected and begins to pull troops out of Iraq as he promised, oil prices will skyrocket…possibly to $400/barrel with gas prices going to over $10/gallon. The suburbs will be killed or everyone will have to work via the Internet from home! Heck, Obama won’t even be able to afford his home either!
Janet – The fed raised interest rates to curtail inflation caused by a heated economy. If oil is causing inflation and not a heated economy, why would they raise rates. On the other hand you could argue that higher interest rates may cause a rally int he dollar. A stronger dollar could bring some of the speculation out of the oil trade and bring a little relieve at the pumps.
The problem the fed faces is support for the $$ vs. stangling the economy with higher rates. They are F’d if you ask me. I would bet they keep rates low (to keep us out of a long-term recession) and let the $$ fend for itself. Lowering the $$ is really the only way to get the US back in the manufacturing game.
Hey John – Maybe we should get Bush to stay another 8 years. That would be great wouldn’t it? LOL!
That guy is not qualified to run a little league team let alone a country.
Hey John – If you are looking for a place to rent I have 3 properties with the leases coming up. I love having people pay off my mortgage and think they are actually bettering themselves. LOL!
Bob says – “Of course this is peanuts in a declining market which is why its not a risk free investment, but in 2-3 years time hopefully enough of the institutions who brought us here will be out of business and the remaining ones will understand risk controls and the market will have stabilized.”
Well Bob – The federal government was the institution that forced Freddie / Fannie to insure high risk loans. Remember there whole “My goal is for every American to own their own home” thing. They forced 100% financing and reduced requirements on credit and ratios.
I hope they are out of business too…
Valasko – Your graph is missing one very important variable. I am not saying that some markets are bubbles but can you guess what is need to actually analyze this graph?
***Theoretically, the price you pay for a home is 100% irrelevant if you plan to hold the property for the full amortization cycle of the loan. Is this statement true or false?
I am looking to buy a condo and the owner has offered me financing from his personal bank. He said I have a choice between the below options of how I want to structure the purchase price and financing.
1. $400,000 purchase price 100% financed at 6.5%
2. $685,000 purchase price 100% financed at 2.0%
If I plan to hold this property for 30 years, which option from above should I choose?
Steve,
You just hit the disgraceful slippery slope banks are using in marking their Level 3 assets. Theoretically the price you paid is 100% relevant and so is current value (for better or for worse)
Steve,
The government won’t allow the FHA, Fannie or Freddie to fail. They’ll just use our taxpayer dollars to support these institutions whose C-level execs make millions every year. And I blame the government too but bad things happen when governments fail, generally. But there are many other institutions that can fail and will.
Howabout Lehman? They were the #1 securitizer of the junk CMBS bonds that caused much of this (Bear Stearns was #2), their business model is shot and many think they’re done (they deserve to be done). Wachovia? They were a small town Carolina bank until they decided to buy every bank in sight in hopes of making it an empire. Our economy can afford for them to be done too. Bond insurers? They’re leveraged as much as Fannie or Freddie but our government owes them nothing, we can afford for them to be done, too (Warren Buffet has a new company in this space with an untainted reputation and 0 risk of default, he’s a smart man).
Ratings agencies? They won’t go away but they can afford to be drastically less profitable in perpetuity.
Steve,
Also forgot to mention. Much of the pain from this won’t be felt at home. Some on here post the banks filing the lis pendens and its not a bank you’ve likely heard of unless you read the FT or WSJ. They’re not banks with any branches in the US. They’re typically european investment banks who got caught with their hand in the cookie jar, too. Our economy could definitely still steam along without a Deutsche Bank, UBS or HSBC in the world. Many of the coming business failures due to the housing bubble won’t impact our economy at all but rather other economies far removed from ours.
Steven Heitman – You seem to be one of the least objective people that post on this website. Seriously, you must make your living off pawning real estate and related debt onto people. Chicago pricing is only halfway through the decline. Sorry to tell you but Bush probably is the person who help you during the bubble now he’s letting it sort itself out, I know you’re probably bitter, but you shouldn’t have put most or all of your eggs into the real estate basket…three properties to rent? Sounds like you drank the Kool-Aid big time and are stuck being a floplord. Live and learn I guess. When you can rent for half the price of owning it doesn’t sound like the mortgage is being paid by the renter…moreover, I bet you’re having to put in extra hours to cover all the expenses associated with own real estate. Sounds like you’re a desperate debt slave saddled with illiquid assets. Rule #1: you make money in real estate at the time of purchase. If you overpay you’ll never make money. As someone who has made millions in real estate (not even talking about the bubble times, but during regular times) I am not a buyer now, no way, no way whatsoever.
