Market Conditions: Chicago Developers Predict a Better 2010
The Chicago Tribune talked to local Chicago area developers and real estate experts about what is in store for the new construction market in 2010.
“Owning costs less than renting. Today is an ideal world of affordability because of low mortgage rates and reduced home prices in the last two years,” said Chris Naatz, Midwest director of marketing for Pulte Homes in Schaumburg.
“Pricing has stabilized, and there are opportunities in the housing market that were not affordable before,” he added.
“The government’s $8,000 tax credit for first-time buyers last fall created a momentum that helped significantly to get people with limited funds into houses,” said David Smith, vice president of sales and marketing for Cambridge Homes, Libertyville.
The high-end market is hurting as well as other price ranges. “There are a lot of multimillion-dollar homes for sale. But jumbo loans may be hard to get, even if the buyer is qualified,” Samuels said.
Housing may be edging upward, but by how much?
“In 2010, less than 5,000 housing units will be built in the Chicago area,” predicted real estate analyst Tracy Cross. “That’s down from 33,000 in 2005 and up from 4,000 in 2009.
“I hope we can turn the corner this year. It will depend on the economy and consumer confidence,” said Cross, president of Tracy Cross and Associates in Schaumburg.
New building will be non-existent in downtown Chicago. That shouldn’t be surprising given the amount of inventory. It would also follow the pattern after other Chicago condo booms when there was little new construction for years afterward.
Meanwhile, in downtown Chicago, the condo building boom is history. This no longer is the “crane city” that produced 18,000 units in four years.
“There are no new high-rise residential buildings in the pipeline for 2010,” said Gail Lissner, vice president of Appraisal Research Counselors in Chicago.
She estimates that 2,800 unsold condos will be on the market this year, with the bulk of them in the South Loop.
One downtown builder agrees that no new condo towers are on the horizon. “No lenders are willing to finance new buildings,” said Richard Gammonley, president of the Gammonley Group.
“We’re wrapping up sales at our 757 N. Orleans high-rise condo with 198 units,” said Gammonley. He noted that the slow market has resulted in price cuts of $65,000 to $95,000.
Going forward, he believes market conditions are favorable. “It’s just psychological. People have to feel comfortable to buy. They never again will see today’s bargains,” Gammonley said.
As we have seen, many buyers still believe in real estate as an investment. In another Chicago Tribune article discussing the “lost decade” in stocks the last 10 years, people are turning their backs on stocks and investing in real estate.
For some investors, the one-two punch of the financial-system meltdown of 2008 and the severe damage it did to the stock market — the Dow lost a stunning 54 percent from its all-time high in 2007 to its low in March — has far exceeded the shock of the dot-com era losses.
“There’s been a paradigm shift. People are wondering, ‘How could this happen?’ ” said Sunil Gupta, a software developer and trainer.
Although he has held on to the stock mutual funds in his retirement accounts, Gupta, 46, said he is plowing savings into condos that he plans to rent, instead of looking for more opportunities in equities.
“I think this is a once-in-a-lifetime opportunity” in housing, Gupta said.
Local builders see light at the end of the tunnel [Chicago Tribune, John Handley, January 1, 2010]
For stocks, an end to a ‘lost decade’ [Chicago Tribune, Tom Petruno, January 1, 2010]
Does this feel like just another example of people who have money to make by selling us stuff, telling us how great of an opportunity it is to buy now, and only now, or else we’ll miss out?
In the past few years we have gone from “buy now or be priced out forever” to “Buy now because prices HAVE to go back up.”
Let’s see how that inventory moves in the next 12 months eh?
the stock shills on cnbc point to how much the market rallied this year. ignoring the large chunk it’s still down.
the real estate shills point out that re didnt drop 56% like the stock market, and is now “affordable”. of course if it had dropped 56% it would be more affordable.
Just buy something already! You will feel better about yourselves:)
it’s always the best time to buy!
Happy New Year everyone. Thanks to Sabrina and all of the regulars for providing an entertaining and enlightening forum.
It’s gonna be a renters mkt until we start seeing some cash flow neutral to positive places on cribchatter.
“we start seeing some cash flow neutral to positive places on cribchatter.”
you wont see many of those they arent as entertaining.
Right up the CC alley:
http://www.nytimes.com/2010/01/02/business/economy/02modify.html?hp
Happy New Year everybody!
When have realtors, developers, and others whose income relies on the sale of real estate not been optimistic about the future of real estate?
