Market Conditions: May Sales To Be Weaker Than Expected?
We won’t have the Chicago May sales data for several weeks yet but indications from other parts of the country are showing a much weaker than expected May due to the tax credits pulling buyers into the market ahead of the normal spring buying season.
Everyone knew there would be a slowdown, but much like December of 2009, the first time the tax credit expired, it appears that sales have slown dramatically (again).
From the Wall Street Journal:
Home-purchase contracts signed in New Jersey last month were down 25% from a year earlier, estimates Otteau Valuation Group, an appraisal firm in East Brunswick, N.J. New Jersey’s state legislature is considering its own tax credit for home buyers.
In the Minneapolis area, the number of newly signed home-purchase contracts in the week ended May 22 was down 30% from a year earlier, according to the Minneapolis Area Association of Realtors. “Our buyers, if they haven’t purchased, have just decided to wait,” said Brad Fisher, president of the local Realtor group.
In the Phoenix area, contracts signed in May plunged 26% from a year earlier, local Realtor data show. In Denver, the drop was 27%. Northwest Multiple Listing Service, which covers 21 counties in Washington state, including the Seattle area, reported Friday that contracts signed in May also were down 27% in its region.
In another sign of weak sales, the number of homes on the market is growing again. ZipRealty said the number of homes listed for sale in 26 major metro areas across the U.S. in May was up 1.7% from April. In a typical May, the inventory doesn’t increase from April, according to Ivy Zelman, chief executive of Zelman & Associates, a research firm.
Apparently, Manhattan isn’t seeing much of a lull in buying:
“Now people seem to feel it’s okay to spend some money,” said Pamela Liebman, CEO of Corcoran Group, a big broker in Manhattan.
Even the always positive National Association of Realtors sounds not so optimistic:
Lawrence Yun, chief economist for the National Association of Realtors, estimated that contracts signed for home resales in May were down 20% to 30% from a year earlier. He expects June and July to remain fairly weak and will be watching nervously for signs of a rebound in August or September. “Housing cannot just depend on [government] stimulus forever,” Mr. Yun said.
Remember, 96% of all mortgages in the first quarter were backed by Freddie, Fannie and FHA.
As David Stevens, the head of FHA said last week:
“This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”
May home buying activity looks worse than expected [Wall Street Journal, James R. Hagerty and Nick Timiraos, June 4, 2010]
FHA home financing volume sign of “very sick system” [Businessweek, Jody Shenn and John Gittelsohn, May 24, 2010]
30pc below last May, not 30pc below this past April. Double dip in store?
How long before you think i sinks into sellers heads that they need to adjust list to reflect the “gone for now” Obama Coupon.
My guess is never as most sellers cant adjust list to reflect a bad market.
10% cap rates in Green Zone-ish Chicago, anyone?
“30pc below last May, not 30pc below this past April. Double dip in store?”
Yes- that’s what I thought was interesting about these stats. They’re not saying that sales are going to drop from April- as that’s a given. But they’re saying they are going to be 20% to 30% under LAST year’s sales.
We were seeing year over year gains for the last few months. Will that reverse?
Searching-
10% cap rates on multifamily in sought after Chicago neighborhoods isn’t happening right now. There are way too many investors with cash ready to bid the deals that trade up. It’s still way more demand than supply for apartments in the best areas. And not much is trading because owners don’t want to sell in a soft market.
Maybe humbolt, Rogers park you can find some true 9% caps, but not that many…
the data will show Chicago is ahead of the curve; i still think Chicago is a ‘value’ buy and a better than most parts of the country; we might have fallen 1st in the double dip but we’ll come back strong next year.
And why exactly will we come back strong next year? Will it be a decrease in the 11.7% unemployment rate? Will it be the 4.2 billion dollar budget deficit? Will it be the most likely to be enacted next year 4.5% income tax rate? Will it be the release of hundreds of thousands of shadow inventory into the market? I’m thoroughly confused…
With no appreciation in sight, don’t really see why anyone would deal with owning a building without a good yield…seller strikes don’t last forever. Why would anyone take a 4% cap? No chance of conversion.
“Why would anyone take a 4% cap?”
To be able to tell they world that they *own* their condo?
It doesn’t surprise me that there is a dip. At a micro level, purchase business has been quite strong for me and we are still seeing decent contract activity post housing credit. I am seeing some move up buyers as well. With that said, we are just getting a bigger piece of an ever shrinking pie.
The credit just forced a lot of people to move up their timelines. I personally haven’t dealt with too many buyers who need the credit or based their decision on the credit, but certainly decided to take advantage of it while it is being offered.
