Chicago Housing Bubble

What does a housing bubble look like?

A housing bubble is a prolonged gap between what people typically earn (ie. median income) and how much a home costs (ie. median prices). Here's what it looks like at a national level:

The bubble deflates when the prices of homes and the incomes people earn start to come back together. (Important side note - the correlation here doesn't necessarily imply a buyers or seller's market. While the affordability was good in the early 90's, the US still experienced a solid buyers market.) So - coming off 9-years of prices running out of control, how long will it take Chicago's bubble to deflate?

Well - according to our graph above, assuming income continues to grow at a consistent pace (a safe bet considering it's done so through 2 recessions over the past 37 years), we'll need to get back to 1999-2001 prices in order for our market to "normalize". Here's how that looks in a few neighborhoods on the northside of Chicago.

 

In other words (and as an example) we can expect condo prices in Lakeview to fall another 17% before we have a "normal", non-bubble market. Yesterday I talked about the market "taking it's medicine". Now you can see the size of the pill...

Albany Park 2008 market results

Albany Park was a booming neighborhood that saw tremendous growth back in 2003-2005. First-time homebuyers, who were unable to purchase the ever-more-expensive condos and houses in Lakeview and Lincoln Park, went there to find prices that more easily fit their budget. Developers flocked too. Tear downs, land, and apartment buildings were all available for cheap.

Now, as the market adjusts down, Albany Park is getting hit hard on prices and shrinking sales numbers.

Here are the numbers for Albany Park for 2008.

Take your medicine!

In the fall, I read this piece in the Tribune that described the attitudes of buyers and sellers in OUR market very well - buyers thought everything was too expensive, and sellers thought they weren't going to be affected by the market.

Then the stock market took a pretty healthy kick in the junk.

Now, with massive layoffs, and every headline going something like "World ending. Run for the hills.", sellers are finally asking the buyers to dance by lowering their prices.

The article in the Tribune today is another accurate painting of what's actually happening out there:

Real estate agents, who have been pleading for months with stubborn sellers to lower their prices, say the tide has finally turned and sellers are capitulating. Price reductions totaling $25,000 or more are becoming commonplace, and homes that have been relisted after several months off the market are being offered for significantly less.

I've been using the term "take your medicine". The market can't bounce until it hits the floor. The sooner sellers start selling for what buyers want to pay, the sooner the market turns around.

California homes lost 40% (they took their medicine). Guess what's happening now? Their market is improving...

Lakeview error fixed

I just updated the Lakeview condo results for 2008. There was a mistake in the average market time for West Lakeview. I had it listed as 13 days. The average market time was 113 days. It was a typo. So sue me.

The original post (updated)

Direct link to the stats

"I want a deal"

"I want a deal" is one of the most common things I hear from clients. Buyers have been conditioned (rightly so) to take advantage of the buyers market and are out there sniffing around for the best deals possible.

It's my job to ask a very important followup question: "What do you define as a deal?" In many cases, 2 things pop out of their mouths:

• foreclosure
• short sale

Believe it or not - the best deals are not necessarily either one of these. Foreclosures that hit the retail market are usually there because cash investors didn't want to buy them at auction. And short sales are just a PAIN. You can wait for months to get an answer from the bank. And in many cases, the answer is simply "no thanks". (NBC5 did a nice piece on short sales last week.)

Deal exist everywhere. Stop labeling them "foreclosure" and "short sale". In 2008 I helped dozens of clients get incredible deals. NONE of them were bank sales.

The hot neighborhood

"This area is very desirable - I'll have no problem selling"

I’ve heard that a few times from clients as they come to terms with the market. Let's take a look at the reality. I looked at 2 areas on the north side that are typically defined as "desirable". The North/Damen/Milwaukee intersection (ground zero of Bucktown), and the Southport Corridor. Here's what I found.

AREA: "North/Damen/Milwaukee"
I used the half-mile square around the intersection: roughly Schiller to Bloomingdale, Wood to Leavitt.

Type	Listed	Sold/Contract	Median List	Median Sale
Condos	198	95	$452,500	$410,000
Single Fam	80	21	$1,299,000	$1,050,000

48% of condos sold. Those that did were typically 10% below market.
26% of homes sold. Those that did were typically 19% below market.

AREA: "Southport Corridor"
I used the half-mile square from Racine to Ashland, Belmont to Addison.

Type	Listed	Sold/Contract	Median List	Median Sale
Condos	302	141	$439,900	$415,000
Single Fam	51	17	$1,900,000	$1,490,000

47% of condos sold. Those that did were typically 6% below market.
33% of homes sold. Those that did were typically 22% below market.

So that’s what you get in a “desirable” location. How about a neighborhood that isn’t as magnet-y as the Southport Corridor or Bucktown? Let’s take a look at the first half-mile square west of California in Albany Park. Still a beautiful neighborhood, but not typically what people think of first when they think “north side”…

AREA: Albany Park
I used the half mile square from California to Kedzie, Irving Park to Montrose.

Type	Listed	Sold/Contract	Median List	Median Sale
Condos	226	44	$259,000	$236,750
Single Fam	32	7	$351,950	$309,950

19% of condos sold. Those that did were typically 9% below market.
33% of homes sold. Those that did were typically 12% below market.

Moral(s) of the story...

• The 3 L’s of real estate are alive and well
• if you followed the 3 L’s it gives you a 50/50 chance of selling (instead of a 20/80 chance)
• if you’re above market on price, you’re not going to sell anytime soon

Fannie condo fee exceptions?

I just spoke with a lender about the 3/4 point Fannie Mae charge for new condo loans. This particular mortgage company told me Fannie "waived" the fee for their bank. According to him, their history was good enough to give them an exception.

Continuing to investigate this...

Buy now or pay later

Condo buyers who are on the fence about whether this is a good time or not to buy might want to put this little nugget on the scales: starting 04/01, Fannie Mae is charging 3/4 of a point on any condo loan with a 25% (or smaller) down payment.

For the buyer, the fee is an additional closing cost. For banks, it's an additional insurance policy against those troublesome condo owners who don't pay their mortgage.

The extra cost won't break the bank for most condo buyers, but it's something else they'll have to prepare for. To make it easier on buyers, most lenders I've talked with about it said they'll end up baking it into the loan (ie. charging a slightly higher interest rate).

Rogers Park 2008 market results

Rogers Park was the neighborhood all the developers flocked to when the land was cheap and the condo buyers flowed like wine. In this professional's opinion, it became overdeveloped, over saturated, over... everything. And now the market in the neighborhood is paying the price.

But fear not, everything comes back - eventually.

(I dare anyone to argue with me on that point by the way). I'm looking at you, everyone who reads Crib Chatter.

Here are the numbers for Rogers Park in 2008.

Apple store followup

 

I was in the area yesterday and sure enough - the station has been torn down and they are clearing the site...