Everyone agrees that the market isn’t as predictable as it has been in the past. However, this market still offers abundant opportunities for those who understand how to read the industry signs. The pages below highlight thoughts, opinions and tips from industry leaders on the state of the current market.
THE SUBURBAN BUILDER
The Best Will Stand Out
By Jim Chittaro, CFO, and John Wozniak, President, of J. Lawrence Homes
Chicago has always had a relatively stable real estate market, which has historically benefited those builders driven by long-term profitability. However, with the recent influx of large public builders, a new model which stressed short-term goals (defined by quarterly conference calls to Wall Street), caused a timing and pricing mismatch on when the return on a land asset actually occurred. Specifically, certain large builders drove the price of land to a place where gross margins shrunk so tight that money would be made in only the most high-velocity times. These high-absorption rates were not sustainable and neither was paying too much for land. At the same time, individuals that did not have the level of sophistication needed to maintain a production building company were becoming home builders. For a while, the strong performance of the market hid their inefficiencies — merely adequate product and lack of direction.
In today’s challenging market, the best home builders will stand out. After all, buyers are more educated, so builders have to respond to their demands. Those who understand the submarket they build in will create floor plans, feature amenities and offer financing programs that directly benefit their targeted buyer. While these goals aren’t new, past execution on these major points has been lackluster. Further, as no builder is an island, we feel that those who have developed and maintained good relationships with banks, contractors, vendors and Realtors will continue to thrive. Those with a high level of experience will find new ways to capitalize on current market-driven opportunities. Those who understand their respective submarkets will retool their product lines and operating costs because they’ve experienced similar market fluctuations over the years.
For new companies, the current market represents an opportunity. Land values are reset to a place where the purchase price matches a realistic time frame for a target return. We created our company last year and successfully opened two new communities in Wadsworth and Joliet. Our focus is to capitalize on current market inefficiencies by acquiring new communities which fit our economic model. We also have benefited from the strength of relationships we’ve built over the years, which, coupled with our solid management team and employee base, will provide consistent results and a clear direction. Although some builders are struggling in this market, we found the conditions to be a timely catalyst for starting a new company and we are very optimistic about prospects for the rest of 2008 and beyond.
Jim Chittaro is the cfo of j. lawrence homes and John Wozniak is the president of J. Lawrence Homes. Chittaro can be reached at 630. 281.4702, or by e-mail at [email protected] Wozniak can be reached at 630.281.4701 or by E-mail at [email protected]
THE OFFICE PRESIDENT
No Slump for Chicago
By Doug Ayers, President, Koenig & Strey GMAC Real Estate
While the current real estate market is certainly challenging, the Chicago market is not in a “slump,” nor are we suffering to the extent that many other U.S. cities are. The Midwest may not enjoy the same highs as other areas of the country, but we do not suffer from the same lows, either.
Right now all of the factors that make for a great housing market are aligned – interest rates are low and employment and incomes are high. But the fallout from subprime financing practices and inflated home values has significantly damaged consumer confidence. What was once called irrational exuberance has become an irrational fear.
One of the biggest obstacles we need to overcome is perception of the market based on reports in the media. News outlets inundate consumers with national housing statistics, rather than providing a local perspective that highlights what is happening in our own backyard. When Chicagoans read information about the average national home price or foreclosure rate, they assume it pertains to their neighborhood, their home and their family. It is our duty to educate our clients and the media about the state of the local market.
Moving forward, we must also be adaptable. We need to be aware of what is going on in the market and understand that conditions can – and will – change at any time. We can’t avoid another downturn, but we can be prepared for it. It is our responsibility to be accountable for our actions and to keep our clients educated about the market.
At the same time, a downturn provides innovative brokerage firms with an opportunity for growth. For example, Koenig & Strey GMAC Real Estate has opened nine new offices in the past 12 months. And we have grown to be the No. 2 residential brokerage firm based on total market share volume. By adapting to the market and the needs of clients, brokerage firms have the ability not only to survive the current market, but to thrive in it.
