Wednesday, January 9, 2008

Three predictions for Chicago real estate in 2008

It appears that at this time of the year, it's a blogger's duty to write an article filled with predictions for the upcoming year on their topic of expertise. Making predictions is fraught with peril for the prediction writer as we don't really have a crystal ball in which to divine the future or a time machine with which to travel to the end of the year and confirm our predictions. Let's hope I don't wind up on the list for 2008's worst predictions like these for 2007.

Chicago real estate prices have already hit bottom.

The fundamentals in Chicago were never as messed up as they were anywhere else. For a two main reasons, real estate in Chicago just didn't have as far to fall as real estate prices in other parts of the country. First - our real estate did not run up as far and as fast as real estate in other parts of the country. Namely - California, Florida and the northeastern states.

Some quick examples: In the Los Angeles metro area, between 2004 and 2006, the median sales prices ran up 31% over the three year period. In the Miami - Ft. Lauderdale metro area, prices ran up just under 30% over the three years. And in Chicago, our prices rose almost 14%. (Figures from N.A.R. - email me for a copy of the report.)

The Midwest economy - and Illinois' in particular - has remained healthy since 1999. Unemployment in Illinois has fallen from a high of 6.9% in August of 2003 to a low of 4.0% in November of 2006. It has crept up slightly to 5.2% in November, 2007, but the figure is still comparatively low historically. (U.S. Department of Labor Statistics.) Illinois homeowners have been able to keep their jobs.

There will be more homes sold in 2008 than in 2007.

The rate of home sales slowed tremendously in the second half of 2007 throughout Chicago. Actual figures show a high of 4,138 properties closed in June, 2006. The high in 2007 was June with 3,440 closed sales. Figures dropped crazily throughout the remainder of the year to 1,820 closed properties for December, 2007.

I predict that the number of closed sales for 2008 will be greater than last year and I attribute the increase to these factors:

There is pent up demand for homes. Many people put off lifestyle change moves last year in order to wait out the slumping market. They still want to sell their city homes and move to the Suburbs. Or vice-versa. These folks will sell their current homes and move to new homes in large numbers this year. Chicago is not as dependent on the first-time home buyer segment of the market as other parts of Chicagoland.

(See Sunday's Tribune article for an example of a sub-market that is totally dependent on first-time home buyers and the challenges facing sellers there.)

The banks that foreclosed on properties in 2007 still need to sell them and the bureaucracy to do it is finally in motion. Getting a committee of bankers to decide what to do, interview potential real estate companies, decide who to hire, process the paperwork and make the actual process happen takes months. All those houses should be coming on the market in the next four to eight weeks. They're priced aggressively and there are buyers out there looking for a great deal.

Interest rates held steady, then dropped this year. Most economists predicted that interest rates would be much higher today. Rather, today's rate on a conforming loan is 5.625%. That's a really good interest rate and brings a lot of buyers back into the market.

There will not be as many foreclosures as everyone thought just a month or two ago.

First, with interest rates hovering at near-record lows, the adjustable-rate mortgages will not adjust as high as economists had predicted (and everyone had feared.)

Second, there will be a bailout of adjustable-rate mortgage holders. The government will either write a law that forces banks to re-write their adjustable loans, or it will bail out the banking industry by propping up cash flow by pumping money directly into failing banks.

Sympathetic media stories about more American families being evicted from their homes is a scene politicians can not afford to have playing all over the news. Forcing mostly faceless corporate-owned banking conglomerates to take it easy on suffering borrowers is an easy way to gain favorable headlines ~ even if only a few actual troubled homeowners are saved.

I had planned to write at least five predictions for 2008, but the day has come to an end. Appointment times are fast approaching; look for a couple more in a near-future post.