Jan 9, 2008
Housing Bulletin—Where is the Bottom?
In the late 1990s, economists, real-estate analysts, and others were puzzled by the housing market. House prices kept going up, confounding everyone’s forecasts. Ten years later, we’re on the other side of that hill: Prices are going down, but nobody seems to know how far they will descend.
Since home prices are a moving target at the moment, up-to-date price data is hard to come by. But I have been hearing routinely that appraisers now use 2004 prices as their benchmarks; just a few months ago, they were using 2005 prices. A 2004 price would mean that after 13 years of increases, we’ve slipped back about three years. That means if you bought your home before 2004, you are still ahead of the game. But that’s only if the market doesn’t fall any farther—and most forecasts say it will.
The number of houses sold is a clearer indicator of the market’s health, and that figure is not encouraging. Sales volume in the Chicago area was down 57 percent in 2007 from 2006 (approximately 89,000 homes sold here in 2007, down from about 212,000 the year before, according to data from the Multiple Listing Service of Northern Illinois). But like prices, the sales volume figures may only be falling back to something closer to normalcy. Suzanne Cannon, the head of DePaul University’s Real Estate Center, has recently been investigating sales volumes in the city; she has found that the pace of sales in 2007 is about the same as the pace in 2002. After 2002, she says, “we had this big run-up in sales until 2005.”
Virtually everyone in the real-estate industry—even those who just a few months ago were putting a sunny spin on things—agrees that the market will continue to head downward in 2008, but the estimates vary as to just how far. Here is a sampling of recent opinions:
- Earlier this week in the Chicago Tribune, a Lehman Brothers economist predicted that prices would go down a total of 15 percent before they hit bottom in 2009.
- In the Wall Street Journal, the head of the mortgage investor Fannie Mae put the final drop at up to 11.5 percent; that’s a combination of the 6.5 percent prices have dropped since June 2006, plus another four or five percent by the end of 2008.
- David Seiders, the chief economist for the National Association of Home Builders, told reporters at the end of 2007 that he expects the market to start recovering—slowly—in the second half of 2008.
- In his latest article, Lawrence Yun, the lead economist for the National Association of Realtors, didn’t offer any numbers but wrote opaquely that the number of home sales and home prices “will be very similar in 2008 as in 2007.”
One certainty seems to emerge from this range of opinions: Don’t expect any good news in the first half of 2008. Beyond that, it’s hard to say what will happen. “I don’t see anything that tells me whether [we will reach bottom] in 2008 or 2009,” says DePaul’s Cannon. “It’s impossible right now to say.”
Here are a few looming questions that could influence how things turn out:
- Will the dawn of the traditional spring selling season, which most real-estate agents now believe starts immediately after the Super Bowl, bring out enough bargain-hunting buyers to eat up the enormous backlog of unsold homes? In late December, there was enough residential property listed for sale in the Chicago area to equal at least 29 weeks of sales.
- Will the foreclosure numbers mushroom the way analysts have been predicting? A recent USA Today article reported that Illinois has the country’s fourth-highest rate of adjustable rate mortgages: 4.9 percent. Compared to California’s 17.3 percent and Florida’s 12.3 percent, that’s a relatively small number—but it still means that one in twenty Illinois homeowners who have a mortgage face a potentially costly spike in their house payments in the next few years. If the teetering economy drops into recession, how many of those people will be forced out of their homes? Add those residences to the excess inventory, and the time needed for the market to recover grows even longer.
- Will those people who must sell wake up to the reality of today’s market? Nowadays, at least two real-estate agents a week say something to me along the lines of: “My clients think I got a ridiculously low sale price for them,” or “I would have priced this house at X, but my clients insisted on X plus $20,000.” Some sellers have figured out that right-pricing is crucial now; they have learned that it’s no longer a good idea to put a house on the market at an optimistically high price just to see if they can get that amount. (Hint: they can’t.)
