Market Conditions: Chicago Sales Remain Grim, Falling 42% in March YOY
How many different ways can you say the headline every month?
Home sales continue to plunge in Chicago and across the Chicagoland area.
From the Illinois Association of Realtors (as reported by Crain’s):
In the city of Chicago, sales fell 42.2% in March, to 1,181 compared with 2,044 in March 2008.
The rate of decline for the Chicago area slowed slightly from 28.8% in February but edged up from 40.4% in February in the city.
Median price also fell sharply to $220,000 from $300,980 a year ago.
As we’ve chattered about before, sales of foreclosures and other distressed properties are dragging down the median.
“We see positive signs in March numbers over February, and are cautiously optimistic about the second quarter sales and median pricing in the Chicago market,” said David Hanna, president of the Chicago Association of REALTORS®.
“We continue to observe disparity in the ability of buyers to find adequate financing, especially in the condominium sector. While pricing has continued to make this a buyer’s market, the activity levels needed for a sustained recovery in local housing are still far above the current numbers. We will need several months of increasing sales, declining inventory and continuous absorption of distressed properties if this is to be called a recovery.”
To add to the bad news, Chicagoland unemployment in March jumped to 9.3%, the highest since 1992. The data includes Chicago, Joliet and Naperville.
Local home sales fall 26% in March [Crain’s Chicago Business, Apr 23, 2009]
Press release of the Illinois Association of Realtors [Apr 23, 2009]
Metro Chicago unemployment up to 9.3% in March [Crain’s Chicago Business, Lorene Yue, Apr 23, 2009]
I’ve updated my stats back to 2006 here: http://blog.lucidrealty.com/chicago_real_estate_statistics/
I show the employment trends as well on the same page.
There is an interesting standoff between buyers and sellers. The bid/ask spread is just too high – partly because people who want to sell can’t. They won’t have enough down payment for the next place.
It’s not about having enough down payment for the next place, because they can always rent again. It’s the fact that they’ll have to bring money to the table to close. Most people were buying their condos with 5% down in the bubble years.
For those who bought at the peak and are looking at a 20% price drop (according to Case Shiller), that means someone that bought a 400k condo at the peak with 5% down and sells at 320k now needs to bring 60k to the table to close. And since most people were leveraged to the hilt and were spending beyond their means, they probably haven’t saved a dime. They get to make the tough decision of living with huge amounts of debt on their shoulders, or walking away and watching their credit score get destroyed.
I search the MLS and I see suburban homes listed for 500k. Similar homes in similarly boring suburbs in Indianapolis or Cincinnati go for 200-300k. I can’t figure out how Chicago real estate got overpriced but am skeptical of owners here who claim “thats the way it is”. No thats the way it was. I also don’t buy the argument that its Chicago’s “cultural attractions” or other people who sound like a tourist brochure, it doesn’t wash.
Chicagoland is going to get hit hard until real estate comprises the same percentage of take home income that it does in other midwestern cities. Absolutely no reason a boring house in Schaumburg should be worth half a million. None whatsoever.
The baby boomers who were counting on their RE appreciation are going to be the Wal Mart greeters of tomorrow.
The price chasm between sellers and buyers is unlikely to be resolved soon. The only thing that can realistically bridge the gap are short sales and foreclosures, and Illinois foreclosure courts are completely swamped.
comparing chicago market to indy and cincinnati is a joke!
clearly, it was Chicago’s upper-income job market that allowed much of the price upswing. so it seems logical that as the financial sector is being (rightly) downsized, so too are the housing prices that were inflated by it, among a host of other factors.
something to remember is Da Mare encouraged this. after Shakman he pretty much disregarded the old blue-collar patronage workers and instead courted large corporations for campaign cash. anyone remember all those jobs Boeing was supposed to create to justify a $50m or so incentive package to move HQ here?
but to be fair, you also can’t discount the tourism. talk to anyone from the midwest, and they will tell you that the winters here suck, but that in the summer there is no place on earth like Chicago, and they’re right. how much of that can be credited to Daley specifically and the gentrifiers more generally is of course up for debate.
Chicago C-S has to fall to 120 before we can say the bubble has popped. It will probably fall well below that before it stabilizes, due to the stuck market issues.
I still think we’re waiting for the other shoe to drop – new construction. There are plenty of developers out there who still can’t find buyers, mostly because they won’t lower the price because if they did, they lose money. Why lose money when you can just hold out for as long as you can and then go bankrupt? Then it’s the bank’s problem.
yoho,
You are the joke. The suburbs of Chicago are exactly the same as suburbs of any other midwestern city. Perhaps it is “cosmopolitan snobbery” responsible for Chicagoans paying a higher percentage of their take home income on housing?
That’s not entirely true, Bob. For instance, there are a multitude more $200k+ jobs in Chicago than there are in Indianapolis. Sure, your street block looks the same in both suburbs, but that income opportunity is what makes the Chicago burbs more desirable.
Bob,
By all means, feel free to move back home to Indiana or Ohio when it comes time to buy a home.
“Similar homes in similarly boring suburbs in Indianapolis or Cincinnati go for 200-300k. ”
There’s no way you can compare a Naperville to a Carmel.
The cosmopolitan snobbery is a different take on ‘it’s different here’.
