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February 8th, 2010 by Sari
Last October, I wrote about an outrageous mansion, Villa Taj in Burr Ridge. Since then I have obtained some interesting tidbits of updated information.
- The auction reserve price was $12 million dollars – the auction failed
- The current broker thinks the place could be sold for scrap for a mere $6mm
- The seller isn’t entertaining any potential buyers who can’t back up their interest with a $10mm documented net worth
While the cooperating commission is not published my guess is about 1.0-1.5% on a sales price around $10mm, which of course, we’d split with you if we represented you in the transaction. When I first wrote about this home, I thought it would sell for north of $12mm. My optimism has diminished.
Posted in Bizarre, Financial Considerations, Market Insights, Way Cool | No Comments »
February 6th, 2010 by Sari
Seriously though, the government has again ramped up their efforts to help the millions of Americans who are upside down in their mortgage and need to sell for reasons of financial hardship. Yet another acronym lurks…HAFA which stands for Home Affordable Foreclosure Alternatives Program goes into effect April 5, 2010. HAFA is designed to simplify and streamline the short sale process/transaction. While there are 43 pages of guidelines to review, below are some of the changes that are key to helping streamline the current process of completing a short sale.
- The banks will now tell the borrower (or borrower’s real estate agent) the net figure required to complete the sale prior to the borrower listing the home. This is huge, since in the past in most cases borrowers had no idea what amount the bank would accept and the home sat on the market because it was overpriced or the bank took more than a month to respond.
- The new laws requires banks to fully release borrowers from future liability for the first mortgage debt. No cash contribution, promissory note, or deficiency judgment is allowed.
- New forms were created to standardize the process. With the new forms comes standardization of responses times for each step in the process.
- HUD now provides financial incentives to get the short sale completed – $1,500 for borrower as “relocation assistance”, $1,000 for servicers to cover administrative and processing costs, and up to $1,000 for investors.
Oh, and a nice bonus included in this program is that banks can’t ask the real estate brokers to cut their commission anymore. That is if the broker is charging 6% or less on the listing agreement. And ya know, 3% is fair compensation to an agent having to guide a buyer or a seller through the short sale process.
Officially, the program does not take effect until April 5, 2010. However, banks can start offering this earlier if they meet requirements. In fact, I’m certain that they are already using the new process because we have more than one client in this situation. You can learn more about the government programs at MakingHomeAffordable.gov.
Posted in Financial Considerations, Government Programs, Mortgages, Tax | No Comments »
February 4th, 2010 by Gary Lucido
As part of my ongoing rant about the high condo assessments in Chicago I’d like to revisit a topic I covered a while ago – what is the appropriate tradeoff between price and assessments? In that previous post I got into some fairly esoteric finance details about discounted cash flows and perpetuities that may have made the decision process seem a bit unreal. However, in discussions with a current client, I came up with a more concrete analysis that looks at what the impact of different assessments might be for a typical buyer with a finite time horizon.
In the example below I look at a theoretical high income buyer facing a choice between two condos, with one condo having assessments that are $100/month higher than the other. Given that the buyer is only going to live there for 5 years, the question is how much more can the buyer spend on the condo with lower assessments and still have the same monthly expenses, if the mortgage rate is 5%. In addition, are there any other economic considerations?
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Unit A |
Unit B |
| Price |
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$ 500,000 |
$ 541,311 |
| Mortgage Rate |
5.00% |
|
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| Monthly P&I |
|
$ 2,684 |
$ 2,906 |
| 5 Year Average Monthly Interest |
|
$ 2,006 |
$ 2,172 |
| Tax Bracket |
36% |
|
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| Initial Assessment |
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$ 600 |
$ 500 |
| 5 Year Average Assessment |
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$ 637 |
$ 530 |
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| After Tax Annual Cost |
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$ 23,047 |
$ 23,047 |
|
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|
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| 5 Year Appreciation @ |
3% |
$ 79,637 |
$ 86,217 |
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|
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| Appreciation Benefit |
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$ 6,580 |
I factored in the buyer’s tax bracket because of the deductibility of mortgage interest. The impact of the deductibility is to make mortgages more attractive relative to assessments for high income buyers than for lower income buyers. I made a few simplifying assumptions as well: that assessments and the value of the condos would go up with the rate of inflation, assumed to be 3% per year and, that for purposes of this analysis, we could just look at an average of the monthly interest and assessments.