The larger problem is that buying a home is an emotional as well as financial investment. I just don’t think people in general feel very confident so that is putting a damper on sales. The administration has also not shown a lot of love for pro business growth policies.
I am also seeing a lot of the higher earning first time home buyers with substantial down payments available to them continuing to rent and skipping the luxury 2/2s. When they do buy, they go straight for a larger town home or right for the burbs. There isn’t a lot of confidence that they can get rid of a 2/2 if they get married or have a kid.
“To be able to tell they world that they *own* their condo?”
Yeah, well, not for long.
Taxes, repairs, vacancies, headaches, trophy seekers should stick to wives or husbands.
No 4 caps trading even is best locations, but no 10s either. Some in the middle 7-7.5. Investors pay lower cap rates for a variety of reasons. I would rather buy a 7% cap rate in a sub market with high occupancy and rent upside than a 9% with vacancy risk and no rent upside.
It’s not a seller strike, the majority of owners in the best locations are well capitalized, long term operators. They buy low and sell high, not the opposite.
Which is why long term I thought the proliferation of 2/2’s in yuppie aka green zone neighborhoods was poor housing planning. The developers tore down so many SFH’s with 3 or 4 bedroom and replaced them with basically high quality apartments but marketed them as condos. The aldermen didn’t care as long as they got their $500 campaign contribution per property. Now we’re stuck with these $400k 2/2’s marketed to 20 something yuppies that are suitable really only for a couple of years during their 20’s or early 30’s, or until the kid reaches school age or baby #2 comes along.
“I am also seeing a lot of the higher earning first time home buyers with substantial down payments available to them continuing to rent and skipping the luxury 2/2s. When they do buy, they go straight for a larger town home or right for the burbs. There isn’t a lot of confidence that they can get rid of a 2/2 if they get married or have a kid.”
c’mon folks, place yer bets! You can’t win if you don’t play! Stocks are looking cheap too!
“the data will show Chicago is ahead of the curve; i still think Chicago is a ‘value’ buy and a better than most parts of the country; we might have fallen 1st in the double dip but we’ll come back strong next year.”
May sales reports will be closings, not contracts written, so the numbers will still be strong because of the contracts written in April. However, my own analysis suggests that contracts in May were down about 25% from April of this year levels:
http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/2010/05/chicago-home-sale-activity-off-slightly-after-tax-credit.html
“There isn’t a lot of confidence that they can get rid of a 2/2 if they get married or have a kid.”
Nor should there be. It’s a suspect asset class.
““There isn’t a lot of confidence that they can get rid of a 2/2 if they get married or have a kid.”
Nor should there be. It’s a suspect asset class.”
This asset class could see an upsurge as baby boomers age. The boomers who moved into a SFH (whether the burbs or city) in the 70s and 80s will be looking to find something maintenance free and in a good walk zone as they get older, the kids are gone and lawn work is unappealing. Obviously not a quick fix, but this could happen over time.
“10% cap rates in Green Zone-ish Chicago, anyone?”
hah good luck with that, you’re only going to find stuff like that in the borderline or actual ghetto
I have seen several 8 percent mixed use on very solid streets. At that point we are only a couple hundred thousand off. I think you under estimate how many people bought under inflated pre-texts and how little money is out there at the moment. As for the 2/2’s, 20 somethings don’t have the cash, and 30 somethings have been burnt or have seen people get burnt. Good luck moving those. Let put all our hopes on the empty nester/boomers!
“Let put all our hopes on the empty nester/boomers!”
Don’t forget Section 8 and HUD supported financing. We can put our hopes on slumlords buying up the places at 8 caps. And foreigners.
One obvious flaw with the retirees-as-saviors is that they’ll only want elevator buildings (so Sonies is okay there). Another is the Chicago/Cook County/Illinois tax/deficit problem, which I wouldn’t want to be entering into with a fixed-ish income. Another is that how many of these retirees really want-to/can spend $300/400/500k on a condo? Another is the alternatives–how many of those (relative) few who *can* allocate $300k+ to real estate want to do that here rather than AZ or Fla or someplace else warm, where the grandkids will come for vacation/summers/etc?
Which is the problem with the proliferation of condos–not so much their existence, but the valuations placed on them. Were the bulk of the 2/2s trading in the high 100s–>low 200s, there wouldn’t be the problem.
Unless their fledglings don’t leave the nest due to continuing under/unemployment problems. Could be the family homestead keeps on kicking.