“Bob on April 24th, 2009 at 7:54 am
yoho,
You are the joke. The suburbs of Chicago are exactly the same as suburbs of any other midwestern city. Perhaps it is “cosmopolitan snobbery” responsible for Chicagoans paying a higher percentage of their take home income on housing”
Bob there is a much larger number of higher paying jobs here in chicago than in any of those other cities you mentioned. Yeah, physically there is really no difference between the burbs in indy or chicago, but the amount of money families make is far greater here than somewhere else.
“There is an interesting standoff between buyers and sellers. The bid/ask spread is just too high – partly because people who want to sell can’t.”
This is exactly the problem and it exists in other asset classes as well. On the commercial real estate side, you have properties that are currently generating stung cash flow, but are way overlevered(ex. initial LTV as 80%, but property value has declined 25%.) So when the owners try to sell, they receive offers 30-40% below their expectations. They then decide to hold the property and deal with the lender when the debt matures. Same story with banks holding loans and other debt products at artificially high prices. Even if the bank recognizes that a default is imminent, they won’t sell at a significant loss because they would rather wait and see what happens. Worst case is the loan defaults and they take the loss later.
So how does this all relate to residential real estate in Chicago? During the bubble days you had a lot of young(er) people making decent money. A lot of them bought over priced condos because they could get a mortgage with 0-5% down. Now, with the economy in shambles, they are starting to worry about whether they will have a job in six months. Right now they have enough income to cover their mortgage (strong cash flow), but if they lose their job, it’s all over. So in anticipation of the worst, they put their condo on the market at stupid prices in hopes that the one uninformed buyer will come along and buy their condo at bubble pricing plus 10%. Obviously, the condo doesn’t sell, but so long as they remain employed, everything is OK. 6 months down the road, they lose their job and eventually a short sale or foreclosure occurs. This is what we have to look forward to.
And yes, I know this is filled with generalizations that cannot be supported with hard data.
Bob – just curious, if you feel that living near Chicago is no different then living near Indy or Cincy then why are you living here. As you said, you can get a home for half the price there over over Chicago. What’s the draw of you living here vs. there.
“It’s not about having enough down payment for the next place, because they can always rent again. It’s the fact that they’ll have to bring money to the table to close.”
While that is absolutely true in some cases it’s just a different point along the spectrum. A loss is a loss whether you get back less than you started with or have to actually bring money to close. However, what I finally realized is that even if they don’t have to bring money to closing if you can’t scrape up the down payment for the next place you’re hosed. Yes, you can rent but we have this bizarre home ownership culture where renting is viewed as personal failure. These people can’t bring themselves to renting.
Regarding the cost of housing in Chicago. I have felt something was out of whack here as soon as I moved back in 1999. Even then people were spending too much of their disposable income on housing. I think it will always be that way here until people realize that there are great alternatives out there. The best financial move I ever made was to take a job in Richmond, VA where housing was 1/3 the cost of Chicago.
We’ve debated this here before. People mistakenly think you have to live in a big city to have a life. I’m actually presenting to a bunch of graduating college seniors next week on personal financial management and this is one of my points for them.
“So how does this all relate to residential real estate in Chicago? During the bubble days you had a lot of young(er) people making decent money. A lot of them bought over priced condos because they could get a mortgage with 0-5% down.”
that’s part of it. the other substantial part is that as Greenspan and Bush were dropping interest rates to try and avoid dealing with the effect of the dotcom bubble popping, they created an imbalance where the people you described could quite literally buy a condo and end up with cheaper monthly payments than rent in the same neighborhoods. in LP/LV, I know of quite a few owner-occupied 2 flats where they had to decrease rents, even as staggering property value (on paper) “returns” meant that their taxes were going through the roof.
it was largely a win-win game for everyone but the displaced, until of course the ponzi scheme came crashing down, which it eventually had to – those property taxes didn’t actually go up due increases in the assessed value, they went up due to increased municipal budgets, and the $500 million getting diverted into the TIF coffers certainly played a large role.
“People mistakenly think you have to live in a big city to have a life.”
I’d say it’s more a reality that the City is where as a single twenty-something you can meet up with a lot of fellow singles. Sure, people could move to Kenosha or Peoria and live cheaply and get a decent job if they work it right, but that doesn’t matter to youngsters with raging hormones.
skeptic hits it on the head. I lived in a mid size city right out of school. Lasted 1 year. next to no singles in their 20s b/c few graduate college and move to indy/nashville/des moines etc. most come here, nyc, la, and atlanta (oddly). or thats the way it was during the grunge era..lol. (probably seattle too)
“There’s no way you can compare a Naperville to a Carmel.”
Seriously–Why not?
What’s the meaningful difference b/t Naper and Carmel (or Eden Prairie, or Brookfield, or Overland Park, or Ladue (prob not the right STL choice), or wherever)?
Other than the proximate city and State laws, I don’t see it.
“if you feel that living near Chicago is no different then living near Indy or Cincy then why are you living here. ”
Marco I live in the city. I understand the premium that RE in the city might vs. the suburbs. But in comparing Schaumburg, IL to Shake Heights, OH there isn’t a whole lot of difference. Why does a house cost 250k in Ohio yet 500k in Illinois?
I don’t think this discrepancy can be explained by skeptics raging hormones hypothesis. Also a long time ago G posted the multiples of RE to median incomes and for IL it was much higher than other midwestern cities, around 4x.
I think there are a lot of overextended RE owners in Chicagoland who may have been counting on their RE gains before they were realized. I think Chicagoland ‘burbs are going to get harder than most of the rest of the midwest as a result, excluding areas with deeper economic problems like Detroit.
