Market Conditions: July Sales Rise 9.7% YOY as the Median Price Jumped Again
We already know that July was another hot month but it wasn’t quite as strong as June.
From the Illinois Association of Realtors:
The city of Chicago saw sales of 2,989 homes in July 2015, up 9.7 percent from last year when 2,725 homes were sold. The median price of a home in Chicago was $285,000, up 5.2 percent over July 2014 when the median price was $271,000.
Anything would be an improvement over last July as it actually saw an 8.2% year over year decline in sales.
Here’s the July data since 1997 (thanks, once again, to G for the historic info):
- 1997: 1,694
- 1998: 2,139
- 1999: 2,186
- 2000: 2,013
- 2001: 2,410
- 2002: 2,661
- 2003: 3,105
- 2004: 3,429
- 2005: 3,487
- 2006: 3,088
- 2007: 2,819
- 2008: 2,200
- 2009: 2,040
- 2010: 1,631
- 2011: 1,666
- 2012: 2,088
- 2013: 2,902
- 2014: 2,725
- 2015: 2,989
“The busy summer homebuying season is closing out on a high note,” said Hugh Rider, president of the Chicago Association of REALTORS® and co-President of Realty and Mortgage Co. in Chicago. “We’ve seen solid gains throughout the year, and there is every expectation that we’ll see the market momentum continue into the fall as buyers select from reduced inventories.”
“The strong year-over-year gains we saw in July suggest there is plenty of steam left in this market,” said Jim Kinney, ABR, CRB, CRS, GRI, SRES, president of the Illinois Association of REALTORS® and vice president for luxury sales for Baird & Warner in Chicago. “Buyers are finding they have to work quickly once they find the home they want since inventories are very low.”
The time it took to sell a home in July averaged 58 days statewide, down from 65 days a year ago and faster than 63 days last month. Available housing inventory remained tight with 72,371 homes for sale, a 7.7 percent decline from July 2014 when there were 78,373 homes.
The 30-year mortgage rates were also lower year over year at 4.04%, down from 4.11% a year ago.
Will these perfect selling conditions continue into the fall season?
Illinois home sales and median prices surge higher in July [Illinois Association of Realtors, Press Release, Aug 20, 2015]
Ok I literally heard two people tell me the “buy now or forever be priced out” story recently. Had not heard that sentiment in years…..Is this a sign of another bubble about to burst again?
They were both late twenties early thirties couples expressing sadness that they had already been priced out of their #1 pick for hood. And that it had happened in the last two years. Hmmmmmm……..what do you c.c’ers think of that statement?
“what do you c.c’ers think of that statement?”
I think the housing market is topping here again. I expect lower prices over the next few years.
We’ve been looking for a house since January in the Northern Suburbs. In my opinion, a combination of low rates and low supply has artificially increased the prices. Most people don’t seemed to care about the price of the house as long as their monthly payment is manageable. A property tax increase next year, higher interest rates and an increase in supply will drive the prices downward in the next few years, IMHO. We may consider renting for 1-2 years if won’t find anything reasonable priced in the next few months.
“A property tax increase next year, higher interest rates and an increase in supply will drive the prices downward in the next few years, IMHO. We may consider renting for 1-2 years if won’t find anything reasonable priced in the next few months.”
We ARE a monthly payment nation. That’s why the auto companies have stretched out loans to 8 years now. The lower you can make that payment, the better.
“I think the housing market is topping here again. I expect lower prices over the next few years.”
This is what’s interesting about this market. Another housing price decline would be unprecedented in US history. Even the first one was unprecedented.
I’m not saying it won’t happen. But these are uncharted times.
“They were both late twenties early thirties couples expressing sadness that they had already been priced out of their #1 pick for hood. And that it had happened in the last two years. Hmmmmmm……..what do you c.c’ers think of that statement?”
People don’t think prices could fall. It’s amazing to me. They believe that housing prices are going to keep rising. I don’t know how they think that’s going to happen unless mortgage rates continue to drop.
But the “buy now or be priced out” mentality is definitely back. There’s a desperation in the bidding wars and a lot of people are “settling” in their housing choices because of low inventory. A lot of these same conditions happened during the bubble years.
Are we in a bubble? I don’t think so- but I do think the market is not “normal.” While there’s some speculation appearing (more flipping going on etc.) it’s not nearly the frenzy as 2007-2008. But sometimes it takes time to build.
I think you negative Nellies should step up to the plate and sell the long dated Case Shiller futures for Chicago. See the second graph here: http://www.chicagonow.com/getting-real/2015/08/home-price-forecast-real-estate-experts-less-optimistic/ Could be some nice profits for you.
My biggest concern is property taxes but area employment is getting really close to an all time high and that’s really good for housing. Way too many people underwater still for us to be anywhere near a bubble top.
“Another housing price decline would be unprecedented in US history.”
I am not predicting another 2007 crash. I think flat to -10% over next few years.
“priced out of their #1 pick for hood …[within] the last two years”
What hood? Condo or SFH?
I generally agree with Chuk, but that sort of pullback ain’t going to make *certain* sub-hoods go back to 2 years ago pricing (on a monthly payment basis, at least), unless there is really significant upheaval.
“That’s why the auto companies have stretched out loans to 8 years now”
That is f’d up….. Sorry folks but if you need more than 60 months to pay for your car then you should consider a lower priced ride. Or skip the cool spinning rims. What is the average turn on an auto loan? Do most people keep them past the payoff date or are they changing prior to payoff?
If it is the latter then you are likely also financing some old debt from the first loan into the next auto loan. And that sux!
“We ARE a monthly payment nation. That’s why the auto companies have stretched out loans to 8 years now. The lower you can make that payment, the better.”
The fact the everyone doing it does not make it a viable financial decision.
“I generally agree with Chuk, but that sort of pullback ain’t going to make *certain* sub-hoods go back to 2 years ago pricing”
I don’t see the -10% as an across the board thing. I think some areas may be flat to slightly up, while others may go down more than 10%.
“That is f’d up….. Sorry folks but if you need more than 60 months to pay for your car then you should consider a lower priced ride.”
I guess I agree in theory, but I really don’t see the harm in having a longer term new car loan. Any decent car will last you 8+ years. Most people have mortgages longer than they will be in the house.
“That’s why the auto companies have stretched out loans to 8 years now.”
Well, cars do actually last that long now.
Gary is right that most place in IL and even greater Chicagoland are still below the last peak in pricing and people are still underwater. But since we are a GZ crowd and that is one of the few areas above the 2007 highs, how much of it is tied to stock market performance and confidence?
GZ prices correlate directly to stock market prices, which are also above the 2007 highs. But now crashing below 50 and 200 day moving averages right now, today.
How much are GZ prices tied to stock market prices?
I’ve been looking at new cars. A lot of dealers offer 60 mos at 0% interest. I’ve seen 72 mos at 2.75%. However, if you can’t afford the note at 60 mos/0%, you are probably spending too much.
Maybe it is because I haven’t bought a car in 10 years, but I’ve been blown away at how expensive cars are now and I’m not even talking the German lux variety.
What hood? Condo of SFH
They were both looking at condos. One in LP Buck the other in West Loop
” guess I agree in theory, but I really don’t see the harm in having a longer term new car loan. Any decent car will last you 8+ years”
If you keep the car that long I guess it is ok. Many buyers don’t.
“Most people have mortgages longer than they will be in the house”
That is true but houses “could” appreciate. The majority of cars bought with a loan are depreciating assets. Therefore if leaving early on the loan it is quite likely you are upside down. And if you have zero chance of being paid up to market rate on the asset you are now financing that debt back into the next loan.
