Market Conditions: Chicago-Area Construction Loan Delinquencies Soar
Crain’s reports that the delinquency rate for Chicago-are construction loans surged to 13.7% in the third quarter- making it the 10th highest delinquency rate in the nation. Riverside, CA is first at 19.3%.
From Crain’s:
The delinquency rate for construction loans in the area hit 13.7% in the quarter, up from 10.8% in the second quarter and more than four times the rate in the year-earlier period, according to Foresight Analytics LLC, an Oakland, Calif.-based research firm. A big chunk of the bad loans here are residential, mirroring national trends, according to Foresight.
A growing number of local single-family home and condo developers can’t pay back their lenders because they haven’t sold enough units to generate the cash. Residential developers sold just 5,952 units in the first nine months of the year, down 55% from the year-earlier period, according to Schaumburg-based real estate consulting firm Tracy Cross & Associates Inc.
With the economy in a recession that some expect to stretch into 2010, there will be a lot more working out to do. Though the overall delinquency rate will stabilize as more banks take bad loans off their books, “I’d be surprised if there’s any kind of a turnaround before the middle of next year,” says Foresight’s Mr. Anderson.
This confirms what I’m seeing on a daily basis (and what we’ve been chattering about.) The developers are starting to throw in the towel.
Bad loans pile up for Chicago developers [Crain’s Chicago Business, Dec 8, 2008] -Be sure to check out the excellent graph.
I predict the SP or DJIA will go up 300 pts b/c of this very positive news just like it’s reacted positively b/c of all the other recent good news…
Of course, after commoners get some faith and start investing again, the harsh reality of our economic condition will bring us right back to mid 8000 level.
I hate waiting on the sidelines to buy my own crib here. End of 2009 hopefully…
I think it will go up until Janauray, then I am buying SRS.
jason-
right after 4th quarter results come out aroudn 2nd week of Jan. Right now it seems like the DJIA is shaving a balloon. 1 slight knick and the balloon bursts…
Developers are indeed throwing in the towel, but this is still early stages. The price drops on spec housing in the city is only 10-15% below in most parts. But in the last couple of months the bottom has fallen out and its starting to show.
Somewhat off topic but we have been to 4 open houses in last few weeks and of the 3 existing homes, one was owned by a realtor, another by a commercial realtor and the third by a real estate attorney. The fourth new home was developer cutting 15%. of course the cuts in existing homes were much less agressive then spec home. Developers will lead the way.
Hey–I’m 66 years old. NOW is the time for me to buy. It would not be a good idea for me to wait for another 5% drop.
Bow to the buyer. Start cutting prices or go bankrupt.
construction loans have been given out in recent years for projects that have only a 10 or 15% profit margin. That kind of margin gets eroded quickly when projects don’t sell as quickly as anticipated or when prices are cut modestly. If a developer wants to cut prices due to lack of sales, there’s a good chance they don’t have any more profit left in the project, so they will have to get permssion from the bank to cute prices. at that point the project is already distressed.
but it takes a while to get to that point, cuz most loans have some interest reserve built in. which is why projects are only now starting to go belly up.
The Treasury just sold $27 billion in three month bills at 0.005% which is the lowest rate since it starting auctioning the securities in 1929.
– Can someone say liquidity trap?
So the government is getting free money.
But I don’t believe in liquidity traps. There’s always the helicopters.
Despite these delinquencies, the prices are only moving, in my opinion, at a snail’s pace. Let’s get this market moving with some MEANINGFUL discounting. I just don’t understand why r.e. prices have not been coming down more. I have been looking for months for a 2 b.r. 2 bath north of the river, south of division, east of dearborn — and although I see regular $5k or $10k reductions as prices creep slowly down, when can we expect the 20% + that I need to be able to afford a place? The prices seem to be about where they were 2 years ago. I am looking for a quality building and location, $550k max, including parking. Am I dreaming? If so, maybe I should wake up in 6 months, or is a breakthrough about to happen?
desteve,
I hear you. I am similarly baffled. What I finally concluded is that most sellers don’t have to sell right now so they are sitting on the sidelines waiting (illogically) for the market to come back. I hear this all the time. Also, because of the bubble, anyone who even dreamed of moving did so in the last few years so they’re relatively new in their homes.