“But in comparing Schaumburg, IL to Shake Heights, OH there isn’t a whole lot of difference.”
While I agree that on the surface there isn’t much difference but you’re paying a premium to live in Shaumburg b/c of its accessibility to Chicago. The same goes for those living in NJ or CONN b/c of its accessibility to NYC.
Being from the suburbs and spending a fair amount of time out there over the last 15 years I can resoundingly testify that access to the City of Chicago is non-issue for a lot of suburbanites. They live in the suburbs for the sole purpose of avoiding the city. My aunt in the far NW suburbs says that she visits Paris more often than she visits downtown Chicago.
“While I agree that on the surface there isn’t much difference but you’re paying a premium to live in Shaumburg b/c of its accessibility to Chicago.”
“but you’re paying a premium to live in Shaumburg b/c of its accessibility to Chicago”
Thats one rationale. Either I disagree with it or the size of the premium but historically the market has been what it has been.
It used to be parts of NJ & CT near NY were indeed more expensive than surrounding northeast seaboard but a couple years ago I looked up my grandma’s old run down house in a ‘burb of PA and it was estimated at 450k. I think the bubble inflated RE assets all over the northeast seaboard to ridiculous levels (and they will similarly get hit hard).
Err ‘burb of Philly but you get the gist.
Bob – you bring up a valid point, and everyone here has jumped on your ass about it, but I think the real reason is geographic. Indy (metro aread) for instance is effectively one large circle. Chicago is more of a semi-circle because of the lake. Since there is a certain percentage of people that want a suburban lifestyle, and a certain proximity to the city, but in Chicago we lake the land, the price goes up. On any given day, this may not hold true, but over the long history of Chicago, this is why Schaumburg costs more than Carmel. This is why San Fran is so expensive. They just don’t have the land for all the people.
The premium of living close to the City is being able to WORK in the City, where the high-paying jobs are that Big Ten graduates are attracted to.
As annoyed as I get with Daley on numerous issues, the people and elected officials in St. Louis, Indy, Detroit, etc. have clearly been asleep at the switch for decades.
The reason why some areas have high housing costs and others don’t is the velocity and abundance and availability of money. Look at Edmonton in Canada. Lots of oil shale money making it’s way through the economy shot up housing prices. There’s no shortage of homes or suitable land to build on. If it weren’t for the oil money that town would be a cultural backwater with a low cost of living. Prices are a function of lots of money changing changes relatively quickly. More rural areas which didn’t see a boom (absent equity locusts) didn’t quite have the same influx of funny money floating around and they didn’t see the same rise in home prices. That’s my working theory and I’m sticking to it.
sorry, to close my logic loop, the City RE gets bumped up due to large numbers of college grads making decent cash between 20 – 30 who want the lifestyle benefits you don’t get in Elmhurst, or Berwyn, or Crestwood.
once you’ve been in Chicago for 10 – 15 years and want to do the family thing, what are you going to do, leave the high paying job to go back to Indiana or Ohio? No, many are going to move to the burbs, taking their purchasing power with them.
I grew up in the City and I’d rather be shot than have to live in a no-sidewalk, no-public trans, endless grid-locked cul-de-sac sprawl suburb, that is pretty much my definition of hell, although I certainly understand and respect people who feel differently.
for me, it’s City or small town, period. sprawlville just isn’t an option.
HD is dead on. Go to Ottawa or any of the old mining boom towns and you can see evidence backing him up. If I ever leave Chicago it will be for a town like that, one with some history, some interesting (if crumbling) architecture, and proximity to open space, forests, etc.
For every high paying job in the city there is one in Schaumburg, Oak Brook or Rosemont or Naperville.
“skeptic on April 24th, 2009 at 9:26 am
The premium of living close to the City is being able to WORK in the City, where the high-paying jobs are that Big Ten graduates are attracted to.”
“you’re paying a premium to live in Shaumburg b/c of its accessibility to Chicago”
Right, a nominal dollar premium. And Chicago salaries are at a premium to Cleveland salaries (as are NYC salaries to Chicago). But that doesn’t justify substantilly higher Price:Income ratios.
Although I recognize that the P:I ratio might not actually be much higher if you select the proper cohort of Incomes. Using Metro-area median income to say Naperville (for example) is overpriced compared to Shaker Heights isn’t necessarily correct.
The interesting thing is how much cheaper comparable houses are in Chesteron, IN compared to Naperville. If you work downtown and drive (yeah, I know), they’re about the same commuting distance, but Naper is much more expensive.
“No, many are going to move to the burbs, taking their purchasing power with them.”
Good points. However the leverage here (median purchase price of over 4x median income) is higher than other midwest cities. Showing that incomes don’t cover all of the housing premium–increased debt fills in the gap. A lot of Chicagoland is in trouble in this respect. I don’t care what anyone says when the median house is 4x the median income for an area you’ve got problems.
“I don’t care what anyone says when the median house is 4x the median income for an area you’ve got problems.”
So, coastal California (SD, LA, SF) has had a problem for 40 years?
http://blog.lucidrealty.com/images/CAR_quarterly_sales.jpg
So based upon this it looks like we’re at about the 98 levels.
http://blog.lucidrealty.com/images/Case_Shiller_Chicago.jpg
Based upon the CS Index we’re at about 04 levels. Things wont get better until both of these graphs match up. 6 year spread.