While 2008 will be a grind-it-out year, real estate values should continue to appreciate and we will recover from this adjustment period. Looking to the next five years, I believe we are going to see residential real estate brokerage firms providing agents with the tools they need in order to operate more efficiently and effectively. This is an important and necessary step that will allow agents to better serve their clients and communities.
Doug Ayers is the president of Koenig & Strey GMAC Real
Estate. he can be reached at 847.853.6600, or by e-mail at [email protected]
The Mortgage Market
By Joe McBreen, Branch Manager, National City
The current state of the mortgage market has created challenges for all parties involved in a real estate transaction. Realtors and lenders have felt the consequences of the housing market slump and the mortgage crisis, and are on the front lines when trying to put potential buyers in homes. It is no secret that the investors for jumbo loans, Alt-A loans and 100 percent financing have all but disappeared, but creative financing, something that every lender could promise to buyers, has been replaced by creative solutions using a much-depleted product mix. Fannie Mae and Freddie Mac guideline restrictions, along with mortgage insurance companies declining to insure loans over 90 percent LTV unless the borrower has a certain credit score (680), has certainly humbled the mortgage industry and the result is buyers now must actually have some money for down payment.
On a positive note, Fannie and Freddie have taken action to promote home ownership and have increased lending limits in certain higher-priced markets. FHA, which also increased its loan limits, is coming to the rescue of the mortgage industry. FHA believes that home ownership and mortgage financing contributes much more to stabilizing our communities and markets. In the past, Realtors and sellers would push back or decline FHA financing because of cumbersome underwriting, processing and closing costs. This has changed completely; lenders underwrite and process FHA loans locally just like conventional loans, and closings costs can be freely negotiated between buyer and seller with a 6 percent seller contribution allowed. FHA appraisals now reflect Fannie and Freddie techniques and no longer require completion of cosmetic repairs to the property before closing.
FHA is the only investor that will insure a loan with cash out to 95 percent LTV and does not have a declining market policy in place. FHA has increased the debt-to-income ratios to 43 percent for the primary borrower. FHA adds a human element and approach to underwriting, so if a borrower’s deal makes sense, lenders can manually underwrite the loan. FHA does not have a credit score minimum, although some lenders will have credit score minimum policies. FHA promotes first-time home ownership more aggressively than other investors, by providing competitive rates and lower down payment options, which many first-time buyers need. FHA allows for down payment assistance from the seller, a family member or other nonprofit organizations. In addition, borrowers can still qualify for a FHA loan one year out of bankruptcy with extenuating circumstances
In addition to FHA becoming much more borrower friendly, in recent months there have been some other positive changes to the mortgage industry. Mortgage insurance (MI) is now tax deductible, and MI companies have become more creative in how borrowers can finance this insurance. Most MI companies allow the traditional monthly insurance to be added to a borrower’s payment, but loan officers can also provide no MI loans to borrowers, or allow borrowers to finance their entire mortgage premium into their new loan. Any unused portion of this premium is refundable if the real estate market begins to rebound and the borrower realizes some equity growth and decides to refinance to an equity position that does not require mortgage insurance.
Realtors and borrowers alike must realize that interest rates are still historically low, so qualified borrowers will still have historically low payments. The mortgage industry and loan guidelines in particular are constantly changing, but recent changes have been more pronounced and more widely understood and discussed by Realtors, buyers and sellers. I believe that these changes were necessary in creating a strong and stable lending environment. They have leveled the playing field among lenders by streamlining product offerings and have provided a much more positive outlook for the industry as the economy recovers from recession.
While it is difficult to make any predictions in this market, I think the mortgage insurance companies will ease their credit restrictions on borrowers and provide insurance on loans with 95 percent LTV and some policy changes that are coming from Fannie are the repeal of its declining market policy on June 1. I believe that rates will stay at these historically low levels through 2008 and as the economy, in particular the capital markets, recover, we will begin to see Wall Street investors start purchasing mortgage-backed securities which will provide much-needed liquidity to an industry that is integral to promoting home ownership for the future.