First, happy new year to all and thanks to Sabrina for another year of CC.
Second, as someone who had planned on buying a place in the summer of 2008, then delayed until the winter of 08/09, delaying again until the current 09/10 winter commenced, let me say that I have only become more entrenched in my lowly renter’s ways.
I’m fortunate to have held on to a relatively high-paying professional job, the sort that should enable me to buy in the $450-$550k range. But very few places worth buying in my desired areas have seen a sufficent reduction in price. I thus continue to rent a place in the $500k (plus very high assessments) range in my desired area from someone who is losing nearly $1,000/mo on the place.
Surprisingly, a few friends at work are more confident than I am about (i) their job security and (ii) the real estate market, and recently purchased places in the $450-$550 range. I wish them the best, but for at least another year, I’ll not only remain a renter, but I’m actually going to look for an even better deal, in an effort to save more for an eventual purchase.
Pete, I’m a broker and ive been telling all my clients, Chicago still has a ways to go down and not to rush into buying. Sure I would have more business if things were better, but it doesn’t matter to me if things are up or down; I make money either way. Most individual agents you talk to share my opinion about the market, yet the realtors’ associations keep cranking out the ‘buy now bs’. There really is a disconnect between the top of these organizations and the average agent.
The builders are another story. They are boxed into saying real estate looks good. A developer has to say that or he’s tipping his hand.
The funniest thing i heard from a developer recently was when i asked if she was putting any more deals together in spite of everything and she said “yes, I have to. that’s what i do”
“(plus very high assessments)”
Out of curiousity, how high is very high? What type of building is it?
anony,
sounds very similar to the situation i am in. i’m fortunate to have a great job situation but that still doesn’t mean i want to blow a bunch of money just so i can say i own something. i have friends who make literally 10% of my annual income who have purchased places and continue to think i’m a fool for renting. oh well.
Count,
Just wanted to say, nice to hear from someone in your position who seems to be honest. I’m sure it will serve you well.
Hi,
I am in the same boat as anon – I would like to buy relatively soon and have just started looking. Any advice on which agent to start with ? Anyone has had any good experiences with an agent who wont rush you ? I am in the beginning stages of the hunt and want to take it slow.
Owning costs less than renting? I’d like to see their math. If they’re talking about Chicago, they are full of crap.
CountDeMonet, I love your honesty. Is your take based only on Chicago proper, or the burbs as well?
Mike…
Owning costs less than renting in the sense that if right now I pay $2,200 a month in rent, and I buy a similar place with a mortgage payment of $1800 a month + $350 in assestments, a) that is less, b) I am building equity. And, in fact, this is my exact scenerio.
If you’re not a professional real estate investor then it’s best not to look at real estate as an investment. When everyone is shunning stocks for real estate, that’s when I want to be in stocks – except that I don’t think stocks are cheap right now. Equities are certainly more volatile than real estate but I’m only down about 10% from my peak portfolio value right now.
I think most often owning costs more than renting in Chicago.
If owning costs less than buying, then I’ll buy.
In that case I think you’re going to be a renter for a long time dd.
I don’t ever envision a scenario occurring where owning is less than buying.
http://www.redfin.com/IL/Chicago/4416-N-Kostner-Ave-60630/unit-1C/home/12604984
A 2/1 for $100,000 on the NW side. When converted in 2005 it sold for $143,000 and sold again a year later for $174,000.
Today you can own it for $793 a month (PITI=HOA) with 20% down.
Unrehabbed 2/1’s in the neighborhood (Albany Park – Mayfair) rent for about $975 per month.
chicago.craigslist.org/chc/apa/1537466401.html
“If owning costs less than buying, then I’ll buy.”
The condo market tanks first; then multi-units, then single families.
HD in no example that you posted does owning cost less than buying.
You posted rentals, which are not part of owning or buying.
Rental rates are also going down, so even if the cost of buying decreases a significant amount (25-30%), it won’t get below rental rates except in rare circumstances. My old landlord offered me 10% of my rent for my lease that expired in August 2009, but I declined and moved into a better place. This was not a random occurrence. Rents are declining all over the “green zone”.
My combined rent and parking was renegotiated down from $930/month to $880 a couple months ago (parking was month to month so got the new rate of $125 instead of $175).
When my lease comes up for renewal I have ads printed out from my LL advertising a unit with my same floorplan for $645/month. I’m currently paying $755.