“The boomers who moved into a SFH (whether the burbs or city) in the 70s and 80s will be looking to find something maintenance free and in a good walk zone as they get older, the kids are gone and lawn work is unappealing. Obviously not a quick fix, but this could happen over time.”
Many of the boomers I know are broke and over heloc’d. The ones that do have money i.e. the ones with nice pensions, savings and paid off homes aren’t looking to move or down size. I highly doubt my parents or their cohorts are looking to move from teh suburbs where they have lived for 30 years and return to the city to buy $400k 2/2s in the green zone. If anything they’ll move to arizona before they return. Of course there are a handful of people here and there who buy in the city and downsize but generally speaking the movement isn’t large enough to warrant that.
IMHO long term the 2/2s will eventually become apartments. Saavy investors will buy with cash and negotiate short sales with the various lenders with liens. The current occupants will have to leave sometime. They’re not all going to live in a 2/2 with 2 kids in Lakeview. 30 years from today’s 2/2’s will be the 3 and four flats of the future – complete with original granite countertops, scuffed up 42″ maple cabinets and original hallway carpeting.
I was joking about the boomers. Obviously there is a need for bulk condo sales to support the higher demand for rentals. “sorry no sec 8”
“30 years from today’s 2/2’s will be the 3 and four flats of the future – complete with original granite countertops, scuffed up 42? maple cabinets and original hallway carpeting.” LOL 🙁
I wouldn’t count on the boomers for anything but being a drag on society in general
Interesting takes on the boomer generation by (I assume) non-boomers. The largest concentration of home ownership is in this demographic. While this means the largest number of “underwater” mortgages, it also means the largest number of positive equity mortgages. I cannot comment on “who you know” but most of the people I know well are in this demo (as am I). There is very little talk of the joys of home ownership and a lot of chatter about downsizing and “no maintenance”. There is also not much out-of-state movement. I do know a number of snowbirds who winter in warmer climes but very few want to move permanently. This demographic is also healthier than previous generations and while some prefer elevators there are is a good number who don’t mind stairs. Don’t forget that most SFH’s are two story and have all the bedrooms on the 2nd floor.
There will never again be a strong market for 400K 2/2s, but, as these properties decline in price, they will be attractive options for an aging demographic.
Interesting article on housing/demographic trends –
http://realestate.msn.com/article.aspx?cp-documentid=23482112
“Interesting article on housing/demographic trends”
Most interesting to me: “Walkable, urbanized suburban town centers will see an influx of aging boomers”
Seems a lot more plausible than soaking up the supply in the Sloop.
my take is as a boomer, thank you very much. one with kids just going into/getting out of college, hence the first person take on under/unemployment of offspring and continuing family units. I may just be an old softy, but have no plans to boot the kids out on the street to face uncertain economic futures. Also, I don’t anticipate having to worry about stairs for a few decades.
“Interesting takes on the boomer generation by (I assume) non-boomers.”
What I’ve been observing is people in their 70s/80s downsizing (from their green zone house/townhouse to a retirement/assisted living facility.
“Seems a lot more plausible than soaking up the supply in the Sloop”
that’s pretty harsh, I mean the South loop isn’t THAT bad…
“There will never again be a strong market for 400K 2/2s”
I completely disagree. What most people are refercing are $HIT homes. The good ones will always hold value and increase at that. A more accurate statement would be “there will never again be a strong market for 400k 2/2 in $shitty neighborhoods, smaller than 1200 sq ft, half walls, without central ac and parking.”
My oh my, what did city residents do and where did they live in the days before they could buy a 2/2 in ubiquitous brick three flat?
They lived in 2/1’s in three flats?
I reckon I’m one of these Boomers that some are counting on. We’re 61 years old, retired on 2 pensions, kids are all long gone and on their own and last year we sold the house we owned (outright) and moved back to the city core. As RENTERS. We’ve no interest in buying in this city; too big a risk for us, I wonder where the money to run this city is gonna come from. It sure as Hell isn’t comin’ from US Steel, Wisconsin Steel, International Harvester, Zenith and Hotpoint any more.
However a condo in downtown Glen Ellyn might be nice some day.
“I reckon I’m one of these Boomers that some are counting on.”
No one was counting on the boomers. It was a joke harkining back to the 2006 days when developers thought boomers wanted weekend places in the city to pad their retirement. I don’t think anyone was even looking at the taxes back then. What a difference a few years make.
“No one was counting on the boomers.”
Sounded too true to NAR-type boosterism/panic/rationalization.
