An agent friend of mine forwarded me a write-up he did about the state of the Chicago market. He shared this with his client. With his permission, I'm sharing it here.
Enjoy.
---------- Forwarded message ----------
From: (OMMITTED REALTOR)
Date: Mon, Jul 20, 2009 at 6:19 PM
Subject: THE MARKET
To: (OMITTED CLIENT)
No problem - good that we're both busy these days!
Here is the best explanation of why I feel this way, and it's a two part explanation. This is something that, after watching and wondering what was going on in the market and with my listed properties specifically as well, I spend A LOT of time analyzing as well as speaking to successful agents locally and nationwide about what they have seen and expect.
Reason #1: The momentum of the market
The market is an extremely strong buyer's market. Whenever a market is heavily tipped in either direction, even contrary news doesn't seem to make much of a dent in the market. This is the momentum of the market. Although I'm no stock broker, the same could be said for Wall Street - where an overriding mindset that permeates throughout has a pervasive effect on the market.
The difference between the stock market and the real estate market is: stocks tend to make much faster moves in either direction than the real estate market. Real estate tends to move faster on the way down than on the way up, and rarely if ever moves up any faster than a cargo ship making a u-turn. Only after years of a strong and positive market does the real estate market start jumping at a large clip.
Reason #2: The reasons that the market is hurting
- The mortgage approval process is longer. Every step of the way takes much more time than it used to.
- Inventory. The levels of inventory are staggering compared to years past. Furthermore, when distressed properties go on, they only damage an already hurting market
- % of listings selling - currently (2009) is around 20% of listings sold compared to listings taken - one in five ... This has been pretty much the case in each neighborhood I've done a study for, including Lakeview.
- Appraisers are using all comps when determining values for the banks they appraise for, and short sales/foreclosures/bank owned properties are part of the lending landscape. I've seen deals where - even if a buyer and seller agree on a higher price - the appraisal comes in low, and the buyer says "I'm only paying the appraised value", so the seller either takes that amount since it's the amount the appraisal came in for, or nothing at all and goes back on the market. Appraisers are also looking at active properties as well, and if they are similar can be used to show where a value is NOT.
- Unemployment rate - is significantly higher than in years past, and continues to push in that direction. This means less buyers, and supports the current momentum.
- Foreclosure rate - continues to struggle. The next 12-18 months will most likely usher in a new onslaught of foreclosures caused by payment-option adjustable rate mortgages and other risky lending practices.
- The S&P / Case-Shiller Index tracks home values nationwide by metro area. It has shown a consistent and marked decline in values everywhere. Currently, average Chicago real estate values are at Sept 2002 levels, and have been dropping over the past two years consistently.
- Ave Household Income vs Ave Home Values. Keller Williams did a significant study on this, and found that the two ran pretty much hand-in-hand at a very consistent rate from the 1970's to the late 1990's. In the late 1990's the Home Values shot up dramatically while Average Income stayed at the same rate. We are now at a time when the discrepancy still exists, with tons of inventory, fewer buyers, a sluggish economy and a rising unemployment rate also in the mix. Once the two come more in line, things will level out. What happens in between then and now is likely the reduction in home values for everyone ...
I am generally a positive individual and God knows I wanted to find a silver lining in the clouds above our heads these days. Unfortunately the more I studied, the more things pointed downwards. I most certainly want to put a positive spin on everything, but bottom line my responsibility is to my clients and to what is best for them. If keeping a property long term is a possibility for them, I am suggesting that. If it's for the short term, I am suggesting selling. For people who are selling and buying up, this is a great time to do so. I will continue to study the market and certainly hope that there are positives that begin to arise with some consistency. It would be great for everyone if that were to happen.
The long and short of it is: the market is in a decline. The news is negative and most of the sources that make up the news are reporting negative findings. News like this does not change overnight, but even if the news reports started coming out more neutral the overwhelming momentum is that it is a market supporting the buyers. In order for it to truly change, a succession of exceedingly positive news needs to come in with consistency over a long period of time. I by no means have a crystal ball, but here is the rough time frame that I see things as a whole by timing and by average home values (the numbers may be slightly less and the timeframes slightly shorter in more balanced neighborhoods like Lakeview, but no neighborhood is immune):
- 2009: current conditions exist
- 2010: 5-7% lower values than this year. Market still in decline
- 2011: 10-15% lower than right now. Market begins to level out
- 2012/2013/2014: Same as 2011 levels. Market flat
- 2014/15: 2-3% better than the prior year.
- 2015/16: 6-7% better than the worst year
- 2016/17: 9-10% better than the worst year
- 2017/18: Market returns roughly to today's levels, this time on the upswing
So ... you can see why I thought it would be good for us to talk. I do not like being the bearer of lousy news, but figured that you and Daryn would like an in-depth opinion on the subject.
Should you want to or be able to hold onto the condo long term, I would suggest doing so. If you want to sell it in the next 7-9 years however, the sooner the better.
I suggest we still talk over the phone, but now you know the background behind my thought process. I'm happy to talk whenever.
Thanks,
(OMMITTED REALTOR)