“They were both looking at condos. One in LP Buck the other in West Loop”
LP Buck condos are not dramatically more expensive than 2 years ago, apart from some portions of the top end, and much of the bottom end.
West Loop is a different story, but it’s still not a priced out scenario unless they have fairly specific requirements.
In both cases, I think it’s reasonable to be looking only at a certain segment, and finding those units that fit in that segment being much higher, but there certainly are place that aren’t out of reach, unless the 2-year-ago price range was already a significant stretch.
“But since we are a GZ crowd and that is one of the few areas above the 2007 highs, how much of it is tied to stock market performance and confidence?”
The GZ is not above the peak in total. I keep showing plenty of examples of places under the highs and will show more.
I think the stock market is going to affect people who have a substantial portion of their net worth in the stock market or those who, unwisely, have their down payment in the stock market. That former group is the high end buyer. I don’t think someone looking to buy a 400K condo is affected that much.
If you want to see what is really going on out there: go on redfin, select whatever price range suits your fancy, and select ‘price reduced: In the last 7 days’. You’ll see the increasing number of places that are cutting prices. There has been a noticeable uptick in the number of places cutting prices. Maybe this is seasonal (I wasn’t tracking this as closely in previous years), but to me it points to a general downturn that is occurring.
I just bought a car and put $10k down and stretched the loan over 6 years. I keep cars until I end up with an issue that would cost more to fix than the car is worth. My last car was 14 when the transmission conked out. I plan to keep my new car at least ten years.
I wanted low monthly payments and the interest rate is about 2% so I am happy.
Isn’t a low rate on a car loan an incentive that is usually given in lieu of a lower price on the vehicle – i.e. if you had paid cash you could have gotten a lower price?
Isn’t a low rate on a car loan an incentive that is usually given in lieu of a lower price on the vehicle – i.e. if you had paid cash you could have gotten a lower price?
– no, this is a common misperception about buying a car. Offering to pay in cash actually hurts your bargaining position. Dealers want you to finance at any price as they make more money from selling the financing than they do the car. You’re likely to get a lower price when NOT paying cash.
There is no way that they are making money at 2%. In all likelihood they are losing money because they sell the loan to investors and they have to sell a 2% loan at a discount. No way investors want a 2% loan.
Car dealers seem annoyed when someone is going to pay cash. My parents negotiated the price for their most recent car ahead of the payment portion and the dealer was actually annoyed because they weren’t going to make much money on the car and they also weren’t going to make anything up on a loan.
In my case, I don’t think I would have gotten a better deal if I had paid cash because I had planned to use one of those car check loans. I negotiated price ahead of the payment terms and when I told them I was going to use the car check loan, they went out of their way to beat it (2.35% car check loan vs. 1.99% dealer loan).
I do wonder how they make money. I bought a used car and the trade in value was about $3,000 less than what I paid. The car was certified, so they had to do some work on it and it came with a warranty. It had been on the lot for two months. The dealer told me that they take loans on the cars on their lots, so they were paying interest during that time. From what I can tell, the margins are low at dealerships. Perhaps they make their money off of their service centers.
Yup I agree. My husband always buys cash and the dealers are not thrilled.
I think for my fugly car (forced on me by the aforementioned husband), he paid 50%in cash and the rest I pay at 0% over 4 years.
They do make money on service and on selling extended warranties and on the “upgrades”. They make money on the loans when they can sell them at a premium. It’s hard to believe they can sell a 2% loan at a premium.
I know car dealers do get some kind of yield spread premium on car loans. Probably a few hundred dollars. They do prefer you to finance instead of paying cash as the financing allows them to make more money. Same thing with trading in a vehicle. This is why they seeming won’t come right out and give you a price until they know if you are financing and trading in a car. They can give you a better deal on the car as they can make it up on the trade and financing versus just paying cash.
Car business seems to be fairly low margin. Most of the money is made in the service department.
Oh jeez. You people are nuts. Listen to Gary. He’s the only one here with two feet firmly planted on the ground.
Newbie here. Can someone tell me what GZ stands for? (Love this site!)
“I don’t see the -10% as an across the board thing. I think some areas may be flat to slightly up, while others may go down more than 10%.”
Any price decline anywhere in the Chicagoland area would be unprecedented. Other then the bust, prices have never gone down in the Chicagoland area. In the mid-1980s they were basically flat for about 5 years but that was with mortgage rates over 10%.
What would be the catalyst for prices falling for the second time in 10 years? It would have to be something pretty dramatic.
Green Zone – as in Baghdad. Highly desirable area.
“In both cases, I think it’s reasonable to be looking only at a certain segment, and finding those units that fit in that segment being much higher, but there certainly are place that aren’t out of reach, unless the 2-year-ago price range was already a significant stretch.”
What if they wanted a 2-bedroom but those 2-bedrooms that used to be $375,000 are now selling for $450,000 and their limit is $400,000? So unless they get a 1-bedroom or go to the fringes of the neighborhoods they wanted (i.e. “west bucktown” instead of bucktown) then they are “priced out.”
Seems pretty easy to understand to me.
About the stock market and the housing market:
Of course they are connected but really only on the upper end. Anything under $400,000 probably won’t be impacted if stocks fall 20%. But you can bet the luxury end will die quickly if stocks enter a bear market.
And it’s really all about psychology at that point. People just don’t feel as good when their stocks are going down- even if they’re in a 401k plan. That could put a damper on the housing market too. But it’s too soon to say.
“What would be the catalyst for prices falling for the second time in 10 years? It would have to be something pretty dramatic.”
This is still a reverberation of the crash. I told you 4 years ago markets overshoot to the downside in corrections (ie, 2012) and then overshoot to the upside (ie, 2015). I believe the markets are now in a “settling” process where they will find their level. You can’t look at 2008 by itself. This is all still a part of that event.
“This is still a reverberation of the crash. I told you 4 years ago markets overshoot to the downside in corrections (ie, 2012) and then overshoot to the upside (ie, 2015).”
But housing has NEVER done this before in all of US history.
How long do you allow for this “event” to happen? 10 years after the original crash? 15 years? 20 years?
Come on. That’s absurd.
So you’re saying they overshoot on the downside and then also on the upside? But the upside is never called an “overshoot.” It’s called a bubble. So you’re saying we’re in a bubble? Because without a bubble, no reason for prices to fall. Ever.
By the way- plenty of metro areas in bubbles.
In Denver, prices are up 35% in some areas in just the last 18 months. There must be tech jobs there, right?
In California, only 7 counties remain “affordable” to those with the median income. It’s pretty absurd. Even the head economist at the CAR is now being quoted wondering “where will the Millennials live?” Ha. Yeah- that’s normal.
Chicago is always late to the actual bubble party. Even in 2007-2008- there was massive speculation all over Chicago but lots of people weren’t priced out.
There are SFH in the GZ that sellers are trying to get a $1 million gains in just 4 years. Is that a bubble?
I’m just asking these questions because there’s clearly a lot of froth in the market now in the GZ.
“In California, only 7 counties remain “affordable” to those with the median income. It’s pretty absurd. Even the head economist at the CAR is now being quoted wondering “where will the Millennials live?””
That’s such a meaningless statistic. It’s obviously affordable to the people buying these places. The Millenials will live where they can afford to live. Meanwhile, San Francisco is full of 20 somethings making $150K+/ year.
“There are SFH in the GZ that sellers are trying to get a $1 million gains in just 4 years. Is that a bubble?”
No. Only if they actually get it and $1 MM is a significant gain and it puts the price higher than the peak and it happens a lot.
Just a side note: S&P Futures are down 53 points right now.
“So you’re saying they overshoot on the downside and then also on the upside? But the upside is never called an “overshoot.” It’s called a bubble.”
