Market Conditions: Midwest Sees Largest Sales Plunge in the Nation in February
Apparently, the Midwest is home to the fastest sliding home markets in the country. Not by price- but by sales.
The Associated Press reports that Midwest home sales, which includes a 12-state region, fell 18% in February from a year ago, according to the National Association of Realtors. The nationwide home sale average was a decline of just 10%.
However, prices in the Midwest fell 8% year-over-year, the second-smallest drop of any region.
So- sales are plunging but prices are not.
Conclusions?
From the Associated Press:
Chicago; Wichita, Kan.; Indianapolis; Des Moines, Iowa; and Kansas City, Mo., posted the biggest losses in the region, dropping by 25 percent or more.
Home sales in Chicago plummeted by 65 percent in February from a year ago, one of the worst showings in the nation, according to the AP-Re/Max report. The median home sale price has also fallen, declining 23 percent to $179,000.
Israel Fuentes, a real estate agent with Home Center in Chicago, said buyers who would normally have taken advantage of lower home prices are now staying out of the market, afraid that prices will continue to crater. He said the problem has only worsened as more homes go into foreclosure or are being sold short – that is for less than the balance on the mortgage.
“I have never seen so many short sales,” Fuentes said. “Everything that is selling is mostly short sales. There are huge, huge, entire neighborhoods that have basically plummeted (in value).”
Those stressed sales make it virtually impossible for regular sellers to put their properties on the market for good prices, even in higher-valued neighborhoods, he said.
“Everywhere has been touched and affected,” he said. “Properties that I sold for $410,000 a year ago now go for $120,000.”
Midwest home sales fall 18% in February [Associated Press, David Twitty, Mar 23, 2009] [Same article also in the print edition of the Wall Street Journal on Mar 25, 2009]
To summarize the statements above, foreclosure and a lack of expensive home sales (those over $600k) are driving the average down. The average price will appear to shoot up like a rocket once foreclosures subside and expensive homes start selling again.
My guess is that the reason the Midwest has the highest drop in sales is because it has one of the smallest drops in prices. No one wants to buy at high prices when they see prices dropping everywhere but here.
Nothing to see here….
I’m sure the bears will all say this indicates a huge price drop is forthcoming. I disagree.
My reason is simply that the bubble was not as big here as the non recourse states like CA, AZ and NV nor is it overbuilt like Miami.
Sales are slow because nobody wants to buy in a downward market. Prices could cut in half and if people thought the market was still going down they still would not buy. People who say it’s all about price are wrong. It’s about fear and greed.
There are affordable props out there right now. They might not be the place a lot of people want to live but when has it ever been true that most people could afford the house they want? Never.
I agree with RunnerRunner. Price is irrelevant right now and sellers essentially bid against themselves by dropping prices for “phantom buyers.” Selling is a giant waist of time right now, which is why so many people are renting. For those who reply about how their home sold in 5 days or 30 days, congratulations on finding one of the outlier buyers and I am not being sarcastic.
During the bubble a lot of idiots used “comps” and looked to see what their neighbors were paying or getting before arriving at a price. Nevermind that prices got terribly out of whack with a great substitute: renting. Had they anchored on a cash flow basis to rents this bubble would’ve never happened.
Now we have people saying “make it virtually impossible for regular sellers to put their properties on the market for good prices” with no basis in reality for this claim. What is even a “good price”?
If you bought six plus years ago, you’re fine. If you put down a significant downpayment and bought over three years ago, you’re fine. I think Mr Fuentes is confusing the set that bought within the past five years and expects to trade up their house twice a decade with everyone.
I never had a lot of respect for the crowd that trades in their car every five years for a new one. I have even less so for those that treat their house like this.
Well, I refuse to buy something I don’t want.
I am perfectly fine renting until the property I want is reasonably priced. History has shown that eventually I will be able to buy what I want.
Think small:
Price is relevant now, as always. I am a potential buyer who will buy when the price is reasonable and the property is what I want. It is not about greed or fear, but a logical and wise view.
