Around a year ago, I wrote about a 30,000 plus square foot home fit for only a king, Villa Taj in Burr Ridge.  In February, with a potential client trying to buy the place for $6mm, I learned that the seller wasn’t entertaining any potential buyers who can’t back up their interest with a $10mm documented net worth.

As of August 13 2010, the auctioneer has listed the property on the MLS for $13mm.  My guess of the place selling for $12mm may not be so far off.  As suspected, the co-op commission is listed as 1%.  That means buying the place using a traditional agent, the buyers agent gets paid $130k.  We think that is a bit much and under our model we’d rebate at least 50% of that amount to our client who closes on the purchase of this home.

Chicago, IL (PRWEB) September 20, 2010 - Today, Lucid Realty, Inc. announced the results of its August Chicago Real Estate Market Summary, compiled from 4 different data sources. The real estate market summary contains 7 different indicators of the residential housing market.

“For the fourth month in a row Chicago’s real estate indicators have remained negative. This is the logical consequence of the ill-advised government intervention in the housing market ending. It’s only a matter of time before these negative trends are reflected in lower short term prices”, said Gary Lucido, Lucid Realty co-founder and President. “However, we believe the longer term outlook is still positive, given record low mortgage rates and home prices well below the long term trend line for Chicago.”

Read more about the Chicago Real Estate Market Summary…

A little background on mortgages: There is a primary and a secondary market for mortgages. Banks such as Chase loan money to consumers (primary market), then sell those loans to secondary mortgages holders such as Fannie Mae or Freddie Mac. This provides Chase with money to continue offering loans to additional borrowers; the cycle continues. Even though Fannie Mae and Freddie Mac own a majority of the mortgages out there, they still enlist the help of banks to service their loans. For example: Chase may give you a mortgage and then sell the mortgage to Fannie Mae. At that point it is very common for Chase to act as a front for the loan, providing you, the borrower, customer service, the ability to monitor your loan, etc. This also gives Chase a chance to retain you as a customer and market additional services to you; a win-win for the banks. It is also important to note that if Chase wants to resell your mortgage they have to make sure that they lend you money based on guidelines set in place by the secondary mortgage company who will be buying it; in this case Fannie or Freddie. If Chase plans to keep the mortgage themselves, they do not have to conform to these lending guidelines.

HAFA Shortcomings

Opt-In

The HAFA program is opt-in for non-GSE mortgages. After the guidelines were put into place, there was an almost nonexistent response from banks who were already slammed with too much work. As a result, very few banks leapt at the idea of completely re-working the procedures they have been hacking together like a patchwork quilt for the past year or so; especially with one that has no track record to prove a direct benefit to their bottom line.

Learning Curve

Since the policies and procedures of these guidelines are largely untested they are constantly going through revisions. If anything this will discourage banks from participating until the revisions taper off, if ever. There is no way to test these policies except in real life scenarios and selling a financial institution on the stability of standardization, while simultaneously enduring frequent revisions, will be tumultuous at best.

Inconsistent

The fact that the HAFA guidelines for Fannie and Freddie have variations from the HAFA guidelines for non-GSE mortgages is a mistake that needs to be remedied. How can you wave a banner of standardization while at the same time have variations under the same name? Also, banks that service Fannie and Freddie loans will be required to conform to the GSE version of HAFA on loans they wish to resell and continue to service. One question that lingers unanswered in my mind is: If Fannie or Freddie strikes a deal for a bank to service a loan that wasn’t originated by that bank (common), will that bank need to be GSE HAFA “certified” on all of their loans? The answer is important, because if Fannie and Freddie require banks that service their loans to be GSE HAFA accountable, it would be a huge boon for the efforts to standardize the industry as a whole. If the answer is that banks servicing Fannie or Freddie loans can opt-out on all non-GSE short sales this would impede movement toward standardizing the short sale process, which is supposedly the goal of both HAFA programs. If the new GSE HAFA guidelines do not require banks that service their loans to be consistent with the way they handle all of their short sales it opens huge doors for banks to rob consumers out of their portion of the HAFA guidelines depending on what’s best for the bank.

