Blame it on Distressed Properties: September?s Housing Numbers

This morning the Illinois Association of Realtors reported that in September 2009 the number of residential sales were up 3.3 % but that the median sales price fell to $160,000 statewide, a 9.3% decrease compared to September 2008. Following this trend, units sold in the City of Chicago were up 5.8% – 1,918 sales this year compared to 1,813 homes sold in September 2008. Chicago?s median home price this September was $225,000, down 16.2 percent compared to $268,600 in September 2008. Outside of Chicago, in those areas that include the rest of Cook County as well as DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry and Will county, the average sales price was only $199,00.

Why the Increase in the Number of Sales but the Decrease in Pricing?

For the traditional homebuyer, pricing is back to 2004 levels. Short sales and foreclosures have impacted property values for sellers but they have also given buyers the opportunity for finding a good value for a home. The first time home buyer tax credit has been an incentive for some and steady interest rates that have hovered around 5% for the past year have also helped. As savings rates have increased over this past year, home buyers have repositioned themselves to meet new lending guidelines. It is not unusual to now see buyers putting 20% down.

What the Next Months Will Bring

Market watchers believe the next few months will be a mixed bag for buyers and sellers. If unemployment does not abate, distressed properties will continue to impact market pricing for months and even years in the future. Bank inventories of REO properties continue to grow. On top of this, the median sale price may only rise if financing larger projects and homes become increasingly available. For example, Chicago?s $500,000 – $1,000,000 market is crippled by having a conforming loan number of $417,000 – much lower than those numbers found in other areas of the country. Qualified buyers are expected to enter the market at higher rats because of relocation and also because they have financially readied themselves to move forward with a home purchase. On the flip side, many homeowners are opting to stay in their current home for longer periods of time, often to see if the market rebounds. Just as buyers need to be qualified to buy, sellers need to be qualified and willing to sell.

We would like to thank BasicGov for sharing today?s photo via the Creative Commons License.

Blue Line Train in the Median of The Kennedy Expressway

The Chicago Tribune posted an article in yesterday’s Business section titled, “Chicago housing prices drop even faster.” In the article there was a graph which posted home prices and their price reductions broken down by neighborhood. The news source for the pricing was Trulia. Trulia is a website where seller’s and agents alike are welcome to post their homes for sale. Same concept as Zillow, Craig’s List, etc.

Granted, prices are dropping in the Chicago land area. We obviously have not hit the bottom of the market. The only way to know we have hit the bottom is when we see appreciation on properties. The problem with the article is that it does use Trulia as a source. Prices may have dropped in certain areas but it does not take into consideration the difference between condos vs single family housing. It also uses the average number. The average number in statics takes into consideration all numbers; this includes foreclosures as well as short sales. These transactions are not arms-length transactions and cannot be accounted for in general real estate sales. A better  number to be used in such an analysis is the median price point. The median is the number that is the most accurate and used by appraisers to adjust for market downturns.

There are many issues with the article that was written. One that I would like to point out is that the typical buyer has no idea what it takes to purchase a foreclosure or a short sale. Both of these transactions can be extremely time consuming and frustrating. One has to define if they are a short sale buyer or not. There are deals to be had all over the city of Chicago. If a property has been seasoned on the market and the seller has reduced their price a few times, that is the indication that they are negotiable. You can pick up a nice property without all the headaches and still get a great deal. This is truly a buyer’s market. If you have a good agent that does their homework, you do not need to deal with foreclosures or short sales.

I do agree that sellers need to be realistic with their listing price. A property may have been worth $100,000 more two years ago. What everyone needs to understand is, it is no longer two years ago. People change and prices rise and fall. Property values have certainly declined from two years ago. The only way to determine what a property is worth is to put it on the market and find out what a “typical” buyer will pay for that property. That is the true value.

We’d like to thank Andrew Ciscel for generously sharing today’s photo via the Creative Common’s License.

Chicago's Famous and Highly Recognizable Marina Towers

The Illinois Association of Realtors is reporting that March home sales in Chicago were up 40.6% over February. February 2009 saw 840 transactions and there were 1,181 in March. However, year-on-year the numbers are way down, with a drop of 42.2% (down from 2,044 in March of 2008).

Chicago’s prices are proving to be sticky?the median price in March was $220,000, which is an increase of 0.8% over the median price of $218,125 for February 2009. However, once again the year-on-year numbers are far more grim: prices are down 26.9% when compared to the median price of $300,980 seen in March of 2008.

We’d like to thank Laffy4k for sharing today’s picture via the Creative Common’s License.