RRunner-
the bubble might not have gotten as big in CA/AZ/FL but Chicagoland is still shedding a massive amount of jobs, the majority i’m guessing are the “professionals” that could previously afford 500K-800K 2-3 br places.
It is delusional to think that all sellers can just “wait it out.” The correction will not only be notable for its size, but for its duration.
The article clearly points out that Chicago is performing much, much worse than the Midwest as a whole.
“Home sales in Chicago plummeted by 65 percent in February from a year ago, one of the worst showings in the nation, according to the AP-Re/Max report. The median home sale price has also fallen, declining 23 percent to $179,000.”
Besides, didn’t the Foster Ave house featured a couple of days ago make it clear that there is a price at which you can attract buyers? You really have to try hard to believe that drastically lowering prices will not result in increased sales.
RR-
For the record, I wish you’re right. But that’a all it is, a wish.
The saying ” Wish on one hand and shit on the other and see which gets filled first,” apllies here. Are you showing you’re hand?
Your comment is irrational, for many reasons. I’ll let the other folks on here point them out.
Kind Regards.
The same pattern has played out all over the nation, in this order: slow down in volume – increase in median price; then large drop in volume – small drop in median price; slight increase in volume – large drop in median price. Look to the coasts for the pattern played out over and over again; it works it’s way from the coast in. Chicago is toast.
The other half of the equation is the return of lending standards. The days of Countrywide, IndyMac, New Century and Golden West are GONE. The securitization of wholesaler mortgage lender’s loans are gone. The day of the fly by night mortgage broker are gone It will be 20 or 30 years before the financial world again throws that much money at US real estate.
Bubble pricing and expensive homes aren’t coming back anytime soon; a significant number of expensive homes ($600k+) used some sort of jumbo mortgage and a high percentage of those were exotic in some way or another. (100% financing, IO, option arms, balloons, etc). This crisis has shown that the more exotic the mortgage the more likely the default. The number of households that can truly afford a jumbo with 20% down at conventional lending standards is small niche anyway which results in relatively few expensive home sales. Basically anyone who bought (and still holds) an expensive and/or jumbo mortgage is screwed: they took a huge gamble and lost.
“Prices could cut in half and if people thought the market was still going down they still would not buy.”
Well that’s just it. “IF people thought the market was still going down”
If prices drop in half the number of people who think the market is going to continue lower will be drastically reduced.
“People who say it’s all about price are wrong”
It is precisely about price in relation to income and rental rates. They have always, and will always revert to hisorical means given enough time. Anyone who believes otherwise is simply confused.
John
My feeling on the Chicago market is that bubble-era price appreciation in the prime Chicago areas wasn’t so great as to set the stage for real financial distress, large-scale foreclosures, and the needed downward price adjustment. So what we are seeing instead is a market frozen in time. The majority of sellers seem to be doing everything they can to avoid taking a loss or (especially) bringing cash to closing, while the majority of buyers are apprehensive because (a) they’re seeing what’s happening in other markets and expect better discounts than what’s available, (b) they are beginning to shift their expectations about the future trajectory of home prices, (c) they don’t qualify under tighter mortgage lending standards, and (d) they are insecure about their jobs.
We also have a condo inventory on the market right now in which most buyers bought in 2004-2007. I almost never see a unit for sale that was bought before that. I’m wondering whether that’s just because people don’t live in these 2/2’s and 3/2’s long or because those who bought in that period feel they have a last chance to get out now. At any rate, it means their cost basis is near peak levels and without cash to bring to closing they’re unwilling to price at a level that will sell.
I do expect a return to early 2000’s pricing and I don’t think we’re close to it yet. But it seems like it will be a long grind downward, and no matter what happens on a national level we can expect the adjustment to come slowly to Chicago.
RunnerRunner, I think you’re completely wrong. If prices fell by 50% we would see a massive spike in volume. Let’s be honest about what’s going on in this market. Nearly every property out there is being marketed above the 2006 price, either outright or through gimmicks like “parking extra,” and nothing is trading. Sellers want to hold on as long as possible. Time will tell if that’s a good strategy. In the meantime, there are buyers out there (I am one) with the means to buy who are waiting for them to get real.