Joe McBreen manages both the Gold Coast and Downtown Chicago branches of National City, where he oversees $300 million in residential loan production every year. McBreen is a member of the Platinum Circle, a group of the most talented and dedicated Mortgage Consultants at National City Mortgage. He can be reached at 312.337.2345 or by e-mail at [email protected]
THE CITY BUILDER
Time Equals Money
By Bruce Fogelson, President, Paramount Homes
Real Estate is a matter of perspective. People mostly mean buildings when we say real estate, and Chicago neighborhood residential buildings are my business. As a long-time builder, I think my buildings look good; yes, this is a matter of perspective. Frankly, as a builder, I probably think that most buildings look good, even if that’s from a mile or two away. Time often leaves one to lose perspective. After 20-some years, it helps to have some perspective.
Recent quotes in the news compare the market to times like Sept. 11, 2001, which I recall all to well. Or, we also hear comparisons to the recession when I started. Every time, the market claws its way back, just like the stock market. We just don’t keep the same kinds of charts and graphs; however, we should, and here’s why, if not how. As I get ready for the grand opening of my third building on the same block in Bucktown, I’ve gone back to compare the pricing and appreciation of the last two buildings.
When comparing the 49 units that sold five years ago to the roughly one-third which have resold, the people who sold made an average of about $85,000 in one building and $115,000 in the other. That’s over 30 percent in one and over 45 percent in the other – but that’s only half the story. To get the full perspective, consider that those buyers got that tax-free, and saved on their taxes while living there. If that’s not convincing enough, consider the average buyer probably put down about 10 percent, which equals about 300 percent to 450 percent or more return on equity. And that block was more risky back then. Now, there are more new developments, more shops and a brand new El station. The neighborhood, and the city, just keep getting better.
The proper perspective for your clients to view a home is about five to seven years. That’s how long most people stay in one place. And the best way to view that time is through the prism of interest. It doesn’t take an Einstein to realize that time equals money and historically low interest rates mean that real estate is cheap to buy and hold. Interest in new-home buying should run high when interest rates run low. And, just like the stock market, that’s when the buyers claw their way back in.
Now, step back and get the best perspective of all: From a few miles away! I love this city, and, yes, from a few miles away every neighborhood does look great and is getting greater. Don’t look too closely at short-term trends or last week’s prices. Don’t forget to look ahead and imagine what things will look like in five to seven years – say 2016 – just before the Olympics? Greener and greener (in every sense of the word), and an investment in your self and your neighbors, this is how I buy real estate to make buildings, in any market.
Bruce Fogelson is the president of Paramount Homes. He can be reached at 773.528.9077 or by e-mail at [email protected]
Are You Ready for the Turnaround?
By Mary Corbett, Founder/Co-Owner, Success Builders
When posed with the question, “What is your opinion of the current state of the market?” I have to stop and think. The truth is that the market is definitely more challenging than it has been in recent years. Prospective buyers used to come to us wanting our product. Now, although they still may “want” that new home, we have to make them feel safe enough to actually make the purchase. We have to build value in our homes, effectively demonstrating why our products best suit their needs and why now is an incredibly smart time to buy.
Further, we must convincingly instill a fear of loss if potential buyers don’t act quickly. Once you have secured their decision to go forward, it is imperative that the transaction closes in a timely manner. This seems like a tall order, and it’s true – getting a sale is not as easy as it used to be. However, by meeting the challenges mentioned above, there is great satisfaction when the sale and closing all come together.
Prospective buyers are now asking, “How much can I get off on this home?” As if they are buying the deal and not the home. With this being the case, we have to turn their thinking around. We have to get them to focus on what their wants and needs are as it relates to the home they will be residing in, how they will enjoy the home and what they are going to get when they sell, not just what they are getting when they buy.
The media has painted a grim picture of the state of the market, and many prospective buyers might have the mindset that they are doing us a favor by buying. However, much of the tales of woe encompass a national perspective and not a local perspective, and things are not that bad in the Chicago market. There are still many buyers out there and homes are being sold every day. We just need to stand out by offering exceptional service and unmatched sales skills.
I can’t help but think when the market becomes less challenging how much better and stronger we will be for having gone through this experience. While many of our colleagues might be switching career paths, those of us that stick it out and persevere will have great success.
