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.

The Realtor associations have been harping on the message that real estate is local. This is their way to diffuse all the panic about home prices dropping by getting people to ignore the national pricing data. Of course, people will ultimately look at their local data and for most of the nation the answer won’t be much different. And the answer is not much different when it comes to Chicago real estate either.

However, as I have observed in the past some of the Chicago communities have been weathering the real estate storm quite well. So I decided to investigate a few communities in a bit more detail to see exactly what the differences were and confirmed that not only is the Realtor mantra true, but it’s actually true down to the community level in Chicago. This is one of the few times that I actually agree with the industry’s proclamations.

I looked at 2 - 3 bedroom condos in Lakeview, Lincoln Park, and the Near South Side. The first thing I examined was median price trends, which, as I have often pointed out, is a seriously flawed measure. However, it’s the only price measure available to us at the community level. What it shows is that median prices have actually trended up in the last 2 years, which probably means nothing more than the mix of units sold is skewing higher.

The next thing I looked at is how fast homes were moving in the different areas. This is where the real differences became apparent. I have added graphs at the bottom of the following community profiles that show the trends in months of supply and days on the market:

• Lakeview - The real estate market in Lakeview appears to be relatively stable, with homes that go under contract doing so within 60 - 90 days. And as recently as May 2008 there was only a bit over 4 months inventory on the market.
• Lincoln Park -During the past year the number of days to contract has actually drifted down. However, at the same time the months of inventory has increased, with August 2008 at 7.8 months vs. August 2007 at 4.6 months. That indicates that supply and demand are increasingly out of balance at current price levels. It is still possible to sell a home quickly but it’s going to have to be priced correctly or the right buyer is going to have to come along.
• Near South Side - This area has had a very large home inventory over the past 2 years, never dipping below a 10 month supply and a few times spiking to a 3 year supply. In August 2008 home inventory jumped to almost 22 months, which is higher than August 2007’s 19 month supply. At the same time the number of days to contract has been highly variable but recently has hovered around 300 days.

While Lakeview remains unscathed by the real estate crash, Lincoln Park may be turning the corner for the worse, and the Near South Side is already in the doldrums and heading further downhill.

This week’s Crain’s ran a story on the continuing demise of the downtown condo market. According to data from Appraisal Research Counselors sales of new downtown homes (i.e. condos) sank “73% to a record-low 685 units during the first six months of this year” compared with the first half of 2007. Here is the data:

And of these 685 units more than half were from the Chicago Spire. Given that construction cranes continue to fill the skyline and existing units continue to be foreclosed it’s a mystery how they are going to ever sell all these new units.

One would think that a) this is good news for affordability and b) this will eventually depress prices in the areas of the city that have thus far been immune from the price declines - e.g. Lakeview and Lincoln Park.