Chicagoland Home Sales Plunge Again in May
The Illinois Association of Realtors have released May sales numbers for the state and the nine county Chicagoland area. From the Tribune:
In the nine-county Chicago area, home and condominium sales were down 29 percent to 6,095 in May compared to a year ago. Prices were fairly stable dipping just 0.5 percent to $251,000. Between April and May, home sales were up 13.7 percent.
Statewide, home sales were down 22.9% from May 2007. Median price dropped 7.3% to $190,000.
“The Illinois housing market showed some positive signs of stabilizing in May with a sizeable jump in sales from the previous month and the fourth consecutive month-to-month increase,” said Kay Wirth, president of the Illinois Association of Realtors.
The report did NOT include Chicago specific sales numbers. Stay tuned for those.
So we still aren’t seeing anything close to market clearing prices.
When are sellers going to figure this out and really start cutting prices?
“So we still aren’t seeing anything close to market clearing prices.
When are sellers going to figure this out and really start cutting prices?”
The bank will lower the price once it becomes a REO. Banks have the ability to lower prices whereas many sellers with 95% to 100% financing cannot.
June 27 (Bloomberg) — Rising mortgage rates are driving up the cost of buying a house even as prices fall, making property more expensive across the U.S., according to a new study by Zillow.com, an online provider of home valuations.
Monthly payments on 30-year fixed mortgages are 6 percent to 10 percent higher in 41 of the top U.S. housing markets than they were two months ago. First-quarter prices have declined from a year earlier in 88 percent of those areas, Zillow said.
“We’re going to need about a 30 percent decline in house prices if you are going to keep payments stable,” said Morris Davis, a former senior economist with the Federal Reserve and now a real estate professor at the University of Wisconsin-Madison’s School of Business.
Where’s Steves Spin?
Steve’s spin here is obvious — prices in the metro area were down only 0.5% year-over-year, and sales are climbing quickly month-over-month. Everyone agrees that Lincoln Park is doing better than other parts of Chicago, so it clearly has rising prices. Move along; nothing to see here.
I’ve been a prospective buyer for 8 months (searching in the max $275k range), hoping that many prices come down to more reasonable levels, while also looking for a place that has all the amenities I would like in my first place.
I recently had my mortgage guy recalculate the numbers and he’s told me I’ve lost approximately $20k in buying power since last November.
Reductions in any asking prices have been completely negated.
It has turned into a catch 22 and I’m not sure what I’ll do… most likely stand back, keep renting and see what the market does.
“When are sellers going to figure this out and really start cutting prices?”
When Steve says so!
You guys keep hoping for these reports to come out and identify drastically lower prices. It is not in cards right now and my areas of Chicago will only come down in value if the economy continues to struggle. There is no bubble in the areas I follow. There are people who over paid and there are people that bought undesirable properties who will take a loss when they sell. The majority will be fine.
Homedelete – It is interesting that you reference interest rates as the 10-year just sunk below the 4% mark again. Rates were up the past few weeks but are now on the way back down. Keep hoping for you crash!
Stevo:
What’s the other area? You regularly say that a piece of LP (what is it? North to Fullerton; Kenmore to the Lake, excluding conversions, anything on Clark and some other stuff–or is it bigger than that?) is going to do fine and now you say “areaS” will be fine. Where else other than the above?
Steve – I think you are a bit confused. When you say not everyone overpaid, which is true since not everyone bought in 2005-2007, but enough people did buy then and a fair percentage will highly regret that decision if they didn’t have a fixed rate mortgage and plan to live there for 10+ years. That will affect home prices and of course those people who were banking on their homes being worth $X when it is worth less (or maxed out second mortgages and HELOC’s). The fundamental dynamics clearly dictate further price declines going forward, just not sure the extent and when inflation will catch up with the inflated prices. Realtors® and developers sold housing units for short-term ownership (less than 2 years even) as “investments” and now those people who should have been renters are big big losers.
Steve is full of it, talk to any NAR member privately when you’re NOT their customer and they’ll admit things wont bottom out until a few years from now.
Everyone on here likes to beat up on Steve because his opinion happens to be in the minority. However I think the commentary is value added from both housing bears and bulls. If Steve and the bull crowd were to leave this would turn into a board of re-inforcing opinions that housing in Chicago is going to collapse and every Tom, Dick and Jane making 60k/year will be able to afford the 2MM mansions featured here. Sorry housing bears: it ain’t so.
Today’s closing figures for LP – I just picked 2 properties that closed in the past few days in a great location in LP. The data supports a flat market in LP over the past 3 years. 2354 n cleveland units 2 & 3. Sold for the same price purchased for in 2004 and 2005. (each lost a couple thousand). These properties appreciated at a 5% rate from 1999 to 2004 and basically have been flat since. Units 1 & 4 are also under contract (nothing wrong with the building but the whole building was ont he market at the same time – not good for pricing but they all sold)
Not down 20% but flat since 2004 & 2005. The world is not coming to an end.
