Market Conditions: Where Do Chicago Home Prices Go From Here?
The Chicago Tribune discusses the fate of Chicago area home prices now that the government stimulus has come to an end.
Now that the government tax giveaway has ended, watch for the market to level off or dip through the summer. A housing recovery depends on the economy bouncing back, and by most forecasts the buying and selling of real estate will remain rocky for a long time to come.
“We’re likely to bounce around at the bottom for this year and next,” predicted Chris Huecksteadt of the Metrostudy housing research firm in Chicago. He said he expects “ups and downs” but no upward trend in prices.
If you want new construction, it looks like some of the homebuilders are no longer in the negotiating mood. This is especially true as inventories of new construction properties dwindle as sales are made but few new units are built.
This could be one of the reasons that many flippers are having success- as they are taking a beat up older home and making it look like “new”- with stainless steel appliances, granite etc.
The Silver Leaf housing development is a long ride from downtown Chicago, and, as Wozniak can attest, sales in the area have been slow. His Wheaton-based company operates a half-dozen communities, and during the fat years sales of 20 or more houses monthly would have been a reasonable tally. By 2009, however, sales had dwindled to one or two a month.
Wozniak said he survived by stepping up renovation, maintenance and property management. In the past few months, he has been selling more homes than he has since the bust began.
Although foreclosures abound, finished new homes available for occupancy on short notice have become scarce again as builders have retreated, he said. “There’s not a whole lot of competition.”
To shoppers waiting for home prices to fall further, Wozniak offers this advice: Don’t.
“This adjustment we’ve made over the past three years is really all we can do,” he said. “I don’t think we can go any lower than we are right now. I really believe that.”
>Housing prices still going nowhere [Chicago Tribune, G. Burns, May 24, 2010]
Several thoughts:
1) Sales have definitely fallen off since the tax credit expired but it’s not as bad as I thought it would be: http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/2010/05/chicago-home-sale-activity-off-slightly-after-tax-credit.html
2) Mortgage rates are so low that for the first time in 10 years I’m ready to buy vs. rent. I can get a 7/1 arm at 3.75%. It’s a no-brainer for me.
3) I’m amazed at how many clearly overpriced listings there are out there – and they’re not moving – go figure!
4) I’m even more amazed at how many people buy new construction, direct from the developer, and clearly overpay – by a lot
5) I’m amazed at how many people are ignoring short sale/ REO opportunities.
this has me worried; seen too many news stories to know it has been said b4.
““This adjustment we’ve made over the past three years is really all we can do,” he said. “I don’t think we can go any lower than we are right now. I really believe that.””
“To shoppers waiting for home prices to fall further, Wozniak offers this advice: Don’t.”
It would’ve been interesting to see Mr. Wozniak’s thoughts on “Now has never been a better time to buy” at various points in the past during this protracted downturn. I have an inkling he has never wavered in this sentiment from the boom all the way up through today.
Gary, don’t sales usually increase in April and May due to better weather and other factors? Also, quite a few of those sales contracts may not close in time to be able to get the credit, especially if financing doesn’t go through, or if it’s a short sale.
At the end of the day, it’s probably a better time to buy now that the credit is gone, and withe easy FHA related money floating around.
The answer to the question posited above is:
“Down.”
i agree; except for the low inventory choices; hopefully more summer sellers will come to market.
“At the end of the day, it’s probably a better time to buy now that the credit is gone, and withe easy FHA related money floating around.”
Dave M,
Yes, April and May are usually significantly higher but the contract spike and subsequent fall off happened over such a short period of time (2 weeks) that that effect was almost negligible.
I’ve been sort of keeping an eye on the extent to which contracts don’t close. I’m currently estimating about 15%.
Clearly prices have to come down on lower end properties to offset the loss of the tax credit. Demand has fallen off. However, do they have to come down by as much as $8000? I’m guessing not.
“To shoppers waiting for home prices to fall further, Wozniak offers this advice: Don’t.”