The major mortgage lenders (countrywide, new century, indymac, resmae) that went bust came from Cali – and they arose from the need to sell homes that were priced out of whack. See the pattern? They exported that toxic waste all over the country.
“anon (tfo) on April 24th, 2009 at 9:44 am
“I don’t care what anyone says when the median house is 4x the median income for an area you’ve got problems.”
So, coastal California (SD, LA, SF) has had a problem for 40 years?
“
Chicago and other healthy metro areas will sell at a substantial premium over a place like Shaker Heights, OH, simply because this is still an economically healthy (relatively speaking)area while Ohio is now one of the poorest states in the union.
Shaker Heights is actually a vastly more “elite” suburb than Schaumburg, and actually is more comparable to Wilmette, IL or Clayton, Mo than it is to Schaumburg. However, the prices there look downright low-end, because the entire state has been economically very depressed for many years. A beautiful 6=room vintage with incredible millwork and herringbone parquet floors can be had in Shaker Heights for about $150K- you couldn’t touch it for less than $350K anywhere in Chicago, and all that really tells you is how incredibly difficult it has become to make any kind of living in OH or MI, let alone get a good managerial or professional job that will pay for $400K dwelling.
That doesn’t mean Chicago prices aren’t too high. They ARE still too high, as you can see by comparing the median prices of a particular zip code against its median income. While the median income of a home buyer will be higher than that of the median income for all residents, when you see modest condos priced at 5X the median income, you can know that your prices are still way out of line.
Don’t compare city areas with each other, for real estate has always been about location. The more apt comparison is with median incomes, median buyer incomes, and rents for comparable properties. By those yardsticks, our prices are still way out of line.
And many of these stubborn buyers will be bumped out of their homes not when they lose their good jobs, but when their mortgages reset. I don’t have the precise figure at hand, but judging by all the mortgages written by my three mortgage broker friends (all employed by different institutions), which were, they told me, almost all ARMS. Most of them were “option” ARMS with ridiculously low “teaser” interest rates of 1% or 2%, which means that the borrower went in, even with a down payment, into a contract where he was building negative equity. When the mortgage resets, there is usually a massive balloon payment due, which the buyer does not have, and then it resets to a massively higher payment, which the buyer really never could afford but agreed to because he thought he could sell at a profit or refinance. Things you can’t do now, because the prices have dropped so much from the values all this nutty lending drove them to.
Boom goes the Dynamite.
Gary said:”Yes, you can rent but we have this bizarre home ownership culture where renting is viewed as personal failure. These people can’t bring themselves to renting.”
yes, and I am very thankful to this generation of fools. Sold in 2007. Rented for 2 whole years and watched the prices tumble. Paid 30% less than I would have paid in 2007.Easiest 250k I ever saved.
See the entitlement society is not bad because they are all so damn predictable. You just have to patiently watch as they all jump off the cliff.
HD:
Those “major mortgage lenders” weren’t around in the 60s, when Cali real estate was 4x median incomes. EsEff has been well over 4x median since before your parents were born.
So, no, I don’t see a pattern, other than idiots overpaying for 1500 sqft 4 BR houses.
“So, coastal California (SD, LA, SF) has had a problem for 40 years?”
While I admittedly haven’t researched the data I seriously doubt that California real estate, overall, traded at 4x+ income levels during periods of higher interest rates.
*I’m not talking about areas like SF proper either, which is similar to Manhattan in that you have zero savings rate people with no dependents livin’ the dream.
The 1960’s 4x median income is before my time that was 50 years ago I’m not quite sure I’m qualified to compare that today
however in sept ’07 in the the Silicon Valley a 4 bedroom two 2000 sq ft house would sell for nearly a million dollars. Of course high paying jobs at Yahoo, Google, Intel and AMD were within a 30 minute drive. Throwin the CA living the dream lifestyle and you get a high velocity of money floating around driving up prices to 4x income and higher . Homes became unaffordable for most people so ta-da! toxic mortgages were developed sending prices to 6x to 10x incomes in some cases.
Aspiring knifecatcher but just don’t seem to be able to muster up the funds for a downpayment?
Have no fear the government is going to step in and save you! No budgeting or thrift necessary!
http://blogs.wsj.com/developments/2009/04/24/cant-afford-the-down-payment-some-states-putting-up-cash/
“They loan money to fund down payments and/or closing costs — possibly getting buyers keys for nothing out-of-pocket. The aim is to be a short-term lender, getting the money back once qualified first-time buyers claim a federal tax credit of up to $8,000 for purchases before Dec. 1. States offering deals include Missouri, Ohio and New Jersey in efforts led chiefly by their housing finance agencies.”
“While I admittedly haven’t researched the data I seriously doubt that California real estate, overall, traded at 4x+ income levels during periods of higher interest rates. ”
I never said “California overall”, just coastal Cali. Fresno may as well be Topeka, but with much higher taxes.
LA was 4.4x in 1980. It got as low as 3.8 in 1986. San Diego bottomed at 4.1, SF/SJ/Oaktown at 4.2. See http://www.jchs.harvard.edu/publications/markets/son2007/metro_affordability_index_2007.xls if you don’t believe it.
Chicago-metro was under 3.0 until 1990, and no higher 3.4 to 2001. I agree that 4x is a problem for *Chicago*, and that a stable number here is not more than ~3.2x. I disagree that 4x is a clear indication of a problem *anywhere*.
price to income ratios from the 60s and 70s are not really valid as the interest rates were so much higher. the only stat that counts IMO is housing as a share of one’s income.