1887 Poe 1F (as highlighted here) purchased in June of 2005 for $519k and sold yesterday for $532k. Down 20%, or a flat to higher market?
Those sales match my understanding — we are back to 2004 prices, and people who bought before then probably have a paper profit.
The 20% drop that people are talking about is from the peak. Based on Case-Schiller, the peak occurred in late 2006.
I’ve no idea whether these examples are representative, but doesn’t flat since 2004/5 imply significant declines from the peak? E.g., Case Shiller showed 20+ percent appreciation from 2004-7. If things are now selling at 2004 prices, that’s a big drop. Note also that 2004 prices are nominal prices, so the owners have lost significantly in real terms (even without getting into the opportunity cost discussion).
I know some others are waiting for bigger declines, but I would be fine with paying 2003 prices and would probably pay 2004 prices for the right property.
“purchased in June of 2005 for $519k and sold yesterday for $532k. Down 20%, or a flat to higher market?”
Yes, basically flat in nominal terms. But down 1% to 11% in real terms (using 3-5% inflation) pre-commission, down as much as 16% on net, real dollar basis.
Anon – How much is the stock market down in real terms? with 100% financing you lose nothing from inflation. Don’t distort your “real terms” that only applies for cash purchases. Also don’t assume that everyone uses a realtor to sell their properties.
The Poe property appreciated in value 2% from 2005 to 2008. That is what the data points to and nothing else. People don;t have to use a realtor to sell their properties. You can list it on the MLS for $100.
DZ – From my experience 2005 was the peak. 2006 was slow and people were more diligent about pricing.
“You can list it on the MLS for $100.”
So, you’d bring a buyer to a property for no commission? Awesome. You must be the most generous Realtor in the country.
“with 100% financing you lose nothing from inflation.”
No, you’re wrong. With 100% INTEREST-ONLY financing, you lose nothing to inflation. We now see one of the proponents of the Option ARM.
For the S&P500, it closed at 1194 the last week of June 2005 and is trading at 1278 today. That is a 7.0% nominal gain, compared with the 2.5% nominal gain for the Poe property. This should translate to something between a 3.5% real gain and a 6.5% real loss (assuming that anon’s calculation was correct).
Anon – Your “Real Terms” calculation assumed 100% equity on the purchase. I was simply pointing out that your calculations was not realistic and simply wrong…
Let’s say you finance it 100 percent. You’re paying a bundle of interest (even net of the tax deduction) for an asset that is not appreciating. Yes you save on rent during the period.
Try the NYT rent v own calculator. I’d bet you could have rented something much better and still made money compared to buying.
There is a problem compairing stock market returns with realestate returns, its a little more complex. Stock market returns do not include any type of leverage. Realestate is a leveraged investment so you have to look at loans expenses, etc. If you purchase a 100k unit with a 10k down payment and you sell it for 110k your return on you capital isn’t 10% it might me 60%. You do have to consider your cost of capital, transaction cost etc. Guys don’g kill me on my math I am only trying to make a point. I absolutely hate these comparisons it’s like comparing apples to oranges.
With less than 100% equity, gains (and losses) are magnified by leverage. If the owners had a 6% 30 fixed mortgage at 100% LTV, they paid $20K in principal and $92K in interest over three years of ownership. For this $112K outlay, they received back (before any transaction expenses) $33K — the paper gain of $13K plus the $20K in principal payments. They also benefited from living in (or renting out) the unit, a rent-equivalent value of perhaps $2000 per month ($72K over 3 years).
This looks to me like a nominal loss of at least 6% over three years, excluding transaction costs (like moving, realtor, transfer taxes, etc). Essentially breakeven.
If they had gone with an interest-only 100% loan (assuming 6%), the nominal loss would be about 7.5%.
You can quibble with particular numbers here, but these owners didn’t make much money in a nominal sense and almost certainly lost money relative to inflation (or stocks).
So in a perfect world we should all financed our purchases back in 2001 at teaser rates of 3% and sold in 2005 for maximum profit. We sould have then used all of our proceeds to purchase gold and oil.
If only you guys would have called me I would have advised all my clients.
“this would turn into a board of re-inforcing opinions that housing in Chicago is going to collapse and every Tom, Dick and Jane making 60k/year will be able to afford the 2MM mansions featured here. Sorry housing bears: it ain’t so.”
Things need to return to how they used to be. Homes in working class neighborhoods are priced according to working class wages; Millionaires will live in million dollar homes in Lincoln. Right now most of the desirable properties cost $500k and people took option arm loans to pay for them. Imagine how good life would be in people could buy home they could afford without resorting to toxic financing. That’s what I’m expecting will happen. Maybe you don’t remember those days, pre-2000, when people could afford to live in Chicago without devoting 45% or more of their take home income to the mortgage.
Chicago was not quite the same place before 2000 now was it. The city has become a more luxury place to live. It is not our fault that many working class people can no longer afford to live in the better areas of Chicago. The difference between pre-2000 and now is the better neighborhoods are indeed better. Sorry to inform you but purchasing at Damen and North will never return to prices before the neighborhood turned. Areas like this went from undesirable to desirable and the price reflects the change.