Says who? Let’s say XYZ stock has bad news. Goes from 100 to 50. Then people think its oversold and step in and buy and it goes up to 80. Then it sells off and settles at 75. Are you saying 80 has to be called a “bubble”?
“How long do you allow for this “event” to happen? 10 years after the original crash? 15 years? 20 years?”
Each year does not exist in a vacuum. It is all connected. The fed easy money policy was prompted by the 2008 crash. They are just NOW talking about raising rates. So, of course they are part of the same “event”.
““What would be the catalyst for prices falling for the second time in 10 years? It would have to be something pretty dramatic.”
Market getting dramatic enough yet for you?
TNX 1.95. Still “sure” we are gonna see higher rates this year?
I hope we see higher rates this year, will mean we don’t enter a bear market
what a day
We will see higher rates either this fall or very very early 2016. The “crash” today had nothing to do with the U.S.
Its all about China. Or well, the Chinese government. The only citizens in China that will be affected by this are the ones who leveraged their positions via margin accounts.
You can only trade a margin account for so long. When stocks start to lose, positions trigger a margin call. They have to sell, the book ticks down, likely triggering more margin calls. The market was going so nuts over there that the locals (only ones allowed in at the time) leveraged their positions. The bill is coming due. The large decline Sunday night spooked the markets elsewhere today. That is why the open was down 1,100 points, and came back intra-day to within 150 points. It closed down around 500 points.
Ultimately, companies in the U.S. will see lower quarterly results for two reasons:
1) China is slowing down, they built ghost cities for years to prop up the world market. Now that the world market is more stable, they’re probably pulling back. That means less consumption across the board.
2) The strong U.S. dollar is fucking us pretty hard as well. International companies get less total dollars in the exchange rate. Suddenly a sale overseas only nets them $3 instead of say, $3.50. So its kind of a double edged sword.
The crash today was compounded by a lot of companies reacting Sunday night by dumping their positions just to be “safe”.
This isn’t armageddon though. Its just…the market. I would not be surprised if tomorrow we saw the DJI close 300 or so points up. But hey, who knows.
“Market getting dramatic enough yet for you?”
The US stock market has dropped worse than this 17 other times since 1970. Did housing prices fall?
Hm…other than 2008-2009, the answer is NOOOOOOOO!
Stock market sell-offs have NEVER caused housing prices to fall in the United States except for during the bust.
“Says who? Let’s say XYZ stock has bad news. Goes from 100 to 50. Then people think its oversold and step in and buy and it goes up to 80. Then it sells off and settles at 75. Are you saying 80 has to be called a “bubble”?”
That is a stock. It is liquid and traded within seconds. A piece of property isn’t liquid. In order for it to “overshoot” to the upside, something else HAS to be happening or else it doesn’t make any sense.
“In order for it to “overshoot” to the upside, something else HAS to be happening or else it doesn’t make any sense.”
Nope. Do you agree that the housing market overshot to the downside?
“Stock market sell-offs have NEVER caused housing prices to fall in the United States except for during the bust.”
Ha. I’m just going to assume you are kidding. No one is that clueless.
“That’s such a meaningless statistic. It’s obviously affordable to the people buying these places. The Millenials will live where they can afford to live. Meanwhile, San Francisco is full of 20 somethings making $150K+/ year.”
Yeah- with $150,000 student loans!
Too bad they can’t buy shit in San Francisco with their $150,000 salaries. The average home price is now over $1 million. Lol. Don’t make me laugh Gary. You have NO idea what is going on there. You really have to live there for a few years to understand how out of whack it is. Isn’t your daughter there? Maybe she should get outbid by someone for a complete dump in a neighborhood where there are shootings yet it still sells for $900,000 to understand what is going on.
The median salary in San Francisco is $72,000. It’s SUCH a myth that “everyone” is making $150,000. Those waiters must be HIGHLY compensated. Same with those cashiers working at the movie theater on Market Street.
Sales are falling in California, by the way. No shock there. It’s completely unaffordable.
By the way- this LA Magazine piece got a lot of press. The author is a journalist who moved to LA in 1998. Yes, he bought a home there during the boom. He lost it in the Great Recession to foreclosure when he was laid off. Was living in Burbank with his wife and children when he decided they had to leave because they just couldn’t afford it anymore. The middle class is being forced out. So he wasn’t trying to live in Santa Moncia or anything.
Looked at a lot of different cities to move to (Chicago wasn’t one of them- the snow, after all) and ended up moving to Athens Georgia where the average home price is $128,000.
In a lot of these articles, Louisville gets mentioned a lot. I wouldn’t have thought that would be a popular destination for people escaping the coasts.
http://www.lamag.com/longform/leaving-los-angeles/
BTW, nice job top-ticking the real estate market Sabrina. Your contrarian record remains perfect!
“Ha. I’m just going to assume you are kidding. No one is that clueless.”
Please. Enlighten us when the last 12% pullback in the S&P 500 caused housing prices to fall.
No?
I didn’t think so.
By the way- the Dow was down 22% in one day in 1987. Did housing prices fall in Chicago?
Hm….
Let me think.
No.
That. Didn’t. Happen.
Chuk- you never comment on ANY properties on this site. I think it’s you who is clueless.
“Chuk- you never comment on ANY properties on this site.”
Sure I do. Yet another thing you are wrong on.
“Yeah- with $150,000 student loans!
Too bad they can’t buy shit in San Francisco with their $150,000 salaries. The average home price is now over $1 million. Lol. Don’t make me laugh Gary. You have NO idea what is going on there. You really have to live there for a few years to understand how out of whack it is. Isn’t your daughter there? Maybe she should get outbid by someone for a complete dump in a neighborhood where there are shootings yet it still sells for $900,000 to understand what is going on.”
Well, for struggling recent college grads they sure seem to be living a pretty extravagant lifestyle from what I hear. Yeah, my daughter lives there. They all rent with 1 – 4 roommates. They don’t need to buy.
“The median salary in San Francisco is $72,000. It’s SUCH a myth that “everyone” is making $150,000. Those waiters must be HIGHLY compensated. Same with those cashiers working at the movie theater on Market Street.”
I’m looking at some fairly recent median household income data by census tract for SF right now. About 50% of the city is at or above 100K. Many around 130K and I see one at $157K.
It’s impossible for housing to be unaffordable because you have to be able to afford it to buy it. What it really means is that not everyone gets to live wherever they want. Like I can’t afford to live on Park Avenue. Big deal. The fact that waiters can’t buy $2 MM properties when plenty of other people can won’t drive down prices. What will drive down prices is when enough people decide that they are tired of spending 40% of their income on housing and move away or employers are tired of paying people twice what they would somewhere else.
“I’m looking at some fairly recent median household income data by census tract for SF right now. About 50% of the city is at or above 100K. Many around 130K and I see one at $157K.”
About 50% of the city of San Francisco is rent controlled apartments. The new construction high rises won’t be rent controlled but at $4,000 a month for a 1-bedroom, you’re not getting many young people living there. It has the fewest number of children of any major city in America because families cannot afford to live there.
Ah- group housing. In your 20s. At least that’s not so bad as a friend I have. He and his wife are in their late 30s. They live in a group house in the East Bay because that’s all they can afford. No kids- obviously. Good times. But it IS their choice. They have multiple college degrees but, alas, no stock options.
Yeah- this sounds normal. But don’t worry. It will all work out.
“Households in San Francisco earning the median income of $75,910 were only able to afford a home costing $383,670, a difference of $863,900 or 225 percent. That’s compared with the actual second-quarter median home price of $1.2?million.