“the crowd that trades in their car every five years”
I can only imagine what you think about the [large] crowd that trades (or used to, at least) in every *two* years.
“Basically anyone who bought (and still holds) an expensive and/or jumbo mortgage is screwed: they took a huge gamble and lost.”
Gawd, HD, take a perfectly reasonable point and screw it up with your ridiculous hyperbole. If Stevo were around, this thread would devolve into a fight b/t you two.
“bubble-era price appreciation in the prime Chicago areas”
Right, but the appreciation in non-prime areas (look at disfavored parts of S and W sides) and the over-luxury-ation of condos (i.e., way, way too many for the market) is a bad set up for the non-prime areas, which will affect the prime areas, if no other reason hurting potential move-up buyers and giving first-timers a cheaper, if less desireable, alternative.
As the auctions at the Vetro and other places have shown, if they cut the prices, people will buy.
One saving grace for Chicago is the Developers saw the decline in the market early enough to halt construction of new units in the Downtown area. For awhile there, it appeared as though Chicago was headed in the same direction as Miami in overbuilding.
I seriously do not see housing prices falling to the point where those who are holding off buying to get that one great deal will be satisfied with the pricing. Sure prices have fallen, but many sellers (like myself) are refusing to drop their asking prices just because we are going through this mess. Granted there are those who NEED to unload at any cost, but the quality you would get in those props is not what it was a few years ago.
I realize the market is in serious trouble, but a huge problem we have at the moment is the media drastically overplaying this issue. It is sort of comparable to the way the coverage of the past administration was handled….yes there were problems, but when it is taken to the level where any person who wrote a book on anything relating to the problem was asked to give their overly dramatic take on how things were playing out. Sort of a fear mongering now in the RE markets?
On a bright side, Decautur and Bloomington Illinois were recently named two cities who seem to be escaping this free fall the rest of the nation is experiencing and are holding steady both in sales prices and having qualified people who are able to buy.
This blog focuses exclusively on properties in the city but if you look at Chicagoland as a whole the Case-Shiller index is now around 137, or 37% above 2000 pricing. At the peak in September 2006 it was 168.6. The only thing I can infer from this is that the suburbs must be cutting their prices at a much faster clip than the city so far.
“This blog focuses exclusively on properties in the city but if you look at Chicagoland as a whole the Case-Shiller index is now around 137, or 37% above 2000 pricing. At the peak in September 2006 it was 168.6. The only thing I can infer from this is that the suburbs must be cutting their prices at a much faster clip than the city so far.”
Remember that CS is an index of *single-family homes*–it excludes condos. There is a separate Condo index, which peaked at 160.98 in Sept 07 and is 145.7 as of 12-08 (latest release). The condo index currently only coves Chicago, Boston, LA, SF and NY.
Find it here: http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,6,0,0,0,0,0.html
LA is truly crazy, having peaked at 287.12 in 7-06 (for ~21%/yr increases from 1-00) and down to 199.23 (for almost 14%/yr decreases since).
This doesn’t surprise me at all, especially in the city. The jumbo market is DEAD except for those who can must up 20-45% down payments. This fact alone knocked all the DINKs (Dual Income, NO Kids) couples out of that market in the city who would normally be buying the $500-$600k condos. They now are focusing on places that can qualify for conforming pricing. Our market is suffering from a lack of jumbo financing.
All the sellers asking more than $463,333 for a 2/2 condo are screwed royally. That is dead man’s land. That is the max price since you could reasonable expect someone to put down 10% and get a conforming loan. Most people do not want to come up with that kind of cash to buy an illiquid asset.
There is quite a bit of lobbying going on to get Chicago added to the high cost list so the conforming limit here is $729k instead of $417k. That would open up higher FHA loan limits (currently $410k in Chicago) and 10% down for the conforming loans.
westloopelo, to be honest I think you are out of touch with the situation facing ordinary people. It seems like you collect real estate like baseball cards… Fine, but you are clearly among a tiny minority of buyers and sellers.