“For every high paying job in the city there is one in Schaumburg, Oak Brook or Rosemont or Naperville. ”
very true. but you could also make the point that a lot of those folks actually live in Chicago. it’s a strange world.
“you get a high velocity of money floating around driving up prices to 4x income and higher ”
Look at some data instead of just making up crap, HD. I’ve made it easy for you. Coastal Cali has been 4x income forever, thru booms and busts. And the housing stock is, in general, crap.
“however in sept ‘07 in the the Silicon Valley a 4 bedroom two 2000 sq ft house would sell for nearly a million dollars. ”
HAHAHAHAHAHAHAHA. If you thought you could buy a 2000 sqft house in SV for under a million in 9/07, you’re seriously deluded. It would have been much closer to $2mm, unless it was a total ghetto shack. 600 sqft shacks (literal shacks) sold for $750k+. It was beyond insane.
“price to income ratios from the 60s and 70s are not really valid as the interest rates were so much higher. the only stat that counts IMO is housing as a share of one’s income.”
So, LA may have been less overvalued at 9.1x in 2006, than at 4.4 in 1980? C’mon, it’s the attitude that “only the payment matters” that caused most of the problems.
Sept 07 – 4 bed/2 bath 1000 sq ft ranch with 1000 sq ft 2nd level addition in sunnyvale $1,000,000 i know because I was in it and my uncle owns it. let’s not get too far off topic discussing the absurdity of 1mil v 2mil sv housing prices; your point of 4x historical incomes is well taken so let’s just agree to call SV the trend but edmonton a closer approximation to what happens when money starts floating around boom towns. Fortunately for costal cali it’s been more sustainable than other mining boom towns.
i mean SV is the exception not the trend, typo
god damn this site is distracting, i have to get some work done today
“Sept 07 – 4 bed/2 bath 1000 sq ft ranch with 1000 sq ft 2nd level addition in sunnyvale $1,000,000 ”
Oh, Sunnyvale. Well, then you live in Sunnyvale.* But it is hot and flat compared to a lot of the nerby towns; at least it wasn’t Cupertino.*
But the part of town makes a big difference as there’s a perception (no idea if it’s real) difference in the schools.
*j/k. It’s not like it’s NW Cook County.
I love this bullshit.
http://money.cnn.com/2009/04/24/real_estate/new_home_sales_March/index.htm?postversion=2009042410
“PAY NO ATTENTION TO THE NUMBERS, EVERYTHING IS RECOVERING!”
For those who keep on calling the bottom in housing, there is an interesting read in “The Big Picture”:
—————————————–
The Elusive Housing “Fair Value”
By Barry Ritholtz – April 24th, 2009, 7:27AM
Those who are now calling a housing bottom (despite having done so for years) are finding comfort in this mean reversion. They shouldn’t — and for three reasons. The first is that asset classes which become wildly over-priced do not merely revert to the mean — they tend to carom straight through the mean, eventually becoming significantly under-valued. You see, if you only spend time above the mean trend line, and never below it, well then, that cannot possibly be the “mean” — the line down the middle.
Second, we know the recession plus a glut of foreclosed homes creates a “self-reinforcing cycle.” Job losses and income decreases lead to more distressed sales, with prices especially pressured. Falling prices make put mortgage holders underwater — holding homes worth less than the mortgage. This leads to walkaways, jingle mail, and even more foreclosures. All of this adds up to an even greater excess supply of homes for sale. More supply equals lower prices. The entire vicious cycle continues.
But the third issue is the biggest one of all. Its something we touched upon previously in NAR Housing Affordability Index is Worthless. None of the factors outside of price and interest rates are constructive to home sales. Outside of the $8,000 buyers tax credit, all of the rest of the factors impacting sales are deeply in the red:
1) Employment: Job losses and unemployment data remain at deep recession levels;
2) Down Payments: Surprisingly few buyers have a cash down payment of 20%. Unless we go back to LTV of 90 and 100%, that reduces the pool of qualified mortgage applicants.
3) Debt servicing: Many mortgage applicant do not qualify in terms of 25% of monthly gross income available to pay for Mortgage Principle and Interest. This is a function of the prior debt binge — credit card, HELOC and auto.
4) Credit: Lots of potential buyers damaged their FICO credit scores in the last round of leverage;
5) Non-purchase costs: have risen dramatically. The biggest being local property taxes, and energy. The silver lining is energy prices are more reasoanble lately, and thanks tot he recession, maintenance and repair costs (especially labor) are the cheapest they have been in years.
All of these factors only go to buying a house.
The bottom line: An increasing number of families no longer qualify for a standard conforming mortgage. We are still no way near a bottom in housing . . .
so anon, you think double-digit interest rates and 20% down requirements will fix this?
I don’t think so. I think the ludicrously low ARMs the Fed caused contributed the most to condos and condo flipping, and that’s what I see as fault. SFH sales aren’t what screwed up Chicago’s market, they were a side effect.
“so anon, you think double-digit interest rates and 20% down requirements will fix this?”
No, but I didn’t say anything like that, and you *did* say that “the only stat that counts IMO is housing as a share of one’s income”, by which standard Chicago had a **better/more-sustainable** housing market in 2005 than in 1980, which I *think* you would agree is incorrect.