Deflationary environments definitely favor the renters over the owners, whose mortgage payment is fixed and whose tax liability likely will not go down at a similar level as taxation seems more sticky.
Back in the pre-bubble days investors bought cash flow positive rentals. That’s why Chicago has a large rental housing stock – because it was profitable to buy properties on the cheap and then rent them out for a profit.
During the bubble the idea of making money every month was forgotten as the capital appreciation investors got in flipping. Capital appreciation investors often carried property for a loss every month with the expectation the profit on the sale would exceed total carrying costs.
My example above works. My example above cash flows. The rental property is not as nice as the condo, yet it costs more per month.
homedelete:
Good example of where owning may be less expensive than renting.
“The condo market tanks first; then multi-units, then single families.”
Why do you predict that condos will tank first? I agree, but I’ve seen very few condo REO as compared to single family houses. Why is that?
“I don’t ever envision a scenario occurring where owning is less than buying.”
Bob- maybe you weren’t living on your own in the 1980s and 1990s when this did indeed occur in the city of Chicago.
The bubble has messed with people’s perceptions of what a “normal” housing market should be.
“Why do you predict that condos will tank first? ”
Because they already have in the non-crib chatter ‘hoods.
All over the city 2/1’s are selling at or near rental parity and in many cases better than parity. Newer conversions are selling for slightly more while the older ones are selling for less but generally they’re in the low 100’s or low 200’s for better situated units. The only places that 2/1’s are holding any value as of today are in crib chatter hoods but we’ll see how long that holds up but in my opinion not much longer. The proverbial 2/2 seems to be holding up better around the city but only because they tend to be much newer than the 2/1’s.
I agree HD.
But there is now tremendous weakness in the cribchatter-hoods (as you put it). It’s only a matter of time. It’s just taking longer for the short sales and foreclosures to work their way through the system in some areas.
“Bob- maybe you weren’t living on your own in the 1980s and 1990s when this did indeed occur in the city of Chicago.”
How many people on this thread are going to mentally substitute the word “renting” for “buying”? Everybody but me?
I still don’t foresee any scenario where owning is less than buying.
To spell it out quite explicitly they’re always equal, at least in my perception.
“To spell it out quite explicitly they’re always equal, at least in my perception.”
They aren’t, but hey whatever you want to believe. Some people believe in Jesus, some don’t. Who cares.
Owning will be less than renting when inflation returns. My mortgage will always be in 2009 dollars at a fixed, 30-year, very low interest rate.
Good luck buying a place in 18 to 24 months when mortgage rates are above 7% because the world has maxed-out on US Treasuries, and the tax credit is gone.
LS studies have indicated house prices are payment based. So I`d rather purchase a lower priced home in a high interest rate environment than a higher priced home in a low interest rate environment as you can always renegotiate the rate via refinancing
I’m going to agree with Bob. The whole “you will be priced out” if rates go up is totally not true and is just used to pressure people into buying something now.
if rates drop. But its very difficult to renegotiate the purchase price. Also as more of my housing payment will be in interest I will get a bigger tax break.
It will just reduce the cost basis, Logan Square. Down payment will go further, too. Demand will be crushed again. Rents will fall further due to the new, lower cost bases. The rent:own downward spiral will continue.
Bob–yes, this is a very weird phenomenon. Even when you have spelled it out, people still can’t see it. Brains are funny.
Bob and Dave –
You two are correct, but only if there is another very significant drop. Do the math.
Scenario A: $200,000 purchase price, 20% down, 5% rate, 30-yr amort. Monthly P&I equals $859.
Scenario B: $160,000 purchase price, 20% down, 7% rate, 30-yr amort. Montly P&I equals $852.
In other words, you would need another 20% drop in prices to offset a 200 basis point increase in the interest rate in order to make the monthly payments equal. You end-up saving $8,000 on the down payment – however, you probably won’t have the $8,000 credit in 12 months either, so that offsets.
What am I missing here?
“How many people on this thread are going to mentally substitute the word “renting” for “buying”? Everybody but me?
I still don’t foresee any scenario where owning is less than buying.
To spell it out quite explicitly they’re always equal, at least in my perception.”
LS thanks for running the numbers showing why I believe we`re in for at least another 20% drop. HD-“owning” & “buying” think about it.,
Buying right now makes sense for someone who has nothing to unload. New or first time buyers who will stay in their place for a decent amount of time. On top of that the current $8,000 incentive for those first time buyers is a huge plus. I am in this position- and I can tell you in 7 years, when I am still paying on a 5% loan- I will be one happy camper.