Sales prices will be determined by what the market will bear and it’s a buyer’s market right now.
Make a lowball offer and when they counter, counter back.
REO FTW!
buy now or be priced out forever!
Gary, ARMS are so cheap because you’d have to be retarded to use one when 30 year Fixed rates are only 1% higher and rates pretty much have only one way to go… up
Aren’t we kind of in the throes of a deflationary spiral right now? The inflation numbers last week sure seemed to indicate that we were and unless there is a massive influx of middle class and upper middle class people moving into Chicago, I don’t know what would drive the market higher or even keep it from bucking the general deflationary trend.
Yeah, pretty much have to go with the 30 year fixed, unless you have the available cash to do the 15 year fixed and wanted to pay down principal quicker anyways.
My updated predictions for the city and burbs – urban core green zone hoods on the east side of 90 will do ok for the rest of 2010 – probably not drop any more in price. The rest of the city will continue to fall.
The suburbs are in for some massive pain for the rest of the year. It will be interesting to watch. It does depend on how quickly banks start to unload properties, but it’s like draining a bath tub – prices will drop more and the paper net worth people thought they had is going down the drain.
Sonies
I went with a fixed rate on one of my properties, because I was in it for the LONG haul.
On another property which I was planning of letting go, I went with a 5 yr ARM re-fi.
All I am saying is that there are different products for different markets.
So what you’re saying Dave M is that Chicago is turning into your typical Brazilian city. A core of really expensive homes (the green zone) and everywhere surrounding of that is cheap and dangerous including the suburbs.
I don’t buy it. I’ll move a couple of stops further down the blue or red line to save hundreds of thousands of dollars and so will others. A couple of stops from Bucktown is Jefferson Park or Avondale and the last time I checked neither were shanty towns.
“My updated predictions for the city and burbs – urban core green zone hoods on the east side of 90 will do ok for the rest of 2010 – probably not drop any more in price. The rest of the city will continue to fall. “
Eh I think you’re reading into that too much. “Continue to fall” doesn’t exactly mean “will be complete ghetto”.
My definition/translation of “continue to fall” could be anywhere from a 5-15% fall depending on the hood.
“Eh I think you’re reading into that too much. “Continue to fall” doesn’t exactly mean “will be complete ghetto”.”
Most of the time he says that its *necessary* that the prices in place like JPark and Avondale continue to fall. Now it’s “if the prices continue to fall, it’s going to turn into the get-toe”.
Also, B’town, Green-zone or no, is West of 90, and thus (possibly) in the “continue to fall” portion of Dave’s prediction.
Sonies,
Well, I don’t think I’m retarded. I don’t think I’ll be in a place more than 7 years. Need to get out of the city before property taxes are 10% and sales taxes are 20% and you need a Hummer to navigate the potholes. Besides I think the spread is a little bit more than 1% and with the annual caps it would take more than 7 years for me to lose vis a vis a fixed rate.
Very few people stay in a place more than 7 years anyway. The vast majority of sellers have been in their place less than 5 years, which of course begs the question as to why they bought in the first place.
“Gary, ARMS are so cheap because you’d have to be retarded to use one when 30 year Fixed rates are only 1% higher and rates pretty much have only one way to go… up”
“Very few people stay in a place more than 7 years anyway. The vast majority of sellers have been in their place less than 5 years, which of course begs the question as to why they bought in the first place.”
This is a good point. As soon as I’m confident i’ll stick in one place for 5-7+ years, I’ll buy. Until then, it takes a very optimistic outlook on the RE market to expect to make buying>renting.
It’s crazy how so few people realize this.
The days of buying to live in a place for two years and selling to move up at a profit are over. Even if now is a good time to buy, you should have at least a 5 year time horizon, if not longer.
The 7/1 ARM is probably the most popular mortgage I am originating right now. Rates are very low relative to the 30 year and seven years is a pretty long time. 10/1 ARMs are also pretty attractive.