Guys, There is a lot of time wasted here debating returns, how the market is going to collapse, etc. If your goal is investing and getting the best return on capital realestate is dead money. Like any asset bubble it has to return to its historical mean. This process includes the follow: price delcine, price stablization, no movement, return to nomalized returns, and finally speculation again. I would spend less of your energy trying to forcast realestate values and try finding the next sectors to invest. Then in 10 years you can go and purchase your dream house.
“Chicago was not quite the same place before 2000 now was it. The city has become a more luxury place to live. It is not our fault that many working class people can no longer afford to live in the better areas of Chicago. The difference between pre-2000 and now is the better neighborhoods are indeed better. Sorry to inform you but purchasing at Damen and North will never return to prices before the neighborhood turned. Areas like this went from undesirable to desirable and the price reflects the change”
I’ll call that another NAR BS talking point. There is no new paradigm. Everyone said the same about Miami and Vegas until they crashed. The fact of the matter is that there are homes and there are people with incomes that want to buy those home with the limited means. You can’t physically transport them, you can’t really sell them internationally, you can’t put them on a ship and reduce the amount of homes. Chicago is a relatively closed market of people who live here need places to live. There clearly isn’t a supply issue because inventory is at record highs in *most* neighborhoods (I’ll agree that LV and LP are not at records but are still high). There are plenty of homes and plenty of people to buy them and the market will in balance when buyers can afford a home using a reasonable amount of income without resorting to crazy toxic interest only option arm financing, like the example of the guy who lives at 1300 Webster.
“You guys keep hoping for these reports to come out…”
These reports have been coming out for a while. We don’t really have to hope for for the inevitable. I think you’re hoping they’ll stop.
“It is not our fault that many working class people can no longer afford to live in the better areas of Chicago.”
Still, decidedly working-class neighborhoods (Humboldt Park, parts of West Town, parts of Pilsen) that skyrocketed in price will return to values where likely residents can afford it.
You win – Lincoln Park is not returning to 1940s prices.
“…Chicago will only come down in value if the economy continues to struggle.”
The economy will continue to struggle because this dip in housing wasn’t caused by a bad economy, the bad economy was caused by the dip in housing. It is furhter exacerbated by people pulling money from RE in putting it into commodities (oil, gold, corn, wheat etc) causing prices for staple items to go up which further puts pressure on people struggling to hang onto their homes that they over extended themselves on when the economy and employment were strong.
We have a long way to go.
“Anon – Your “Real Terms” calculation assumed 100% equity on the purchase. I was simply pointing out that your calculations was not realistic and simply wrong…”
And you were assuming the opposite extreme, Stevo. Yes, the reality is likely in the middle, but you won’t ever admit that–you just create exceptions and change baselines.
So Anon, you are saying that if you made 6 figures and wanted to live in a nice neighborhood for the next 5 years, you would be a renter?
Don’t know. Bought in ’01 with an intent to stay 10+ years–intent is now to remain 10+ years from today. Probably, if looking to buy today, I’d boogie on out of Cook County–the Stroger nonsense is too much–notwithstanding a strong Chicago preference.
Other units on Poe sold for;
Below is the data for the other units in the Poe building. Do you know how different the units are?
$577,500.00
1887 N POE ST 1R, CHICAGO, 60614-8974 04/12/05
$650,000.00
1887 N POE ST 2F, CHICAGO, 60614-8973 11/16/04
$630,000.00
1887 N POE ST 2R, CHICAGO, 60614-8974 10/25/04
TS – 2nd floor units are duplex ups and 1st floor duplex downs. The front dup down is a 2 bed, 2 bath while the rear dup is a 3 bed 3 bath
Steven, I love your examples. 2 out of the 3 about were bought using crazy toxic financing. If LP and LV is so rich and everyone has so much money
1R $577k sale ($462k 1st mortgage + $86k 2nd mortgage + $29k downpayment)
95% financed
2R $630k sale ($527k 1st + $70k 2nd + $33k downpayment)
95% financing
2F $650k sale ($250k 1st)
38% financing.
and the added bonus:
1F $510k sale ($360 1st + $150k 2nd + $0 downpayment)
100% financing
Why is it that toxic financing fueled the boom and now the bust in most major markets, but when 3 out of 4 units in your examples use toxic financing the rules don’t apply? LV and LP are next. Watch out below.
3 out of the 4 units sold because the buyer bought using other people’s money to finance 95% or more of the purchase price. It’s transactions like these the drove up the cost of housing for everyone else. The buyer who put down 60% was the last to buy in the building; the 3 bozos with crazying financing set the comps.
HD:
Stevo’s made his view on this clear–he’s a cashflow guy who thinks that the price assigned to the transaction is meaningless, so long as your annual cashflow is neutral. He thinks it’s a GOOD idea to lever as much as possible, albeit I think (hope? wish?) he would acknowledge that relying on teaser rates to assess whether the cashflow is actually neutral is a bad idea.
