The State of the Chicago Real Estate Market

I’ve been heavily involved as a Chicago realtor for the last eight years and have seen quite a turnaround in our real estate market. While starting in the business just a year after 911 I have seen this market soar and to the point it is currently at, very soft in my opinion. During the condo craze, both existing and new construction sprouted up in every neighborhood and market. To fully understand how the Chicago real estate market will eventually recover you must understand the geographical and demographics of Chicago.

Neighborhoods…

Chicago is a large city comprised of many little different neighborhoods. For example every neighborhood is a different market. The near north side neighborhoods of Lincoln Park, Lakeview, and even Old Town differ in many ways from other areas like the West Loop and South Loop. Those who know the city would understand the difference in the styles of living in certain neighborhoods. For example West Loop condos are in soft loft like buildings where condos on the near north side may be in a 3-flat style building with little to no amenities.

While Chicago has many neighborhoods it was the abundance of desirable areas and their vicinity to downtown and public transportation that led to the Chicago real estate boom. Neighborhoods like the South and West Loops literally were created in the last 5-8 years. The abundance of development opportunities fueled by an enormously large demand for condo living both for investors and live in buyers that created this huge surplus of demand that we are now facing. Chicago has been overbuilt and it is going to be interesting how this plays out in the next 3-5 years. In every neighborhood development may have been too much too fast, but how can we tell or know.

The Problem…

Inventory

Most people would agree that when someone buys a home they tend to have an average amount of time they live there, which will of course differ by market. Well, in Chicago’s near downtown market that time frame is 3-5 years and that poses a major threat to our market. I am not sure of the exact date the actual boom occurred but I am sure that we have a huge surplus of homes to sell in Chicago. I have been watching the market every day and on average there are about 3 to 1 ratio in homes that come on the market as new vs. closed sales. This is a huge problem. We are continuously creating a higher supply of homes for sale than there are being homes sold which is leading to depreciation of our homes caused by the simple law of supply and demand.

The majority of homes that were sold in the 2002-2006 condo craze averaged about a 3-5 year ownership before those borrowers want to trade up into another property, which then puts us at the right about the time of this article being written. The major problem is that there are going to be a lot of people who are planning on selling on selling now. The one thing that I do want to point out is that Chicago never made it through its original supply of condos on the market that were new construction or conversions. This is only going to increase our supply of available real estate.

There were so many condo conversions and new construction projects that went up by the time the market had started to soften, we still have not made it through the new inventory that was already on the market. There were and still are many projects not yet complete or even some that were slated because of the turn of the market. The major problem is that before we can sort through the mess of existing inventory we already have, we are going to be hit with a large amount of resales that will continue to hit our market. This is what I call a double inventory effect. The amount of inventory existing and soon to become will be enormous. This will be an obstacle the Chicago real estate market will have to face.

Chicago’s Peak pricing

People in the near downtown areas tend to live in their homes roughly between 3-5 years. In 2002-2005 is when I personally saw a great amount of sales. The prices that these properties were selling at were very high and no longer exist in many cases. Because there were neighborhoods that were priced out, it caused a higher demand to other not as attractive neighborhoods. Neighborhoods like the South and West Loops are a perfect example of this. A condo I personally own I am under at least $30,000 on and I bought that with a 90% LTV.

When the real estate market peaked in the most desirable neighborhoods, the new construction and condo conversions gave buyers an alternative to other areas that were also probably a bit overpriced. This led to a very high demand and more importantly an attractive playing field for developers who built the condos.

Please also keep in mind what the majority of homebuyers were financing at the peak years. It was rare to see someone put down 20% on a home purchase. There were so many buyers purchasing at 5%, 10%, and even 100% financing at peak prices that no longer have any equity. In many cases these homeowners have not only lost their equity but they are negative. It is common to come across homeowners with no equity right now. How are these people ever going to sell their homes without doing a short sale or letting it go to foreclosure In the state of our economy it is not often that someone just has $30,000 to pay off their balance, it’s just not realistic.

The large amount of inventory and buyer selection will only create competition amongst home sellers and developers right now forcing them to lower pricing on those who HAVE TO SELL. This is not good for anyone who bought during the peak years. Are they going to be able to clear their balance owed and move on

Buyer affordability…

Financing a home is not as easy as it used to be. As we all know, buying a condo generally needs at least 10% down and a PMI company that is willing to insure it. In the near downtown Chicago real estate market condos make up for most of the market. The new construction is suffering the most since the majority of the newer construction developments are what you call non-warrantable. This means that the building is not 70% sold, certain amount of rented units, and other miscellaneous circumstances that lenders do not want to lend in. Basically a large majority of banks will not finance a non-warrantable project without 20% down. How many people in this economy are willing to do that They do exist but it’s a much more difficult sale and it’s just a fact that there are not as many people out there.

The lending guidelines have also changed. In a market where you could buy anything with pretty much a pulse it now takes a certain credit score and large down payment. How are we going to get through the inventory now with less amount of buyers when we were not able to get through it the first time On a positive note, since prices have been falling buyers are beginning to emerge. However the main question is how long will it take to absorb the tremendous amount of inventory in the Chicago real estate market

Buyer attitudes…

It was not too long ago that the average mindset of any buyer was to just get their foot in the door buying some property under the assumption that the rest take care of itself. As long as you owned 4 properties you already have your retirement plan, right At least that’s what my colleagues and I thought. Real Estate was so hot a topic people were less concerned with what they were buying and more concerned with what they could buy.

That has all changed.

The volatility of the market people are much more conscious than they were. They want to know everything about their purchase when before it wasn’t as emphasized. With the enormous amount of foreclosures and short sales emerging mixed in with price drops buyers want a deal. Properties right now do not sell unless they are a good deal. In this market and conditions nothing sells unless it’s a good deal. Buyer attitudes have changed and they are more concerned than ever with their purchases. This is leading to many price drops and forcing sellers into other options.

Foreclosures…

Finally here it is. I want you to consider all the other things I mentioned. There are many foreclosures and short sales popping up all over and that has a direct effect on the economy. In the Chicago real estate market foreclosures or short sales have become a buzz word. This seems to be what everyone is looking for. Five years ago you mentioned the word pre-construction and people would beat down your door to get in on it. Now it’s the same thing with foreclosures and short sales. The increasing number of these units popping up on the market is huge and it is their comps that are lowering the values of their neighbors. Short sales and foreclosures are emerging as borrowers are in the need to sell and they cannot clear what they owe on their homes.

Foreclosures and short sales are not only lowering property values they are also creating a new buyer mindset that can be lethal to our market. Buy cheap. Foreclosures, short sales, buyer affordability, buyer attitudes, high inventory levels, and over-leveraged properties…

Is this a recipe for the perfect storm Recently I have switched the main focus of my business to short sales and foreclosures. I had to adapt when the real estate market started slowing up in 2006. While I have learned to adapt to this many people will not share the same insight that I have. I now help people facing foreclosure by performing a short sale for them. I see the over leveraged homes and the people who own them on a day to day basis. They are your normal American who were trying to live the American dream and it backfired on them. Only time will tell what will happen but just something else to think about. One thing for sure is that if you are a buyer now is a good time. Go out there and take advantage of the short sales and foreclosures in the Chicago real estate market. Only time will tell what will come of the Chicago Real Estate market.