80% Down on Condo's May Spell B-A-R-G-A-I-N for Buyers

Looking for a steal on a condo or townhome in Chicagoland? You might find that the prices are good, but not nearly as exciting as the slashed values asked for detached homes. In fact, many areas in Chicagoland have relatively "normal" inventory levels for condo's and townhouses. Surprising, I know. And by "normal," I mean that 6 months or less of available inventory is on the market - 6 months or more typically indicating a buyers market, and common levels for detached homes hovering between 10 and 18 months.

The arrival of new lending rules may begin to change that trend, and bring similar woes that have struck the detached home market to the attached segment. Because of the effect foreclosures have had on associations (in states like Florida or California), Condominium values are particularly subject to volatility in value. When a buyer's cost for a property includes a downpayment, mortgage payment, property tax (or monthly escrow), and monthly association dues, that lattermost aspect is integral to deciding how much one can afford. If an owner in foreclosure is skipping out on association dues, the difference needs to be ether a.) picked up by other dues payers (that cost is distributed amongst the others), or b.) ammentities need to be eliminated, and the overall "attractiveness" of that condo declines. Knowing this, and wanting to avoid the mistakes made in places like Miami, lenders see 80% loan-to-value ratios (20% downpayments) as the solution.

I know, I know, this is BAD news for sellers. But FHA mortgages are an exception. If your condo can be approved as an FHA property, and pass FHA inspection, then buyers can mortgage up to 97% of the value (ok, someone might be able to do 100% for you, you never know). This does not change the effect that the new rules have on values. The less buyers can afford, the less you can sell for.

For buyers, however, they will soon be seeing this "play out" in the form of falling condo prices. While we're all brainwashed into believing that prices are lower across the board, condos have not made the same kind of adjustment in the Chicagoland area as have detached homes, and that may be changing shortly...

Are 1st Floor Master Bedrooms Any HOTTER than the Rest of the Market?

The real estate market has benefitted from the Baby Boomer generation since their births caused the great housing boom after World War Two. As they've grown up and had families, they've been the largest economic catalyst in the modern era, with their luxury home, vacation home, and investment property purchases spurring the most recent boom. Experts have been predicting since well before the boom that the housing market would begin to pick up a trend of ranch homes, and first floor master bedroom homes, townhomes, and condos. With the first "official" baby boomers reaching the "senior" age range (62) this year, the purchase preferences of these buyers is more forward looking than ever. Empty nesters are often looking to move on from their 2 story home to downsize into something that gives them everything they want in terms of upgrades and ammentities, but with more lifestyle flexibility.

Now that the boom of housing has moved to what everyone hopes is the trench of it's decline, let's take a look at what many expect will be the economic engine of real estate's recovery: The 1st Floor Master Bedroom Home and Townhome [FFMH & FFMT]. By comparing the inventory level of these properties, with those of non-1st floor master properties [NFFH & NFFT], we'll be able to see if the trend is emerging, or if the experts' predictions are wrong. For the purpose of this analysis, we'll be examining the Tri-City area: St. Charles, Geneva, and Batavia, Illinois.

Looking at Figure 1, below, inventory levels and sale levels for NFFT's, with FFMT's below them. We can clearly see that at the present moment, the experts' predictions are not yet materialized. Townhomes are seen as more a promising housing sector for baby boomers, with the appeal of reduced maintenance, and lower expense during retirement years. Here, however, the number of homes on the market exceeds the prior six months of sales and contract activity by almost 5 to 1 for 1st Floor Master Bedroom Townhouses. Meanwhile, the general marketplace for townhomes over $300,000 is only a 4 to 1 balance between supply and demand. 1st Floor Master Bedroom Townhomes are presently demanded less than conventional townhomes that have 2 stories, with a master bedroom up at least 1 flight of stairs. We have seen townhomes inventory overall in check, but the over-$300,000 price range is clearly still in a strong buyers market.

Figure 1

On the other side of the coin, in Detached Homes, the entire market has been far from in-check during the market's decline. As seen below, in Figure 2, the FFMH and NFFH markets are at 4 to 1 and 3 to 1 ratios of inventory to demand. With a gross 798 actively for-sale homes of the NFFH variety, and 166 with first floor masters, buyers are in the drivers seat of the entire detached home marketplace.

Figure 2

Why is this the case? Are the experts wrong? I believe it is less to do with the preferences of baby boomers, as it is the effect that the housing market has had on their ability to execute purchases of homes that meet their evolving needs. Given the challenge they face in selling their existing homes, this trend is going to continue to lay in waiting for the boomer buying boom to come.