“That makes zero sense, a rise in rates will do nothing to lower oil prices. You have no idea what you are talking about.
D”
Oil is priced in dollars. The dollar v. other currencies has lost value. A rise in interest rates makes the dollar stronger and will likely lead to lower priced oil. Take a look at Oil v. Euro or Oil v. Gold and you’ll see that there’s been much less of an increase. The rise in the price of oil is clearly related to the dollars decline. So maybe you don’t know what you’re talking about.
Thanks John for you conern but I purchase properties that 100% cash flow positive. It is a slow grind to accumlate but they are out there is you are dilligent. And yes the renters pay my mortgage, taxes, and assessments.
IB – It matters only it you don’t hold it to maturity. Like like buying treasuries. The value makes no difference as long as the monthly payment is the same.
“Thanks John for you conern but I purchase properties that 100% cash flow positive. It is a slow grind to accumlate but they are out there is you are dilligent. And yes the renters pay my mortgage, taxes, and assessments.”
You must have bought your properties long ago because today most properties are not cash flow positive. That is of course, unless you continue to charge the tenant rent as the property goes into foreclosure…..I’ve seen that happen way to many times…
Great Article –
http://www.iht.com/articles/2008/06/24/business/exurbs.php
Steve-
you said- “Theoretically, the price you pay for a home is 100% irrelevant if you plan to hold the property”
Your statement was specific in suggesting that whether or not you pay a mil or half a mil is irrelevant so long as you hold it to maturity. You said nothing suggesting cash flow or about monthly payments.
Regardless.. the less you pay, the more positive the equity on your balance sheet, as assets will be same and liability will be lower in any instance. (Assets – Liabilities + Equity) As well as will monthly payments be lower.
typo above s/b (= Equity)
My point was that pricing on housing is tied to interest rates. The example from above had the same monthly payment regardless of which option and price you selected. At the end of your 360 payments you would have paid the exact same amount and owned the exact same property. Only works if you are holding until paid off of course but just and example of what role rates play in housing values.
I also expect that price has relevance, even if the total dollars paid to the mortgage company over 30 years is exactly the same. (The monthly payments for Steven’s example are within $4 on $2500.)
Price likely influences the county’s appraisal to some extent. (Nothing like California, however, where the purchase price is essentially the appraised value forever.) If you pay a low price, that may lower your taxes for a while.
Similarly, some closing costs (transfer taxes at least) are tied to the price.
On the other hand, if you pay a low price your basis will also be low — increasing the threat of capital gains when you eventually do sell.
Insurers might look askance if you try to insure the replacement cost for a home you significantly underpaid on. “Sure I paid $200K (for building and land), but it would take $300K to rebuild the building.”
The size of an outstanding mortgage also should have some influence on credit scores. It should be mitigated by the interest rate difference, but I am not sure how sophisticated FICO (and similar) scores are. Human underwriters seem less likely to be fooled in the same way.
In new condos in IL, it seems that the price paid determines the “share” of the unit. A low price means that you owe less assessments (and have reduced voting power).
Another point — you pay more interest per month for the smaller (high rate) loan, which means that your tax deduction is higher. Assuming that you benefit from the tax deductability of interest, the small loan is actually cheaper (even if the monthly outlay is identical).
Another thing left out of Steve’s example is that most borrowers can refinance in times when interest rates are low, there is no prepayment penalty. If home prices move inverse to interest rates (which they will be if we take Steve’s example that its all monthly payment driven, and there is a lot of evidence to support this), then the smartest buyer will buy a property for less principal in times of high interest rates, only to lock in lower rates a decade later in a different rate environment.
The no-prepayment penalty is another reason why commercial banking is such a low margin business. They make a couple grand in fees from the refinancing but assume substantial interest rate risk in the out years of the mortgage (yrs 10-30).
I was simply making a point on why interest rates should not be left out of the equation when considering income vs home prices.
I understand it goes a bit deeper than the analysis I supplied.
So does that mean that interest rates jumping 3/4 of a point is bad news for Lincoln Park? That’s the movement we’ve seen in the last month…
I would not say it is good for anyone. I again would argue that it effects the lower end of the market before the upper end.
Traditionally real estate downturns have been caused by high interest rates or recession (unemployment). This correction has happened without significant changes in either. What happens when mortgage rates start responding to fears of inflation and we start to get significant white collar layoffs? (Just starting in New York). It’s hard to believe we are at some sort of bottom.
I’m with you, DBA. Most of the decline to date is due simply to prices having gone too high. We are nowhere near the bottom.
SteveO, that last comment sure seems to be in disagreement with your tiresome claim that Lincoln Park will never see price declines.