Unless you are in a position to buy your house with cash- I think interest rates are just as important as price- proven by Logan Square’s example.
I think we’re arguing semantics when in fact we all mean the same thing: the monthly cost to purchase and own today is still higher than renting a comparable unit.
Sonies: “They aren’t, but hey whatever you want to believe.”
Owning =/= Buying? Huh. You’re an FSM guy, aren’t you?
“In other words, you would need another 20% drop in prices to offset a 200 basis point increase in the interest rate in order to make the monthly payments equal.”
Right, and that would be *on top of* any further correction/overcorrection post-bubble. It’s likely to manifest itself in a drop in volume, but there is no way that a significant (ie at least 200 bips) rise in interest rates would not result in a drop in prices, too.
“Owning =/= Buying? Huh. You’re an FSM guy, aren’t you?”
renting =/= buying… what is an FSM guy?
semantics is an interesting way to put it.
FSM = Flying Spaghetti Monster. Sort of dada (non-)religiosity.
You quoted Bob who was *consistently* needling the “If owning costs less than buying, then I’ll buy.” post from dd. He *never* said that renting equals owning/buying.
So that $200K condo market value today would drop to $160K due to a 200 bp rise in interest rates, and then possibly even more due to the market? I think it would drop a little less due to the tax advantages, but maybe down to $170,000 due to interest rates, and then another drop due to the market and end of the tax credit. In the end, that $200K condo could end up being $140K or so in 2011.
“So that $200K condo market value today would drop to $160K due to a 200 bp rise in interest rates, and then possibly even more due to the market?”
I wouldn’t predict the amount of the drop as precisely as LS, but a large change in interest rates would (1) crush volume and (2) lead to lower prices. Your numbers seem non-absurd, but on the bearish end.
I think 140k is a bit pessimistic for that timeframe. If you believe that record low interest rates contributed to the run up as I do it stands to reason the removal of them will deflate the bubble at the same pace (~10%/yr).
Interest rates reflect wage inflation and really have little to do with housing values. The ease of lending created demand that really should have not existed. This demand is gone and today’s values represent tight lending standards. As these standards move to the middle values should again rise.
Free advice from the man!!
Although in investment (read commercial) real estate, there is a very high correlation between interest rates and value due to the desire to have positive leverage when using a capitalization rate driven analysis, I’m not sure that the same relationship is as strong in residential sales.
Consider the period between 1990 and 1997 (I chose 1997 because that was the last year average 30-yr T-Bills were above 6%). In that period, the average 30-yr T-Bill was 7.32% and Case Shiller increase an average of 3.1% per year. Clearly, house prices can still appreciate in face of a high interest rate environment.
Also of note, the average 30-yr T-Bill between 1977 and 2009 was 7.872%. In 2009, the average rate was 4.08% – the LOWEST rate in 32 years. That rate is currently at 4.61%.
Oh I thought I was the only one here who knew what the church of the flying spaghetti monster was.
Nice to see another follower anon (LOL) as it makes for some good humor.
“Free advice from the man!!”
You get what you pay for… in this case, nothing.
You need to have significant employment and wage growth to see increases in values to offset the rising rates. I don’t think there’s going to be enough of that, and prices will have to fall further.
LS: Great points. Real estate prices can certainly appreciate in an interest rate environment higher than where we are today.
That said, the cost of financing is certainly a component of demand for buying a home. All else being equal (which it certainly never is), an increase in interest rates will lead to a lower demand for the purchase of homes.
correct, it’s not static high rates that are the kick in the balls, it’s the journey from these historic lows to higher rates.
“In that period, the average 30-yr T-Bill was 7.32% and Case Shiller increase an average of 3.1% per year. Clearly, house prices can still appreciate in face of a high interest rate environment.”
Of course they can. That is because that was a declining interest rate environment. The 90-97 period generally saw 30-yr T-Bills decline from over 8% to 6%. I don’t see what that has to do with the current situation where rates will likely rise.
The question is how prices behave in a rising interest rate environment? The answer is obvious.
G: The answer is obvious….if the increase happens in a vacuum. As I mentioned in my previous post, all else is never equal.
Isolating out many other significant variables*, as interest rates go up, demand to purchase homes will go down..this will lead to an increase demand to rent homes. This increased renter population will push rental prices up.