“There isn’t a lot of confidence that they can get rid of a 2/2 if they get married or have a kid.”
Exactly the boat I’m in. can anyone defend the idea of buying a 2/2 or even a 3/2 only to live in it 5-7 years?
“can anyone defend the idea of buying a 2/2 or even a 3/2 only to live in it 5-7 years?”
All about the price and your priorities (and whether you want/need an inflation hedge). I can defend it, but don’t think it’s necessarily a good idea, unless the price:rent ratio is low enough–there is a point where it’s low enough to be *almost* a no-brainer.
If the 400K condos are going by the wayside, what are young and middle-aged (no kids) professionals going to live in, I wonder? Particularly when they are working 60-80 hours a week and don’t have time to commute to the suburbs? Doubt very much that they will find it acceptable to spend 30 or so hard-working years in apartments that are not their own, that they can’t decorate, and that they cannot remodel over the years, and also doubt they’ll want to keep migrating to newer and newer rental properties.
“If the 400K condos are going by the wayside, what are young and middle-aged (no kids) professionals going to live in, I wonder?”
The same places, but many/most of them will trade under $300k (in 2010 dollars). The pricing and the number of “luxury” units in non-luxury locations are the problem.
I noticed a purchase price less than 15X annual rent as an approximation for rent/buy pairity. any chance there is an expalination for this or what *really* tips the scale?
There will always be highly compensated young professionals who want nicer condos that are close to everything. Unfortunately, the pickup truck developers overbuilt and converted way too many units targeting this group of buyers. Luxury 2/2s in marginal neighborhoods or units with crappy views, etc are going to go back to apartments at some point.
The regulars on here wishing for the $250k 2/2 right in the thick of things with 2 parking spaces and a private roof top deck are going to be waiting a long time though.
“I noticed a purchase price less than 15X annual rent as an approximation for rent/buy pairity. any chance there is an expalination for this or what *really* tips the scale?”
That’s a ~6.5% capitalization rate–so, with current interest rates, that means it’s a decent place to park your cash. You’d like it to be more like 12x annual rent (~8%) to cover costs of ownership and transaction costs on both ends, and under 10x annual rent (10%) would, imo, make it pretty much a no-brainer for a unit/house you would be happy to live in as-is today and for the next 5-7 years.
Old Man nailed it. Further, even those boomers who might be inclined towards buying a retirement home are in most cases not going to be in a position to tie up $400K of their assets. If they downsize, they will buy as cheaply as they can leaving most of their equity (if any) to generate income.
“There will always be highly compensated young professionals”
Where there a bunch of highly compensated young professionals in Chicago during the 1930s? What about all other decades within the past century before the 1980s?
I think your frame of reference is a bit biased by your experience in life thus far. Just because for the past X years there was a certain population does not mean that this population can’t not 1) shrink, or 2) go away entirely. If this downturn is truly unprecedented, and by all accounts over the past 100 years it is (see chart below), I think using a recent frame of reference is invalid.
http://cr4re.com/CRImagesJune2010/EmployRecessions2May2010.jpg
“Unfortunately, the pickup truck developers overbuilt and converted way too many units targeting this group of buyers.”
You focus solely on the supply side. But I see the demand side getting hit equally hard going forward, basically amounting to a one-two punch.
“The regulars on here wishing for the $250k 2/2 right in the thick of things with 2 parking spaces and a private roof top deck are going to be waiting a long time though.”
I don’t see these expectations from too many regulars on here. I think what the regulars on here see are 500k 2/2s right in the thick of things with 0 (maybe 1) parking space and little, if any, usable outdoor space of questionable construction quality. And we know those valuations aren’t sustainable–its just the banks sitting on the foreclosures in the pipeline refusing to take action. Or refusing to write their balance sheets full of garbage mortgages to their true value as mark-to-market accounting was suspended.
You should know about condos getting slaughtered, Russ–what was that latest Case-Shiller condo value for Chicago? Was it January 2002 levels again?
Employment Population Ratio and Recessions
http://cr4re.com/CRImagesJune2010/EmployPopMay2010.jpg
“There will always be highly compensated young professionals”
It appears there certainly aren’t as many of them if this segment is at all representative or correlated to the larger labor market.
And don’t worry about that little uptick towards the end–thats all temp labor driven by government census hiring.
“It sure as Hell isn’t comin’ from US Steel, Wisconsin Steel, International Harvester, Zenith and Hotpoint any more.”
Hotpoint, lol. No, it is coming from large fortune 500 companies that specifically choose to locate in downtown Chicago, like Boeing.