Deacon Blue wrote: “That makes zero sense, a rise in rates will do nothing to lower oil prices. You have no idea what you are talking about.”
Tisk, Tisk, DeaconB!!
Aprox 67% of our oil consumption today is imported. Contrast that with 54% in our last recession (2002), and something around 40% before that one (1991). All of this imported oil must be bought with dollars exchanged abroad into foreign currencies. If the dollar is at a record multi-decade low, then your devalued dollars just can’t exert the same buying power for refined foreign product it did in year’s past.
So, today the Fed is really in a corner. If they continue to drop interest rates in an attempt to further stimulate the economy, then they’ll essentially flood the economy with cheap and abundant cash. This of course would weaken the dollar’s value even further, increase our costs to buy foreign oil yet again, and increase inflationary pressures on an economy which is already experiencing record price gains across the board of all commodities.
If you’ve been reading any of the Fed governor’s comments, you’ll hear a consistent theme. If forced to chose between the dollar’s value and lowered interest rates, the Fed must defend the dollar at all costs. If the dollar is allowed to devalue any further, we run the risk of foreign owners coming in and buying up much of our domestic corporate infrastructure.
The subprime banking mess may have been the Fed’s concern a few months ago, but today their focus is purely on oil.
Only a fool would expect further rate cuts this fall. Wall street doesn’t and you shouldn’t either. The days of easy loans and easy money I’m afraid are permanently over.
Hey G – I have always said that LP will remain much more stable than other areas. I have no control over short term fluctuations in pricing from one year the next. I certainly would not be scared into renting as I am certain pricing will be fine going forward. It is safe to say that LP as a whole (please don’t point out the few places that sold for a loss) has not declined in price and my opinion is it will not going forward.
You guys are crazy with your 20% more coming.
JanetG its best to see what the fed does and not what it says. The Fed Funds rate is still at a measly 2.0%. This is only 1 point above the all time recent low of the cutting cycle of 2001-2003. From my observations easy money is still here. No not 0% down on a mortgage easy money, but for business and consumers interest rates are still very low. I just refinanced my car at 4.25%–thats easy money.
The feds focus now is on oil and inflation, however they may be hesitant to enter a cycle of aggressive rate cutting. They are hamstrung to react: any aggressive rate raising will likely put a severe cramp on housing prices going forward due to the option arm reset mess and how weak the banking sector is already.
Its a lose-lose for the fed. They’re damned if they do and damned if they don’t. And they know this.
‘rate cutting’ should have read ‘rate raising’.
I said absolutely nothing about the Fed lowering rates, which they aren’t at all likely to do. They Fed has only become hawkish in the last month or so, so your comment about them focusing on the dollar is not at all true. The Fed almost never talks about the dollar, that’s the Treasury Department’s job. Core inflation has been dropping, it’s only a short term spike in oil that is making the headline inflation numbers look bad. The YoY numbers will start to look better as the year progresses too. They will eventually begin raising rates again, but for you to say that they are “absolutely” going to start raising them after the election is an overstatement.
D
I would say a further 10% decline in the Chicago area real estate is probable. A 20% is possible, but not likely…EXCEPT in REAL dollar terms that is likely to be the case in 3-5 years…
“I would say a further 10% decline in the Chicago area real estate is probable. A 20% is possible, but not likely…EXCEPT in REAL dollar terms that is likely to be the case in 3-5 years…”
I’m glad we agree that prices will continue to decline but I think your prediction doesn’t go far enough; I won’t fault you for being conservative. I think prices will continue to decline beyond 20% to the point of 50% in a combo of real and nominal terms. We’re already a third of the way there. We’ve had a 9.3% case-shiller drop YOY plus roughly 4% inflation (or higher if youy beieve shadow statistics). We’re two years into the subprime explosion according to the Credit Suisse ARM reset chart and we’ve got three years left of the alt-a and option-arm resets. Extrapolate current figures at the existing rates of decline, or even with smaller price declines and lower inflation for the next 3 years and you’re looking at damn near 50% decline in the Chicago area. The coasts and Las Vegas are going to experience even larger declines.
Furthermore, consider that it will take at least a year for the bank to repossess the last foreclosed homes from the 2011 mortgage resets, and based on such evidence, I can make an entirely rational prediction that this mess will continue through at least 2012. Expect shinking markets and continuing price declines for the next 4 to 5 years. If anyone else has a better theory why the market will pick up sooner, feel free to argue. I don’t want to hear any of the traditional NAR bullet point arguments such as “boomers/foreigners/generation Y will buy” or “real estate can’t go down too far because it always goes up” or “the fundamentals are good for a recovery next year.” I want a good explanation why the ARM rests for the next three years won’t contribute to further price declines.
