There are a few statistical measures that realtors use to monitor the condition of real estate markets. Two of these measures are months supply of home inventory (how many months it would take to sell off the current inventory at the current sales rate) and market time (how many days homes have been on the market). Seems simple enough, right? Not so fast. Believe it or not there is plenty of room in defining these measures to make them look either better or worse.

Let’s start with months supply of home inventory. Realtors have access to a statistical tool that conveniently spits out months supply of inventory for just about any slice of the Chicago real estate market you might want. However, for purposes of this “official” calculation the tool starts with the number of homes on the market at any time during the month and then reduces that number by the number that went under contract during the month and the number of listings that expired. I guess the rationale for doing it this way is that this represents how many homes remain to be sold. The only problem with this approach is that expired listings were part of the overhang that needed to be absorbed during the month. The fact that sellers gave up on them doesn’t make that housing supply go away. Therefore, I think it’s appropriate to include them in the calculation. The graph below compares the two approaches for measuring months supply of condo (2 – 3 bedrooms) inventory in Chicago. As you can see, the more comprehensive measure is always larger than the official numbers – especially in the fall.

BTW, you will notice that the June home inventory level for Chicago is actually lower than last  year for the first time in over a year.

Then there’s the market time. The real estate industry’s official measure of market time is based upon the number of days that a home was on the market before going under contract. Therefore, it only measures the market time for homes that actually sold! So, it excludes all the homes sitting on the market unsold. Well, that seems sort of biased, doesn’t it – not that the real estate industry would ever want to paint a pretty picture of the real estate market? So I believe that it is more accurate to calculate the average market time of all homes – sold and unsold. This more accurately reflects the pain of home sellers. The graph below compares the market times in Chicago using the different methods. As you can see, it’s a fairly dramatic difference and the more comprehensive method also reflects the seasonality that you would expect to see in a measure like this.

Effective July 1, 2009 we have restated all of our statistics (current and historic) using these new methodologies. As always, you can find Chicago neighborhood specific real estate market data here:

• Edgewater
• Hyde Park
• Lakeview
• Lincoln Park
• Lincoln Square
• Logan Square
• Loop
• Near North Side
• Near South Side
• Near West Side
• North Center
• Rogers Park
• South Shore
• Uptown
• West Town

Did you ever wonder what happens at closing in a real estate deal?  Many think of it as a time where a bunch of documents are signed.  What does the signing of the documents actually accomplish?

Officially, a closing is the culmination of the entire real estate transaction and here is what happens:

• Documents that tranfer the ownerhsip of the property from one party to another (conveyance) and other required instruments are signed and delivered
• A monetary accounting is conducted between the parties based upon the Real Estate Settlement and Procedures Act (RESPA)
• Parties determine if condition of title is acceptable
• Funds are deposited with title company
• Money, in the form of checks is given to the Seller, Listing Agent, Selling Agent and on occasion the buyer, the buyer/seller attorney (referrred to as disbursements) per the HUD-1 by the Title company (escrowee) as directed by parties
• Ownership of the property is transferred
• After closing, the documents of conveyance are sent to the county recorder’s office for recording by the Title company

Below is a chart that shows the common costs in a real estate transaction along with who is typically responsible for paying them.  The chart was provided by First American Title. 

According to the Mortgage Bankers Association FHA and VA loans comprised 36% of the mortgage applications in the month of June – which is a lot. There’s a really simple reason for this huge share of the mortgage market and it should come as no surprise to anyone. Since banks have stopped loaning 100% or more of the purchase price to buyers and people have had to come up with real down payments the government is the only game in town for low down payment mortgages. And there is a huge demand for low down payment mortgages.

Now if you are selling a single family home it’s relatively easy for the buyer to get FHA financing – assuming the house is in decent shape. However, condos are a different animal. There are a whole host of reasons that a development won’t qualify and the condo itself can only be mortgaged for $410K.

So you would think that condo listing agents would be all over the FHA program to make sure that their listings are eligible for this government giveaway. But you would be wrong. We have buyers that need FHA financing and there is no point in showing them condos that won’t qualify. There’s actually a field in the MLS where the listing agent can check the types of financing options available but it’s rarely used and even if it is used the FHA option is overlooked. So the first thing we do is call the listing agents to find out if they think the development will qualify for FHA financing. And you would be surprised how often the agents don’t know and don’t seem to care to find out. Well, let’s face it. It’s only 36% of the potential buyers.