How mucha munth?
Remember: 1887 N. Poe #1R was also on the market.
It’s still pending so we don’t have a closing price yet. But that seller is clearly going to lose quite a bit of money and will have to come to the closing with a big check.
Unit #1R: 3 bedrooms, 3 baths
Sold in April 2005 for $577,500
Originally listed at $599,899 in October 2007
Reduced
Currently listed for $559,900 (parking included)
Pending
Buyers attitudes towards debt needs to change before capitulation happens. The buyers in the 1887 N Poe building think that carrying a 500k mortgage is a good idea. I don’t know why anyone would think that paying 3500 a month in interest is a good idea – no matter what your income is. Especially when most of these loans are interest only. Paying that much interest doesn’t lead to wealth, all it does is make bankers rich. I think 3 out of the 4 buyers in the Poe building were speculating, nothing more. They saw that real estate only goes up so it doesn’t matter if you piss away money on interest because they thought they would make the money back on the sale. If realestate goes up 10% a year but the mortgage is only 5% then that’s a 5% arbitrage – borrowing cheap and investing in higher yielding assets. Pure and simple, this semmingly innocent form of speculating drove up the price for everyone else. The guy who put 400k down paid the highest price because the previous three bozos set the comps.
I’m really fixated on the Poe building because it perfectly describes the bubble of the last few years. I always wondered how somw people I knew could afford sweet condos in lincoln park and lakeview but I couldn’t. This building shows that they couldn’t really afford what they were buying either, absent toxic interest only arm loans. They were taking risks that I quite frankly don’t consider prudent or financially wise. But from they’re point of view, it is perfectly acceptable to leverage their finances to the hilt to speculate in an ever increasing asset. I feel like I’m the smart one in the room for refusing to play the speculation game and my finances are in much better shape because of it.
Homedelete:
As you said, these units on Poe are a good example of what was going on across the nation the last few years. 100% financing? With that going away- who’s buying these $500k or $600k units- even in LP and Lakeview?
A lot of the real estate transactions of the last few years were an illusion. People gave the impression they had true money and wealth, when they didn’t. And much of it will soon be exposed.
I strongly disagree with Steve that we’re not going to see distress in LP and Lakeview. People buying there had as much access to the 100% financing options and NegAm Arms as everyone else. And if the bank is going to give you money to allow you to buy a property that is really out of your price range, why not buy in LP or Lakeview?
Another thing I don’t understand about the boom, was the acceptance of paying 50% or more of income on housing (even in Chicago.) When did that become the path to riches?
“A lot of the real estate transactions of the last few years were an illusion. People gave the impression they had true money and wealth, when they didn’t. And much of it will soon be exposed.”
– You should see how much of that went on in Florida and the Miami area…it is truly unbelievable and until you have researched you would never have thought something of this magnitude could have happened.
“With that going away- who’s buying these $500k or $600k units- even in LP and Lakeview?”
Well Homedelete – I suppose the people who just closed on these 2 Poe units are the type of people who will be purchasing the $500k – $600k properties. Wouldn’t you say?
Miami was speculation and flipping from investors. The music stopped and their were no more chairs to sit in. It was not ever real. Same goes for Arizona and Vegas. People actually live in the units in LP & LV.
Did you buy every property in 60614 during the bubble or something? I’m still trying to figure out all the cheerleading; Realtors can collect commissions in other neighborhoods too you know.
“Well Homedelete – I suppose the people who just closed on these 2 Poe units are the type of people who will be purchasing the $500k – $600k properties. Wouldn’t you say?”
Knife-catchers with slightly less leverage and a slightly larger downpayment. That’s whose buying the two Poe units. I bet they have interest only 5/1 ARM arm jumbo mortgages. Alt-A financing is all the rage right now for those with good credit scores and verifiable income. There is an off-chance that they’re putting down $400k like unit 2F but those buyers are far and few between. I’d put my odds on Alt-A financing.
“- You should see how much of that went on in Florida and the Miami area…it is truly unbelievable and until you have researched you would never have thought something of this magnitude could have happened.” I’ve done research and I would like to see it in person. But vacationing in Miami to see empty condo towers borders on crazy! Chicago had nowhere near as much construction or outright speculation as FL or Las Vegas. But I still feel that passive speculation, i.e. interest only NegAm Arm 5/1 loans contributed to the rise in prices in Chicago.
The 1F unit at Poe for $532K could be bought with a conforming loan and about 22% down — sensible if you have the cash. The 1R unit is too expensive for that trick to work if it sold close to listing.
I expect that most people are still buying with huge leverage, but there are probably a few who could buy in a financially responsible manner these days.
does any one have the %age for interest only/neg am loans made in chicago for 2003-2007 period?
Do the peak reset for these loans coincide with the national peak?