It is possible that the market could reach a steady state before 2012, with the new troubled homes just taking the place of today’s troubled homes.
The banks will have large REO portfolios, so it may be in their interest to limit the rate at which they put them on the market.* (Perhaps the market for REOs is better modeled as Cournot (quantity) competition rather than Bertrand (price) competition.) This could stabalize prices by trying to match the supply of homes officially on the market with demand. I think that this is part of the dynamic that has been seen in previous real estate drops, where there is a quick drop followed by years of no growth.
The homeowners who are forced to sell will drop back to “recession” levels fairly quickly — subprime is mostly done this year and Option ARMs are hitting their fully amortizing trigger levels faster than predicted (so they should be mostly done by late 2009 or 2010).
I feel that Chicago will probably reach a “bottom” in the next year or so while dropping a bit more, and then prices will stay there until the steady flow of REOs runs out around maybe 2015. Areas like Southern California are much more exposed to Option ARMs, which may push the bottom out another year; more significantly they will also increase the REO supply, pushing the flat market out to perhaps 2020.
* The banks need to consider whether flooding the market is better than selling homes over time. Flooding the market earns them lower prices while waiting increases risks, incurs maintenance costs, and ties up assets. Hypothetically, is it better to sell all the REOs now at a 10% discount or to hold half of them off the market for a year (spending 5% on maintenance and losing 5% return on assets)?
DeaconBlue,
We’re disagreeing on details.
t sounds like we’re all in agreement here that prices are likely to continue to drop over the next 12 months or so, and that higher Fed Funds rates are coming (not lower).
Whether this occurs in 6 months or 12 matters little. Lenders and rates are not going to loosen anytime soon and this means that developers are in real trouble. I suspect many are still financing completed projects short-term with high or variable rates and won’t have the financial endurance necessary to weather this multi-year storm. We haven’t seen anything yet.
Homedelete,
There is no way Chicago real housing prices are going to decline 50% from the peak. This kind of armageddon scenario isn’t in the cards here. Maybe Miami and Vegas if they get bad enough. A decline of 50% in real terms returns us to prices not seen since interest rates were in the double digits.
Kevin’s prediction seems to make more sense. But some banks will liquidate quickly–those banks nearing financial distress and wanting to keep management in place as long as possible. When the FDIC takes over a bank the first action they do is fire all the senior management and their resumes are basically shot so if you’re the CEO you’re going to want to keep that job (and earnings) as long as possible.
Also some will liquidate at a pace to keep their REO portfolio below $x, others at a pace to keep their paper losses below $x. Until now the big banks haven’t had to show their true hand to the public as the capital markets have been accommodating to them raising more money via equity issuance. However investors seem to be finally coming to their senses and this pool may dry up. Once this happens you will see desperation even among the bigger banks. More mergers like Countrywide+BofA and dumping assets for cash.
50% declines are already in the works in small areas, like all of California. The California Assn of Realtors reported that the median price *statewide* was down 35% year-over-year for May. Inflation losses will push that close to 40% drop over 12 months.
(They also report that supply has dropped — 8.4 months now versus 10.7 last year. Days on market is down slightly — 49.7 rather than 50.8.)
Kevin, you are more of a bear than me! Two weeks ago everyone thought I was the nut saying 50% declines from top to bottom (real and nominal) but you’re saying it’s going happen even faster than my prediction.
On a side note, what sucks even more is that there are still knifecatchers out there buying over valued properties. I saw one today that sort of makes me sick to my stomach. I can’t give out the address for various outable reasons. Anway, they had a substantial downpayment on a million dollar house on the northside but these knifecatchers still took out an $800,000 5/1 interest only adjustable rate mortgage to buy it. I’m sure they have great incomes, DINK household both professionals but seriously, I have a fairly good idea of how much money these people make, and I’m sure they can ‘afford’ the payments in the sense that they have enough money left over every month after the mortgage payment, but this property sold just a few years ago for nearly 2/3’rds the price they paid and they though they were getting a deal because they got 10% of the listing price. We’re nowhere near capitulation and if young couples like these DINKS think that it’s OK to take on such risk, such risk, to buy a home and pay that much money, way beyond what they could afford if it were a 30 year fixed. but appearances are important and if they want a ‘million dollar house’ then they’ll do whatever is necessary to get it, even if it means catching a falling knife.
Homedelete,
If such appearances are important more power to them. The way I see it the longer it takes for us to hit bottom the better off I will personally be as I will have a larger downpayment. If it takes until 2012 I am completely okay with that–patience is a key part of investing (and a home is the largest investment most ever make).