But I agree that the prices have to eventually come down and by a lot more. I’m thinking that lots of sellers are holding out for the spring market and once that doesn’t materialize as expected there might be some capitulation.
You didn’t say if you are looking at high rises or not. Those definitely are overpriced.
desteve,
Of course you’re looking at high rises in that area. So it must be the assessments that are causing you dismay (they are indeed outrageous) since there is a lot available there in your price range. Or maybe you’re not finding buildings that meet your standards.
desteve,
most sales in this market are distress sales. Folks who bought in the 3 years are looking at bringing 25-50k to the table at your price point. In this situation most people are just stuck and will stay put as long as they can. Builders on the other hand have loans coming due and will clear inventory at any price. Hang in there.
Gary Lucido – Helicopter Ben won’t save the day……. Prices on leveraged assets will come tumbling down as the holders of nominal priced debt against deflating real priced assets get creamed, default and go BK. The govt might get some free money for the short term, but people will be holding cash instead of bonds will more than offset any “free money” advantage. Holding cash no longer has a lost opportunity cost anymore… Deflation will be many debtors undoing.
I agree with John, Bk should be and will be the end result of overleveraged fb’s who wait too long to sell.
But the government can keep pumping money into the system until the deflation stops. There is no limit to what they can do.
If pumping money into the system worked then Zimbabwe would be the greatest place on earth. They can pump all they want but that doesn’t mean the money will work its way down to the average fb who is leveraged a crazy multiple of his income.
Yes! We all agree. I am looking at high rises, and the assessments are really high, particularly in older buildings. I am assuming they will catch up in the newer building too as they age, but the price point is my problem. What do you think of the strategy of lowballing? A waste of time? Do the really desparate sellers keep the prices high in hopes of a sucker, and therefore there is a really chance a a fair price if you make a low bid, or is such an attempt to smoke out really hungry sellers a total waste of time, and thus I should wait and wait for lower prices?
desteve,
My guess is that the assessments are a big part of your financial dilemma and there’s nothing you can do about that. Those high rises are damn expensive that way. Sure you want to live in one?
As for lowballing I always look at the distribution (not just the averages) of sale prices to list prices. That will give you an idea of whether or not you’re wasting your time. But in the city, unless it’s distressed, you’re looking at around 5% on average. Whether or not it’s a waste of time also depends on what signals the listing agent is sending. I think that usually when a non-distressed seller is willing to accept a lower price they lower the listing price.
But I’m not understanding the price point problem because I see lots out there in your price point. Maybe you don’t like those buildings?
Homedelete,
You can say one thing for sure. Zimbabwe succeeded in preventing asset deflation. It’s not a binary situation – hyperinflation or deflation. There is an in between ground. The government can create just enough inflation to lift those depressed assets into the black or that SOME borrowers can get enough of a raise to pay their mortgages. However, I will agree that the system leverage ultimately needs to come down and none of this can happen in the next 6 months.
Rates on near term treasuries (4-week, 13-week) are at zero. In fact the yield on the 4-week slipped negative for a time today (thats NOT supposed to happen). We’re in deep crap folks if the bond market is any indication. The bond market is predicting deflation.
desteve,
in my experience, realtors are no longer at balking at 20% below list. It seems to be a good point to start a conversation. But thats just what I found during my house hunting last few weeks. The inventory out there right now is pretty minimal though due to combination of market crash and seasonality. I am just planning to stay put for the next few months unless a great deal comes along.
Realtors, lenders and homeowners that overextended themselves 3 years ago are the reason prices aren’t dropping. Let a lone the fact that banks are playing hardball with short sales by delaying them for months, when people can’t pay their mortgages anyway, and people don’t even know about loan mods.