*Significant variables that contribute to local housing demand include: Emplpoyment levels, desirability of location relative to competing locations, population, expected future value of home, expected future cost of renting and so on.
There are several variables that impact prices. To the best of my knowledge, rising income (wages & stock market) have more of an impact than interest rates. I would actually like to run a regression analysis on this, but don’t have time . . . We have already seen this to be true in this cycle. Its no coincidence that prices plummeted with the stock market, then began to increase again as the market increased 57% from the trough.
So, what happens when both interest rates and the stock market rise? I don’t know yet, but will maintain my theory from previous posts: We have already experience the trough or have come very close to it. Starting in 2Q10, property values will remain flat or increase at a rate below inflation for the next several years, but you will not see major declines after that point. The next three or four months (winter) will, however, likely be quite bad.
The exception to this rule will be the south loop with its vast over supply, bland units and high assesments.
You don’t think there will be another leg down in the stock market? Most of Asia’s real estate market is overheating (for a variety of reasons including the carry trade). There’s news of it all over the internet. Between China’s empty cities, the copper/garlic hoarding, the miles of empty cargo ships, the overheated real estate market in Australia, Dubai’s half leased 160 story office building, you don’t think any of this will eventually blow up and cause the US stock market to ‘correct’? I could post dozens of links to how screwed up the rest of the world is and I surmise that when one of those blows up, we’ll have our second leg down. It’s easy to see what’s coming, but extremely difficult to predict when. I predict sooner rather than later.
chinadigitaltimes.net/2009/11/chinas-empty-city/
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/25/AR2009112503667.html
http://www.forbes.com/2009/04/15/copper-prices-china-markets-commodities-metals.html
businessmirror.com.ph/home/bloomberg-specials/20525-chinas-property-bubble-may-lead-to-us-style-real-estate-slump.html
http://www.thenational.ae/article/20080612/REVIEW/206990272/1042
http://www.csmonitor.com/World/Asia-Pacific/2008/1208/p07s03-woap.html
boingboing.net/2009/09/15/ghost-fleet-of-conta.html
http://www.arabianbusiness.com/574795-some-40-of-dubai-office-space-currently-empty
http://www.propertywire.com/news/australasia/australia-prices-up-again-200910023554.html
business.globaltimes.cn/china-economy/2009-07/444808.html
seekingalpha.com/article/172279-will-asia-s-real-estate-bubble-burst-soon
http://www.made-in-china.com/showroom/alpha-group/product-detailJnQxkQrEdmud/China-Newly-Built-Empty-Factory.html
http://www.nytimes.com/2008/11/14/world/asia/14iht-14china.17817434.html
Good luck
You don’t think there will be another leg down in the stock market? Most of Asia’s real estate market is overheating (for a variety of reasons including the carry trade). There’s news of it all over the internet. Between China’s empty cities, the copper/garlic hoarding, the miles of empty cargo ships, the overheated real estate market in Australia, Dubai’s half leased 160 story office building, you don’t think any of this will eventually blow up and cause the US stock market to ‘correct’? I could post dozens of links to how screwed up the rest of the world is and I surmise that when one of those blows up, we’ll have our second leg down. It’s easy to see what’s coming, but extremely difficult to predict when. I predict sooner rather than later.
chinadigitaltimes.net/2009/11/chinas-empty-city/
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/25/AR2009112503667.html
http://www.forbes.com/2009/04/15/copper-prices-china-markets-commodities-metals.html
businessmirror.com.ph/home/bloomberg-specials/20525-chinas-property-bubble-may-lead-to-us-style-real-estate-slump.html
http://www.thenational.ae/article/20080612/REVIEW/206990272/1042
http://www.csmonitor.com/World/Asia-Pacific/2008/1208/p07s03-woap.html
boingboing.net/2009/09/15/ghost-fleet-of-conta.html
http://www.arabianbusiness.com/574795-some-40-of-dubai-office-space-currently-empty
http://www.propertywire.com/news/australasia/australia-prices-up-again-200910023554.html
business.globaltimes.cn/china-economy/2009-07/444808.html
seekingalpha.com/article/172279-will-asia-s-real-estate-bubble-burst-soon
LS, there is also the issue of the disappearance of 100% financing and other questionable loan products.
I have a feeling that any correlation between RE prices and the stock market is due to their shared response to interest rates. I don’t expect to see the stock market rising when interest rates rise either.
http://www.redfin.com/IL/Chicago/4416-N-Kostner-Ave-60630/unit-1A/home/13080707
Here’s another better than rental parity condo in a non-crib chatter but otherwise safe and centrally located NW side neighborhood.
