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?

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.

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.

We recently updated our Chicago condo (2 and 3 bedroom units) market data through December 2009. Consistent with all the other positive indicators for the Chicago real estate market, we are once again seeing lower inventory numbers and market times.

Months of condo inventory in December was less than half of what it was in 2008, at a 14 month supply.

This is much better than in the summer when inventory levels were actually higher than the previous year. While units on the market are down slightly, the big impact is from sales that are running at about twice last year’s level.

Meanwhile, the days on the market are also dramatically better at just under 250 days. That’s still a lot but it’s also the best level since the reporting was modified in October 2007.

As always, you can find neighborhood specific data at the following locations. A few of these neighborhoods really stick out – e.g. the Near South Side.

• 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

There was a heated debate on Cribchatter the other day about home price declines in Lincoln Park. Everyone’s favorite Lincoln Park bull, going by the fake name of Steve Heitman, claimed that not only has Lincoln Park real estate held it’s value but that people were still making lots of money on their homes there. He proceeded to provide 4 examples of people who were selling their homes at a profit in the last 30 days. Of course, this unleashed a torrent of discussion. One of his examples proved to be wrong – the seller actually lost money – and “Steve” was also accused of cherry picking his examples.

Well, I did an analysis on Lincoln Park home values about a year ago and have been meaning to update it for some time now so this discussion finally motivated me to do it. Since “Steve” showed condo examples and since there are more condo sales in Lincoln Park than anything else I focused on condo sales – every closing in the last 30 days where prior sales data was available. This is what I found, sorted by prior sale date.

As you can see, pretty much everyone who bought a condo in Lincoln Park since April 2005 lost money in the last 30 days. (I should point out that the 1660 N LaSalle condo, shown selling at a “gain”, might very well have had substantial work done on it since being originally purchased – it’s hard to believe it gained that much value on its own.) On the other hand, eyeballing the data, the situation looks better today than it did a year ago. Homes don’t seem to have lost as much value in Lincoln Park as they were losing a year ago.

As the debate on Cribchatter did include a discussion of transaction costs and renting vs. buying, I will point out that when you take transaction costs into account the situation is even worse and renting would have been a better option during this period. However, 4 years is a pretty short time period and I would argue that, for people planning on staying in their homes for a while, they haven’t done too poorly in Lincoln Park. On the other hand, during this same time period average home prices in Chicago have fallen 15% according to the Case Shiller home price index and it doesn’t look to me like Lincoln Park has held its home values any better than the city as a whole.

Oh, one other caveat. Anecdotally, it does appear that people who bought condos in large buildings on busy streets may have gotten hit harder than those that bought in smaller buildings on quiet, tree-lined streets.

When we updated our Chicago real estate market statistics recently we noticed that the last 24 months of history for 2 – 3 bedroom condos (the sweet spot of the housing market in Chicago) had changed dramatically from the last time we updated these statistics.

The red marker on the graph marks the spot where the new market time data begins. After calling the data provider and launching a 2 day investigation we discovered that they had just fixed an error in the way that they determine the days on the market. The result is that the market times are now shown to be much worse than we had thought but they have also been exhibiting dramatic improvements throughout the course of 2009.

You can see a similar improvement in the Chicago housing inventory, though these statistics were not impacted by the change.

Condo market times are down and inventory levels are down since the beginning of the year. The number of condos on the market is down at the same time that the number of condos sold is up.

There are probably several factors at play here. Certainly the tax credit is helping sales volume and I believe that sellers who are not prepared to price their properties properly have given up on selling – for the time being at least. Many of them just can’t afford to sell at current market levels. Some argue that this represents a shadow inventory of housing that will come back to haunt us another day. However, while I think that may prevent real estate values from rising, I don’t think it’s going to further depress Chicago housing prices because these home owners have already demonstrated an unwillingness to sell at current prices.

As always you can find our housing market statistics for several Chicago neighborhoods at the links below:

• 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