And during the second quarter, just 10 percent of families cold afford a median-priced home costing $1.35 million and they would need to earn a minimum annual income of $267,780 to qualify for the loan.”
http://www.dailynews.com/business/20150820/if-you-make-the-median-income-in-la-county-you-still-cant-afford-a-home-study-says
“What will drive down prices is when enough people decide that they are tired of spending 40% of their income on housing and move away or employers are tired of paying people twice what they would somewhere else.”
I hate to say it- because I lived there- but a big quake will accomplish this. After the Norridge quake in the early 1990s, 500,000 people left LA. It was a significant departure.
“Households in San Francisco earning the median income of $75,910 were only able to afford a home costing $383,670, a difference of $863,900 or 225 percent. That’s compared with the actual second-quarter median home price of $1.2?million.
And during the second quarter, just 10 percent of families cold afford a median-priced home costing $1.35 million and they would need to earn a minimum annual income of $267,780 to qualify for the loan.”
So then who owns these unaffordable homes and how did they afford to buy them? There are only 3 possiblities: 1) That data is screwed up 2) Tons of people live in group homes. 3) Tons of people bought their homes a very long time ago so the value of the house doesn’t matter to them (irrationally so). No doubt home prices are stupid high there but that’s because many people choose to live in squalor, like your friends, vs. move to a lower cost of living place. As long as that mentality exists home prices will stay exactly where they are.
BTW, my daughter rents a 2/1 with one roommate for $4100/ month in Noe Valley but granted they got it two years ago and the landlord has not really raised the rent.
“So then who owns these unaffordable homes and how did they afford to buy them?”
Very few homes actually sell in San Francisco because everyone else is a renter. And many of the current owners are long-time owners who have been there like 20 or 30 years. They never move because of Prop 13.
“Very few homes actually sell in San Francisco because everyone else is a renter. And many of the current owners are long-time owners who have been there like 20 or 30 years. They never move because of Prop 13.”
Exactly. So you have a low supply and all you need is a small percentage of the population to make enough money to buy that small supply. So the market is totally rational and prices will stay exactly where they are until people decide they don’t want to spend all their money on housing.
Part of the problem is that the long time homeowner underestimates their housing cost. If they live in a $2 MM home that they bought for $500K they mistakenly believe that their house cost them $500K. In fact, if you gave them $2 MM for their house and asked them if they wanted to buy it back for $2 MM they’d probably say no.
I do mortgages in CA too, particularly SF / Silicon Valley. What I notice is that many of the borrowers won’t necessarily have high incomes, but they do have a lot of cash on hand and will usually make very large down payments. In addition, it is not uncommon for them to rent out rooms, etc to offset the cost of the mortgage.
People do spend a large amount of their income on housing, but you also have to remember that the higher your income, the more residual income you have so 40-50% debt to income ratios are acceptable. If you make $25k/mo and spend half your income on housing, you still have $12.5k left each month.
For example, if you have a professional couple making $300,000 between the two of them that is $25k a month. If they have the assets to put 20% down, they might buy a $1.5 million place. The monthly nut on a $1.2 million mortgage including property taxes and insurance is about $7500/mo. $7500 / $25,000 = 30% front ratio. The standard is 28%, so they are right on the money in terms of affordability. If they have no debt, it makes it that much easier.
There are just enough people there who have both to assets and incomes to drive up prices. Remember, a lot of these tech folks have a lot of RSUs, stock, etc. So even though they may only be making $125k, they still might have $1 million in stock.
The market is NUTs there. No mortgage contingencies. Close in 21 days. Everyone pays above list. Almost impossible to get an offer accepted if you need a mortgage.
my cousin cashed in some stock options and bought his place in cash on Cali about 2 years ago. worked for a renown tech company for many years and accumulated quite a few stocks over the years. tough to compete with that when even big law bonuses can’t match vested stock options in tech
Have a friend who just bought a place in San Diego, he said they’ll laugh at your offer unless you have 30% down or more
So…it sure sounds like housing is affordable there to me. It’s just that there are plenty of people who can afford stupid high prices.
“It’s just that there are plenty of people who can afford stupid high prices.”
Long term the lack of water is going bring those lofty prices back down to earth..
They can solve their water problem overnight if they just stop under pricing it – and that includes farmers who get it for free. Of course, there would be short term dislocations. But anything that is underpriced will be overconsumed.
“There are just enough people there who have both to assets and incomes to drive up prices. Remember, a lot of these tech folks have a lot of RSUs, stock, etc. So even though they may only be making $125k, they still might have $1 million in stock.”
Are there “tech” folks in Concord? Who is buying the $600,000 starter home there? What about in Napa? Those 1950s shacks are back to selling for $580,000 for 1400 square feet.
Sure- in Silicon Valley itself there are plenty of people earning $300,000. Who cares if the nurses and teachers have to drive 2 hours one way to their job? (which is what they do.) That’s their problem. (Although, when I was out there- doctors were refusing to work at Silicon Valley hospitals because of the cost of living. Doctors!)
But it’s all the rest of the state. Why are homes $700,000 in Long Beach? No tech jobs there. These are 950 square foot homes? It’s absurd. But the low mortgage rates are keeping it artificially propped up- which is the whole point of the low mortgage rates.
Did you know that prices have risen 80% in South Bend Indiana over the last 4 years? Lol. Must be tons of tech jobs there.
The entire US housing market is distorted by the low interest rates. It’s no different than the bubble years. The bubble years were driven by an increase in credit which allowed buyers to buy more than they otherwise could have afforded. The same thing is happening now- only by a different means.
It’ll end badly, just like the last time. But when it will end is anyone’s guess.
“Long term the lack of water is going bring those lofty prices back down to earth.”
It’s really, really bad there homedelete. The rest of the country really has no idea because they’re brushing it off in the major cities (for now.) But I have a friend who runs trips up the American River (rafting etc.) and they are completely shut down this summer. There is no water in that river. She’s been going there for 20 years and has never seen anything like it. And she says everything is so dry, they are terrified of fires.
The area around San Francisco has long been known to be a fire danger- especially in Marin County in the Mill Valley area. The local media has warned about it for years (even before the drought.) They haven’t had a fire to clear out the brush in decades and everything has built up and is overgrown.
It’s a mess- but they’re living with it. I think it will really start to hit home if they start rationing showers and things like that (where you are only allowed to bathe like once or twice a week.) I think they are already doing that in Puerto Rico- which is in an even worse drought than California. They were actually praying for Danny to hit them so they could get some rain. Maybe Erika will bring it instead. It is an emergency in Puerto Rico.
“Exactly. So you have a low supply and all you need is a small percentage of the population to make enough money to buy that small supply. So the market is totally rational and prices will stay exactly where they are until people decide they don’t want to spend all their money on housing.”
But Gary- the ENTIRE state is now like this. Out of 32 counties, only 7 are deemed “affordable” to those with median salary. It’s NOT just San Francisco. It’s Oakland and San Jose and Sacramento and, gasp, Riverside (again- as it was a bubble during the bust and now, apparently, is one again.) Riverside is almost as bad as, say, Modesto in Northern California. They are like DeKalb, basically. Or Rockford. (sorry to those who like those cities.) But you’re going to pay- and pay big- to live in your 1970s 2-bedroom ranch.
Why?
I was watching the latest House Hunters tonight and it was a young couple buying their first house in North Carolina. Their budget? Under $100,000. What did they get? A 3-bedroom, 2 bath very nice starter home. They paid $99,000.
Now THAT is the American Dream. With that, they’ll be able to live comfortably, save for retirement, put kids through college, have savings, take nice vacations and basically do whatever they want. And they don’t have polar vortexes either.
It’s just so shocking what most of the country pays for their housing. It has become the norm- but it never was before 10 years ago. Even in California- it was only about 4x average income. 8 to 10 times isn’t normal. It’s a bubble.