$85,000, fully rehabbed 2/1 on the NW side.
This would rent for over $1,000.
On a monthly basis to own with 20% down:
30 year fixed 5.125% $372/mo
$128 assessments
$136.58 taxes
______________________
$636.58
This cash flows my friend. Anybody looking for an investment property?
G –
This is always my complaint on this site – very few people look at the raw data.
I just took a look at historical US 30-Yr T-Bill Rates and S&P 500 rates on a monthly basis between February 1997 and December 2009. The data set only includes 347 months because 30-Yr T-Bills were discontinued between March 2002 and January 2006.
In 27% of the months, BOTH the treasury yield and the stock market increased. In 21% of the months, the treasury yield increased and the stock market decreased. However, there is a stronger correlation between treasury yield decreases and stock increases (33% of months).
Ok – more data – Case Shiller, 30-yr bonds and S&P 500. In the 228 months where all data was reported, stocks (S), S&P (SP) and Case Shiller (CS) ALL ROSE IN UNISON 20% OF THE TIME. In that period, if S increased in one month, CS had a 45% chance of increasing and only an 18% chance of decreasing.
Conclusions: Even with interest rates increasing, historically the stock market is more likely to increase than decrease. When stocks increase, there is a good chance housing will increase as well.
Sorry – February 1977 to December 2009 on US T-Bill vs S&P 500
My main complaint on this site is people who try to act like they know what they’re talking about with regard to statistics who clearly do not.
Correlation is not a transitive property and the degree of correlation matters.
Stocks being positively correlated with case shiller and stocks being positively correlated with interest rates does not mean case shiller is positively correlated with interest rates. In fact its probably quite strongly the opposite.
Chances are your data isn’t even statistically significant.
Want to see statistically significant data? Why don’t you stop changing the subject and find the degree of correlation between house prices (CS) and interest rates (i)? I’m betting its a strong negative correlation–much more predictive of CS than any variable you listed.
Jesus Christ I hate statistics. It bores me to death.
“historical US 30-Yr T-Bill Rates”
Ten year note is the debt better correlated with mortgage rates.
“Jesus Christ I hate statistics. It bores me to death.”
If you want outsized returns the best way to do that is to learn stats and apply it to the market, OR speculate in RE. However the environment is not right for RE speculation.
No Bob, it doesn’t take statistics or a pencil and paper to invest, it takes HUGE CAJONES to jump right into a flip or a stock or some other crazy investment. That’s how you make real money.
I’m just kidding, of course.
So you all agree that higher interest rates will not lead to lower home prices. Glad I was successfull in my teachings. Just as simple as saying that the last 2 years of dramatic decreases in interest rates did not lead to higher home prices. There are many more variables in determining valuations than simple interest rates.
Whoever mentioned capitalization rates must also realize that target caitalization rates tend to move dramatically with expected variable increase / decreases.
Whoever would have thought the stock market would rally 40% while unemployment grew to over 10% in the past year. Those markets sure do act funny 🙂
Higher rates will make many buyers buy less of a house. They will be priced out of certain neighborhoods as the rates rise and will look elsewhere.
Oh Sabrina – Such a limited analysis from you?
What happens to leveraged housing as wages start to increase? We certainly will not see higher rates until unemployment comes down.
What do higher wages, population growth, and a decreased in new supply do to housing prices? I am talking next ten years.
Love to hear your analysis 😉
When will we see higher wages? People are going on two or three years (in some cases) with no wage increases. Those who lost their jobs and are getting re-hired are taking pay cuts.
Wages won’t be an issue for many years.
If this recession is similar to the early 1980s recession, unemployment could easily stay above 10% for the next 5 or 6 years (as it did then.)
Rates will rise because the Fed can’t keep them low or it will risk a commodities bubble, among other things. They won’t be able to wait until employment returns to raise rates.
As rates rise, my money won’t go as far. Instead of living in Lakeview, I will choose to live in Edgewater for the same monthly payment. That’s what people have done for forever. Now, if inventories get to the levels in Lakeview that are too high, prices will be lowered in order to sell. I don’t know if that will happen or not in this interest rate cycle.
The free money we have now will go away (and soon.) It’s been fun while it’s lasted.