It’s like my example the other day of the million dollar house (I can’t disclose the addresses due to confidentially issues). They put 20% down and financed the remaining 80% with an interest only 5/1 jumbo ARM. They have a good income and good credit but they bought a million dollar house on the northside. This deal closed in the first six months of the year. I’m sure they can ‘afford’ the mortgage payment but seriously, that’s just stupid to buy a 4000 sq mcmansion if you’re 30 years old, even if you have a decent professional dual income household. They honestly believe that they’re buying on a dip and that in five years the house will be worth 1.5 mil, just in time for them to move with the (yet unborn) kiddies to Northbrook. Why else in the world would a household making $160,000 a year take on an $800,000 mortgage? They’re speculating, pure and simple. And knifecatching too.
And Steve can say that the high end LP market is still going strong and prices are stable. Yeah stable like the Titantic before it hits the iceberg.
I assume there are some people that actually have the ability to buy a place in LP or LV now that are reading this blog. What is your story? How do you view things? If you can afford to buy some of these places that are $600K, 800K, 1M + I am sure everyone would be interested to hear what you think.
People rooting for a collapse vs Steve Heitman is entertaining but, getting old.
Just be glad this is rampant in Chicago…condo squatters…
http://www.miamiherald.com/548/story/575458.html
Homedelete – you do need to come see it in person….I would never have believed what went on. Nearly EVERYONE was getting in on the game since nearly everyone could get financing. Oh, and they didn’t just buy one! I would suspect that Chicago was maybe 1/3 as bad. Come take a look at the condos with 5% of the lights on at night. One developer had gone to lengths to turn lights on in empty condos to make it look alive. When a new building has 40% resell listings (and some people haven’t even listed yet) then you know it is bad. People are walking away from their 15% deposits in droves.
I was in Miami in October, and I saw a lot of mostly empty condo towers, with many more on the way. The skies were just full of cranes. You could tell the condo towers were largely unoccupied by the empty parking garages beneath them. While there will always be people wanting a Miami condo, prices got WAY out of control and there is a huge inventory glut. Hey, that sounds kind of like the South Loop.
meant to say “Just be glad this it NOT rampant in Chicago”
TS,
I’m long and definitely not rooting for a collapse, but I don’t let my position fool me into not seeing a perfect storm.
For the sake of argument I’ll take the cheerleading side for the next few weeks. I can argue pretty much anything with a straight face. This should be fun. I may not be as good as Steven with the stats but I got the bullet points down pat.
Look, Brazilian and Mexican oil money is going take care of the condo situation in FL. Miami is the capital of South America; it’s like a foreign country down there anyway. Brazil has oil reserves 500 miles off the coast that rival the Saudis. That money has got to go somewhere, and the most logical place will be Miami. It’s going to take a while before the oil is extracted and works it way up here but that will be just in time for some sweet deals to be had by foreigners.
Homedelete – You really are a moron! Your friends who purchased a $1 million condo on a $160k income are taking a chance. The rest of US who purchased 1 million + homes make enough money to handle our mortgages. Yes we took out interest only arms but are financially responsible and have the means to pay down or off the loan when need be. My housing exp is 18% of my income and it really does not matter to me if rates go up or if rates go down. I can handle the fluctuations. Some of us actually like to live our lives not worrying about the end of the world. Stuff your cash in your matress, buy some canned foods and load the shot guns. Your life sounds depressing…
Steve: Sometimes I can’t tell if you’re joking or not because your comments are so ridiculous. But then your insults towards me are so bitter I think maybe you’re actually serious. Anyway, I don’t know why you insult me so much and you don’t hurl insults at anyone else. Don’t let my strong sense of schadenfreude get to you. My cynical and biting commentary on the state of the real estate market today needs to said; my point of view isn’t well represented on CNBC or in the main stream media. Please stop insulting me. For the second time. You can knock my arguments all you want – I can take it. But when you resort to calling me a moron, an idiot, a studio dwelling loser; that’s just out of line and inappropriate.
That’s a totally crazy story from the miamiherald. Great link. I’ve never read anything like that. I suppose a few american invesco buildings my end up that before this is all over!
Homedelete – I would never have guessed the condo market could get out of hand like in Miami. Anyone that buys is taking a big risk since condo associations are difficult enough without having to deal with foreclosures, tons of owners not paying dues, owners so desperate for cash that they will do anything to bring it in (weekend rentals against the rules, even renting to “escorts” and porn producers), etc. In Florida the lien on a unit for past due condo fees in foreclosures is limited to something like 6 months worth. Rental rates are around 1/2 the price of owning (not including lost equity in price declines). Chicago won’t be this bad, but when you buy into a condo, you get all of your neighbors with it too. When the neighbors don’t give a hoot about the rules, the place will go down hill quickly.
Another interesting thing about the housing bubble, people were under the impression that owning a home would create wealth, when in fact it was those that had accumulated wealth that bought homes in the past (20% down, etc.). The situation got upside down with people thinking that owning a home created wealth instead of simply being an asset that one owns if one has wealth.
“….How do you view things? If you can afford to buy some of these places that are $600K, 800K, 1M + I am sure everyone would be interested to hear what you think.”
