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State of the Industry 2006

by Chicago Agent

By Jennifer A. Morrell

Embarking on a new year of real estate in Chicagoland leads us to ponder both obvious and not-so-obvious questions regarding interest rates, the strength of the market and definitive trends.

Chicago Agent handpicked a panel of industry experts from all over Chicagoland to discuss the 2006 outlook for the real estate, mortgage, title and development industries. Panelists included Alex Chaparro, president-elect, Chicago Association of REALTORS® and managing broker and owner Hudson Street Realty; Chris Eigel, president, Koenig & Strey GMAC Real Estate; Dan Jungclas, broker manager, ABR and e-PRO, RE/MAX of Naperville; Greg Kosin, president of Greater Illinois Title Co.; Leslie Struthers, senior loan officer, National City Mortgage; and Steven Weitzman, CEO, Restruction General Contractors.

WHAT 2005 INDUSTRY TRENDS DO YOU SEE GOING AWAY IN 2006? WHAT NEW TRENDS DO YOU PREDICT?
Chris Eigel: The trend that I see fading in 2006, which began in 2005, is the strong sellers’ market that we have been in for many years. We have been moving into a much more balanced market in which buyers will have more options and more time to make selections. Sellers will need to be more careful in their pricing, recognizing they have more competition than has been the case. Price and condition, always important, will become even more so in 2006.

Alex Chaparro: Throughout the years, the consumer has become more informed and sophisticated. The service provided by brokerages, large or small, must continue to meet the demands of the consumer. As far as the market, I see the 2005 trend for affordable housing to continue in 2006 to under $300,000. Markets in the western and southern areas of the city will continue to be strong.

Steven Weitzman: The condominium market in the city of Chicago has been great for a while now, and I don’t see that changing in 2006. The trend I do see slowing down, but not necessarily going away, is the really high-end market, i.e., $1.5 million and up properties. This price point will start to see some effect due to increasing interest rates.

Leslie Struthers: Mortgage refinancing has given consumers, on average, a 25 percent increase in disposable income without a corresponding wage increase. If you’re making $150,000, that’s an extra $37,500 per year we get to spend. Consumers will be paying more attention to making sure they get the most for their money.

HOW WILL CHANGING (RISING) INTEREST RATES AFFECT THE REAL ESTATE MARKET IN 2006?
Eigel: Rising interest rates will have a somewhat dampening effect on the market in 2006, but I don’t think it will be too large. From all reports, rates are likely to continue to be attractive, not likely to exceed 7 percent. However, any increase in interest rates will have a somewhat negative effect.

Greg Kosin: The title industry is tied closely to interest rates. Indications are that rates will remain within a narrow range with a gradual rise of mortgage rates expected during the third and fourth quarters. As mortgage rates rise, we will see more people jumping into the market to take advantage of the lower rates, which is good in the short term but will affect future activity.

Struthers: It’s not the changing rates that will affect the market; it’s the buyer’s perception of the impact of those rates on their buying power. Rates have been a lot higher during very vibrant housing markets. In real numbers, the after-tax payment for a $500,000 mortgage would increase approximately $185 per month. Keeping it in within the context of reality, you can see it’s not a big deal. [Also,] housing is not tied to mortgage rates. Employment is the big factor in our market. If you have no income, are you going to be looking for a home, or more income? Considering the current rate of unemployment is 5.2 percent, and the GDP grew in the face of some major natural disasters and an energy price shock, I’d say we are in excellent shape for a booming 2006.

DO YOU SEE ANY CHANGES TO THE MLS AND HOW IT IS OPERATED? WHAT ARE YOU THOUGHTS REGARDING PRIVATE MLSs?
Dan Jungclas: The MLS will continue to function as it has in the past. The MLS was created to allow brokerage firms to arrange for agreements of compensation to each other. This will continue as such, as well as provide protection to the consumer.

Eigel: I anticipate that our two MLSs will merge in 2006 and form one privately owned MLS. In my opinion, the MLS should be under broker control, as it is based on the listing inventory that is maintained by brokers. The only operational change that I see is that the MLS will be more responsive to brokers’ needs and will limit its activities to those that are beneficial to broker owners. Having one MLS should also produce more efficiencies, and I expect costs to go down. That will produce a savings to all brokers and agents, especially those who are in markets in which they had to belong to both MLSs.

WHAT ARE YOUR THOUGHTS ON THE SUPPOSED “REAL ESTATE BUBBLE?”
Jungclas: There is no such bubble! How absurd. The market is strong, very strong. Just look at all the records being broken! And it will continue to be strong, so long as the consumer believes he can obtain the American Dream.