The real situation in Chicagoland is that the economy is tanking fast, unemployment is spiking, companies are demanding wage cuts, savings put in any kind of asset except cash, Treasurys, gold and a few select others have lost 25-40% of value, there is a nationwide collapse in real estate prices… And yet 90% of the prime condo market wants the starting point of price negotations to be a premium over what they paid in 2006? Parking extra! Are you serious? This is crazy!
“There is quite a bit of lobbying going on to get Chicago added to the high cost list”
There’s lobbying to use smaller market areas for detemining conforming limits in general; there might be local politicians on board, but it’s a nationwide issue. It helps every major market, as most have internal markets that are much higher cost than the market-wide median–b/c the higher limit is 125% of the MSA’s median, which is dropping fast in LA (~$400k, now, for a limit of $500k) and other places *and* it’s only a patch.
Chicago housing market is toast. Period!
For those RE specuvators that plan on “waiting it out”, better be prepared to wait for at least 15 years, probably more, to get even in nominal terms (see Japan for guidance of what is coming your way).
For those RE specuvators that want to get out of the train tracks, while they still can, a piece of advise:
“Do not panic! But if you panic, panic first!”
Still 92% employment, which means that people have income to pay their mortgages. Lots of renters out there if you are in the right building.
I wish I could draw a chart right now. We are at or near bottom. How long bottom lasts is anyone’s guess. If I can somewhat break even on renting and take a 10% loss in 2 years vs a 20 or 30% loss today, people will wait. Someone will now pounce on time value of money, but the market is so volatile right now that a 0% return for an inexperienced stock trader is good right now.
0% return on a rental property that is.
Think Small: you are hitting on a major problem in the city over the last few years, places sold at rates that were out of line with the rents they can draw, and the more rental units coming on the market is some areas, will only continue to drive down rents, which have been soft for a long time now
92% employment means: NOTHING if the prices are out of line with incomes, either incomes will need to come up, or prices down
10 years ago when I purchased my last home there were three common understandings in place. You were going to lose money if you sold in the first 5 years. You need 20% down. You can only afford double to triple your annual income.
I believe home prices need to come down to income levels for our housing market to stabilize. Right now they need to come down to 2001 prices.
Think Small, have you ever been unemployed? Have you ever worked for a company contemplating layoffs? It’s hard to believe that someone who’d experienced a jobless spell would be so glib about “92% employment.” The bottom line is that mortgage payments chew up a lot of cash and cash is a really easy thing to get until it isn’t, and then it’s really hard. My heart goes out to anybody involuntarily unemployed. Unemployment is a complete disaster.
But more to the point, you can be as glib about the current rate as you like, but clearly the rate has an outsize impact on consumer behavior because more households now face a risk of unemployment and if they’re prudent they must shift more resources into saving. That in turn reshapes the collective idea of affordability.
Anyway, the game plan you spelled out is every speculator’s game plan. Whether it works out is to be determined. Rents are down 5-10% from last year in my neighborhood.
“We are at or near bottom.”
Take a look at Gary’s chart of Chicagoland Case Shiller if you’re in the SFH market:
http://blog.lucidrealty.com/images/Case_Shiller_Chicago.jpg
Who knows if it will bottom at 137 (current levels) or at 80?
Condos _seem to be_ doing much better, until you take into account volume has come to a virtual standstill.
“Who knows if it will bottom at 137 (current levels) or at 80?”
I bet those are the outer bounds. I also think that, once there is some more sales volume, you’ll see the CS numbers drop further, but not necessarily see a meaningful drop in the closing prices of the properties you (not just Bob, anyone) might be following.
And the CS condo number probably is a little stickier right now b/c so many of the “discounted” sales are from the developer (e.g., Vetro, which of course isn’t in the latest CS yet) and thus not “paired sales” fitting CS methodology (as I understand it).
And the sales numbers reflect this too.
“”All the sellers asking more than $463,333 for a 2/2 condo are screwed royally. That is dead man’s land.”
