I run into a fair amount of discussion about how the olympics being held in Chicago in 2016 would be such a boon to real estate values on the south side. Interestingly, everyone believes that hosting the olympics would benefit home values but I haven’t really heard any discussion of exactly how this works. Presumably, the construction, the activity, the redevelopment of a few key areas, the attention, and the proximity to a high visibility event would raise all boats.

The following map from Crain’s shows the plan.

As you can see, the affected areas on the south side would be Douglas, Kenwood, and Hyde Park.

As I have often said, people shouldn’t think of a home purchase as an investment but rather as a place to live. For one, you wouldn’t want to live in a community in which you were not happy just for the promise of a future investment return. Secondly, there is clearly no way to know ahead of time what purchase is going to provide a great return, if any. In the case of the Chicago olympics I can imagine a scenario whereby, after the olympics are over and they dump 5,000 former olympic village units on the market as condos, home prices plummet on the south side.

Nevertheless, everyone would like to know what the odds are that the olympics will be held in Chicago. As of the time of this writing there is a 65% chance. And how do I know this? Well, there is a prediction market called Intrade where people trade contracts on events like who the International Olympic Committe will announce as the host of the 2016 olympics on October 2, 2009. Much like a futures market, a prediction market trades contracts which will settle at some date in the future at a price determined by some future event. In this case, the 2016 Olympics in North America (Chicago) contract will settle at either 100 if Chicago is selected as the olympic host or 0 if some other city is selected. In the meantime the contract trades at a price that theoretically represents the probability that Chicago will be the 2016 host because the contract price represents the collective wisdom of everyone trading this contract. If someone believed the probability was significantly different than the contract price then it would make sense for them to either buy or sell the contract because of the favorable odds. This would then drive the price towards their perceived probability. The graph below tracks the current Chicago olympics contract in real time so that you can get a sense of what “the market” believes the current odds are. 

Looking closely at the graph above you can see that the contract price recently rose about 20 points right after the election. The reason for that was that there was a belief that Barack Obama would participate in the Chicago presentation to the International Olympic Committee and that that would help seal the deal.

Well, 65% odds is clearly not a sure thing and as you can see above the odds fluctuate quite rapidly. So this should convince you of one thing: gambling on the olympics coming to Chicago when buying a house would not be a smart move.

I think Mick Jagger might actually know a bit more about the housing market than our politicians. In case you can’t already see where this is going let me spell it out for you: “You can’t always get what you want but if you try sometimes you just might find you get what you need.” In this case what we need is for the housing market to clear and, unfortunately, that is not consistent with stabilized home prices, which is what everyone wants. And in this highly charged political season politicians want to give people what they want, not what they need. So we hear endless lamentation about how we are not going to solve our economic problems until we stop the decline of home prices and everyone is floating ideas about how to prop up the housing market.

No surprise that the NAR is also getting in on the action with their 4 point plan for government handouts to the real estate industry. More on that another day.

Unfortunately, all this is a bit like trying to build a city below sea level in the path of numerous hurricanes. Wait a second…don’t we do that also? The fact of the matter is that sooner or later nature has to take its course. Home prices have to seek their natural level. They expanded at above-trend rates and now they need to return to the trend line, which is a bit below where they are now. Driving this was an unnatural growth in home ownership levels above the norm of the last 40 years as demonstrated in the chart below from the Federal Reserve Bank of St. Louis.

It should be no surprise that during this period the affordability of homes declined.

Now, as the real estate market attempts to cope with these imbalances, we find buyers and sellers at a stalemate and transaction volume has dried up. Politicians can pull all the rabbits out of the hat that they want: tax credits for homebuyers, Fannie and Freddie support for the mortgage market, government purchases of mortgages, etc… However, they can’t stop the ocean from seeking the lowest level. Nothing will return to normal until prices return to normal. And normal prices will be a good thing. For instance, homes can once again be affordable for people with good paying jobs.

During the last 10 years or so the country made poor financial decisions to put too many people in their own homes and to build bigger homes than people really needed. Instead of investing in our infrastructure we invested in granite countertops and marble showers. So today we find ourselves with vacant homes, collapsing bridges, and roads full of potholes. If the government wants to stimulate our economy they would be better off investing in our infrastructure than in more homes.