Now is a great time for people to buy a home. Inventory selections are abundant, sellers are being competitive in their pricing and interest rates are still at historic lows. Much of your current and future success will be based on convincing the prospects out there that this is the case. Add that to having the right attitude during this plateau, honing your own sales skills and paying particular attention to the extra handholding that might be required, and you have a good recipe for consistent sales.
We all know the market will turn around. Suddenly the media is going to open the gates and all those stories of gloom and doom are going to change into “buy, buy, buy.” Next thing you know, we’ll be so busy we won’t know what day it is. Then, sure as you know it, the prices will begin to increase, the incentives will go away and everything will even out. The real question is: “When the market turns around, will you be ready?
Mary Corbett is a 21-year veteran in the home building industry. She is founder and co-owner of Success Builders, a full-service sales and marketing consulting firm. For more information visit success-builders.com, or call 630.893.7777.
THE ASSOCIATION PRESIDENT
Staying Local: The Illinois Market
By Kay Wirth, President, Illinois Association of Realtors
Compared to states along the coasts and the Southwest where the housing boom was elevated, Illinois is now reaping the benefits of our more stable economy and less dramatic run-up in sales and prices. Home sales in April picked up from March 2008, while the statewide median price had a very modest decline of 6.3 percent to $187,500. Prices fared even better in the city of Chicago where the median sale price increased 3.4 percent in April.
Overall, we should begin to see improving mortgage market conditions. Conditions are ideal for buyers with prices moderating, historically low interest rates and a good supply of homes available. Most Illinois homeowners are experiencing healthy long-term gains in the value of their homes, and real estate remains the single best investment providing wealth accumulation, especially for those who keep the home for a typical length of six to 10 years.
According to economist Dr. Geoff Hewings, director of the University of Illinois Regional Economics Applications Laboratory (REAL), in his latest forecast for the Illinois Association of Realtors (IAR), “Over the last 12 months, the Illinois economy has matched the employment growth rate of the U.S. economy for the first time in over a decade.” However, REAL continues to suggest slowing employment growth for the next 12 months, with little moderation in the decline in home sales in Illinois through July of this year.
“Both the U.S. and Illinois economies appear to be flirting with recession with rapid increases in gasoline prices generating inflationary pressure that may temper any future interest rate adjustment downwards by the Federal Reserve,” says Hewings.
Realtors believe any boost to buyer confidence will have a significant impact in reviving the housing market and lifting the economy. Toward that end, many Illinois Realtors joined the nearly 10,000 Realtors nationwide in Washington, D.C., the week of May 12 urging Congress and the White House to enact legislation to modernize FHA programs, GSE reform and establish a homebuyer tax credit. Realtors believe these measures would quickly stabilize the housing markets and get fence-sitters into the market to buy homes.
Local market conditions are often different from what’s happening statewide and nationally, so remind your clients that it’s best to work with a local Realtor whose guidance on all aspects of buying or selling a home can help navigate a challenging market.
Realtor Kay Wirth is the president of the Illinois Association of Realtors. For more information, visit illinoisrealtor.org or yourillinoishome.com, or contact her at [email protected]
Some Wards Will Always Be Strong
By Alderman Brendan Reilly, 42nd Ward
The amazing real estate market of the past decade is over. Of this, can be no doubt.
The market we witnessed in the past six to 10 years was a once-in-a-lifetime market, and the neighborhoods that make up the 42nd Ward were at the epicenter of the explosive growth. More than 30,000 units were added between 1994 and 2007 in the Central Business District and the immediately surrounding area. And until 2007, the majority of new units sold before the end of construction.
Streeterville, River North, the Gold Coast, River West and even the Loop itself saw explosive growth. Even though the market may be slowing, those neighborhoods remain positioned for relatively strong sales. It won’t be like the first part of the decade, but it should be better than other areas of the region in both residential and commercial real estate sectors.
At the center of the region’s transportation hub, the 42nd Ward still remains the premier location for retail and office development. Michigan Avenue remains an international shopping destination, and the Loop remains as the place to locate an office. Even through a recession, the area should hold its own. The area is further aided by the continued strength of the convention business at the Merchandise Mart and Navy Pier.
Residential real estate in the 42nd Ward also should continue to beat regional and national trends.