______
There is jumbo financing; It’s just that it’s priced to better reflect the risk of a non-conforming mortgage. Oh, and the exotic provision of the jumbo loans are mostly gone. Gone are the days of the $1,000,000 100% financed stated income no asset option arm provided by defunct companies like WaMu (true story). It was these types of loans that today’s sellers were expecting buyers to get; and now that there are no more buyers with exotic financing there are no more buyers.
what’s interesting is that many of the condo owners 2002-2007 stretched themselves to the limit to buy – and used one or more exotic financing provision in the process (IO, jumbo, balloon, ARM, pick-a-payment, etc). They truly expected that the next round of buyers would come along and use two or more exotic provisions to pay the seller their expected appreciation. Now that exotics are pretty much extinct, buyers have to go conforming and that means yesterday’s option arm buyer for $500k is today’s 20% conforming for $250k. I don’t think the jumbo market is coming back anytime soon.
Our market is suffering from a lack of jumbo financing.”
______
“that means yesterday’s option arm buyer for $500k is today’s 20% conforming for $250k.”
Heh wow I think you’re giving yesterday’s option arm buyers far too much credit here. If they can’t figure out or aren’t concerned with the details of a toxic mortgage what makes you think they could budget and save up 50k?
Option-ARM borrowers were at the margins of homeownership, almost all never should’ve owned and few will likely ever own again.
And lets not forget how many more option ARM borrowers there were (esp in more bubbly areas like the sunbelt) than 20% down types. Remember the prerequisites here: the 20% down crowd needs a substantial downpayment and most Americans don’t save. The option-ARM crowd needed to be able to fog a mirror–it was really like opening Pandora’s box of moral hazard.
Chris,
I take your analysis of me and my outlook with a grain of salt.
I am no different than an ‘ordinary’ person , whatever that means, as we are all going through this economic crisis at the same time. If anything, I am feeling it harder than quite a few as I have so much of my investment money tied up in a market that many seem to be saying is either dying quickly or has died already!
I see things in a different way than you do… I do not live in a ‘doom and gloom’ world.
Is it rosy and prosperous at the minute? Of course it is not and I sympathize with those who have lost jobs, as many who I have worked with before have lost theirs as well. But I have to stay somewhat positive and go on living or I would be standing at the top of the ‘Willis Tower’ looking down.
I just do not believe our country will get to that point where the majority of people are wondering around homeless and hungry. I refuse to be put in that mindset!
Chris,
No glib about unemployment. It is what it is and you cannot be paralized by it. Yes, my employer has performed sizable layoffs, but all I can do is go on the offensive from a personal standpoint. I can cut expenses, work that much hard to add value at my employer and save the company money.
Mark my word that ths will be another jobless recovery like 01′-02′ was. Unless the gov comes out with some pro-business policy, no one wants to create jobs in this country and every employer is looking for a way to retire.
Chris,
Actually, to be quite honest, this economy makes me miserable but I have to look for what will bring us out of it and plan for reality.
Oh yeah…almost forgot…that “real estate that I collect like baseball cards” is selling just as fast as I am buying and in many areas around the county most in Florida. So I guess that market that many are predicting is toast still has some edible parts left on it.
In reading a few of your latest posts, I am assuming you have just become unemployed, hence your bad outlook towards this subject. If so, I am very sorry…if not…get a life and stop telling others how you perceive theirs to be.
Chicago is the latest city I am trying my RE skills at…give me a year and I will tell you how I am doing.
“Option-ARM borrowers were at the margins of homeownership[.]”
Most. THe product arose for a legit reason–HNW folks with lumpy incomes from commission, bonuses, or business owners. It was originally a cashflow management product for Merrill (or maybe MS) private bank customers. It was horribly, horribly misused and misunderstood by ratings agencies to the detriment of us all.
Exotic financing doesn’t cause defaults, people cause defaults.
“get a life and stop telling others how you perceive theirs to be”
Uh, it’s nice to be important, but it’s more important to be nice, WL.
Especially when one perceives “uh” to be somehow uncivil.
“Originally a cashflow management product for Merrill (or maybe MS) private bank customers”
You learn something new every day. Wow.