Construction Workers at Work Would Be Good to See

Housing starts went up in February. By now you have read in many, many, many places about how the Commerce Department announced this amazing fact yesterday (click here for the PDF). First of all, what is a “housing start?” The Commerce Department defines them as, “the number of single or multi-family dwellings that have begun construction.” It turns out that the lion’s share of these starts were in multi-family dewellings, which in this case means apartments followed by condos.

However, simply having this number go up is amazing since most people who follow such trends expected them to go down. However, many worry if it was simply a matter of nicer-than-expected weather in February allowing shovels to hit the dirt.

A Look at the Numbers

Nationwide, the Commerce Department reported that housing starts in February went up 22.2 percent when compared to January. Also important is that housing permits were up 3 percent in February as well.

However, this isn’t just a straight 5th grade percentage calculation. The Commerce Department adjusts their numbers based on historical data regarding the season. Generally there are fewer starts in the winter, and they try to take that into consideration. They try to put January and February on a level playing field by looking at traditionally how many starts are there in January and February and take that history into consideration.

If they extrapolate this information out, the Commerce Department says that if this trend were to continue, 583,000 units would be built in the US this year. This is compared to the experts in the field saying that there would likely be 450,000 units started this year. Again, the big 583,000 units is a projection based on history and the big increase in February.

In the Midwest, housing starts were up 58.5% when you compare January to February. Many of these starts are multi-unit buildings, which usually means condos. However, even single-family home starts were up in the Midwest by 12.8 percent.

This may all sound really good, but they are simply comparing January 2009 to February of 2009. When we compare January 2009 to January 2008, we see that there were 45.5 percent fewer housing starts in 2009 than in 2008.

What About Chicago’s Housing Starts?

Unfortunately the data from the Commerce Department does not include metro area information. The Chicago Tribune is reporting that Strategy Planning Associates says that, “suburban developments, sales are averaging 0.15 sales per week per project.” They don’t say if this is bad or good; it certainly sounds bad.

What Does This Increase in Housing Starts Mean?

It’s important to note that January’s housing start number was a record low. So the improvement we say in February is like taking one step up the stairs of a basement flooded with three feet of water. You’re standing in less water, but the basement is still flooded and your feet are most definitely still wet. But, any improvement is a great thing.

This news is sparking the question of whether or not this marks the end of the real estate slide. Does it mean that we’re on the upswing? There are hundreds and hundreds of answers to that question available on the web, but the real answer is none of these prognosticators have a clue.

My basic thought is that if a large number of these starts are for apartments in areas that need them, it’s great tnews. However, when we look at the slow sales in Chicago, we have to wonder if this market needs even one more new condo. As Barbara Kiviat at Time so clearly points out, with so many houses unsold on the market, is adding more a good idea? And, given what I’m hearing from my friends in the leasing business, there isn’t an over demand for apartments at the moment either given how many condo projects ended up being really nice apartments.

So, it’s good news but I wouldn’t suggest go buying that used yellow Maserati I saw in used-car lot on Ashland yesterday!

Thanks to Bill Jacobus for the photo, which he so graciously licensed under the Creative Commons License.

Are the Clouds Over Chicago Gathering or Parting?

The Illinois Association of Realtors® (IAR) announced yesterday that both home prices and home sales were down in Chicago when comparing December 2008 to December 2007. They are also down when comparing all of 2008 to 2007.

Chicago Home Sales Figures

In December a total of 1,215 homes were sold in Chicago. This is down 23.0 percent from the 1,578 homes sold in December 2007. IAR also announced numbers for Chicagoland (defined as Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry and Will counties), where there were 4,232 home sales in December 2008 compared to 5,033 in December 2007. This is a drop of 15.9%.

In Chicago, for the whole of 2008, there were  20,589 home sales compared to 27,503 in 2007, a drop of  25.1 percent from 27,503 sales in 2007. In Chicagoland there were 68,676 home sales in 2008, which is a drop of 25.9 percent from 92,657 sales in 2007.

Chicago Home Prices Down

In the city of Chicago, the median price for a home was $235,000 in December 2008 compared to $287,450 in December  2007, a drop of 18.2 percent. The numbers weren’t as bad for the whole of Chicagoland where The 2008 median price was $290,000, down 0.5 percent from $291,500.

David Hanna, president of the Chicago Association of Realtors® said, “A lack of consumer confidence and financing continue to prevent the Chicago housing market from maintaining any recovery momentum. Low interest rates and flexible pricing are bringing buyers into the market, the continual lack of reasonable financing requirements and lender adversity to lend to the average consumer thwart our best efforts to see the housing market rebound. Lending conditions must change or the real estate market will not recover.”

Didn’t NAR Say Sales Were Up?

It’s important to note that these numbers are a different than the national numbers widely reported by the National Association of Realtors®; the jump NAR reported yesterday was comparing November and December of 2008. The numbers above are comparing year-on-year December numbers. In the their report NAR did show a 3.5 percent drop in national home sales in December 2008 compared to December 2007 sales.