The conclusion is that you could spend an additional $41,000 on the condo with the lower assessments, have the same monthly after tax monthly expenses, and end up with an additional $6,580 of appreciation at the end of 5 years. In other words, think long and hard before signing up for a condo with high assessments.
Tags: Assessments, Condominiums, Condos
Posted in Assessments, Condos/Townhomes, Financial Considerations, Home Ownership Costs | 2 Comments »
February 1st, 2010 by Gary Lucido
Crain’s came out with a story today about how the Chicago housing market won’t recover until 2013. This comes at a time when many statistics have been released and there has been a lot of debate regarding the interpretation of those statistics. Since I have recently been providing the bullish perspective on the housing market in Chicago I thought I should give equal air time to the other point of view.
The Crain’s story includes outlooks and analysis from John Burns Real Estate Consulting, Economy.com, First American Core Logic, Realty Trac, and Fiserv Inc., which calculates the Case Shiller home price index. In a nutshell:
- According to John Burns, existing Chicago home sales won’t start to rise until 2011
- According to Fiserv, Single Family Home prices in Chicago will continue to decline another 5.7% before heading back up
- Chicago homes are still expensive relative to incomes. From 1980 to 2000 the median home was 2.6 times the median income but currently that ratio is 3.3 (and that’s down from a peak of 4.2 in 2005)
- The home ownership rate of 69.3% is well above the more normal 65% level. If you believe that the incremental home ownership was driven by reckless lending to people who can’t afford to own a home then you can expect that percentage to drop – the hard way
- The number of foreclosures in Chicago was up 33% in 2009 and that will continue to drag down prices
- More foreclosures are expected because 21% of all Chicago mortgages are underwater
- Unemployment will drive even more foreclosures, with the rate peaking this year at 11.5% from the current 10.6%
Those do seem like pretty compelling arguments. On the other hand, a 5.7% drop isn’t that much, so if you are trying to find the exact bottom of the market you could easily miss it.
Posted in Market Insights, News | No Comments »
January 31st, 2010 by Gary Lucido
Earlier this week I received a lot of flack on Cribchatter for focusing exclusively on the Chicago Case Shiller index for Single Family Homes when Chicago’s housing stock is largely condos. Case Shiller provides a separate index for condominiums, though it only goes back to January 1995, while the Single Family home index goes back to January 1987. “G” pointed out that the condo data suggests that condominium prices have not bottomed in Chicago.
So I promised to take a more in-depth look at the data. Herewith is the condo index superimposed upon the single family home data, along with the trend line for single family homes.
I should first point out that these indices are normalized to 100 for January 2000, so they arbitrarily cross at that date. What you see from this graph is that condo prices have tracked pretty closely with single family prices until the bubble really took off, at which time single families went a bit higher. Subsequently, single family home prices dropped much more than condo prices until today when the single family index is below that for condos. Both indices hit a low point in April of 2009, after which they began to recover, recently they declined a bit more. Based upon this “G” suggested that the condo index has a really good chance of hitting a new bottom.
In order to gain perspective on that claim I tried a couple of different analyses. First, I looked at the historic ratio of the two indices – the single family home index divided by the condo index. Since in the long run the two classes of housing should appreciate at the same rate one would expect the ratio to fluctuate around a constant value.
The only “normal” period is from 1995 – 1998 (pre-bubble), when the ratio of the indices averaged 1.027. That’s a pretty short period in which to attempt to determine a normal ratio. After that you can see how the ratio peaked at 1.05 as single family home prices grew faster than condos and then dropped to almost .9 as they crashed faster than condos. However, even if we expect the ratio to climb back above 1 there are two ways for that to happen: either single family home prices can climb or condo prices can fall further. Given that the single family home price index is well below the trend line I would expect the former.
The other perspective I tried was to develop a trend line for condo prices. Since we don’t have much history I borrowed the single family trend line and adjusted it for the average ratio of the two indices from 1995 – 1998.
Based upon this trendline it looks like condo prices in Chicago have returned to trend. Of course, that doesn’t mean that condo prices can’t fall below trend but I can’t believe they can fall much further. While single family homes overshot on the downside, they were falling from a bit higher level than condo prices. I would also expect the two classes of housing to be subject to the same economic factors – i.e. they peaked around the same time and they both hit a low point in April. Perhaps they are climbing out of this quagmire together.
We should know a lot more in the next few months.
Posted in Condos/Townhomes, Market Insights, News | No Comments »
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