ThinkSmall, I don’t get it. If that’s how you feel (jobless recovery), why are you so bullish on RE?
westloopelo: Not recently, although once (’02). No interest to say more on the rest. I’ve said how I feel and I don’t need to say more.
Option ARMs weren’t toxic until WAMU and Countrywide started pushing them on Joe Sixpack. Most of my higher income & networth clients preferred interest only loans too.
Having financed countless $500-$600k condos for young couples, I don’t think the chicago market was over run with landscapers making $10/hr using 1% option arms to buy $500k places like in CA. Most also did not necessarily want to put more than 10% down either, even if they have the cash. Once you put money into your place it immediately becomes illiquid.
The general lack of confidence and the lack of liquidity is what is killing the jumbo market. Even if the DINKs have the cash, they don’t want to put it in an illiquid asset if they face temporary unemployment. Who would you rather be? The guy who takes all his cash, say $100k to use as a down payment or the guy who maybe only put 25k down and still has $75k in cash? Both lose their job, who do you think is SOL first?
People on here assume way too much that unless someone puts 20% down, they can’t afford a place.
Taking a 10% loss versus a 20-30% loss is not bullish. Just prudent. Also, better to keep rental income flowing even if rates are dropping because time on the market seems infinite. I doubt there are many who would like to carry a vacant house/condo for 6-12 months while trying to sell it and then take a loss on the on the sale price plus the carrying costs for 6-12 months. Sounds miserable to me!!!
You’re totally right – but maybe the guy who only has $100k in cash shouldn’t be buying a $500k house with a $25k (5%) down payment. Maybe he should be looking at a 10% down payment on a $250k house. If everyone in the market thought that way then housing prices would be a hell of a lot cheaper. Putting down 5% on a 500K home is clearly over-leveraging the entire market place. Do you remember what happened the last time an asset class was over-leveraged by the masses? Think the stock market in 1929. At least back then it was a 10:1 ratio; 5% down is 20:1 and 3% down is even worse. It forces up the price for everyone else who wants to conform. Get rid of the leverage and prices go lower. The leverage in the housing market is gone gone gone and prices aren’t coming back. Even if they could afford the monthly payment.
“The guy who takes all his cash, say $100k to use as a down payment or the guy who maybe only put 25k down and still has $75k in cash? Both lose their job, who do you think is SOL first?”
“People on here assume way too much that unless someone puts 20% down, they can’t afford a place.”
““People on here assume way too much that unless someone puts 20% down, they can’t afford a place.””
And HD assumes that unless everyone else puts 20% down, HD won’t want to afford the house he wants.
“You’re totally right – but maybe the guy who only has $100k in cash shouldn’t be buying a $500k house with a $25k (5%) down payment. Maybe he should be looking at a 10% down payment on a $250k house.”
Uhh no! Its my plan to save up that 100k and lever up 5:1 in a few years time when we get through this. If you can reasonably time the bottom and rates are super low (think 3.5%) it wouldn’t be too bad. And the government seems committed to pushing real mortgage rates negative.
“The leverage in the housing market is gone gone gone ”
Show me another asset class that allows you to lever up 5:1 or even 10:1 still? You can still do that with real estate.
“Uhh no! Its my plan to save up that 100k and lever up 5:1 in a few years time when we get through this.”
Dude, you’re agreeing with HD. Certainly not “uhh no” worthy.
anon(tfo) – How much would homes cost if there were no mortgages and people had to pay cash? 5:1 leverage is a great historical standard that worked just fine for many many years. And no I’m not afraid to admit that the homes that I want to buy are currently out of my price range. My household makes a decent buck, well into the top 10% of all households nationwide, and in 2006, I wasn’t going to accept that fact that a 2/1 condo conversion in lakeview was out of my price range. It’s the market’s problem that I couldn’t afford anything not my problem. I’m not afraid to admit that. Now that housing prices are returning in lines with incomes I expect to buy a modest but nice place in a decent neighborhood for a price within my means. I don’t see anything wrong with that. If you as an owner hate me because I won’t pay retail well then go f’ yourself; it’s not my problem you paid too high a price at the height of the boom. maybe you’ll learn your lesson. I’ve learned financial lessons in life too; thank god they haven’t been nearly as costly as a 100% financed jumbo mortgage for a 2/2 condo.