San Fran has to be the most overrated and peculiar place in the country. The weather really is miserable with the cold and fog. Enjoy the Chicago “fests” we have all summer? They don’t have those in SF. Frank Sinatra sang “She doesn’t like California, it’s cold and it’s damp, that’s why the lady…..”
San Francisco attracts all the uppity college grads who want to move to Cali, but cannot bring themselves to actually move to LA or SD because with their private college degrees they think they are above those 2 cities. So, they move to SF and try and make a go of it.
I may have read it on this blog, but native Californians will tell you that most people who live there are transplants and the ones who “leave for Austin” or CO or UT or NV are most often non-natives, so the people leaving CA are usually just the transplants who had their asses handed to them and couldn’t hack it in CA.
SF is full of aforementioned yuppie transplants (case in point Gary’s daughter) who do not move all the way to California to save and be fruga etc. They want to live the dream, so they literally will blow all their income on housing rentals, and yuppie pursuits like bars, restaurants, trips to Tahoe, etc. I’d say over the long haul in SF probably 3 out of 4 of the transplants will ultimately leave the Bay Area and never buy housing.
Sabrina is right that the % of people who actually hit it big with tech stock options etc. is very small. You’d be surprised how little tech is in Marin Co. It is so far from Silicon Valley as to be practically in a different metro area, imho. Most of the people who live in SF don’t work in tech jobs, let alone the ones with stock options. Does anyone here think the homosexual community there is producing high technology breakthoughs? Lol.
There are many Chinese immigrants who actually save, are frugal, and own tons of property in San Francisco. They must laugh at the continual revolving door of spendthrift yuppies with their private college degrees most of whom leave. Chinese keep buying up more of the city there. You just never hear about it, because that’s not the Jezebel, HuffPo etc. narrative, they don’t want to acknowledge it.
Let’s not forget FB’s Zuckerberg and his cohorts who support the H-1b visa scam so they can pay foreign (male) workers less and work them like dogs. Not many of the Swarthmore (Tuition and fees: $46,060 (2014-15)) type know-it-all leftist college kids, or even the UC-Boulder types will ever really stay and make it in San Fran.
PS Not that they should want to anyway, the city is totally overrated.
“the ENTIRE state is now like this. Out of 32 counties, only 7 are deemed “affordable””
There are 58 counties in California. If you are going to discuss the ‘entire’ state, you should reference the entire state.
“There are 58 counties in California. If you are going to discuss the ‘entire’ state, you should reference the entire state.”
The article from CAR only quoted 32. So I don’t know what counties they are using.
“The article from CAR only quoted 32. So I don’t know what counties they are using.”
Either way, they left out half the state (but probably less than 10% of the people). Plenty of the state is “affordable”, but also basically Oregon.
I actually agree with Helmet. SF is extremely overrated. It’s filthy and the people are obnoxious.
I did a vacation in SF two years ago and was unimpressed. The city was filthy and bums everywhere. We did SF and Carmel Valley and so unimpressed with SF, we cut our SF stay short. Highly recommend Carmel / Big Sur though!
The only thing I liked about SF was the food scene. Seemed like every restaurant we went to was phenomenal.
I don’t like SF either, mostly because of the weather and one dimensional techies everywhere. I love the East coat though, Boston, NYC, even DC.
I agree that the food is off the hook in SF, but Chicago is now slouch either.
With my daughter there we get there at least twice a year now. In fact, we are heading there for a few days soon. I don’t find it dirty at all but I’m not a fan of the weather. It’s always cold and dreary. When it’s warm and sunny it’s awesome. There are lots of interesting things there and where else can you see a 60 year old man wearing nothing but a sock (and not on his foot) in the middle of downtown in the middle of a Sunday? This sort of stuff doesn’t even phase my daughter any more. Yeah, it can be pretty strange.
Interestingly, my wife and I went to SF for vacation more than 20 years ago, got bored and went to Yosemite for the duration.
I do find the food overpriced though but that’s to be expected with high real estate values.
I haven’t been to SF since I was a kid, but I really liked it at the time. I don’t think I’d enjoy living there, but Alcatraz was fun and so were the cable cars. I also liked their homeless people better than ours. The guys with rabbits that would jump through a ring of fire and various other weirdos made the city interesting. I don’t think I’d enjoy it as much as an adult. I have to say that Yosemite and Carmel were more fun to me though.
I once saw a naked guy walking around Chicago when I was driving home late at night. He wasn’t even wearing a sock. Somehow the sock makes it amusing, whereas the entirely naked guy was creepy.
So if you’re walking around naked where do you put your keys, your wallet, and your smart phone? That’s why I’ve never done it.
Uh, Gary, I don’t think you want to know the answer to that…
Jenny you are like the computer nerdy geek’s dream girl. I swear if you did some cosplay and spent a day at comic con you would get 100 marriage proposals in a night. you’d be going on dates every weekend night for a year. you could tell your friends”I only date IT guys” and men would love it.
“Plenty of the state is “affordable”, but also basically Oregon.”
I have a friend who is retiring and lives in the Bay Area but she can’t stay there as a retiree. She moved there just 10 years ago and doesn’t own her home outright. She’s basically priced out of almost all of Northern California- even in Lake County which is nothing to brag about. Wisconsin is nicer. She was looking in the Gold Country but starter homes are $300,000+ up there. She’s switched her focus to Reno now because she can still drive back to the Bay Area to see her children within a reasonable time.
It’s just a mess.
The fact that someone or even an entire group of people can’t afford to live wherever they want does not define a mess. I can’t afford to live on Park Avenue. That doesn’t mean Park Avenue is a mess.
“The fact that someone or even an entire group of people can’t afford to live wherever they want does not define a mess. I can’t afford to live on Park Avenue. That doesn’t mean Park Avenue is a mess.”
Jesus. Housing is about incomes. What incomes are supporting $300,000 home prices in Gold Country? What incomes are supporting $600,000 piece of shit shacks in Concord? What income is supporting a $600,000 starter home in Park Ridge? Or Elmhurst? Or Oak Park? What income?
Oh- wait. Mega-low mortgage rates! That’s right. And easy lending. Yes- it is STILL easy. FHA requires just 3% down.
The housing market is in another bubble Gary. No wonder you can’t see it Gary. The realtors never want to see it. Housing prices are disconnected from the reality of incomes. Which is why the head of CAR actually admitted “hmmm…don’t know who is going to be buying all of these $700,000 homes. Gee. I guess it’s a conundrum.”
Lol.
But it’s different this time.
So it has nothing to do with who can afford to live where today. It has more to do with how people are affording today’s homes.
First of all interest rates may stay like this for a while. The US can not just unilaterally raise interest rates because the global markets will buy up all our debt and keep a lid on it. The rest of the world apparently doesn’t have much of a stomach for high rates into the near future.
Second, we can ask Russ if the people who are buying the $600K homes today could still afford them with rates 1% higher.
Third, rates have been high before without killing the real estate market. If rates go up 1% then the $600K homes will be bought by the people that would have bought the $700K and the people who would have bought the $600K home will buy the $500K home. Total demand will stay the same. There might be some downward pressure on prices but it’s not going to be like a bubble popping.
“Third, rates have been high before without killing the real estate market.”
Coming off of the lowest rates EVER?
This has never happened before.
But I’ll tell you what HAS happened. We were at under 4% rates and rose to 4.75% and the market died (see 2014.) Sales actually dropped. But mortgage rates went back down so the panic was over and the buying resumed.
Imagine if rates went above 5% again? OMG. The whole housing market is screwed. The Fed knows this. It was hoping that by now incomes would be rising enough to counter whatever rate increases it was going to have to do. But so far, that’s not happening enough to support the 20% to 30% or more gains in housing prices.
