This week’s Crain’s ran a story on the continuing demise of the downtown condo market. According to data from Appraisal Research Counselors sales of new downtown homes (i.e. condos) sank “73% to a record-low 685 units during the first six months of this year” compared with the first half of 2007. Here is the data:

And of these 685 units more than half were from the Chicago Spire. Given that construction cranes continue to fill the skyline and existing units continue to be foreclosed it’s a mystery how they are going to ever sell all these new units.

One would think that a) this is good news for affordability and b) this will eventually depress prices in the areas of the city that have thus far been immune from the price declines - e.g. Lakeview and Lincoln Park.

Recently the Bureau of Labor Statistics released their June numbers. For the first time in a while employment levels in the Chicago metro area actually declined year over year - not by a huge amount but by 12,500. The unemployment rate surged to 7.1% from 6.3% the previous month but this was more a result of a large increase in the labor force that was not fully absorbed. Updated statistics of this and other measures significant to the real estate market are compiled here.

Nothing irritates me more than a lack of basic ethics among certain Chicago real estate professionals. It’s an endemic problem in the industry, and one that motivated me to enter the industry. However, maybe there’s such a thing as real estate Karma, as my recent experience with a certain real estate developer has led me to believe.

The names in this story are being withheld to protect the guilty and to protect me from a slander lawsuit. Of course, if it’s true then it’s not slander but then I would have to pay my lawyer to prove it and I like my lawyer but I would rather not pay him for defending me against a slander claim.

The story begins with my client who was looking for a condo. We finally found what appeared to be a nice garden unit. However, on a subsequent visit to the property we encountered one of the other residents of the building who not so subtly let it be known that he and his wife were having issues with the developer. They had been the first people to buy in the building and they had a laundry list of problems that they felt the developer needed to address. However, according to them, the developer was either not responsive or didn’t fix things properly. Since they mentioned that many of these issues had been uncovered during an inspection of the property I asked them if I could see a copy of their inspection report. Karma #1: the developer had unresolved issues with a buyer and now it was coming back to haunt them. Oh…did I mention that the property had been on the market since August of 2007, starting at $219,000 and was now listed at $169,000?

I then went through this issue list with the developer who either claimed that the issues had subsequently been fixed or that they really weren’t problems or that they would be fixed. My client and I discussed our strategy and decided to make an offer contingent upon some important subset of these issues being fixed. Once we did that it became much clearer exactly where the developer was on each of these issues and what they were willing to do: not much. In addition, some problems that were supposed to have been fixed “next week” had still not been fixed. So our mistrust of this developer was growing rapidly. I’ll skip past a few rounds of negotiations but let’s just say that we dropped our upper limit in order to compensate for the problems and our mistrust of the developer.

Finally we agreed on terms and scheduled the inspection but between the last time we had seen the unit and the inspection it had rained - rather heavily. I think you can see where this is going - especially since this was a garden unit. When the inspector arrived he didn’t even set down his bag before pointing out that not only did the unit have water damage but that there had been an attempt to hide it. The lower two feet of many of the walls had been repainted. The inspector also found evidence of mold and, as a side note, there were serious deficiencies in the electrical wiring. That’s 3 material defects that are required disclosures by law.

We ran into that other resident of the building again and he confirmed that he had seen workmen in the unit during the past couple of weeks replacing carpeting and drywall - repairs that are purely cosmetic and won’t stop the water from coming in. I think that pretty much killed the deal right there. Within a week the listing price dropped to $159,000 and a week later it dropped to $155,000. Did I mention that when I went by the developer’s office to present the offer there were several large Mercedes in the parking lot?

Fast forward to Monday of this week. It rains in biblical proportions. Tuesday morning the listing on this unit is canceled. Coincidence? I think not. Let’s just say that in response to an inquiry my sources have now confirmed that there was extensive damage to the unit and once again the developer is making cosmetic repairs. Karma #2: they didn’t fix it correctly and now they are having to fix it again.

This is a rather interesting situation. The developer is required to disclose these problems to potential buyers. Think they will? If they don’t they can be sued by the buyer. If they do who is going to buy the place? Or will the developer just throw in a lifetime supply of drywall and carpeting? If the developer doesn’t fix the water leakage do they expect the condo association to fix it? There is a paper trail a mile long documenting this problem and there are numerous witnesses to the aftermath. Think the association will allow themselves to get stuck with this problem?

What goes around comes around.

There are a number of statistics that are reported monthly that are of interest to potential and current homeowners. Everyone seems to want to know where the real estate market is going. Therefore, we have collected all the relevant Chicago area real estate market data in one place and will keep them updated monthly. We have included monthly data on the Case-Shiller Home Price Index, unit sales, and employment.

On an ongoing basis you can find this page from our useful links on the bottom right of this blog and also from our resources page (link in top menu bar).

If you have any questions just contact us.

We just launched a new, fun feature on our Web site where people get to demonstrate their real estate prowess with virtual dollars and also help us all get a better grip on home prices in the Chicago area. It’s called Price This Home.

This new feature was created based upon three simple facts:

1. When it comes to real estate everyone is an expert - or at least they think they are
2. A group of people can produce better estimates or answers than the average individual (that’s actually a fact)
3. Chicago homes just aren’t selling these days and it’s often because they are mis-priced

Enter prediction markets, which are sort of like futures markets - you know, where all those traders yell at each other about pork bellies. It is said that you can get a more accurate weather forecast for Florida by watching orange juice futures than you can by listening to the national weather service. Well, that shouldn’t be a surprise. After all the NWS is part of the government.

Participants in a prediction market buy or sell “contracts” with either real or virtual money based upon their outlook for certain events - e.g. who will win the presidency. The investment activity influences the value of the contracts, which represent the predicted outcome. For instance, right now Obama contracts on Intrade sell for $.65. If you buy these contracts and he wins you get $1.00 for every $.65 you invested. If he loses you get nothing. Therefore, a contract value of $.65 represents the consensus view that he has a 65% chance of winning.

The really cool thing about prediction markets, just like the financial markets they emulate, is that over time the people who are really good at predicting stuff end up with more money. And people with more money in these markets have more influence over the consensus prediction.

So we thought we would apply this concept to estimating home values in the Chicago area. Here is how it works. When you sign up with Price This Home you receive 5,000 virtual prediction dollars which you can then invest in various home price contracts. For each contract you either buy it in the belief that the ultimate sales price is going to be higher than the current prediction or you sell it in the belief that the ultimate sales price is going to be lower. The market price then moves in proportion to the size of your investment and you either make or lose money based upon how accurate your prediction is.

We are starting out with just a few homes in the market but if there is a lot of interest we will add more. Give it a try and have fun!