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!

Despite, and in some cases because of, all the turmoil in the mortgage markets there are still creative ways to finance a real estate purchase in the Chicago market if you know where to turn. We work with a few different lending professionals that keep us in the loop on the current alternatives available.

For instance, Tom Fishwick of Guaranteed Rate tells me that he still has the ability to do 97% financing with borrower paid mortgage insurance. However, only one lender out of the 40 he works with and one mortgage insurer out of 5 will currently back such a loan and I imagine it’s only available for people with very good credit scores. Of course, his fear and mine is that this type of loan will disappear any day as the mortgage situation continues to deteriorate.

Tom also shared with me some updated pricing of FHA loans where borrowers can get up to 97% financing if their credit score is above 499 (you can also get loans with scores below 499, but you need a bigger down payment). However, there is a mortgage insurance premium that depends upon the loan to value ratio and the borrower’s credit score. There is an up front premium that ranges from 1.25% to 2.25% of the loan amount and an ongoing premium that ranges from 0.50 - 0.55% of the loan amount on an annual basis. The other trick is that the home must be FHA approved, which is usually not a problem unless it is a condominium. Then you get into a whole range of additional issues that I just don’t want to get into here.

This week I also heard Barbara Fifield of Chicago Bancorp who told me about a new program they are offering for people at the other end of the financial spectrum. This program allows buyers to borrow up to 80% of the value of stocks deposited with the lender with no income or credit score. However, this means that the stocks that are deposited can no longer be traded, though you still collect the dividends from them. In addition, as you can imagine, if the price of the stock goes down by more than 20% you have to come up with additional collateral - or they can sell off your stock and pay down the loan.

Regardless of how bad the mortgage situation gets people will always come up with creative ways of keeping the business running.

As I promised in part I of this series there is plenty to write about regarding how the real estate industry uses statistics to propagate lies and myths. Today I’d like to call your attention to an NAR sponsored Web site: www.housingmarketfacts.com, the goal of which is to talk up the real estate market. Nothing like an unbiased source of information.

Here are some of the “facts” found on this Web site:

More than three-quarters of all recent buyers believed their home purchase was at least as good as an investment in stocks. So…when three-quarters of the world thought the world was flat that made it true? It is incredible that they can even publish such a statistic. In the last 10 years this belief was probably justified but in the long run it’s simply fantasy. As I’ve pointed out before, in the long run, after adjusting for inflation, housing has had a zero return.

According to the 2007 NAR Profile of Home Buyers and Seller, first-time home buyers made a median down payment of 2 percent, while repeat buyers who financed their purchase put 16 percent down, indicating the wealth-building effect of homeownership. Well it’s bad enough that they even report this statistic in the first place but it’s really sleazy to add in their own, highly-suspect conclusion at the end of the sentence. In all likelihood the higher down payment has nothing to do with the wealth building effect of homeownership. It has everything to do with the forced savings of monthly mortgage payments and the fact that repeat buyers are older and more successful for other reasons. Do you think that maybe upwardly mobile consumers are more likely to move around?

Homeowners benefit from the power of leverage. Over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5% would return nearly 5 times the stock market return, at $110,300. Oh….my….God. This thing is wrong on so many levels I don’t know where to begin.

1. Their math is wrong, though directionally correct. The stock market return under their assumptions would be almost $26,000 and the return on the home would be almost $136,000.
2. 5% annual home appreciation is way too generous so there is nothing “normal” about it. For instance, for the 10 year period beginning in January 1987 the average appreciation for the 10 city composite in the Case-Shiller index was only 2.2%. At that rate the $10,000 down payment in their example only returns a bit under $59,000.
3. They are assuming 20 x leverage (5% down). You can leverage your stock investments as well and if you use 20 x leverage then that stock return would be almost $329,000.
4. Of course, using 20 x leverage is just not smart. It cuts both ways. If your investment goes down by 5% you are wiped out. That’s sort of what happened to people in the last couple of years.

I’ll save the rest for part III.

Although my last post provided 3 different sets of data that suggest that Chicago housing prices will continue to decline the local employment numbers actually paint the opposite picture. A while back I wrote about how employment in Chicago is a primary driver of housing demand. Surprisingly, a few months later the numbers continue to look encouraging. As you can see in the chart below the trend through April (the most recent month available) is still up.

On a year over year basis April employment is up 1.5% over April of the previous year. Although the growth rate has slowed in Chicago employment is still growing - to the tune of almost 70,000 people in the last year. All those workers need a place to live, which may explain why home prices haven’t declined more than they have. Of course, those 70,000 people are spread out over a large area that includes all the surrounding suburbs and Joliet but it’s still a large number. The question is whether or not those extra workers are going to absorb the excess inventory that is on the market right now.