Banks Have Too Much Control

On many mortgages, it may be financially beneficial for banks to opt-out of HAFA. For example: The proposed incentive is $1500 given to a bank for conforming to HAFA guidelines on a short sale ($2200 for GSE HAFA). These guidelines also protect Realtor commissions up to six percent, but given that even a one percent reduction in commission can save the bank many times that amount depending on the purchase price, how attractive are these incentives? Also when compared to the enormous amounts of money the lending institution is losing when they agree to a short sale, the $2200 seems like a drop in the bucket. Combined with the fact that banks are allowed to opt-in on a case-by-case basis, it seems like HAFA is encouraging banks to keep their ad-hoc guidelines running in parallel with those of HAFA. What this will allow them to do is analyze whether or not it is beneficial for them to go HAFA or not; regardless of what’s best for the consumer that is experiencing a financial hardship. If it works out that the bank can save more money by choosing not to go HAFA, then the consumer loses out on the relocation assistance money that HAFA would have awarded them to find a new place to live. Also because the HAFA program puts a cap on the money that junior mortgage holders are allowed to be awarded and many banks hold both the first and second mortgage on a given property, this will be another incentive for a bank to opt-out if they feel that they can recoup more money by doing so. Another thing that may push a bank to opt-out is the fact that with HAFA they can no longer go after the borrower for a deficiency judgement which in some cases is could be a huge loss for them. With regard to the time it takes to process a short sale, HAFA may make things take even longer as now banks have even more risk to analyze before moving forward one way or the other!

No Enforcement

As an optional program, initially there were few banks that chose to be the guinea pig for these guidelines. Many bank workers still have no idea what HAFA is. Anyone working on a short sale right now has undoubtedly encountered this lack of awareness. For many banks that did decide to get involved with HAFA it ended up being on a case-by-case basis rather than a company-wide policy. What is the point of implementing standard procedures if they are not standard across the board at a given institution? What this is turning out to be is more of a way to for banks to work the system by utilizing HAFA when it is financially beneficial to them and avoiding it when it is not. This may bode well for their bottom line but what about the consumer? What happened to focusing on Main Street not Wall Street? The fact of the matter is that in order to accomplish what HAFA claims to, the industry must adapt these guidelines as enforceable regulations, and a governing body must be created to evolve, educate and enforce said regulations with the power to enact penalties for noncompliance.

Prognosis

HAFA is a weak start in a long race.  While trying to regulate and streamline an already laborious process, it seems to accomplish the antithesis.   For now it’s more of a conversation piece than a tool to help us climb the short sale mountain.  At the very least (and not much more) HAFA gives us bloggers something new to BS about.   Until the revisions taper off and an agency to enforce these regulations is implemented, we’re like a hamster with two wheels in our tank… either one we choose, we’re just running in place.

So why are we doing this? Because Chicago Now has at least 500,000 unique visitors per month and we want to get our word out to as many people as possible.

Sari will continue to occasionally post here but Gary will be doing all his posts at the Chicago Now site. Old posts will be archived here.

The new URL for the blog is http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/ or you can also just type in chicagonow.com/gettingreal

I’m going to try to move the RSS feed over but in case I’m not successful you can subscribe to the new feed at http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/atom.xml

In addition, market times for condos that are on the market also continued their decline.

While inventories of unsold condos did show some decline in Chicago, the main driver of this improvement is an almost doubling of February sales volume from the previous year.

A bit of a caveat is in order here, as I recently discovered some issues with the underlying data. The calculations above differ from the standard industry practice of focusing on closed deals – for sales volume and for market times. In an effort to make the data more current and meaningful we use contracts written for sales volume and we report the market times for condos that are for sale instead of condos that sold. However, there is a problem with this approach in that as many as 15% of contracts written never materialize in a sale. When a contract falls through the property is reactivated and no longer counted as a sold condo in the data above. Consequently, as time progresses, the sales volume for February will decline and the inventory level will rise retroactively. Similarly, deals that fall through are returned to the inventory of unsold condos, having racked up additional market time without a sale. Consequently, the February market times will increase as these older properties are returned to the pool of unsold condos. In other words, both inventory levels and market times are initially understated but correct over the course of a couple of months as the data ages.

As always, you can find inventory levels and market times for some key Chicago neighborhoods and suburbs on our site:

• 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

• Addison
• Bensenville
• Elmhurst
• Hinsdale

The bottom line is that of the almost 25,000 real estate agents with recorded residential sales in the last 12 months only 3,189 agents exceeded $3 MM in sales. If we make the simplifying assumption that those agents earned 50% (their split) of a 3% commission on average then close to 22,000 agents earned less than $45,000 last year – and that is before expenses. At the national level median expenses for realtors were $5,810 in 2008. When you factor in that this is not a cheap area to live in you can see that these agents are struggling. Furthermore, as you might expect, a minority of the agents closed most of the deals.