I don’t think the Fed really bet on new record high housing prices. They hoped it would bounce back- but this? Sky high prices? People flipping for 20% more just a year or two after buying? All of this speculation happening again?
It’s what happens when the Fed keeps mortgage rates low for too long. They have distorted the market. There is nothing they can do now. They will try to raise rates slowly as to not bring down the whole thing. 2014’s scenario is the best they can hope for- which is just falling sales (and not prices.)
Alan Greenspan in Jackson Hole in 2005. Sadly, it is just as applicable 10 years later:
“The lowered risk premiums–the apparent consequence of a long period of economic stability–coupled with greater productivity growth have propelled asset prices higher. The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.
Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”
I do believe that the stock market is too high as a result of record low interest rates and I believe all that stuff about the risk premiums. However, “I don’t think the Fed really bet on new record high housing prices.” Look at the Case Shiller index for the 20 city composite, since you are talking about the nation and that should be pretty representative of the nation’s housing prices. We are far from record highs: https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/226352_cshomeprice-release-0825.pdf?force_download=true
Gary- most of the GZ is at record prices. Case Shiller- as we know- is 3 months delayed (for one) and includes 9 counties in the Chicagoland area (or is it more?) So- sure- some parts of Joliet might not be back to their record highs.
So I don’t really care what Case Shiller says, to be frank. It’s not an accurate read on what is going on out there.
Do you not agree that the housing market is on fire with multiple offers and prices continuing to rise month after month- at least in the GZ? (although evidence of this very thing happening outside of the GZ is easily found by googling it.)
We are a monthly payment nation. The only way that 28-year old Millennial with a student loan payment is buying that $450,000 2-bedroom GZ condo (which may now be $500,000, actually) is because of record low mortgage rates. When those rise- UNLESS his income dramatically increases- then he’s not going to be able to buy the $500,000 condo. And who WILL be able to?
It’s SO obvious that this housing market- nationally- is completely messed up.
Over the last 3 years housing prices have soared:
1. Up 75% in Lansing Michigan
2. Up 47% in South Bend Indiana
3. Up 42% in Minneapolis
Yes- coming off of very low levels in the bust. But 75%? That is laughable. Of course- incomes nowhere close to that. Incomes up- what 5% in those 3 years time? If that?
In Denver, housing prices are up 33% in the last 18 months. People are doing cash out refinancings again.
Party on!
I don’t accept that most of the GZ is at record prices. Eventually I’ll present more proof of this.
But you were talking about the nation so what is your issue with CS at the national level? You can’t keep switching between talking about the nation and talking about Chicago. You’re worried about the nation and the nation is well below record prices. And those 9 counties are as much a part of the “housing market” as Chicago is. You can’t just dismiss them. Are you worried about a meltdown of biblical proportions or just a GZ meltdown?
And where in the heck did you get that Lansing home prices are up 75%?
“And where in the heck did you get that Lansing home prices are up 75%?”
http://www.bloomberg.com/news/articles/2015-08-21/midwest-home-prices-surge-with-silicon-prairie-job-boom
The job market has returned to health, no doubt about it. But incomes aren’t rising enough to cover these kind of housing price gains.
“I don’t accept that most of the GZ is at record prices. Eventually I’ll present more proof of this.”
Appraisal Research tracks 65 downtown condo buildings. These would be the larger buildings- so the three flats or even the north side or Bucktown/Wicker Park 6 or 8 flats aren’t included in this.
But two GreenZone areas are now past peak- the Loop and River North. All of the others are within just a few percentage points of it- with the exception of the Gold Coast which is still 5.3% off its highs. That’s not surprising given the age of the buildings there and that they don’t have as “modern” amenities that buyers want like the other neighborhoods.
What is most shocking is that even the South Loop, which was battered the worst of all of the “downtown” neighborhoods, is just 3.3% off its 2008 peak. Wow.
From Dennis Rodkin at Crain’s just a few days ago:
http://www.chicagobusiness.com/realestate/20150827/CRED0701/150829882/loop-leads-downtown-condo-comeback
Also, as I’ve said before, we’ve forgotten what “middle class housing” is. If you make $60,000 a year, your house isn’t supposed to cost $300,000. It’s supposed to cost you $120,000.
$300,000 or $400,000 is NOT a “starter” home. Only the upper middle class can afford that. But low mortgage rates mask that incomes haven’t risen enough to support it. We ARE a monthly payment nation, after all. When those mortgage rates rise, so will the monthly payment and people will be priced out.
Of course, rates may not rise for another 10 years, or so the thinking goes.
“The only way that 28-year old Millennial with a student loan payment is buying that $450,000 2-bedroom GZ condo (which may now be $500,000, actually) is because of record low mortgage rates. When those rise- UNLESS his income dramatically increases- then he’s not going to be able to buy the $500,000 condo. And who WILL be able to?”
well if he’s smart, he’ll lock in that 450k condo he wants to live in at a fixed rate… if they rise, who cares payment is the same, if they go lower, well you can refinance for a lower payment. It will effect that person when they want to sell obviously but when exactly do you think rates will go up significantly?
Why aren’t you talking about the retarded increases in rent prices in the GZ? I mean wtf are you supposed to do as an alternative to buying?
IMHO, I don’t think a 1% increase in rates would affect the GZ that much for borrowers purchasing homes in the $600k range. In my experience, most of these borrowers are not at the margins in terms of qualifying and their purchase decision isn’t constrained as much by monthly payment.
A 1% increase in rates on a $600k mortgage is about $350/mo. If $350/mo gives you a pause, you can’t afford a $600k mortgage. Typical GZ buyer is not stretching their qualifying to the last dollar.
In the GZ, most of these borrowers are at the beginning of their careers. Their incomes increase quite a bit as well. If anything, I find overall job stability to be more of a driver than rates.
However, I do think you might see more of an impact in high cost areas like the west coast where buyers definitely stretch their qualifying and having high DTIs is not uncommon. A $350/mo increase in payment could disqualify someone.
“The median home price has surged 75 percent in the metropolitan area of Lansing”
Yep, that’s what I thought. There goes that median price bullshit again. That is not the same thing as “prices”. It could easily be mix driven. For instance, in East Village median home prices went from $126K in May 2011 to $1.2 MM in February 2015. Whoa! Prices are up 1000%! But wait then they fell to $460K in July. The sky is falling!
Sabrina, it is all relative. In big cities, $300k is a starter home. You have a high concentration of high income workers all vying to live in the same areas. Supply and demand dictate prices.
Sure, if you want to live in Podunk, NC you can find a nice home for $120k on acreage. However, the job market in Podunk is not the same as Chicago.
Even if I conceded that the GZ was at record high prices then we might be worried about GZ prices crashing. OK. What about the other 90% of the metro area? And the other 90% of the country that is not GZ in SF, Denver, NYC, etc…?
I don’t see a problem.
“we’re a payment nation”
Actually, I wonder sometimes what will happen to commercial RE. There is no “30 yr. fixed” loan. If interest rates rise, there will be some serious refinancing issues and gaps, not to mention after debt service cash flow problems.
Maybe it’s all these owners that are telling their cousins at the Fed not to take aways the punchbowl.
“And where in the heck did you get that Lansing home prices are up 75%?”
From that story:
“In terms of comebacks, nothing beats Reno, Nevada’s 82 percent home-price gain in the past three years. Atlanta had the second-biggest increase, at 80 percent, followed by the Cape Coral and Fort Myers, Florida, area, at 77 percent. Even with the increase in values, Reno’s median home price is still 36 percent below the peak of the last housing boom, Atlanta is off 10 percent and Cape Coral-Fort Myers is down 29 percent.”