Chaparro: The “real estate bubble” has been hyped by the media, which says the housing market is going to experience a huge, sudden downturn. Fortunately, this is not the case. Chicago real estate has had steady gains year after year, causing less chance of a “bubble.”

HOW WILL TECHNOLOGY – NAMELY WEB SITES AND EMAIL – AFFECT YOUR BUSINESS IN 2006?
Eigel: We are all familiar with the statistics citing the high percentage of buyers who begin their real estate searches on the Web, and that trend will continue. Real estate agents and brokers with strong technology backgrounds will be able to take advantage of these [Web marketing] trends to improve their marketing capabilities, reduce costs, or both. Agents frequently find that their busy clients prefer email contact. Email is also a great way for agents to keep in touch with their spheres of influence and to prospect and provide valuable information.

Kosin: Technology and business-to-business interaction via the Internet have already had a tremendous impact on the title industry. For example, nearly 70 percent of all closing packages sent to Greater Illinois Title Co. in 2005 were sent to us via email. The accessing of information, the electronic delivery of products, and communication via the Internet will continue to drive our industry.

WHAT AREAS OF CHICAGOLAND DO YOU PREDICT WILL EXPERIENCE GROWTH IN 2006, AND WHY?
Eigel: In general, the hottest part of our market area continues to be the city itself. While there are areas of overbuilding and excess inventory, we continue to see significant activity in the Lincoln Park, Bucktown, Wicker Park, Lakeview, Andersonville, Streeterville and Gold Coast areas, especially in new construction. There will also be strong growth in DuPage county and our North Shore markets as downtown areas continue to develop “urban centers” as alternatives to city living.

Weitzman: The Rogers Park corridor will continue [to grow] as its location and proximity to public transportation will finally push neighborhood development. Additionally, the South Shore neighborhood and Hyde Park will continue the South Side rebirth.

WHAT ROLE DO IMMIGRANTS PLAY IN THE REAL ESTATE MARKET IN CHICAGOLAND IN 2006?
Chaparro: Immigrants will continue to drive Chicago’s real estate market. Many immigrants are choosing to purchase homes instead of rent apartments, as they realize the benefits of homeownership. Also, there are many foreign investors purchasing second or third homes in the city and suburbs, since the cost of real estate in the United States is less expensive than in other countries.

WHAT CHALLENGES WILL DEVELOPERS FACE AS THEY MOVE FORWARD WITH PROJECTS IN 2006?
Weitzman: In any project, large or small, there are hurdles to overcome. Land availability has not been an issue, because there are still a lot of terrific areas that are just on the verge of exploding.
The key to getting projects approved is to have a project that makes sense. If you put the right people together for the land analysis, you can get it right and bring something to the city’s attention that will bring excitement to moving forward.

Rising energy and construction costs have always been a concern in this business. They are two of the most critical factors in going into a development. Once you have been doing this for a while, you understand the per-square-foot costs of each different type of construction. Steel and concrete buildings have obvious extra costs, whereas wood frame construction has some savings that make certain developments more desirable than others. In any case, a contingency must be factored for both construction and unexpected delays. If those factors are not made in the beginning, a development can be in serious jeopardy as time goes on.

Municipalities are just a fact of life. Everything needs a regulating body to make sure each development is being built properly and end users are safe and secure. This may take some time, but it also covers the developers. No developer I know wants to build something that could potentially be hazardous.

The necessity of permits and other fees are also a great revenue source. Each city can take those dollars and create even more positive attributes within their city limits. This leads to wonderful investments in parks and road work, to name a few, which make any city more desirable.

DO YOU SEE A HEALTHY LIFE FOR NEW CONSTRUCTION IN 2006? WHAT ABOUT FOR RESALE/PURCHASE OF EXISTING PROPERTIES AND REHABS?
Kosin: It appears many new projects are not only in the planning stages, but are coming on-line this year. Uncertainty still lies in where the costs of construction materials are headed, but that is not dampening the prospects of continued strength in new construction. Both the city and suburbs will continue to see shares of rehabs in those more desirable areas, as some people would prefer to live in more established neighborhoods with existing schools and shopping nearby. C.A.

ALEX CHAPARRO
President-Elect, Chicago Association of REALTORS®
Managing Broker/Owner,Hudson Street Realty
773.292.2500

CHRIS EIGEL
President, Koenig and Strey GMAC Real Estate
847.853.5000

DAN JUNGCLAS
Managing Broker, ABR, e-PRO, RE/MAX of Naperville
630.712.1855

GREG KOSIN
President, Greater Illinois Title Co.
312.407.9344

LESLIE STRUTHERS
Senior Loan Officer, National City Mortgage
312.217.6500

STEVEN WEITZMAN
CEO, Restruction General Contractors
847.412.0966

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