So, when we take into account the national numbers from yesterday and the Chicago numbers today, what do we learn? It is looking like December 2008 was a better month than November 2008. It looks like some momentum is building and buyers are returning to the market. However, today’s Chicago numbers temper that optimism by comparing 2008 with 2007; when you do that, the numbers are most definitely down.

I was listening to an economist yesterday on the radio. He said that layoffs continue to happen?and even reach a peak?after the bottom of the recession has hit. This is because no one knows that the bottom has been reached. All they know is that revenues are down and they have to cut expenses. He pointed out that yesterday’s huge job cuts could, COULD be a wacky indicator that the bottom has hit.

Could the increase in November vs. December sales signal a bottom despite the bad 2008 vs. 2007 numbers? If you know the answer, you’re going to be a very rich person!

Photo by Katie/OnlyMayDays

Simple supply and demand are having a strong impact in the South Loop.

A quick search in MRED for condos in the South Loop (I defined it as Congress to 18th, Dan Ryan to Lake Michigan) shows a huge number of condos on the market. If we look under the new, stricter maximum HUD loan of $380,000 we find:

• 391 active with an average price of $289,449, median price of $299,000.
• 144 pending* averaging $305,913 with a median price of $312,900.

For jumbo loans (over $380,ooo), the numbers are:

• 414 active The top price being asked is $3.2 million; the average is skewed by some very high end properties at $695,139; the median is a much more telling number at $539,500.
• 186 pending* The top pending price is $2.5 million with an average of $695,139 and a median of $539,500

Clouds Over South Michigan

I was surprised at the number of pending sales. (Pending is defined as when all contingencies?such as obtaining financing and inspecting the property?to the purchase have been met and there is nothing in the way of the closing). However, as many of us have seen, having a contingency-free deal no longer means the transaction will close. More and more often the deals don’t close due to financing “disappearing” or the buyers just not willing to go through with the deal and willing to lose their earnest money.

Despite all of these numbers, Appraisal Research Counselors is reporting that developers are planning to complete 2,147 more condos in the South Loop, which is 66% MORE than were completed in 2008.

But where is all of this leading us? Well, Crain’s Chicago Business is reporting that Miami developer, Lennar Corp., has sold only 43% of the condos in Library Tower, a 184-unit project at 520 S. State St.. This means that Lennar will likely not be able to pay off their construction loan that is due Jan. 11. The ramifications are huge in this type of situation, especially for those who have closed on a unit in the building and had planned to live in it.

So, where can we see things going in the South Loop? It’s pretty clear that we’re going to see a lot of bankruptcies, longer marketing times, and most importantly, much lower prices.

*Be aware that, amazingly and annoyingly, real estate agents very often do not understand what pending means and label their deals incorrectly as pending when they should be contingent.

Locked

The AP is reporting that 2009 is likely to be a difficult year for commercial real estate. Real Capital Analytics is quoted as saying that $25.7 billion of commercial property are currently bank-owned or in default. They are projecting that this number will likely more than triple in 2009 to $80.9 billion.

At least part of the situation is rooted in the credit crisis and the lack of available capital. Marcus & Millichap Real Estate Investment Services and National Real Estate Investor magazine surveyed 1,100 investors in October and found that 40 percent would need to refinance at least part of their portfolios this year. However, an appeal by a commercial trade group to the Bush administration to be included in the $700 billion bailout (TARP) has not yet been answered by the Treasury Department.

On top of financing problems, there is a drop in demand for store space due to so many retailers going out of business. Marcus & Millichap are expecting an 11 percent vacancy rate this year. This is, of course, going to put downward pressure on rent rates. It looks like 2009 will mark the beginning of a market where tenants are going to have the upper hand over landlords in negotiations.

High vacancy rates, lower rents, and tight credit are all a recipe for a very difficult time for commercial landlords.

It only takes a short walk near my Lakeview home, along the commercial streets of Halsted and Broadway to see that this will hold true for Chicago as well. The demise of large tenants like Linens ‘n Things are going to gaping holes in shopping districts. But equally disturbing is the rise in the number of soaped up windows that were once little boutiques, inviting galleries, and glittering knick knack shops. As I walk by the still open, but all-but-empty little stores, I can only imagine that there will be many more papered windows in my neighborhood soon.

