Chicago Housing Bubble

West Loop, Ukranian Village, Wicker Park and Bucktown in 2009 (so far)

I met with a client last week who will be shopping in a few different neighborhoods in the new year. And as part of the... uh... let's call it "discovery process", he wanted to see some statistics on the market in those neighborhoods.

Considering the fact I haven't posted in nearly a month and that I have some fresh stats, I thought: "What the hell, stop being a jerk and put those stats up on that super-awesome site of yours. I mean, this content can't write itself. It needs your brilliant mind."

First things first - transactions...

My guess is that you're smart enough to ask the question: "How is 2009 relevant if it isn't over yet?" Well, it's relevant to me because December will not produce more than about 7-9% more closings (at most). In the West Loop, that would account for just 18 more closings (again - AT BEST) and drop the transaction loss from 2005 to 34%. Bottom line - the market took a huge hit in number of sales this year.

And yes - it took a big hit DESPITE the homebuyer tax credit that expired and was then renewed at the end of November.

Moral of (this part of) the story: the homebuyer tax credit extension will not turn the market on a dime in 2010.

On to prices...

We did start to see some Q3-Q4 price improvement in 2009. By improvement, what I mean is that the bleeding seems to have stopped (for now). Here's the picture...

For the CHB un-initiated, we measure 2/2's here to get a good thermometer of the overall market. You might be buying/selling a 3/2 or a 1/1 or a studio or coachouse or whatever... but the trends will be similar. If you bought in 2004/2005, in almost EVERY situation, you're likely down on price. But the picture might be a little better than it was earlier this year.

So what's next? We'll have to see some January/February numbers to start to get a picture for what will happen in 2010. My analysis: we'll not see any price improvement in 2010, and if transactions continue to fall on the northside, we'll continue to LOSE VALUE in 2010.

But my guess is - we're at the bottom. That's right folks, my VERY EARLY PREDICTION is that we're at the bottom of the northside Chicago housing market. And we're going to be sitting here on the floor for a while.

I can't wait to see what happens next :-)

Northside condo numbers through 08/15

Now that we're entering the last 3rd of the year, the numbers are starting to be more predictable. And in fact, the 08/15 numbers are exactly the same as the numbers through 07/31.

Bottom line:
Northside condo sales for 2009 are expected to be down 37% from 2008.

This of course is an average of all the "northside" neighborhoods (Lincoln Park, Lakeview, Near North, Uptown, Edgewater, Lincoln Square, North Center, Albany Park, Irving Park, Logan Square, Bucktown/Wicker Park). Individually, North Center and Irving Park are down the least. Bucktown/Wicker Park, Lakeview and Albany Park are faring the worst.

Contracts are another indicator to watch. In 2009, contracts through 08/15 are down 28%.

Single family home numbers tomorrow...

One agent's take on the market

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)

The numbers at halftime (for single-family homes)

Per my promise on Friday, I'm going to cut to the chase and present the 2009 single-family home projections through 06/30/2009.

Clearly these numbers are better than the halftime numbers for condos. But we're still seeing a reduction in demand of almost 26% in 2009 from 2008. And since the peak (2005), the north side is seeing a reduction in demand of 54%.

The same advice applies - price your home to sell at market value. If you put your house on the market too high and don't sell this year, you're going to have a harder time next year when the prices adjust after the 26% reduction in demand.

The numbers at halftime (for condos)

Well, the market seems to be a little warmer than we predicted it would be back in January. I'll just get right to it - here are the condo closing numbers through June 30 (half of 2009).

Quick note: I never posted numbers through 06/15. The rolled up numbers are here...

Rolled-up demand is still down 43% from 2008. This continues to improve from the -55% we saw back in February and March. Clearly the year started off REALLY bad for home sellers. The big question is - if the market ends up down 40% from 2008, what will that do to prices? There's no way we should see anything other than falling prices through 2010. The market looks better than it did in the beginning of the year. But don't confuse that with a sign of recovery.

I like to make the update a little different every time. So this time, I'm going to include closing numbers by neighborhood on the north side. Remember - the 2009 numbers are the latest full-year projections for closings:

More fun on the way. I have numbers for single-family homes now too! Stay tuned...

2009 Projections through May 31

Time to look at the numbers again. Let's start with this:

I posted this chart a few weeks ago when I wrote about the projections through May 15. One of the things you can see as we've gone forward is that the projections have gotten better. That's the good news. So things will likely not end up as dire as they looked when we started tracking the numbers back in February.

At the beginning of April, it looked like condo sales would be down 55%. The market isn't performing as badly as we thought. But don't mistake that for a market that has somehow fixed itself.

For the first time we're seeing some consistency. The projection as of the end of May is the same as it was in the middle of the month. So we can start to make some real predictions.

But - remember that it's the relationship that matters! In other words, what the heck does 4500 condos selling this year have anything to do with anything? Well - you have to look at it compared to previous years:

Bottom line: condo sales are down 47% from last year.

Here's a question for discussion: what would you do if you put your condo on the market and got 97% of your asking price in the first week on the market? I hope your answer is: "take it!"

It's the relationship that matters

If you read the post from yesterday, you should be asking this question next:

"I guess it's interesting that demand is expected to be down 48% this year. But what about supply? If supply comes down, can't that make things easier?"

The answer is: YES! That's why demand doesn't matter. And supply doesn't matter. The only thing that matters is the *relationship* between supply and demand. And here it is through 05/15:

Demand is expected to be down 48% from 2008 (or 70% from 2005)
Supply is expected to be down 15% (or 28% from 2005)

The gap between supply and demand is getting bigger right now. In other words:

We're in an increasingly intense BUYERS MARKET on the north side of Chicago.

2009 Projections through May 15

I've been a little behind in tracking numbers, so I'm catching up with the May 15 numbers. The end of April projection is given in the second chart below. But I never fully reported it because... well... I was selling real estate. Doesn't matter anyway because the latest numbers are the most accurate anyway.

As usual, here are the number of sales over the past 4 years compared to this year's projection:

Condo listings/sales on Chicago North Side through 05/15

Northside = Near North, Lincoln Park, Lakeview, Uptown, Edgewater,
Lincoln Square, North Center, Logan Square, Bucktown/Wicker Park.

The overall facts remain true through 05/15 - demand on the north side is down about 50% from last year. The interesting thing is the relationship between the real estate winter we just went through and the spring that we're in now. The market is always busier in the spring, but it's outpacing previous springs as related to their winters. Here's what I mean...

I've been taking 15-day projections of the market since the end of February. Here are the total-year projections and how they've changed:

What does this mean? Well - the market remains intensely challenging. We're expecting to see a reduction in demand of at least 40% this year (right now we're at 47%). From there, we can expect prices to continue dropping as well. 2010 should be an even better year to buy. But the good news for sellers is that we're having a relatively healthy spring.

It's too early to tell what this means. But for now, the same, boring rule applies - price your home appropriately or you will NOT sell

This Month in Real Estate - April

I said it last month and I'll say it again - this piece is a little watered down, but it gives a snapshot of some numbers from the US housing market. It's nicely done and a good "once over" of things.

Chicago price index down 17.6% since February 2008

Wow! I was working on a 15-year historical look at the Case Schiller report last night. I didn't finish it and went to pick it up this morning and WHAM! New data!

The Trib wrote the story for me about Chicago. Here it is. Chicago is down 17.6% since February 2008.

The "good" news? For the first time in 16 months, the index has *not* set a record for a decline. As President Bush would say: "Mission Accomplished!"