TS, I guess I would fall in this category. I currently rent and see things getting much worse. I am no particular hurry since this will hopefully be my last house purchase. Rising interest rates are to my advantage since they will push the prices down further and I have no need for a mortgage. Plus I see great rental deals all over the market. I also know several people on both sides of the fence- some very well off folks who have mostly moved out of real estate as investment and are more concerned right now with “return of investment” rather than “return on investment”, so they are sitting tight with the money. On the other end of the spectrum there are everyday folks who are hanging by the skin of their teeth with lower housing equity and rising prices of everyday need items. The latter group will be left holding the bag (as always).
The downhill trajectory will be sticky, it always is. Real estate is an emotional purchase and can’t be sold with “sell” button.
We are going to have a bad case of recession (probably worse than 92). I’d rather have cold hard cash in the bank than illiquid assets at this time.
“Yes we took out interest only arms but are financially responsible and have the means to pay down or off the loan when need be.”
I can’t be the only one waiting for this to end in great deals for the rest of us.
I’ve never considered my home as an investment – it’s an expense. The only other alternative to the expense of home ownership is renting. Over the years, there have been times when renting would have been cheaper, but at other times, owning has been a better deal. Right now renting is cheaper, but that won’t last forever.
For those who do consider residential real estate as investment they should realize that:
1) it is about as illiquid as you can get
2) it has huge carrying costs (opportunity cost of the money, taxes, upkeep, fees, etc.)
3) the costs to get into and out of residential real estate is crazy (what other “investment” has 7% purchase and sale fees built in? Not to mention transfer taxes, appraisal fees, surveys, title insurance, etc.)
4) it has volatility with very long cycles (it may take years to come back this time)
I used to be a banker and we had a saying – “Never take anything as collateral that has to be fed.” Real estate is like an investment that has to be fed – the costs make it really hard for the average guy to make any money.
On the other hand, owning a home to live in can be a good financial alternative to renting and has intangible benefits than can enhance your quality of life.
I am at a time of my life where I would like to buy. I am now financially secure and could afford a home with a sizable downpayment.
I have been watching the local market in various neighborhoods for over a year now, and am concerned that it will take years to adjust due to the sticky nature of real estate prices. And sellers of some homes I have been interested in are simply not realistic. As I was told by an agent, the sellers are going to hold on (to their overprized home) until the market picks up next spring. Who could possibly expect a pickup in prices by next spring (unless we see a major downward adjustment this fall/winter)??
And yes, a home has to be fed, with repairs, HOA dues, taxes,…In the meantime, we are saving more money renting.
Wally,
Excellent points. And they are all valid if someone is investing from a purely equity standpoint (ie: paying cash for a home). However when someone can achieve 19-1 leverage or infinite leverage via 95% or 100% LTV financing, this leverage, by far, negates any of the negative aspects of real estate you had mentioned.
Thats the problem with housing today. It continues to be less optimal from a pure cash standpoint but can be (and has been) very lucrative or disastrous depending on which way the market goes. I really think a return to pure 20% down required financing should be required and it would eliminate these problems.
“My cynical and biting commentary on the state of the real estate market today needs to said; my point of view isn’t well represented on CNBC or in the main stream media. Please stop insulting me….when you resort to calling me a moron, an idiot, a studio dwelling loser; that’s just out of line and inappropriate.”
LMAO! do you realize what a whiny b!tch you come across as?
I get a kick out of all of you who “know” what’s going to happen to the economy and the housing market, when it’s clear that you are just regurgitating the latest Reuters article. The only real guide there is to a situation like this is to look at history. Housing markets that are more moderate, like Chicago’s, rarely ever drop in downturns, they simply go sideways for several years until incomes/rates increase enough to bring things back into line. All of you doomsayers who are rooting for a collapse so that you can finally afford a place (and are jealous of everyone who made money in the boom) had better get a life and stop hoping because it isn’t going to happen.
D
Deaconblue:
How much kool-aid did you drink today?
Deaconblue,
Have you looked at appreciation rates in Hyde Park, South Loop etc since 2000? I wouldn’t call it moderate. And the creation of supply in recent years, and still ongoing – anything but moderate.
Even a flat market for multiple years in the most stable areas will hurt homeowners substantially, as it represents a drop in real values.
Chicago’s markets is still considered a moderate one compared to the national averages. There are certainly individual neighborhoods that are going to suffer, but the city/area as a whole will not be in as bad a shape as all you doomsayers hope it will (and the data is supporting this as we speak). Flat housing prices are not the end of the world, we’ve had them before and it doesn’t cause harm the way that falling prices do. Homedelete, you are the one who “drinks the kool-aid” because you obviously can’t think for yourself. You are the one following the crowd like a lemming and that’s a guaranteed way to always be on the wrong side of a trade.
D
It’s funny how the boosters have changed from “housing will continue to rise at 5-10 percent in the near future, housing prices NEVER fall, don’t get locked out of the market forever, they’re not building any more land, etc.” to “well, maybe it will be flat (in nominal terms) for a few years but that won’t be the end of the world”.