On the geezer topic, my brother in law sold a condo last year and had tons and tons of older couples come through it. The ultimate buyer was a 20 something using, of course, FHA financing, but I was still surprised at the boomer interest it got. Condos appear like simple living, though that really isn’t true once you factor all the association BS in. Maybe older folks have time to put up with that crap so it is less of an issue, who knows.
“No, it is coming from large fortune 500 companies that specifically choose to locate in downtown Chicago, like Boeing.”
So Boeing’s HQ employs more people in downtown Chicago than Sara Lee’s did? Because I think Sara Lee recently moved to the burbs. In order for your argument to have merit the inflows of these positions from these F500 companies into downtown Chicago would need to surpass the outflow, equating to a net inflow. Which I don’t see at all.
JMM, did you instead mean the recovery in jobs is coming from 200k/year Big Swinging Marketeers/Brand Managers? I’d sooner put my money on government patronage positions, but if you want to marketeer to each their own.
I’ve seen plenty of boomers buying in the high rises as places to live after their children have left the nest. Many are also buying intowns in the high rises.
I’ve never heard of any buying in 3 or 4 flats in the neighborhoods like Lakeview or LP. They certainly don’t want to walk up any stairs! Perhaps if the building had an elevator- they might consider it. But frankly, they want the doorman, the exercise room, the pool etc. And they want more upscale restaurants- not pubs and bars to go to.
But those are just the ones I know. A lot of these second home buyers have propped up downtown neighborhoods. Remember, Lakeshore East was marketed a few years ago as “feeling like the suburbs” just to appeal to these particular buyers.
Great point on the elevator desire Sabrina. Lakeshore East recently broke ground on the new retail center that will have a large grocery store as the anchor. There was also a $125 million hotel recently announced in that area as well. Seems like positive activity in a tough market.
New retail center in Lakeshore East – http://www.magellandevelopment.com/retail/
I’d feel better if Boeing had a big airplane factory in Chicago as well as corporate headquarters.
I have a friend who recently sold her (beautiful) duplex-down in Uptown to an older couple from the Western suburbs. I think she said they paid cash.
So go figure……
Bob,
Chicago condo prices are back to August 2001 levels. Not pretty – for sellers that is. Of course, employment in Chicago is back to 1996 levels.
I think the price trend downwards will continue through the fall. Where is the employment growth to drive confidence in the real estate market?
in the suburbs, you will see terrible declines come July/August due to families that have to move before the school year, who will just take the hit and move on.
“Apparently, Manhattan isn’t seeing much of a lull in buying:
“Now people seem to feel it’s okay to spend some money,” said Pamela Liebman, CEO of Corcoran Group, a big broker in Manhattan.”
This is why I live in the 10011 area! If anything in my ‘hood prices have continued to climb and places have become harder to get into. As much as I want to tell of the increase in value of my building over the past 15 years, I will remain mum.
To a casual observer, it has been business as usual in the city while residents of Fl, Az, Vegas, Chicago have made full on head to toe wet suits the outfit de jour over the past 5 years.
It’s not so fabulous being a condo buyer in this market, at least if you are the type who likes a unique property (which usually does not mean a high rise). For one thing, people are not as willing to offer you a great deal as you might think. The condo market has not really taken the serious hit that is merited given the shadow inventory and the rate of unemployment. For another thing, you can forget about financing. I’m not talking about getting a jumbo (which you’ll need 20% down to get). Even getting traditional financing with excellent credit is tough. If there’s a short sale or foreclosure in the building, that one unit will also be in arrears on assessments and, as lenders do not offer financing where more than 15% of units in the building, that one unit is enough to make EVERY unit in the building inalienable. Therefore, if you not into the waiting game of a short sale or foreclosure, but want to buy a unit the traditional way, you will still have to wait for that foreclosure or short sale in the building to go through. I’ve been through this particular scenario twice already. People who have a short sale or foreclosure in a 4- or 6-unit building should not bother because their properties are inalienable unless they can find a cash buyer.
Sorry, last line should have read “People who have a short sale or foreclosure in a 4- or 6-unit building should not bother TRYING TO SELL because their properties are inalienable unless they can find a cash buyer.” It wastes the buyer’s time as well as money (for appraisal, attorney review, inspection) only to find they can’t get the financing by the proposed close date because of those assessments in arrears in the foreclosed/short sale unit.
ALT,
Good write up on non high rise condo buying. to most not looking to buy in that area it seems that there are many to choose from but i guess the choosing is the easy part financing is the PITA.