Condo's/Townhomes Vs. Detached Homes

As some readers may have noted, a trend has been playing out through this real estate cycle that deserves mention: Townhouses & condominiums are not in the same trough of this cycle as detached single family homes are.

St. Charles Detached Homes

St. Charles Attached Homes

In fact, attached houses are actually in territory that indicates they are neutral as to being a buyers/sellers market. This sample was taken of strictly St. Charles, Illinois, but I am seeing this play out through much of the suburban area. Looking at the market time statistics, below, one can see that attached properties are selling in less than 180 days, on average.

St. Charles Attached Market Times

Why is this happening? Three factors are at play- lower prices for attached properties put them within the reach of cautious first time homebuyers; todays buyer is looking for a more "move-in ready" home - less tolerance for major renovations that often come with older single family detached homes; and buyers often do not have time to do the yardwork and maintenance that goes along with a detached home. Today's buyer is changing, which has affected families and individuals selling their homes. With the challenges of being a "move-up" buyer in this market, first time buyers are a major driving force, despite the drastic reduction in their ranks due to the extinction of many high risk loan instruments that brought more first timers into the buying process than ever before.

[note: Market time statistics are problematic because of real estate agents cancelling or expiring property listings, and then re-listing them the same day. This is done in order to reintroduce a property to the "hotsheet." This is part of the reason that I utilize absorption statistics to indicate realistic expected market times.]

How are Chicagoland's Condos & Townhouses Selling?

Many home buyers today are looking to take advantage of great prices on condominiums and townhouses. When it comes to buying a condo, location is paramount, and different areas in Chicagoland are in very different stages of this downturn in the real estate cycle. Looking at a market's absorption rate tells you how "backlogged" the market presently is- How many properties are for sale, divided by how many have sold in recent months, and if that rate stays constant, how many months will it take to sell them all? This is a great indicator of future price direction, year-over-year improvement or decline, and the relative health of one area versus another.

Those of you wondering what makes a buyers market versus a sellers market? Absorption rates of well over 6 months should tell you that it is a buyers market. It is a buyers market in much of Chicagoland, but not all areas are created equal.

I've picked one community from North, Northwest, West, Near West, South West, and South Suburbs, as well as a popular Chicagoland neighborhood just outside of the loop. You will notice that the market has improved from the winter's heavy saturation, but pay close attention to where 2008 March statistics are in contrast to March of 2007. Just click on the graphs to see each one in greater detail. I sampled Evanston, Schaumburg, St. Charles, Oak Park, Naperville, Orland Park, and Lincoln Park.

Evanston

Schaumburg

St. Charles

Oak Park

Naperville

Orland Park

Lincoln Park

What should we make of all of this? It tells me that there is a looming reduction in list prices and selling prices coming out of the near west suburbs, and the southwestern suburbs.

Theory: Based on the perspective that the "epicenter" of values resides in Chicagoland's city limits, one assumes that prices become lower the further away one travels from Chicago. If one area has a higher inventory to be worked off, then prices will drop, causing the next-furthest area to experience a stagnation in sales. Then as that area accumulates inventory, sellers recognize the need to reduce prices. As they act, inventory drops, and the process continues. As an area further out drops in price and experiences a wave of inventory absorption, the desirability of the closer area then diminishes, as a longer distance from the "epicenter" becomes acceptable to homebuyers. This eventually causes the process to start over again - inventory builds at the epicenter, prices drop, and as buyers eventually reach their limit to how far they will live from the epicenter, they decide that as prices in the epicenter reach a lower level, justification for the still more expensive, but closer, purchase arises once more.

Absorption is just below the 6 month mark in Lincoln Park, and around the Northern and Western collars of Chicagoland it is hovering at or around 6 months. It remains at higher levels in the near west and southwest suburbs. Based on this ideology, it would seem that near-west suburbs may experience a period of depreciation, with the farther western and southwestern suburbs then experiencing a greater increase in inventory.

Is Chicagoland moving towards Milwaukee? Is Joliet and Kendall County growth justifying a Peotone Airport & subsequent Southwest suburban buildup? These trends strike down any notion regarding "The Loop" as the epicenter for real estate values, and the movement of values based on proximity to downtown Chicago. Any idiot knows that values vary drastically across the north and south sides of Chicagoland. If that is the case, then are these areas independent of one another in their progression through the real estate cycle?