For the first time in a long time, residential units have taken months to sell. In the next two years, more than 10,000 units are expected to come on the market in and around the Central Business District. However, the 42nd Ward is uniquely positioned with many of the premier neighborhoods in the Midwest.
River North, the Gold Coast and other areas of the Ward remain the place people want to be. Furthermore, the weak dollar has spurred more purchases from overseas buyers who are looking either for a second home or an investment opportunity in Chicago. Developments such as the Trump Tower and The Spire seek international buyers and add to the cache of the area. These factors should combine to stabilize the real estate market in the 42nd Ward during what is becoming a difficult market elsewhere.
The days of double-digit price increases are over. It is no longer easy to flip a unit before the end of construction. However, the 42nd Ward remains a great place to live, work and play. Because of this, the market here should remain stronger than the rest of the region.
ALDERMAN BRENDAN REILLY WAS FIRST ELECTED IN 2007, DEFEATING A 36-YEAR INCUMBENT. HE IS A FORMER REGIONAL VICE PRESIDENT FOR AT&T AND SERVED AS A STAFF MEMBER IN THE ILLINOIS HOUSE OF REPRESENTATIVES. HE CAN BE REACHED AT 312.744.3062, or by E-mail at [email protected]
THE SUBURBAN REALTOR
Tomorrow is a New Day
By Kerry Franze, Codwell Banker Real Estate, Barrington Office
The current state of the market seen through the eyes of a suburban Realtor probably is not much different than the current state anywhere else in Chicagoloand. Here we have lower average sales prices in the past 12 months ending March 30, 2008, longer market time and lower list-to-sale price ratios. We also have a huge differential of supply and demand. Inventories in some suburbs at some prices have five-year inventories. It’s just not news anymore – it’s the reality. In the March 3, 2008 issue of Chicago Agent magazine, an article ran suggesting the possibility of the “Bust after the Boom.” So what is it that we see in the real estate world in 2008?
In the suburbs, we have sellers unhappy about the reality that their homes are worth less than they were two years ago, and that if they purchased in the peak of the market, they will probably sell for less than they paid. We have buyers, if they are relocated into the area, who have just had the unfortunate experience of losing money on the sale of their homes. They have decided that even if agents say they have adjusted the price for the market correction, they cannot afford to overpay. Buyers are certainly unsure about when the market will rebound and they will not be victim for a second time. If the buyer is a local buyer, their motivation is causal: “We’ll make a purchase if we can find a real bargain and if we can sell our current home for what we must get out of it.” This sounds overwhelming, just as it did two years ago. So what is it that is different today?
Currently, Realtors are beginning to have success translating what sellers hear and see in the media. We are able to assist sellers to determine their motivation. When present, we can discuss candidly the state of the market and all that it takes to get their homes sold. We discuss updating, painting, staging and usually doing more to their homes than they have in the past several years. Sellers are also realizing that only the real estate professional can accomplish their goal, which is a great thing for the industry. Realtors have become better listeners in today’s market, resulting in putting better products on the market because we know that we must. We also know that the new “energy pricing” strategy is what creates excitement and activity in the market. This market has forced us to become even better at what we do.
On another positive note, buyers are starting to take a look at the possibilities open to them. More and more families are starting to think that taking the plunge into selling their homes might get them to the home they couldn’t consider two years ago. Of course, we have the foreclosure possibilities for the investors and the builders searching out the tear-down values. We are seeing activity in both the lower and higher price ranges. The first-time homebuyers are still out there, as are the relocation buyers. There are now people who want to live closer to their work, since gasoline is costing them more than $4.00 a gallon. The buyer pool is always out there and our job is to get them off the fence.
Where is the market going? We’ve all heard the predictions. Does anyone think they really know? What we do know is that the market has been here before, and this is something people seem to forget. We know that it will rebound and we know what and where we must be when that happens. We have polished our skills, gone back to the basics and learned new and exciting techniques. We have become better marketers and we’ve earned the respect of our clients. Tomorrow is a new day and we’ll be ready for it.
Kerry Franze is a Realtor with Codwell Banker Real Estate, Barrington Office. She can be reached at 847.277.2703, or by e-mail at [email protected]