- How many people will opt to stay put—neither buying nor selling—until they see which way the presidential election is going to go?
The answers to those questions could give us all a clearer idea of just how much farther the market might fall before it hits bottom.
Posted at 08:57 AM in Housing Bulletin | Permalink
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Reader Comments:
As a Realtor working Chicago's northside lakefront neighborhoods, I can say that, so far, market times are up considerably, but prices have not come down at all!
prior to 2000, homes went up at a rate not much higher than inflation -- then creative financing got folks to "afford" 2-4x the house they actually could, and prices skyrocketed 10-15%/yr for a decade. Do the math - we'll not be any higher in prices in 2018 than we are now. Further, as unrealistic sellers keep their prices "sticky" and don't allow them to fall to where they should, sales will keep slowing until developers just have to start unloading at losses -- after another 15-20% drop, we MAY hit bottom in 2009, but I'd guess in 2010, then flatline for another 4-5yrs...
Home prices in Chicago need to correct another 25%. Do not buy a home or condo for the next 3-5 years. Developers, realtors and bankers have made millions at the expense of homebuyers. Perhaps now is the time to stop paying the ridiculous 6% realtor commission - should be no more than 2%.
I challenge Mr. Rodkin to do an indepth article on the Chicago Market and not just some vague story about national statistics. This type of article is truly hurting many home buyers and sellers because it gives numbers that don't apply to them and causes confusion. How do you explain to the buyer that just lost a home to another buyer because they were told by the media that it was a buyer's market but it turns out that the home they wanted is a limited commodity in the area they want to live and there won't be another in that price point with the same charactieristics coming on the market for another 8 months but they have to move in 5. These rash generalizations are hurting a lot of people and it is about time that the media took responsibility and acknowledge that they don't know every readers specific market and should not be the definitive word in how the public views value for homes in their neighborhood. Would you give such general advice to a couple going through a divorce?
3:54: "These rash generalizations are hurting a lot of people"
Largely you and your co-workers, Mr/Ms. Realtor?
My husband and I are very confused! He's just been transfered to Chicago, he's renting an apartment in Lakeview, but actively looking at homes FOR SALE in the Lincoln Park area and surrounding neighborhoods. Should we, or should we not buy right now? Is renting a good option?
To the reader who is concerned about my use of national figures: I wholeheartedly agree that national figures do not reflect the particulars of local markets. I have my feelers out for good, solid local stats--and when I get them, we print them. In fact, the mention above of appraisers using 2004 prices is expressly from our region. If you look back over our content here and in the printed magazine, you'll see that we work hard to reflect the local reality as much as we can--but national trends are relevant, as well.
To the transferee who is wondering about buying or renting: I'd say renting is better unless you are certain you won't be transferred again in a couple of years. Prices may still come down in the next year or two, so if you end up transferring and being forced to sell before you've been in the house for very long, you may find yourself in a losing proposition. If you know you're staying put, then buy.
Thatnks for reading, everybody.
It is unbelievable how the media has distorted the truth about home prices in the Chicagoland area. It is even more ridiculous to solely blame the Realtors for the mess we are in. Victims of "Adjustable rate mortgages" were often forced into these programs not just because of financial reasons but because of the "Fair Issac credit scoring systme. A system whose rules and regulations were created by banks in order to scam the "middle class and working poor consumer even more. Trans union, equifax and esperian cannot give you the exact mathematical equation used to determine your score and two people oweing the same amount of debt with no negetive items can have a vastly different score. Wake up people and force the credit scoring system to grade "home buyers" on the payment history "only" so that everyone can have a fair chance at receiving the best possible rates. When this happens consumers won't be forced into low rate short term adjustable rates that will increase in time and force them into financial hardship. Thank goodness for FHA loans. This is the only type of loan that approves loans at favorable rates for all consumers even those with low credit scores but who show timely payment histories. Americans are more than just a number!!!
To the Original comment realtor if you want market times to go down, lower the price! Duh!