Reliable Sources Offer Mixed Messages

The debate rages on.  Is it time to step off the sidelines and buy or is waiting the better option since interest rates and prices may continue to fall?  Difference is, instead of local experts supporting one side while the national media suggests the other, national sources are standing on opposite sides of the fence.

In this post I will provide commentary on the following two articles:

For the MSNBC article click here:  The Argument Against Home Ownership by James Surowiecki

http://www.msnbc.msn.com/id/23439843/

For the CNN article click here: Housing: Best Time to Buy in Four Years by Les Christie

http://money.cnn.com/2008/03/04/real_estate/markets_less_overvalued/index.htm?postversion=2008030413

1. Argument Against Home Ownership  (all quotes taken from web copy of article)

The principle argument of this article is that in a falling market, the commitment of owning a home can tie down an owner limiting autonomy and cash flow.  The reasons for these limitations are threefold:

First, it used to be that a hefty down payment was required to purchase a home.  Averaging 18% for first time buyers in 1976.  In contrast, “a National Association of Realtors study of first-time buyers between mid-2005 and mid-2006 found that almost half put down nothing at all, and that the median down payment was just two per cent.”  Therefore, a borrower is in essence starting from zero and paying back their loan month by month.

Second, “homeowners took out more than six hundred billion dollars in home-equity loans between 2004 and 2005 alone — ten times as much as they had a decade earlier — and are spending much of it on personal consumption.”  So now, not only are many borrowers starting from zero equity when they begin paying off their mortgage loans, but also homeowners that do have equity are borrowing against that equity and depending solely on appreciation to pay off those loans.

Third, the article draws a strained correlation between  home ownership and unemployment rates based on a study conducted from 1960 to 1996 by British economist Andrew Oswald.  The research states that a “10% increase in home ownership correlated with a 2% increase in unemployment.”

While the article seems to denigrate home ownership in and of itself, it stands to reason, the true culprits of our current housing slump are the knockout collaboration of irresponsible lending practices and irresponsible consumer spending.  Currently, lending standards have become much more strident.  Moreover, borrowers with a 5 to 10% down payment that do not borrow heavily against their equity are well leveraged and safe.

2. Housing: Best Time to Buy in Four Years (all quotes taken from web copy of article)

There’s no way around the numbers.  Housing prices have dropped in the vast majority of the US over the last 18 months.  While this article illustrates that fact quite well, it also illuminates the silver lining of that downturn.  “Housing valuations are almost back to long-term norms,” said National City’s chief economist, Richard DeKaser. He called current affordability “the best in the past four years.”  He does caution that they could fall further.  The trade off here is that price decline directly increases affordability.  The article goes on to say that “there are still 21 housing markets, or 6% of those surveyed, that are severely over valued…That’s down from 56 overvalued markets at the peak of the housing bubble in 2006.”

As with all forecasting of markets, this article would not be complete without a source of ambiguity.  In determining market value the report “…compares actual median home prices with what the authors determine are proper home values based on population density, relative income levels and interest rates, as well as historically observed market premiums or discounts, to determine whether markets are over or under valued.”  Let me tell you why that makes me nervous, I count one control (median home price) and five variables in that sentence.  We all remember grade school science, it was all about many controls and one variable, right?  The only true source for determining market value is an agreed upon price between a buyer and a seller.  I’ll call it the elusive obvious.

The long and short is there is no clear answer.  A home buying decision must be made individually based on simple personal factors: budget, housing preference.  Each situation will vary so plan to consult with a professional.  A good realtor and mortgage lender can illuminate this murky market.

Best,
JLC

Neighborhood Update – Lincoln Park

Market statistics indicate an increase in buyers entering the market which should reduce market times and begin to reduce the excess inventory. To illustrate this point I will be using absorption rate.  Absorption rate indicates how long it would take for the current inventory in an area to be purchased if the rate of consumption continued at a steady pace, assuming no new units come onto the market.  In order to determine that pace I will use the number of closed units in the month of February. 

Hence, there were 36 closings of condos in Lincoln Park during February. (ranging in list price from $152,000 – $2,317,500)

There are 612 condos currently on the market (ranging from $149,900 – $13,066,900)

 Therefore, it would take approximately 17 months to absorb the current inventory. 