Only CNN would be stupid enough to try to spin a 3.5% month over month decline in median price as a good thing. Or maybe they’re just arrogant enough to think they can get away with it.
Its a hilarious article in that it tries to strike an upbeat tone and likely will with people who don’t understand numbers or data, but for those that do the data points referenced are nothing short of horrorshow.
“Only CNN would be stupid enough to try to spin a 3.5% month over month decline in median price as a good thing.”
Isn’t that just them re-packaging the NAR or Builder’s Assocaition (whatever it’s called) press release?
And don’t forget that: (1) a February to March decrease in sales is good and (2) an increase in sales from Jan/Feb to Mar/April is notable as a good sign, rather than just a normal seasonal thing.
“No, but I didn’t say anything like that, and you *did* say that “the only stat that counts IMO is housing as a share of one’s income”, by which standard Chicago had a **better/more-sustainable** housing market in 2005 than in 1980, which I *think* you would agree is incorrect.”
you pulled my comments out of context.
my comment was referring to home price/income ratios, which I pointed out are an incomplete picture – for most of us, the price of a house is 100% tied to the mortgage rate.
put another way, a home’s purchase price is not the final price the buyer is going to pay – it’s that figure that makes most first-time buyers’ heart rates jump when you see the total that includes all of the interest. so yeah, a house that was only 3x your income may seem affordable until you factor in that 8 – 11% mortgage.
that make more sense?
I also should have added the Democrats deserve a lot of blame for their role deregulating the financial sector in the Clinton years. I’d be thrilled to see Dodd thrown to the wolves, quite frankly.
skeptic,
I see your logic but at the end of the day the price of the house is only perfectly correlated with the price of a house. Interest rates can only goto zero. The “payment is what matters” crowd fails, or didn’t want to, see the downside in their position or had a vested interest in keeping the bubble going.
When you purchase a cheaper house during times of high interest rates you can always refinance later if rates drop. You cannot go back and negotiate the purchase price of real estate. Additionally other liabilities are calculated off of the purchase price and not payments: taxes and insurance come to mind.
And now the market is in freefall. Prices paid are dropping 3.5% per month. I guess 100% LTV loans are still available these days if you’re willing to wait 30 days–the fastest way to get a 100% LTV mortgage is to buy a house now via the FHA with 3.5% down and wait a month.
I think all of these things are factors, but we talk about “the bubble,” and we need to remember this didn’t happen naturally, or do just greedy people, the government at all levels went out of its way to inflate that thing and what a great job they did!
the feds kept money moving, by way of refinancing for smart and stupid reasons, which kept construction jobs going, and some consumer spending. local governments like Chicago used inflated property values to mask ridiculous bloated budgets, passed on in property taxes that have nothing to do with the housing market per se, and everything to do with the tax levy.
and then there’s the TIF fiasco…
but at the same time, have some faith in the market. we bought in 02, and although I wish we could have done so earlier, I wouldn’t be drastically annoyed had we bought a little later – although certainly by 05, 06 things were getting stupid.
“that make more sense?”
It made sense the other way, too. But, my point was that, using the Payment to Income approach, higher, (imo) unsustainable values look good:
$100k in 1980 at 15%, with $40k income (2.5x) = 1264/month or 38% of income
v.
$250k in 2009 at 5%, with $62.5k income (4.0x) = 1342/month or 26% of income
2009 is much more affordable on a monthly basis, but what’s more likely to happen to interest rates going forward? There isn’t really any room for them to go down (much) further, where there was a *lot* of room beneath 15%.
And what happens if there is a 10% drop in values because of higher interest rates? $10k is 25% of the 1980 income, but $25k is 40% of the 2009 income–that’s a lot bigger problem to overcome.
Sure, “affordability” is better, but there is a lot less margin for error. Anything goes wrong, and you get the big spread b/t buyers and sellers we are currently experiencing.
PS:
I agree with most of your points about the underlying causes. Even with low rates, it took the insanely loose money to makes things move as much as they did.
Do remember tho, that is was all very bi-partisan, both before and after 2000. Dodd, Gramm, Bush, Clinton, House repubs and dems, Greenspan, everyone else–they all happily took money/support/accolades from all the folks who benefited from the deregulation to the eventual detriment of the rest of us. Anyone who sez different is pushing a cause or grinding an axe.
I find the GOP in general has been the most fiscally irresponsible party at the national level, but there’s plenty of blame to go around on both sides, certainly. Greenspan is of course the constant in this sad drama…
but on this:
“2009 is much more affordable on a monthly basis, but what’s more likely to happen to interest rates going forward? There isn’t really any room for them to go down (much) further, where there was a *lot* of room beneath 15%.”
doesn’t this support my contention the ARMs are a fundamentally flawed part of the process? you can refinance if you have a 30 if the rates go down, but if you’re on an ARM and the rates go UP, it’s welcome to screwed-ville, population you.
I have a problem with the idea of someone taking possession of an asset like real estate when there is no legal framework for that asset to be paid off in full.
A quick search on wiki shows me that ARMs originated as part of the same mess that led to the S&L Crisis:
http://en.wikipedia.org/wiki/Garn-St_Germain_Depository_Institutions_Act
That isn’t reassuring.
“doesn’t this support my contention the ARMs are a fundamentally flawed part of the process?”
Yes, I agree. The *only* part of what you’ve said in this thread that I was taking issue with was that “the only stat that counts IMO is housing as a share of one’s income.”