Speaking Of Potholes

While perusing David Dalka’s Internet Marketing Blog the other day I noticed several links to sites for reporting potholes and even filing a claim for vehicle damage from potholes. Sounds like a great idea. However, I attempted to file a claim about 6 months ago using the process outlined on one of those sites after my car was nearly swallowed by a giant sinkhole. OK, maybe I’m exaggerating a little bit but I did blow a tire. After dutifully taking my pictures, attaching a receipt, filling out the form, and sending it in I’m still waiting. However, I wouldn’t let that discourage you. Maybe if they get enough forms in the mail they’ll have to do something about it.

As you may have already figured out I don’t exactly adhere to NAR’s, IAR’s, and CAR’s policy of talking up the real estate market in order to drum up business for Realtors. However, as I expand our Web site’s Chicago community housing market profiles I’m not finding a lot of evidence of the end of times - at least not in most of the communities I happen to be analyzing at this time. This is not to say that there aren’t severe problems in some areas of Chicago. It’s just that the more centrally located areas seem to be hanging in there - so far.

First, I should explain that there is a bit of a challenge in summing up the market conditions at the community level. There are no reliable price indices you can look at at this level and I am not a fan of examining median prices because they are so heavily impacted by the mix of homes sold (if lots of expensive homes are sold it raises the median price). You can get a sense of what’s going on by comparing current individual sales to their prior sales but there’s no way to summarize this information. I will say that this anecdotal information seems to support the idea that prices are soft but not plummeting.

Therefore, as a proxy, I rely upon monitoring the trends in housing inventory and the number of days that a home, that is sold, is on the market. The idea is that when these metrics rise it’s an indication of a market in trouble. And I report these statistics for 2-3 bedroom condominiums since condos represent such an important part of the Chicago housing market. I recently updated these real estate statistics for the following Chicago communities:

• Lakeview
• Lincoln Park
• Logan Square
• Near South Side
• West Town

The ongoing list can be found in our Chicago community profiles section. At the time of this post we only cover the above communities but we hope to expand this quickly.

The data shows that the housing market in most of these communities has yet to show signs of stress. The one exception is the Near South Side, which includes the troubled South Loop. Check out the graphs.

…Happy Days Are Here Again.

Well, that might be a bit of an overstatement but not by much. In reaction to the Fannie and Freddie takeovers bank stocks were up today and so were homebuilders. In fact, Toll Brothers (luxury homebuilder) was up 9.4%, reaching its highest level in more than a year. The reason for all the optimism is that some folks are predicting that mortgage rates will drop by a full percentage point in the next week or so as the governement’s actions reduce the risk of funding mortgages. So this would appear to be good news for the housing market.

Could this be the bottom of the housing market? Not so fast!

The fundamental problem is that all this appears to be the very visible hand of the government interfering with the markets and artificially supporting housing prices. It might work for a while but in the end houses must be priced in accordance with fundamental values. And if prices are being propped up for now then it just means that the day of reckoning has been postponed. Either they will ultimately come down or they will stop moving up until fundamental value catches up with prices.

The US Treasury just announced a plan to place Fannie Mae and Freddie Mac into conservatorship - whatever that means. As explained in the Wall Street Journal the plan “provides as much as $200 billion of new capital plus new credit lines for the country’s main suppliers of funds for home loans … and puts the two companies under management control of their regulator, the Federal Housing Finance Agency, or FHFA.” As part of the plan they are replacing top management of the companies and suspending dividends on the common and preferred stocks. Presumably common stockholders are going to get wiped out. I sure hope this is the case as taxpayer dollars should not be used to benefit stockholders. Besides, I own Fannie Mae puts so I’m hoping the stock goes to zero. We’ll see what the market thinks tomorrow.

This action was absolutely necessary as the mortgage market is becoming paralyzed. However, there is one deeply disturbing aspect of this plan. The WSJ reports that “The Treasury also plans to buy an unspecified amount of mortgage-backed securities issued by Fannie and Freddie in an effort to bring down borrowing costs for home buyers.”

Whoa!!! What’s this? The government is going to further subsidize home purchases? It’s not the place of the government to lower home owenership costs. All this is going to do is slow down the housing market’s adjustment to rational prices. Home prices have at least another 10% to fall, and in the end help solve the housing affordability problem for millions of Americans the right way. Instead taxpayers are going to end up holding the bag on homeowners behaving badly.