There is no reason why any property under a million dollars should be on the market for over a year. Its the stupid realtors not having the guts to tell people what their homes are really worth and telling their clients that their asking price is stupid and will never sell.
I’m currently looking for homes and I can’t believe the prices some of these people are asking! I was browsing the MLS and there’s numerous properties in terrible neighborhoods that they are trying to sell for $300 a square foot or more!
Things have now come far enough that you can literally laugh in the face of a seller and/or their agent who lists the house at a high price and refuses all but full price offers. This has been long overdue. Those who want to list high can just watch their house linger on the market unsold.
Sonies and Pete,
You are seeing the same thing I am — unrealistic expectations, delusions of grandeur. But every so often one of them sells and there seems to be vindication, as the prices don’t change much. When 550 St. Clair did a deep, deep discount some weeks back, some were predicting that lots of Streeterville properties would follow suit, but they haven’t. If someone would just blow a whistle and say, “OK, starting now everything is 25% less” and people followed that edict, the market would come to life and all of the potential losses, of which there would be many, would swiftly occur, rather than the death by 1000 cuts that doesn’t seem to advantage anyone.
So, even in this Crain’s article they still find someone who will subtly allude to a mid-2009 recovery. Forget it, as others have pointed out, this is in the early stages and housing busts always play out painfully slow. One has to stop and step back and take a second to appreciate how badly today’s FBs have leveraged themselves. Of course they won’t budge on the price, because they simply can’t. Unlike the healthy homeowners of yesteryear, today’s “homeowners” bought with no margin for error. One slip and it’s straight back to mom and dad’s house.
The real price declines accelerate with the default of loans to developers/home builders. This has been the case in the areas that have already seen serious corrections.
Patience. Those construction loans are loaded with IO and option ARM with balloon timebombs. Those loans do, however, have built-in life support through ‘interest reserves.’ That might explain why the disappearance of sales has not created many defaults to date.
The paint is almost dry. Besides, there isn’t a place you couldn’t rent for less than owning AND you couldn’t buy for less in the future. Unless one believes that the historic collapse in sales volume will reverse without price reductions, that is.
desteve wrote:
“If someone would just blow a whistle and say, “OK, starting now everything is 25% less” and people followed that edict, the market would come to life …”
Might have been true a few months ago but now I think fear is holding people back more than price. People are just really worried about the future.
You are correct, RunnerRunner, that it is too late. It will now take a bigger reduction to overcome that fear you describe.
Or, are you laying claim to the “biggest gloom and doomer” by suggesting that properties won’t sell at any price?
You have to remember, buying or selling a home is rarely something that has to be done. For that reason, supply and demand don’t have as much impact on price as say, gasoline.
A few years ago the motivation was the fear that if I don’t buy now I might not ever be able to. Now the fear is if I buy now I will loose everything. It is fear that drove people to pay crazy high prices in 06 and now it is fear that keeps them from buying unless they get a crazy low price. Supply & demand are not as important as emotion.
Also, I don’t believe bank sales will become the new comps except for other bank sales. Sellers won’t accept them. They will stay in the house until they are dragged out before loosing equity.
Certainly the return to rational credit standards will reduce the pool of buyers and eventually this will in general push prices downward. And certain markets that are overbuilt, like high rises, will see sharper downward moves. But in general, for Chicago, I don’t see prices going down much (like 10%) from here unless we get a doubling of unemployment and the country goes into a depression. But that’s not going to happen. Not even Roubini predicts it.
~~~~”Also, I don’t believe bank sales will become the new comps except for other bank sales. Sellers won’t accept them. They will stay in the house until they are dragged out before loosing equity. “~~~~~
My neighbor accross the street keep his price steady and firm all the way into foreclosure and then judicial sale. His asking price: $575,000….finally judicial sales price….$417,000.
Flipped one year later for $425,000 (not much of a flip). The house was torn down a few weeks ago to make way for a $1,500,000 new construction mansion. (Gotta love these builders, keep building until they go right out of business.)
hd,
I think it would be hilarious if a previous lowball offeror got the house in foreclosure and moved in. If that were me I’d send him a Christmas card!