And I don’t know how I took it out of context–you may have been thinking about something else, too (I do it all the time), but that’s what you posted. The preceding sentence: “price to income ratios from the 60s and 70s are not really valid as the interest rates were so much higher.” doesn’t menaingfully modify “the only stat that counts…”.
fair enough, so just to reiterate, when I am thinking of the price of a home, I am thinking of the total cost including all of the interest. that to me is the logical way to think about it, because for starters, your payments in the early years of a mortgage are heavily weighted towards the interest, not the principal.
but I am a pretty conservative guy for these kinds of things, I don’t understand the mindset that seems to go hand-in-hand with the ARMs.
to me, it’s gambling, pure and simple.
“I don’t understand the mindset that seems to go hand-in-hand with the ARMs.”
Easy:
1) howmuchamonth?
2) real estate only goes up
3) I’ll just sell or refinance before the adjustment
4) I plan on making significantly more money before reset so I can afford the new payment
5) gimme that house, I want it sooooooooooooooo bad, I’ll sign what paperwork you put in front of me, I don’t care.
it’s not something you learn. You’re either prone to this type of behavior or not. You being a conservative guy won’t do that. Others aren’t quite as fortunate as you and their impulses take over or the lack common sense or whatever – that’s just what they do.
“when I am thinking of the price of a home, I am thinking of the total cost including all of the interest”
Right. And equal monthly payments means equal total cost of the mortgage except: (1) interest is deductible, (2) re-fi options, (3) re-sale-ability/upside potential, (4) limitation of max loss, (5) amount of down payment, (6) future property taxes, (7) other stuff I’m not up for thinking about on Friday PM, all favor lower purchase price.
So, all else being equal, you’d rather start out with a lower purchase price and higher interest. Not that this is an option you get to choose, but I think you get what I’m saying.
And high Price:Income ratios–even at very low Payment:Income ratios–are a bad situation for Items 2, 3, 4, 5, and 6, at least. Which is part of why the bubble has *already* been so damaging.
What do you all think of a studio condo in the Gold Coast selling for 185,000? Is that possible? I want to sell my studio and bought in 2002 for 145,000. Am I asking for too much? I am in the position of not being able to put 20% down on those great deals out there without selling. Comments?
Susan,
Depends on the specific location, building, sq. ft., finishes and view!
Studios at 777 N. Michigan have recently sold in the $190’s.
Susan,
I understand the desire to sell in this environment to avoid further declines, but why the rush to buy? Do you not think more declines in Chicago are in store? I tend to trust analysis and commentary from proven winners, and one of the other blogs I follow is Reggie Middleton. He started a short position on Commercial Preferred Properties back in the fall of 2007.
Read his thoughts on various areas, especially places like NYC and Chicago that haven’t seen massive declines yet:
http://boombustblog.com/20090130803/Regarding-Housing-Price-Decline-You-Ain-t-Seen-Nothing-Yet.html
The commentary and analysis from informed bloggers like him I am finding is legions above and beyond what any network pinhead can spout about from a teleprompter or whatever journalism school major is trying to produce a piece summarizing NAR reports for their boss.
It totally disgusts me how the realtors spin things..
Instead of Sabrina’s statistically & economically meaningful headline, they write:
“Statewide March Home Sales Jump 35.5 Percent from February”
as their headline.
The saddest part is that I know a bunch of realtors who are too stupid to realize that doesn’t equal good news! I spent 1 day on twitter and got sucked into it & started reading some realtor’s pages and they acted like this news was the messiah coming.
“So, all else being equal, you’d rather start out with a lower purchase price and higher interest. Not that this is an option you get to choose, but I think you get what I’m saying.”
Gotcha. But re: the 70s and 80s, that mortgage interest wasn’t deductible, right?
I do agree it’s more complicated as regards your points, but for most first-time home buyers, I’m guessing they aren’t that savvy, lord knows I wasn’t, and I did a fair amount of homework.
HD – so true. What I don’t get though is why the govt encourages them, I certainly understand how young people see the appeal.
I’ve wondered that too. It could be elected officials prioritize the short term over the long, maybe because of the election cycle. Keep em happy until the next vote!
Mortgage interest was always tax deductible as far as I know. In fact you used to be able to deduct all interest payments, then congress removed them except for student loan interest below an income threshold and mortgage interest.
Honestly over the long run it would be better if there was no mortgage interest deduction. All it has done in reality is help inflate real estate prices.
“Hinsdale renter Alan Reck, 24, said his father’s advice was similar, and he began shopping for a one-bedroom condo in Lakeview or Lincoln Park. With a maximum budget of $250,000, he’s found “there’s just tons to look at.”
http://www.chicagotribune.com/business/chi-sun-housing-optimism-0426-apr26,0,3752998.story
Folks when twenty four year olds are still plopping down a quarter million for 1/1 bachelor pads you know we’ve got a long way to go until bottom. I wonder if his fathers advice was also “real estate always goes up” or “its an investment in your future”?
Bob, I tend to agree with most of your conservative financial points however I don’t believe that 24 yr old college grads, 2-3 years into first job, purchasing 1 bedrooms for $250k is a sign of continuing bad loan granting. But, I’m only picking on your price cap – I’d agree if it were 500k.