“Dude, you’re agreeing with HD. ”
No he is way more conservative saying that you should allocate 25% of your NW into your downpayment and have a sizeable cash cushion. I am saying that its okay to concentrate your NW into your downpayment so long as you know you won’t have a liquidity crisis and time the market relatively okay.
anon(tfo), although I addressed you in my post above, I don’t mean to rant against you! A late afternoon cup of coffee can put me over the edge! especially the ‘go f’ yourself’ part – that’s more for FB’s and not directed at you in any way shape or form!
What I’m saying is that Edumakated’s clients don’t want to put $100k down, they only want to put 25K down, BUT they want a $500k house. for the previous 50 of the last 60 years they would be SOL – either pay up or buy a lower priced house. Thank goodness we no longer have to bid against these 95% and 100% financing bozos driving up the cost of housing for everyone.
“anon(tfo), although I addressed you in my post above, I don’t mean to rant against you! A late afternoon cup of coffee can put me over the edge! especially the ‘go f’ yourself’ part – that’s more for FB’s and not directed at you in any way shape or form!”
I was about to post that you need to chill. Remember: Paragraphing can do wonders, man. Hope you aren’t stuck in the office tomorrow.
“No he is way more conservative saying that you should allocate 25% of your NW into your downpayment and have a sizeable cash cushion.”
He was quoting Ed, man; he was advocating higher %age DPs using the amount of $$ the buyer is willing to put into a house.
HD, price is function of the availability of credit along with supply. Prices today reflect that credit was available for those borrowers. They want a $500k house and the financing was available that allowed them to buy it and they could afford the debt service on the mortgage. However, you take away reasonable financing and prices have to come down which is my point about these borrrowrs looking at cheaper places now based merely on down payment requirements, not if they can afford a more expensive place or not.
Think about it with other aspects of our lives. If people couldn’t get student loans, don’t you think tuition would be cheaper? What would the price of cars be if you couldn’t get a car loan?
However, it is too simplistic to assume that if someone can’t put 20-30% down they can’t afford the place. Down payments are in place to protect the lender, not the borrower.
Tuition is the next bubble to pop. There’s no reason why education should increase 10% a year. My degree from Loyola is printed on the same paper as the 2009 grad who paid twice as much I did. Private lenders filled the gaps and tuition shoots through the roof.
Cars? Car pricing varies from person to person. Quite a few people pay cash for their cars. Others pay 0 financing for 36 month with a substantial downpayment. Others put $1,000 down and have a 600 credit score – and they pay 15% or 20% financing for the very same car.
I’m not assuming that someone cannot afford a place if they cannot put 20% or 30% down. What happens is when you change the rules of the game and remove any semblance of lending standards, prices will rise exponentially. But for every 8 or 9 people who can afford montny payments without down payments there are 1 or 2 who cannot and they default, flooding the market with foreclosure, driving the price down for everyone else. The market needs standards and rules to keep it fair for everyone.
“Think about it with other aspects of our lives. If people couldn’t get student loans, don’t you think tuition would be cheaper? What would the price of cars be if you couldn’t get a car loan?”
HD, I actually agree with you that there is a tuition bubble. People are figuring out it makes no sense to pay $40k/year to go to a low tier school. After a certain point, many schools don’t have a prestige premium that is worth the extra money.
The foreclosure rate is only about 2%, if that. So it is more like 2/100. Half of those foreclosures are investment properties and speculators. The other half are from people going through divorce, medical, or other issues that result in a loss of income.
The market is in shambles because lenders drove the pricing up by making financing available and then they are driving it back down by not making financing available. I have long said that are lenders not lending because prices are falling or are prices falling because lenders won’t lend? It is a death spiral.