“You are the one following the crowd like a lemming and that’s a guaranteed way to always be on the wrong side of a trade.”
Sort of like a seller paying cash at closing just to get out? Like the guy in the Poe building above who bought for $600k and has it listed for $560k? Yeah that’s the wrong side of the trade.
I’m not talking about selling a place that was bought 3 years ago, I’m talking about the current market. You act like you have some innovative outlook on things yet all you do is regurgitate BS from the media (the same media that were cheerleaders during the boom). The more bearish the general sentiment, the closer to the bottom we are. During 2002 every loser on the internet was predicting the stock market would drop another 50% and it promptly rallied 100%. The same psychological phenomenon is occurring now but you just don’t know enough to avoid it! Have fun waiting for a crash that will never come.
D
DZ, I’ve never been a housing booster at all and I predicted that the bubble would burst for years (I was early actually). But hat doesn’t mean that the world is coming to an end now. My assumptions about the bursting of the bubble and its aftermath were based on historical evidence. If you have no idea of history to guide you, like most of the people on this board, you are left defenseless against the power of the media. Anyone who thinks that the Chicago market is going to collapse from here is just as naive and easily manipulated by the media as the idiots who were flipping condos during the boom. It’s the same phenomenon, just different media-driven craze.
D
Wasn’t this housing bubble in some ways unprecedented? Historical data apply to the extent that this bubble had the same causes, but rampant fraud and infinite credit did some amazing things to housing prices in some neighborhoods.
Until there are no more $300K condos in Humboldt Park the housing bears have plenty of ammo.
The Nasdaq in the year 2000 was above 5000. The Nasdaq today is below 3000 and at its lowest it was below 1500. So if you want to use the tech bubble as precedent for the housing crash, go ahead. I’d love to see a greater than 66% reduction in housing prices. You used the tech bubble example, not me.
I’m waiting for the return of affordability brought about by traditional lending standards i.e. 1st time home buyers put down 15% to 20%, 28%/36% full doc lending ratios with 30 year fully amortizing mortgages. It was like this for most of the 20th century; The last 10 years have been an aberration. My guess is that prices will decline up to 50% in Chicago after we return to normal lending standards. Cali, NV and some places FL are almost at 50% already; Chicago is probably more like 15% thus far including inflation and the Case-Shiller numbers.
http://www.chicagohomeestates.com/real_estate_search?intPage=10
There are still plenty of condos in Humboldt for $379,000!
I’m off to the taste; I hope it doesn’t rain!
Sorry that link don’t work!
“The more bearish the general sentiment, the closer to the bottom we are. During 2002 every loser on the internet was predicting the stock market would drop another 50% and it promptly rallied 100%.”
The dot-com bust bottomed in October 2002 after three straight years of declines on all major indexes. In 2003, the S&P 500 rallied 28.68%.
If you read articles on stocks- you will still find people who say, “you never make any money in the stock market”- burned by what happened earlier in the decade. And, given the recent sell-off, this “belief” will again be reinforced.
I have yet to hear people saying, in Chicago, that they will NEVER buy real estate. I hear people saying they are going to “wait a year” (or maybe two) but I haven’t seen any real fear here.
I also continue to hear stories of investors in downtown highrises, people are still trying to flip, and buyers “investing” in short sales and foreclosures (buyers who otherwise have never owned investment real estate before.)
None of this is a sign of a bottom. In a true market bottom, you couldn’t pay people to buy the asset class. In a true real estate market bottom you will hear, “why do you want to buy a condo? That’s stupid.”
I think one should look to history as a guide. History tells us that the runup in housing prices was unprecedented, especially in that it was unsupported by fundamental changes in supply or demand. (It’s not really history as such but the empirical data from the historical record of the relationship of housing prices to construction costs, income, etc.) A further correction of at least 10-20 percent (some think more) from current levels (more from the peak) is needed in the Chicago area to restore housing to the levels that history would suggest.
I think the only thing that is hard to predict is the time path of the adjustment. It may happen relatively quickly over 1-2 years. It may happen slowly over 5+ years.
The other thing to keep in mind re the analogy to the internet bubble is that stock prices can adjust much more quickly, and it still took some time to sort out the bubble. Housing prices are likely slower to adjust (less liquid, harder to short). But, if people see the bubble popping, that can speed things up.
“The only real guide there is to a situation like this is to look at history. Housing markets that are more moderate, like Chicago’s, rarely ever drop in downturns, they simply go sideways for several years until incomes/rates increase enough to bring things back into line.”
Yes- let’s look at Chicago’s history, shall we?
In January 20, 1927, S.W. Straus, a financier, warned of the danger of overbuilding and urged a 6-month to one-year moratorium on building of office buildings, hotels, apartment houses and apartment hotels because of overbuilding the previous years in Chicago and New York. He was worried that the “saturation point” was reached.
His “plea” was ignored.
In February, 1927: February was the largest month in Chicago in the previous five years in terms of construction permits. The 1920 to 1930 decade would set records in building permits in Chicago.