Reasoning: $250k, 5% down, 30 yr fixed, no points = ~$1200 – $1500 monthly by a quick check of bankrate. Plenty of people are paying $1-$1.4k a month in rent. Now, I would rather rent than purchase a 1 bedroom, but that’s me. For others the interest deduction, forced savings aspect, and location might trump that. Also the idea of becoming a small land lord is intriguing – buy a small place, get it paid down decently and start renting.
Either way, I think I’ve just typed a long winded way of saying “a quarter million just isn’t worth what it once was”.
Agree with Wicker….there are MANY 20 somethings purchasing their first homes in the $250-300k range and think nothing about it. At that age, esp in Chicago, there are an abundance of owners who rent out spare rooms in the $600-900 range or half of their total housing expense.
I know many of my places are in large part financed by parents who reward their graduating offspring with enough $$$ to get a head start into adulthood and that first house is usually the way they do it.
I think we are underestimating the economic savvy of recent college grads who have just witnessed a financial meltdown and now have learned a valuable lesson. That and of course, the plentiful supply of $1.00 PBR cans to keep them weekend drunk and happy…nearly no worries for that crowd.
westloopelo,
I think Wicker has semi-valid points. I don’t think you do. The people who buy 250k 1/1s aren’t the people who buy $1 beers, trust me on this.
That being said your equating with adulthood = RE ownership is laughable & comical at best, sad at worst.
Adulthood isn’t defined as “owning” an asset a bank gave you a loan for. How are those banks doing these days, by the way?
YOU may think you are “under-estimating the economic savvy of recent college grads” but I think you are long real estate and obviously desperately trying to equate RE ownership with some sort of societal responsibility ownership premium.
Let me be honest when I say this to you: those days are gone, dude. They’re not coming back.
Believe what you want, honestly I could give a shyt less about your personal situation, but I am adamant in saying _those days are gone_.
If dude wants to go headlong into this market and buy a 1/1 for 250k more power to him. But if in four years time he thinks he’ll get his money back and move to the burbs with his preggo GF I’ve got new for him: past returns are not an indicator of future success.
Wicker,
Valid points. And maybe you are right. I am generally conservative and from growing up have never really hung out with anyone with a 250k+ mortgage where I come from. That being said we discussed on another thread recently how much lower the margin of error is in basing things off of payment only. Its basically driving with no shoulder and no soft median (curbs all around) if you eff up, perhaps appropriate for Chicago given the conditions on Lake Shore Drive.
Also in your example you used 5% down, which is a stretch these days I thought. I was under the impression condominiums in Chicago required 10% down these days. At only 5% down thats a HUGE difference.
Don’t forget this point: low downpayment loans are what effed up our economy and what inflated the bubble. Thank *** most of the over-consumption driven baby boomers will live to reap what they sowed with this.
I don’t know when the rest of America is going to get the memo that giving out real estate loans below 20% is a BAD IDEA but I’ll not be investing my equity into home ownership until at least a couple of years after this.
Come on now Bob! Just because you are not buying does not mean others are sharing the same grim outlook as you. And regarding those $1 beer/home buyers out there, they do exist!
True story. Just this past weekend after our first long, full week of rehab work, (talk about aging…my body was beat down!!) I tagged along with a few of our workers to that epicenter of hipness, Bucktown. In one of the places we stopped there was a group of ten or so very young men who were in the process of getting crazy drunk next to us. On the counter in front of them was a few ‘buckets of $1 canned beers’ as was quickly pointed out to me by said revelers, LOL. The name ‘Bob’ suddenly popped into my head!
Just out of curiousity, I started a conversation with one of them only to learn that they were celebrating one of their group becoming a first time home owner in that same neighborhood. After a bit of friendly prying, I found out that the kid’s parents helped him reach his goal of moving out of his college pad and into this newly rehabbed condo. So yes Dorothy, dreams do still come true!
There ARE plenty of buyers out there who are not that concerned (to the point where many of the negative CC regulars are) about the state of the RE market now. They know that eventually their investment will yield some returns, but that is not their primary concern. Instead their concern is to be able to say they are no longer paying an outrageous rent that goes towards another person’s mortgage….plain and simple.
There ARE still sales going on, if the RE market were at a dead standstill with ZERO sales, then yes your point just might be valid…but luckily such is not the case. Is the housing business where we all want it to be, of course not. But I think we are on the first few steps of a bit of recovery…two steps forward, one step back perhaps, but it is happening.
We all KNOW it will take years for everything to return to pre-bubble conditions, but return it will just as it has in the past. Of course buyers today realize that they will have to retain ownership and stay put, living in their homes for at least ten years, but that is not deterring people from investing in their future. I realize that all of the capital I recently parted with I may not see for years in the form of sales. But like you, there are people under the impression the ONLY way to live now is to rent. So thank you for promoting this belief…it is making my payments and covering the cost of my work!
It is not all about making money Bob, it is about having shelter and shelter that you can afford and be proud of… and it is happening everyday across America.
~1,500 a month for a one-bedroom is the higher end of the rental market. I’ve lived and visited a variety of places in the city and there are only a handful of neighborhoods with $1,500 a month one bedrooms – and the units tend to be pretty nice. (Chicago is not Manhattan!). IMHO, a more representative rent, even for neighborhoods like LV, LP, RP, etc is between $1000 and $1300. The developers overbuilt the luxury $250k+ one bedroom market. There just aren’t enough renters willing to pay $250k which translates into $1500 (plus taxes & assessments) for the premium to ‘own’.