“The only way that 28-year old Millennial with a student loan payment is buying that $450,000 2-bedroom GZ condo (which may now be $500,000, actually) is because of record low mortgage rates.”
This was my ex-boyfriend. He bought a house at 30, with $100,000 down. That was money he diligently saved while everyone else was buying luxury cars, drugs, and expensive watches. I can’t believe he’s the only one to save. I also diligently saved, although my salary was significantly lower. So, yes…there are plenty of millenials who can afford a $500,000 home, with 20% down.
Isn’t Reno a shithole? Certainly seemed like it from the small sample I saw of it
Spent a couple of days in Reno not to long ago. Reminded me of the depressed part of Las Vegas.
“So, yes…there are plenty of millenials who can afford a $500,000 home, with 20% down.”
Yes- with rates at 4%. With rates at 5% or higher?
We might find out soon enough.
“Sabrina, it is all relative. In big cities, $300k is a starter home.”
Portage Park is a “high concentration of high income workers”? That’s news to me.
“Sure, if you want to live in Podunk, NC you can find a nice home for $120k on acreage. However, the job market in Podunk is not the same as Chicago.”
By the way- the $120,000 home can be found in many major cities. It hasn’t gone away because housing depends on INCOMES. Remember those? There simply aren’t enough people affording $300,000 starter homes. At least not without 4% mortgage rates.
“Why aren’t you talking about the retarded increases in rent prices in the GZ? I mean wtf are you supposed to do as an alternative to buying?”
Something has to give, right? You can’t get blood from a stone. There are distortions in the housing market at all levels- and especially on the rental level.
The rental increases are actually showing up in the federal data now because CPI tracks rents- not home prices- so that’s why people complained about CPI being used for inflation during the housing boom when it wasn’t measuring the housing prices at all. But now- CPI should reflect those all time high rents.
Right now, in Chicago, it’s cheaper to buy than to rent in most neighborhoods- especially the GZ (even with the price increases in the GZ.) I don’t know why more people aren’t buying that 1-bedroom instead of paying $2000 to rent it.
I’m glad you brought up Portage Park. Not sure what your point was but it doesn’t need to have a high percentage of high income earners. In the last 30 days 41 SFHs have closed. 8 of those were distressed. Doesn’t sound like a market that has surpassed the bubble peak. 17 of those sold at $250K or less.
“17 of those sold at $250K or less.”
And the others?
16 were OVER $250,000 then.
Your point?
$250,000 is NOT a starter home in a neighborhood where the median income is probably $50,000. Yes- gasp- Portage Park IS middle class. Nothing about it has EVER been upper middle class except during the housing bubble.
So here were are AGAIN. Prices are well above historic levels in that neighborhood. Yet another sign of a housing bubble forming.
But it’s the Fed’s fault again. They always keep rates low for too long. It led to the first bust and it will lead to whatever the outcome of this boom is. Likely another bust.
Second verse. Same as the first.
If “Prices are well above historic levels in that neighborhood.” then why were 8 sales distressed?
If you look at my neighborhood you’ll see that the most recent median household income is shown as $69K yet all the new homes built and sold are at or above $1 MM. How is that possible? It’s not because people with $69K incomes are benefiting from low interest rates. It’s because a much higher income demographic is moving into the neighborhood.
“If “Prices are well above historic levels in that neighborhood.” then why were 8 sales distressed?”
Because they’re beaten down total dumps Gary.
Where’s Milkster?
Milkster has looked at many foreclosures across Chicago over the last 5 to 8 years. She saw it all. Homes without plumbing. Homes without foundations (!).
Portage Park homes are old. If they haven’t been maintained they are total dumps. The bank just wants to get rid of them. Some flipper will buy it on the cheap, fix it up, and sell it for $400,000 to that “middle class” buyer.
Here’s a good example of what is going on in Portage Park.
Sold in 2014 for $140,000.
Renovated and re-listed in 2015 for $454,000!
Is this “middle class” housing even with mortgage rates at record lows? Hell no. That’s upper middle class housing. In the middle of Portage Park, of all places.
And when rates rise (“when” they do- “if” they do) then who the hell is buying this?
https://www.redfin.com/IL/Chicago/5036-W-Patterson-Ave-60641/home/13461239
The Fed has allowed home prices to get distorted with respect to income by letting rates get too low and leaving them too low for too long. As Alan Greenspan warned 10 years ago: people are clueless about the risk.
Just because there has been low risk the last 5 years doesn’t meant there will be the next 5. But they have been lulled into believing that rates will NEVER rise. That the bond bubble will continue for perpetuity. That someone will never have to pay 6% for a mortgage ever again.
And who knows? Maybe they will be right. Maybe rates will still be 4% another 10 years from now and the United States will be Japan.
But if they’re wrong, I sure hope they don’t have to sell that property. Because unless incomes soar, then there aren’t going to be many buyers to sell it to at these high prices.
So the fact that some homes in PP were improved and sold for higher prices is evidence that prices are past peak but the fact that some homes sold at a loss is dismissed as the homes deteriorating?!?!?!?
In 2006 62 SFHs sold in PP at or above $400K. 7 homes sold above $600K.
5832 W Warwick sold for 250K in 2000 and just sold for 260K
4448 N McVicker sold for 345K in 2006 and just sold for 270K
And that’s after looking at only a handful of deals where two sales occurred in the right timeframe. I can’t spend any more time on this but CS doesn’t just make up data. They look at thousands of transactions across the country and I believe data rather than gut feel and anecdotes.
“So the fact that some homes in PP were improved and sold for higher prices is evidence that prices are past peak but the fact that some homes sold at a loss is dismissed as the homes deteriorating?!?!?!?”
No. The distressed sales are normal. They suck. The bank dumped them. Of COURSE they aren’t going to sell for more.
The 16 homes selling over $250,000 are all you need to know. Portage Park is allegedly a middle class neighborhood. That’s what the income levels would show. But home prices are nowhere near middle class. There’s a bubble brewing in Portage Park, just like many other neighborhoods. The longer the Fed allows rates to fester at record low levels, the worse that bubble will expand.
But how do they slow the housing market without crashing it? It is 100% predicated on low mortgage rates. That’s the liquidity in the system. That’s the fire. Without it, no one is buying the $300,000 Portage Park bungalow. Because that house is “just” $1400 a month right now. When it’s $2000 a month, they can’t afford it.
Ah…the Fed’s dilemma.
How WILL it end?
“But it’s the Fed’s fault again. They always keep rates low for too long. It led to the first bust and it will lead to whatever the outcome of this boom is. Likely another bust.”
Sabrina, low rates did not lead to the first bust. Buying with no down payment, fake loans (with no documented income), arm loans, interest only loans and negative appreciate loans that relied on fraudulent appraisals did. I worked for a mortgage company during 2004, 2005 and 2006 and saw hundreds of loan mentioned above with rates anywhere from 5 – 8% rate. Once those mortgages closed, they were sold into mortgage backed securities. Biggest problem with people stopped paying for their homes was that they had no equity in them to begin with and had no incentive to continue paying once prices collapsed. If you had 10-20% equity in your home with income to supported it – I doubt you would stop paying due to a 5-10% adjustment. But they adjustment turned into a crash since equity was not there.
This time low interest rates may contribute to an adjustment, but with job market being strong and a much more stringent underwriting process used by banks, there need to a lot of help from outside factors for a crash.
In addition, higher property taxes in most areas of Chicago compared to 2006 set a price floor that will soften any price decrease. In 2009, I rented full one bedroom in Presidential Towers downtown for $975. When I left in 2011, it was $1150. Now it is $1750. Do you see it going back to $1,000? I don’t. It may roll back a few hundred bucks – but not further. If interest rates rise, it will certainly switch a certain portion of buyers to renting, but not a large portion.