As of last Tuesday there is a way to trade houses just like you would stocks – sort of. A company called MacroMarkets has created two instruments that allow people to take positions that bet on the price of houses going up or down in 10 markets that comprise the Case Shiller 10 City Composite Index. The motivation for creating these instruments (aside from MacroMarkets collecting fees) was to permit homeowners to hedge their exposure to housing prices. These instruments are similar to ETFs in that they trade on the exchanges and their value is (loosely) tied to an index value, that being the 10 City Composite Index. The way MacroMarkets created these instruments is that they deposited money into two trusts – one of which represents an interest in the underlying index going up and the other representing an interest in the underlying index going down. Under the terms of the trusts, assets are passed back and forth between the trusts based upon whether the index goes up or down – i.e. when the index moves up money is transferred from the down trust to the up trust. Macromarkets then issued shares in each of the trusts – the MacroShares Major Metro Housing Up shares trade under the symbol UMM and the MacroShares Major Metro Housing Down shares trade under DMM.

Unfortunately, nothing in this life is simple. The devil is in the details. First you need to understand what comprises the Case Shiller 10 City Composite Index. It’s a weighted sum of the index for 10 cities as follows:

Composite-10 Market	Weights
› Boston:	0.07412188
› Chicago:	0.08886762
› Denver:	0.03682453
› Las Vegas:	0.01480245
› Los Angeles:	0.21161961
› Miami:	0.04986164
› New York:	0.27239040
› San Diego:	0.05513356
› San Francisco:	0.11787881
› Washington, DC:	0.07849949

As you can see it’s largely influenced by New York City, Los Angeles, and San Francisco – not exactly representative of the nation as a whole. Second, the trusts fluctuate in value based upon 3X the percentage change in the index – i.e. if the index moves up 1% the up trust benefits by 3%. Third, the benefit or detriment to the trusts is based upon the cumulative percentage change from the Starting Level of the index, which was somewhat arbitrarily set on February 24, 2009 when the index was 162.17. This level of the index corresponds to both the up shares and down shares having an underlying value of $25 each. Since the most recent index value was 150.34 the underlying value of the up shares is now $19.53. Fourth, the trusts terminate on November 25, 2014 when a payout is made to the shareholders based upon the underlying value of the trusts at that time. Consequently, the up and down shares will trade based upon investors’ expectations of the index value on the termination date – i.e. they will trade at a discount or a premium to the underlying value today. What that means is that in order for you to profit from these securities the index will have to move by more than what the market expected on the day you purchased them and it will have to move in a favorable direction. For example, if you buy the up shares the Case Shiller index will have to move up by more than what was implied in the price on the day you bought the shares. More on this later.

But wait, there’s more! The trusts can terminate early for any of 13 different reasons, including if the index drops below 108.11 or if the amount on deposit in the up or down trusts falls below $10 MM (someone at MacroMarkets explained that it is really based upon the combined value of the two trusts being below $20MM). Well, an index level of 108.11 corresponds to a further 28% decline in the index, which would put it back at June 2000 levels. So maybe that’s not that likely to happen. However, the trusts currently have only $20.5 MM on deposit between the two of them and there are two ways that it can fall further. One is through the redemption process, which is one of the mechanisms that is used to keep the two classes of shares priced reasonably (the other mechanism is the creation process which would increase the assets). The other way the value can fall is through a gradual erosion of value from the very high fee structure, which is 1.25% of assets plus $600,000 per year for each trust. Well, with only $20.5 MM on deposit this thing is on the hairy edge of termination. The last investment vehicle that MacroMarkets created like this, the up and down oil shares, recently died a similar death. And before it died the shares lost about 1% in value per month just due to expense erosion.

So what if the trusts terminate early? Well then, instead of your time horizon being November 2014, it suddenly shrinks to a much closer timeframe. While you might expect the index to move higher by 2014 you might not be as confident of that occurring in the next 3 months. So your entire investment thesis gets discombobulated.

If you can deal with all these nuances there might be a play in here for you. At the very least we might get some insight on what the price of these instruments tells us about expectations for the future. As of today the last trade for the up shares occurred at $14.00, which implies an index value of 135.6 at termination – another 10% drop from current levels. Only thing is we can’t really tell if that is a forecast for November 2014 or a forecast for an early termination before then.

The U.S. Department of Housing and Urban Development (HUD) issued a release which outlines upcoming changes designed to streamline the approval process for FHA financing for condominium projects.

Most notably, there is a provision stating, “Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100”, essentially lifting HUD’s long-standing policy of denying all condominium projects with a right of first refusal provision.

So, what does that mean to you, the consumer?  It means that more of the condo buildings that contained the right of first refusal clause in their bylaws, that were previously nearly impossible for a consumer to purchase using an FHA loan, will now be eligible for FHA loans.

The changes are set to be effective October 1, 2009.

You can read the entire release here.