Why do you refer to low interest rates as free money? Interest rates today reflect the fact that there is no inflation. Last I checked our treasury auctions were going without a hitch. There is either inflation or deflation. Which is it Sabrina? Is the US deflationary while the rest of the world is growing like crazy?
You are saying they will raise rates to aviod a commodities bubble? Rates have come straight down over the past 12 months and oil has is sitting at 50% of the high from 2008. The $$ affects commodities but I can’t quite understand the interest rate correlation you are referring to. Has Japan’s 0% interest rates for the past 20 years spiked gold, silver, and oil? Help me on this one, please?
I am starting to think you may be commenting from a 12th grade level for a 18th level conversation.
“Higher rates will make many buyers buy less of a house. They will be priced out of certain neighborhoods as the rates rise and will look elsewhere.”
Maybe in the short run but its my suspicion higher rates will lower the equilibrium price of housing, even if not the payment.
“As rates rise, my money won’t go as far.”
I disagree and believe the opposite. Ever heard of stagflation?
“Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets, Together, these factors can cause stagflation; equally, either can, if taken to such an extreme that it must be reversed abruptly.”
http://en.wikipedia.org/wiki/Stagflation
Essentially the landlords that will be able to compete will be those without a mortgage payment (or a lower one) in this deflationary environment. Other not as well established landlords might not be as equipped to compete as well on price and default.
It is my suspicion rents are far less stickier than RE prices. The cool thing about being a renter is once a year I can just move if my landlord won’t deal.
Higher rates are a boon to: savers, seniors and those looking to purchase real estate. Low rates are a boon to: spenders, speculators and those who currently own real estate.
Oh the old chasing of yields… is that not where all bubbles are born. Try being in front of the curve and then you will profit. Will there will wage inflation, wage deflation, higher rates, lower rates, stagflation, or simply all of the above? The answer will make you a billionaire tens times over. To think any of us know the answer is simply ignorant.
I don’t know, you don’t know, and certainly Sabrina the blogger does not know 🙂
Good luck buying / selling real estate, stocks, gold, or whatever you fancy! Bottom line is you stand a chance other than any lady luck that is on your side!
“The free money we have now will go away (and soon.) It’s been fun while it’s lasted.”
I hope you are right but I’m not sure. So far the government’s policy in dealing with this crisis has been to keep the free money coming in from banks and pay them for reserves. Borrow at 0.12% and invest that at 1.5% in risk free interest bearing reserves. Definitely a plan to rebuild bank balance sheets.
Until we have a currency crisis or failed government debt auctions I’m not sure the policy will change. Already Krugman and Bill Gross are recommending or predicting the Fed will keep or restart its MBS buying program beyond its scheduled 3/31 end date. Krugman is recommending another doubling of the Fed balance sheet to $4,000,000,000,000. Bill Gross has openly admitted his PIMCO firm dumped off a lot of Fannie and Freddie debt onto the Fed while they still could.
http://www.time.com/time/business/article/0,8599,1951623,00.html?xid=rss-topstories
Other pundits predict the homebuyer tax credit will be extended through 12/31/2010 and other interventions extended as well through mid-term elections. This could indeed be another year of spending into oblivion.
But it can’t continue forever…the higher the house of cards grows the bigger the fall will be.
Bob –
If you have time to do the regression analysis or find the study, please post. I think my point, however, was well made: people keep claiming that housing prices must fall if rates go up or that the stock market will crash as interest rates rise when, historically, that has not always (or even typically) been the case.
The problem with your conclusion, LS, is that your CS data is from a period defined generally by declining interest rates. Monthly fluctuations in 30 yr T-Bills do not directly impact the 3-month rolling averages with 1-month reporting delay represented by the CS index. Your comparison also fails to consider other factors contributing to CS appreciation in that time, namely cap gains exemption increases on RE and the near absence of underwriting standards.
Since when does owning cost less than renting? Have they been living under a rock for the past two years? The math simply does not add up.
Also, I hate to say this, but the American Dream of ‘you havent made it until you own a home’ does not exist any more. I cant understand why people are still holding on to this fallacy. Buying right now is too big of a gamble when you compare it to other options. MAYBE you will break even in 5+ years, but that means your cash is stuck in a very illiquid assett. For many young professionals living downtown, 5 years can mean huge changes in jobs, and lifestyle.
Renting is the best deal right now. You can live like a king and rent a 1 million + dollar penthouse for 5k a month (as compared to paying 8k a month for your mortgage, assessments, taxes).