The inaccuracies of Zillow.com’s Zestimates are not looked upon all that favorably by many real estate agents, brokers, and appraisers. I recently attended the SPARKt conference for technology in real estate where Brian Stalizer of Zillow spoke. After he gave his overview of Zillow and explained how they make money, he opened the floor to questions. The crowd was largely real estate agents and brokers, and they were not overly kind to Brian, pushing him to explain how his company can give accurate estimates of home values in such a volatile market, especially when Cook County is notoriously slow with official documents. Brian’s defense of Zillow was basically, “We try very hard. We have a lot of smart people. We are not perfect, but we disclose how far off we are as soon as we know.”

Nation Wide Data

Map of Year-on-Year Home Price Appreciation in Chicago

That said, Zillow released some very interesting data today that indicates home values nation wide have dropped 9.7% compared to last year. And they are down 12.8 percent compared to the market peak in 2006. Also, nation-wide Zillow estimates that 14.3% of homes nation wide are upside down, meaning the homeowner owes more on the mortgage than the home is worth.

Chicago Faring Better Than Nation-As-A-Whole

Zillow provides information sliced and diced in many different ways: numbers on all of Chicagoland, by Cook county, by zip code, and all the way down to their list of 74 neighborhoods. When I average the year-on-year home value change column for the 69 Chicago neighborhoods they have data for, I get -7.8% instead of the -8.9% they list for Chicago in the city data section. I should probably trust their number crunchers’ number of 8.9%, but I found the discrepancy interesting. With the nation-wide market having dropped 9.7% last year, Chicago’s diverse economy seems to have helped it stay slightly ahead of the nation as a whole.

According to Zillow’s numbers, the average home value in Chicago is $234,643. Some of the least affluent neighborhoods in the cityâ??those with the lowest home valuesâ??fared the best: South Chicago (+3.7%), Armour Square (+3.5%), North Lawndale (+2.9%), Washington Heights (+2.1%), Grand Crossing (+1.9%), and West Pullman (+0.4%) all actually had home value increases over the last year. Armour Square is actually an exception?it’s average home value is actually above average for Chicago at $287,534. These positive numbers could be an indication of several things. Since most of these areas are often where immigrants first settle into the city, it could be an indication that immigration is still going strong in Chicago. These home-value increases could also be an indication that people are looking for the best buy possible.

Surprising to me were the neighborhoods that fared the worst in the survey were also some of those with the least valuable homes: Lower West Side (-18.5%), Douglas (-18.0%), West Lawn (-17.6%), Dunning (-16.2%), and Belmont Cragin (-16.2%) saw the largest declines in value according to Zillow.

How About the Most “Desirable” Neighborhoods?

Some of the most desirable neighborhoods in Chicago are doing well compared to the nation and Chicagoland as a whole: Hyde Park?home of President Elect Obama (-1.4%), North Center (-1.4%), Lincoln Square (-2.2%), Lake View (-2.5%), Lincoln Park (-3.9%), and the Near South Side (-4.5%) have all seen drops, but they are moderate when compared to the metro area and the nation. Many of the areas around the center of the city are not doing quite as well: The Loop (-7.7%), Near West Side (-5.8%), and the Near North Side (-10.4%) have all seen bigger drops.

Home Equity

Chicago Real Estate Market Percentage of Homes with Negative Equity

Zillow did not provide home equity information on the neighborhood level; they only provided this information on their summary page, so there it’s only possible to comment on Chicagoland as a whole. Zillow says that Chicagoland home owners average $39,735 of equity in their homes, which they say is an average of 19.9% of the value of the homes. This number has gone up dramatically compared to 2006 and 2007 when home owners had an average of 8.6% and 6.0% of equity in their homes.

They also say that 12.9% of Chicagoland homes have negative equity, compared to 32.8% in 2007 and 38.6% in 2006. What are the possible explanations of these numbers? The extremely high negative equity numbers in 2006 and 2007 have to do with how many homes were purchased with no money down as well as how much home equity home owners had cashed out of their homes?two options that have been dramatically curtailed in 2008.

Distress Signals

Zillow wraps up their data with what they call Distress Signals…and there are two big numbers here. According to Zillow, 80.6% of all Chicagoland homes have lost value in the past 12 month. Even more surprising is that 20.4% of all homes have lost value over the past 5 years. This means that one fifth of all homes bought 5 years ago are worth less now than when they were purchased.

The second Distress Signal category is what percent of homes are being sold for a loss?the sellers have to bring a check to the closing. 4.6% of homes sold in the past 5 years have been sold at a loss. This number quadruples to 18.6% in the past 12 months. This makes it clear that nearly all the homes sold at a loss have occurred in the last 12 months.

Sweet Home Chicago?

How your home value is doing depends hugely in which part of Chicago you live in. But, on the whole your home is doing better than in many parts of the country. When you look at Zillow’s map, you see California and Florida’s values plummeting. So, maybe with a sense of schadenfreude, you can take a some cold comfort in the fact that others have it much worse than you.