November 1929: Tribune article headline: “Stock Skid Scatters Funds into Chicago Real Estate: Brokers Smile as Public Again Turns to Land”
November 1932: From Tribune: “Drake Tower Conveyed to Bondholders”- The Drake Towers in the Gold Coast was completed in October 1929. On August 1, 1932, both principal and interest defaulted on the mortgage bonds and the building went into foreclosure.
June 1934: Astor Building to Re-Organize and avoid foreclosure at 1209 N. Astor Street.
October 1934: From Tribune: “Real Estate Bond Owner Groups Report Progress on 33 Properties” – including 1220 N. State Parkway, 211 East Chestnut, The Berry on Sheridan, The Beachview Apartments in Hyde Park, The Edgewater Chateau and 5523 N. Kenmore.
November 1934: From Tribune: “Bond Group will take over big flat buildings: Report Outlines Work of 16 Committees”- including 20 East Cedar, 1430 N. Dearborn, and 2440 N. Lake View.
June 1935: From Tribune: “Bankers Life Re-Enters Local Mortgage Field after 4 Years”- “after being out of the Chicago market for four years, the Banker Life company notified us today that they again are making large sums available for investment in first mortgages in this district. Furthermore, Chicago is the first urban area to which they are returning to make mortgages.” Bankers Life was one of the nation’s largest mortgage providers.
October 1935: Work is underway on Evanston’s first new apartment building since 1929.
May 1936: Editor of Land Values Blue Book of Chicago predicts 1936 will be an active one in Chicago real estate.
“Very few new buildings were erected for living purposes in the older sections of the city, even in those districts which had for years enjoyed the distinction of being exclusive. Prices tend to go lower and lower, and movement to the suburbs is absorbing all the new demand for homes.”
January 1937: Home building sets the stage for 1937 activity- and the re-establishment of the home mortgage as a sound investment for private capital is propelling the market. The experts gave considerable credit to the FHA program for this, calling attention to a record of some 1300 commitments for insured mortgages on new homes in northern Illinois.
Previous Chicago history re-cap:
1924-1929: Record building of apartment houses in Chicago
1929-1934: Bust- buildings go into foreclosure
Mortgage providers stay out of the market for at least four years
It’s six years before any new construction is even attempted in Evanston. Similar length of time for Chicago proper.
About eight years after the bust, some life returns to the market.
If you believe this housing boom was similar to the 1920s boom- then you should expect a similar recovery period.
Here is a good example of what I have seen a lot of in the area that I am looking. I own a place in Logan Square and am looking to stay here. The neighborhood has improved a bit in the last 5 years but, it really hasn’t changed a lot.
$630,000.00
2522 N FAIRFIELD AVE , CHICAGO, 60647-1808
03/04/08
$275,000.00
2522 N FAIRFIELD AVE , CHICAGO, 60647-1808
08/05/03
They did make improvements but, even if they tore the place down can you really ever justify that kind of increase? In 2000 you could buy a SFR in Holstien Park for $250K. Now the cheapest one for sale in that neighborhood is $660K most are $800K+. I just cannot see a scenario unfolding that will keep prices in this area even flat in the next 5 years.
Deaconblue-
I was a mortgage broker in ’03-’04. I was in the middle of the craziness and saw it first hand. I closed over a hundred purchases in that time frame and only one put more than 10% down. Some had the ability to put more down but, it was extremely rare. I could go on and on but, the fact is the media isn’t bearish enough about what is in store for the majority of the Chicago area.
Sabrina –
Hopefully you will archive these posts and we can look back in 5 years and see that some people did “Know” what was going to happen. 😉
This may have been linked in the past, but if you look at Schiller’s inflation adjusted home prices since 1890 its hard to think there’s not another 20% of decline to come.
http://www.speculativebubble.com/images/homevalues1.gif
“…are jealous of everyone who made money in the boom…”
You must have sold in 2005 then bacuase that’s who made money in the “boom”.
“The only real guide there is to a situation like this is to look at history.”
There is no history for a housing downturn that wasn’t caused by a recession. This is unprecedented.
General question for chatterers; what effect do you think rising gasoline prices will have on the housing market in the near future? Do you think more people will be looking to buy in the city and inner-ring suburbs as a way to shorten their commute and alleviate the pain at the pump? We’re already seeing an impact on car sales and the seemingly-sudden death of the SUV. I am wondering if homeowners in the far suburbs and exurbs who can sell, combined with 20-somethings graduating from school and/or getting married and looking for a home, will drive up demand within the next 5 years.
It’s too soon to know if people’s home buying habits will change.
There are plenty of homes for sale in Oak Park, Berwyn, Evanston right now- and not many are moving. You would THINK that buyers would want to be near the trains/public transportation.
We’ll have to see going forward.
Despite all the media coverage I haven’t met anyone who has curtailed their driving or took a “staycation” due to rising gas prices. Moreover, many distant suburbs are quite affluent. My humble prediction: in the near future, the target market for urban real estate remains the same.