I mean he just can’t give the place away. And he didn’t. He had the place taken from him 😀
But they will. People can stay in until they are dragged out losing equity. It just takes the properties longer to price adjust in this scenario as the banks need to REO it.
I think much more common than people not wanting to lose equity is sellers unable to lose equity because they are underwater on their mortgage and can’t/won’t bring a sizeable sum to closing. I suspect most who bought in the 2005-2007 timeframe are in this scenario if they need to move. In this instance its not so much as a greedy seller as one who really mistimed the market perfectly.
“Also, I don’t believe bank sales will become the new comps except for other bank sales. Sellers won’t accept them. They will stay in the house until they are dragged out before loosing equity. “
If the 2004-2007 buyers go under water then the only people who have any equity to sell are the pre-2004 purchasers. All comps going forward will be set by those who have equity – which by the way is a significant majority of home owners. It will be an interesting scenario where people are trapped in various new construction buildings because they cannot sell. Sort of like prison. Meanwhile the neighbor in the older building accross the street sells for lower price and moves on because he bought pre-bubble.
Funny, my foreclosed neighbor told my other neighbor that he had an offer of $525,000 but he turned it down. He couldn’t just give it away you know. At $525,000 he thought he was leaving significant money on the table. Hilarious. Funny how all three parties (the owner, the flipper and the builder) have all valued the property way too high. The owner lost it in foreclosure, the flipper made $7k but lost way more than that in taxes and carrying costs for 1 year, and the builder thinks he’s going to turn a $425,000 lot into a $1,500,000 (or possibly higher) McMansion in this market!!! ha!
The lot must be cursed.
Bob wrote:
“I think much more common than people not wanting to lose equity is sellers unable to lose equity because they are underwater on their mortgage and can’t/won’t bring a sizeable sum to closing. I suspect most who bought in the 2005-2007 timeframe are in this scenario if they need to move. In this instance its not so much as a greedy seller as one who really mistimed the market perfectly.”
Indeed. A lot of potential sellers are in that situation. It is another reason why I keep saying, barring a huge economic downturn, we are not going to see prices across the board drop much further in Chicago. For sure volume will stay down.
It’s not like people have to mark their homes to market every day like a hedge fund. As long as they have a job and didn’t buy someplace really stupid they can wait it out until things turn around. As I said before, inflation will probably bail out most debtors in a few years. But if unemployment gets much over 10% in the next year, my view is all wrong and we could see a real collapse. That will be sad for everyone.
Basically the old “Sellers are so beyond screwed right now that prices can’t go lower” theory?
I need to go upstairs for a bowl after reading that one.
Hilarious. I think I’ll join you this morning.
“barring a huge economic downturn”
Geez, I hope that doesn’t happen.
“if unemployment gets much over 10% in the next year”
U6 at 20% in 2009?
Housing supply for various types of residences (SFH, condos (1-3 brs) is very high and may continue to rise. How can prices Not fall another 5 to 10% or just stagnate for 3-5 years if the following are true:
Plenty of inventory available (right now 2 years inventory on the market;
Rental prices are fairly reasonable and (assuming they remain that way);
Stricter purchase price appraisal requirements;
Jumbo loans stay at $417,000.
Yes, sellers may not have to sell. But, they may be holding onto a place that they ultimately sell in 5 years for the same price they bought it for in 2005-2007.
Without knowing how much equity they have in it, their tax situation, etc, it’s hard to say, but many Sellers could be spending alot of money just to keep their places to avoid a loss today.
Sellers in the $450,000 to $650,000 range may get hammered. In today’s market, who can afford to tie up 10 to 20% in that price range? Your pool of buyers dwindles even though money is cheap to borrow because buyers may simply not have the down payment or the stomach to do so on fungible condo units that are in high supply.
I would predict a long term buyers’ market because: No urgency on inventory for buyers, higher down payments required, cookie cutter units, economic downturn, and (most importantly) sellers who SUBSTANTIALLY overpaid per sq foot.