The 30 year is the most expensive mortgage for the vast majority of young homeowners. Essentially paying for insurance you will most likely never need. Very few homeowners do this, but if they took the money they saved from the ARM and reapplied it back on the principal, it would pay the house off significantly faster and nearly eliminate any future rate risks.
I have a question that could turn out to be stupid and would appreciate being corrected.
For those arguing that now is a better time to buy now that the tax credit has ended: Take a 300,000 house as an example, what % drop in price would you need to see to outweigh the cash-in-hand from the tax credit? It seems like even a 5 – 10% drop from now to Dec 2010 would favor those that bought in time to receive the tax credit.
Russ-
how exactly does that work? Are you saying you’d have most of the home paid off before the rate can chane?
How long would you need to stay in your home before a 7-year became a bad investment compared to a 30-year (assuming rates are substantially higher than today 7 years from now)? What caps should people be looking for on a 7-year?
Say your payment is $1500 with a 30 year and $1300 with the 7/1. You would just continue to make the $1500 payment effectively sending an extra $200/month towards your mortgage principal each month. By doing so, you would build equity significantly faster.
Also,simply making 1 extra payment each year on your mortgage can cut a 30 year down to around 23 years. You can do this easily by setting up a biweekly payment plan instead of monthly. If you pay half your mortgage payment every two weeks instead of once per month, you wind up making 13 monthly payments instead of 12 every year.
When refinancing, you can also shorten the amortization period. One mistake a lot of borrowers make is taking a loan that is 10 years old and reamortizing it to 30 years when they should just make it a 20 year amortization with the lower rate.
Most ARMs are tied to one year LIBOR plus a 2.25% margin during the adjustment period. The caps are 5/2/2. It can adjust a max of 5% higher durign the first year and for the life of the loan, but after than it can’t move up or down more than 2% until the cap is hit. So if you get a 3.75% ARM, the most it could ever be is 8.75%.
I think the suburbs are at a tipping point, and prices could really fall off, due to foreclosures increasing, demographic changes that are making school choices almost as difficult as urban areas, and not to mention all the 1960’s-19080’s housing stock that needs massive renovation and upkeep. Some suburban houses are money pits!!
So, someone who buys a suburban house can expect to pay $100K into it, once that realization hits in, then that will help suppress closing prices.
Russ, most people take the $200 a month savings and spend it, or, they borrow more money (and buy a bigger house) with the $1,500 payment. ARMs in theory may be about saving money but in reality they’re about more leverage.
A 7/1 IO ARM payment at 3.75% with a $1,500 a month payment means you can borrow $481,000.
A 7/1 ARM payment at 3.75% with a $1,500 a month payments means you can borrow $325,000.
A 30 years fixed payment at 4.75% means you can borrow $288,000.
“Say your payment is $1500 with a 30 year and $1300 with the 7/1.”
So a 7-year ARM would save you $17,000 over those 7-years. Say you decide you stay for whatever reason after the 7-years and rates are at the max-cap of 8.5%.
Your loan is ~$280k. ($350k property with 20% down). Your balance after 7 years is $240k and say you put your $17,000 toward the principle meaning you now owe $223k.
With a $233k refi at 8.5% your payment jumps to ~$1,700 a month. So you are now paying $400 more a month than at 3.75%. So the $17,000 you saved would be eaten up in 42 months. Meaning you start losing money in the long run if you stay past 11 years (saying all my math is right and the rates are at the worst-case scenario).
“With a $233k refi at 8.5% your payment jumps to ~$1,700 a month. So you are now paying $400 more a month than at 3.75%. So the $17,000 you saved would be eaten up in 42 months. Meaning you start losing money in the long run if you stay past 11 years (saying all my math is right and the rates are at the worst-case scenario).”
Fits my napkin-based mental approximation for that 1.25 spread–if you’re pretty sure that your staying for 12+ and expect considerably higher rates, then it’s the fixie.