Also, even though it is a huge factor – there has been very little new construction in 2009 – 2015, combined with a small (4-5%) but still an increase in population in the greater Chicago Metropolitan area.
So it is not all about interest rates. It is about supply and demand, and right now demand exceeds supply due to all those and other reasons.
Good points Aleks. Housing is a necessity so even if the prices go up, folks are going to have to rent or buy either smaller houses or compromise on the hood. The crisis was not result of high prices but shading lending practices.
“But how do they slow the housing market without crashing it? It is 100% predicated on low mortgage rates. That’s the liquidity in the system. That’s the fire. Without it, no one is buying the $300,000 Portage Park bungalow. Because that house is “just” $1400 a month right now. When it’s $2000 a month, they can’t afford it.”
You have such a narrow view of the housing market. It really is amazing.
Hint: It is NOT 100% predicated on low mortgage rates.
Hint2: Demand shifts down. The person that was going to buy the 300k house buys the 250k house. In your mind, that leaves “no buyer” for the 300k house. Well, the guy who was gonna buy the 350k house buys the 300k house. And so on and so on.
“Hint2: Demand shifts down. The person that was going to buy the 300k house buys the 250k house. In your mind, that leaves “no buyer” for the 300k house. Well, the guy who was gonna buy the 350k house buys the 300k house. And so on and so on.”
In 2013 when rates went up near 5%, the housing market cratered. Sales declined. That’s what we know happened. Prices are much higher just 18 months later. What will it do when the monthly payment goes up this next time?
Oh- and 40% of the housing market is first time home buyers. What will they trade down to if homes are at record highs?
Your view of the “trade down” is SO simplistic with prices at record highs. They would have traded down in 2013 too. But they didn’t. They simply didn’t buy anything.
“The crisis was not result of high prices but shading lending practices.”
No. The crisis was the result of excess credit.
And it has happened again, just in a different way. The Federal Reserve now has over $4 trillion on its balance sheet. THAT is the excess credit. THAT is the liquidity that has pushed up asset prices in ALL asset classes.
This has never occurred before in US history. The Fed has never taken on this kind of debt before. Everyone acts as if this is normal and there will be no consequences. Yet, we can see the consequences with every asset class at record highs.
“So it is not all about interest rates. It is about supply and demand, and right now demand exceeds supply due to all those and other reasons.”
They are building 8,000 apartments downtown right now. But don’t worry. There won’t be excess supply. Builders NEVER build too much.
“In 2013 when rates went up near 5%, the housing market cratered.”
Wrong.
“What will they trade down to if homes are at record highs?”
Who said trade down?
“Sabrina, low rates did not lead to the first bust.”
The Fed left rates too low after the 2000-2001 recession and allowed the housing bubble to grow. Only later did the mortgage fraud begin to happen with people with no jobs getting loans etc.
It’s amazing that just 10 years later no one remembers what happened to cause the last housing bubble.
So Sabrina, in your mind every person can always buy the same house no matter what rates are? So if rates went to 12%, the house they want will just magically go down to a price where they can buy it for the same monthly price as they could when rates were 4%?
“So, yes…there are plenty of millenials who can afford a $500,000 home, with 20% down.”
Yes- with rates at 4%. With rates at 5% or higher?
We might find out soon enough.
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I would argue that a couple of DINK millenials could easily afford a $500,000 home with each person earning about $75,000.
I don’t see how a family of two adults could possibly only make $50,000. I would argue that an income that low for two adults would count as poor.
Chicago is full of affordable housing. I don’t think that can be said of any SF, Boston, NYC, etc…
I worry more about the psychological impact of 5% mortgage rates than the affordability. It’s unfathomable to me that mortgage rates were 6% not too long ago.
“In 2013 when rates went up near 5%, the housing market cratered. Sales declined.”
Correlation does not imply causation.
Prices did not go down.
And you ignored my PP data. Face it. 90% of the country is not at peak prices.
“Chicago is full of affordable housing.”
Indeed it is. Vacant lots too.
What’s a real shame to me, even more than the south side turning into crime ridden 3rd world hell hole, is the degradation of Illinois’s once great northern IL 2nd tier cities, such as Joliet, Rockford, Waukegan and Elgin. These were once wealthy towns with industrial bases, and small, compact walkable downtowns and a sustainable mix of housing from old victorians right outside of downtown, to mixed use and large apartment buildings, and larger wealthier areas at the outskirts. The loss of an industrial base and suburban sprawl turned these small towns into lower class dumps. It’s too bad, we know there’s demand for affordable housing in denser, mixed use areas, and these towns already have these infrastructures, having been developed well before automobiles were popular. I’ve long thought these towns could make great college towns, and just repurpose some of the large, abadoned buildings as dorms or student housing, and build the university as close to downtown as possible. But I’m sure it’s not feasible and the last thing the state needs to do is spend more money.
“The crisis was the result of excess credit.”
I agree. But I’d say the credit was too inexpensive, mispriced, which inturn lead to too much/excess supply of credit—Austrian economics type of explanations.
“It’s amazing that just 10 years later no one remembers what happened to cause the last housing bubble.”
I think it’s amazing no one remembers what happened to cause the housing bubble bust and recovery of the late 80s early 90s.
The revival of chicago house prices in early 90s was something to behold. I didn’t think it would work, but I also didn’t think the Fed could prevent asset prices from falling in Sept 2008 either. So, don’t listen to me. The people who have been “buying the dips” have been creaming me since Oct. 1987.
“I think it’s amazing no one remembers what happened to cause the housing bubble bust and recovery of the late 80s early 90s.”
Yup. I bought a condo for 170k in the early 90’s and sold it for 340k in the late 90’s (not Chicago). But that was a similar boom/bust cycle then that Sabrina may have been too young to live through. Which was also (indirectly) triggered by the 1987 market crash.
btw, the people I bought the condo from paid 260k for it in 1988.
“what happened to cause the housing bubble bust and recovery of the late 80s early 90s”
The recalibration of cap rates in the underpants gnomes’ model??
“I think it’s amazing no one remembers what happened to cause the housing bubble bust and recovery of the late 80s early 90s.”
Late 80s? Not in Chicago. Chicago “housing” prices have never gone down except for the 2008-2012 bust years.
Condo prices have tanked however- a couple of times. People spent over a decade or more trying to just break even in the Hancock back in that era.
There wasn’t a national housing market bust for 75 years- until the one we just lived through. Before this era of the Fed distorting the entire economic system, housing used to be “local.” Not anymore.
“Yup. I bought a condo for 170k in the early 90’s and sold it for 340k in the late 90’s (not Chicago).”
I think Clio also bought property in the late 80s or early 90s (in Boston?) and then flipped it, hooking him on real estate speculation forever, too.
” ‘what happened to cause the housing bubble bust and recovery of the late 80s early 90s’
The recalibration of cap rates in the underpants gnomes’ model??”
That’s what I think. The Fed didn’t cut rates from 9% in 1989 to 3% in 1993 because house prices were rocketing higher — in the wake of the S&L industry’s collapse, the junkbond/LBO market’s collapse, Citibank’s near collapse, etc. The up cycle had ended. The Maestro’s rate cuts were to goose asset prices, or at least stymie their further decline. I didn’t think it would work, but I was wrong. And 25 years later one result is Donald Trump’s candidacy for president.
Ed Yardeni, a famous economist, said in October 1990, when the funds rate was 7.75%: “There are 775 basis points between the federal funds rate and zero” — by which he meant: the Fed will cut rates as low as necessary to prevent asset values from falling. And he was proven right.
So, yeah: drive down the cap rate, drive up the npv of imputed future cash flows. End of selloff.