Meaning for Sellers:

Absorption rates reached over two years in Lincoln Park in 2007.  January saw the absorption rate fall to a little over one year.  February was slower than January which is not uncommon.  While a little over a year of inventory is still quite a bit, the drop off from last year bodes well for the market leveling in 2008.  If you’re selling a condo in Lincoln Park, ideally you should hold off listing it until some of the current inventory is sold.  If waiting is not an option, it is of utmost importance that a seller understand the general amount of competition out there and moreover, have the willingness to price your property according to market conditions and the direct competition to your unit. 

Meaning for Buyers:

It’s a buyer’s market.  While lending standards have become more strident, for those that qualify to buy a wealth of opportunity abounds. Whether buying a first home, or buying up to the dream home, a buyer can be selective in their purchases and search out the best prices, terms, and conditions.

I would like to highlight a couple listings I saw this week while previewing property: 

1. 2620 N. Halsted #2 - New construction three bedroom two bath condo.  Includes two decks and two parking spaces.  Exquisite millwork matches Brazilian cherry hardwood floors.  All the upgrads one could ask for with marble baths, body sprays, and rain showers.  Finishing touches include a fully organized closet and high end appliances.  Listed at $577,000.

2. Lincoln Park 2520 - New construction development sits on three acres of prime parkfront real estate where Columbus hospital used to stand.  Designed by renowned architect Lucien Lagrange. Lincoln Park 2520 offers luxury living at its finest with unparalleled amenities including, a concierge service, fitness center complete with massage rooms and a dance studio, and one acre landscaped garden including a dog run.  Not to mention the finest finishes and abundant square footage.  To schedule a showing contact me. justin.conner@tregchicago.com For further details go to: www.lincolnpark2520.com

 If you have questions about any of the properties mentioned here, or would like a neighborhood update for another area please feel free to contact me.

Best,

JLC

Neighborhood Update – South Loop

In early 2008, specifically February, the south loop has seen an increase in market activity above that of the fourth quarter of 2007.  Market statistics indicate an increase in buyers entering the market which should reduce market times and begin to reduce the excess inventory. To illustrate this point I will be using absorption rate.  Absorption rate indicates how long it would take for the current inventory in an area to be purchased if the rate of consumption continued at a steady pace, assuming no new units come onto the market.  In order to determine that pace I will use the number of closed units in the month of February. 

Hence, there were 102 closings of condos in the South Loop during February. (ranging in sales price from $178,000 – $1,550,000)

There are 1226 condos currently on the market (ranging from $146,000 – $4,250,000)

 Therefore, it would take approximately 12 months to absorb the current inventory. 

Meaning for Sellers:

Absorption rates were much higher in 2007.  While a little over a year of inventory is still quite a bit, the drop off from last year bodes well for the market leveling in 2008.  If you’re selling a condo in South Loop, ideally you should hold off listing it until some of the current inventory is sold, the new construction inventory will make your task all the more daunting.  If waiting is not an option, it is of utmost importance that a seller understand the general amount of competition out there and moreover, have the willingness to price your property according to market conditions and the direct competition to your unit.  In February there were instances of listing a property and accepting an offer within a month.  It can be done, but a good realtor is crucial to effectively marketing a property under these circumstances.

Meaning for Buyers:

 From the purchasing side, a year of inventory still allows a buyer to be selective in their purchases by searching out the best prices, terms, and conditions.  Whether purchasing new construction or a resale unit, opportunity abounds.

I would like to highlight a couple listings I saw this week while previewing property: 

1. The Columbian at 1160 S. Michigan - Positioned on Michigan avenue with easy access to everything that Chicago has to offer including Chinatown, Little Italy, Greektown and Pilsen.  This building was designed to maximize views of the Chicago skyline, Grant Park, and Lake Michigan.  Full amenity building with one, two and three bedroom units ranging from $355,000 to $2.5 million for penthouses.  Heated garage parking is available.  Available for immediate delivery.  For more details visit: www.thecolumbian.chicago.com 

2. 1111 S. Wabash #2602- North East corner unit with views of Chicago Skyline, Lake Michigan, and park.  Three bedrooms, two and a half baths and 2600 square feet provide all the space you will require.  Plus two parking spaces.  55 x 20 terrace includes a built in Viking grill.  Fully upgraded in full amenity building, listing for $1,349,000. 

 If you have questions about any of the properties mentioned here, or would like a neighborhood update for another area please feel free to contact me.

Best,

JLC