Lending is in shambles because banks have gotten so big that there is no longer any common sense applied on each file. Getting a mortgage is all about fitting in a box, not what makes sense. Underwriters don’t underwrite, they basically check a box. A lot of loans that didn’t make sense fit in the box and a lot of loans that are very low credit risk, don’t fit in the box, so the loans aren’t made.
“Half of … foreclosures are investment properties and speculators. The other half are … people going through divorce, medical, or other issues that result in a loss of income.”
And the other half* are people who thought they could continue rolling up their debt and “next year” their incomes would go up. Lifestyle speculators, rather than real estate specualtors.
*No, I’m not asserting that these are 1/3 of foreclosures, but, contra Ed, they are more than a negligible number.
Remember that there’s both a supply curve and a demand curve…
On the supply side, the market seems to be clearing only in the cheapest part of the curve with distressed sellers, banks, developers on the bring…
On the demand side, the curve has gotten steeper because the most financially capable buyers may actually be better off (cheap financing if you have enough cash to convince lender you’re a good risk) while not so capable buyers are a lot worse off because they need to come up with cash when they’re least able to.
I live in the south loop, so that’s what I’m most familar with. Seem that supply and demand are actually holding it together fairly well so far — Vetro is a good example of individual buyers stepping in to pick off the cheap side of the supply curve (and short sales/foreclosures obviously also in this category. There also seems to be enough big money around to hold prices from sliding off into oblivion as demonstrated by Burham Pointe being sold off to apartment developer and other developers seeming to be able to avoid fire sales.
The real question is whether something gives — either demand dries up (because capable buyers loose confidence in real estate or capable buyers simply have bought all they want) or supply curve shifts (probably in south loop because more developers get seriously distressed, dumping inventory on the market at prices that will actually move).
Going back to the orginal question, I think Chicago has been a bit different than other markets because there are less seriously overleveraged individuals playing in the market (which are the first to get flushed out). If developers (and their lenders) eventually follow the same path – being forced to liquidate at whatever price the market will clear at, it will be no different, but so far, I’ve got a little hope that we may be able to avoid the same fate.
Good analysis Tom; my opinion is that there is a threshold where buyers will steadily but slowly come off the fence to buy and reduce inventory.
There’s isn’t going to be a big rush again; the so-called pent-up demand isn’t anywhere near 2001-2007 activity levels. There will be slow tickle of buyers increasing slowly for the next 5 to 6 years.
A lot will depend on the economy, who wants to take on a larger housing payment to buy a unit in this economy? Low end pricing is the wave of the future. Those who are patient and keep their powder dry, so to speak, will be rewarded with ‘deals’ in the future. After the foreclosures have disappeared (we’re still a long long way from that) the comps will still remain; existing home sellers can’t arbitrarily raise their prices and say “well the foreclosures are gone so let’s raise our prices” but their home price will be based on 3 to 4 to 5 years of comparable sales.
i agree with homedelete 100%… a pattern is a pattern and it has been established already in many other markets. prices will fall soon if people really want to move. if they don’t … too bad. prices around them will still fall. i am the perfect example. the jacka$$ across the street has an uglier place than mine (no bigger) and wont drop the price… it’s like 80k over what i paid for mine… seriously. it’s been on the market for a year i think. so good luck.
anyway, i believe this is truly such a problem that i just sold my place at a 60k loss (counting all transaction fees from buying it to selling it + all payments, asm, tax, etc…) because I strongly believe it will drop 50k in value (and i hated living there which is the main reason). by a miracle, i found a buyer in a relatively short period of time… and with 20%…and it wasn’t jumbo. beware, selling condos these days is a pain in the ass for sellers & the condo board…esp if your atty is slow…or your board is slow. 1 document almost held up the whole thing.
i couldn’t be happier i am out from under that sinking ship. i could’ve even rented it at break-even but it wasn’t worth it…rent now, sell in 5 years when renters destroy the place and it’s worth 50k less and still pay transaction / commission fees? no thanks. and i could be laid off any day so now isnt the time to hold this insane mortgage that i got during the bubble (which is when i also got my overpaid salary which is likely to be gone any day). anyway, maybe i dont sound happy but i am….nightmare is over for now. i have this website to thank in part… actually.