Now this analysis comes with a whole bunch of caveats:

• I emphasized above that this focuses on agents that had recorded sales. If an agent never closed a deal in the last 12 months then they are excluded from this analysis because I have no way to know who they are. But I suspect there are quite a few who did nothing in the last 12 months.
• Assuming that these agents earned 50% of 3% on average is a very big assumption. Many agents earn quite a bit more than 50% but on the other hand the commissions might be a bit less than 3% – e.g. typical cooperating commissions are 2.5% but could be as low as 2%.
• Many of the agents that are included in this analysis might actually make most of their income from commercial real estate and maybe they just did one or two residential deals in the last year.
• Many of the included agents might be part timers
• There may be quite a few agents that are excluded because they have no recorded sales in this time period but they might actually be quite profitably employed as members of a celebrity realtor‘s team, where the celebrity realtor takes all the credit for their business (this is a common practice).
• There may be a few agents that are included above who are members of a celebrity realtor’s team but one or two transactions appear under their name for one reason or another.
• As you start to get into the really high numbers – even as low as $16 MM – you start to run into the celebrity realtors who have teams working for them, some of which do a lot of developer work. So it’s not like the #1 realtor did $171 MM of closings all by himself.

Nevertheless, I believe that this data is directionally correct as it is consistent with data provided by the National Association of Realtors. In their 2009 member profile they show that on a national basis 62% of realtors had gross income of under $50,000 in 2008, with a median gross income of $36,700. After taxes and expenses those numbers drop to 64% earning under $35,000, with a median net income of $23,200. And those numbers are all for 2008. You can bet that 2009′s numbers are going to be a bit worse.

And in the Chicago area sales are up a whopping 29.2% over last year. In order to allow year over year comparisons of January data I have graphed 13 month histories below.

As you can see we are close to the January 2008 level now, though we are still below 2007 levels. No doubt this is extremely positive, though we have to wait until the tax credit expires to know what’s really going on. In the meantime, I think it’s a safe bet that activity will remain strong through April. Business has really picked up in the last few months and mortgage rates are still near 50 year lows.

Meanwhile, business hasn’t  been good for the brokerages either. Realogy, which is probably the largest brokerage organization, just reported a loss of $262 MM on revenue of $3.9 B. In case you didn’t know (most people don’t), Realogy is the parent organization of the following brokerages:

• Coldwell Banker
• Century 21
• ERA
• Better Homes & Gardens Real Estate
• Sotheby’s International Realty (and you thought they were high end)
• NRT

How do you charge outrageous commissions and still lose money? For starters, it doesn’t help if you have a huge overhead and spend a lot of money on advertising of questionable value. However, the biggest issue is that Realogy was taken private in 2007 by Apollo Management, a private equity investment firm. As with most private equity deals this one was heavily leveraged and today Realogy still has around $6.7 B of debt from that deal. Oh…and they have negative equity – close to $1 B worth – which is appropriate given that most of their former clients also have negative equity. Things got so bad last fall that Realogy was on the brink of bankruptcy when Carl Icahn stepped in at the last minute and saved them.

BTW, I find Realogy’s so-called strategy interesting. Either they’re not too bright in having all these brokerages that compete with one another or they’re smart enough to realize that there really isn’t any real competition between them. What do you think?

Anyway, Realogy’s woes are symptomatic of the entire real estate industry. RealTrends and Bloomberg recently reported that the dollar value of real estate commissions dropped by 6.2% last year. So, that’s about in line with the decline in the number of real estate agents in Chicago, which makes sense.

But what does all this mean for you? I’m afraid not much. There are still more real estate agents than there is productive work for them (much more on that topic in upcoming posts). And even if Realogy closed the doors on all their brokerages I maintain that it would have zero impact on the real estate industry because all those realtors would simply get new business cards with a different broker’s name on them. At least that’s the way it works with the independent contractor model (more on this some day soon also).

If you look closely at the data (sorted above by selling price) you will see that there is a higher concentration of distressed sales at the low end. In other words the lofts that sold were the ones that sold at the biggest losses. However, if you also sort the data by closed date you would see that there is a higher concentration of distressed sales as time progressed. My interpretation of that is also fairly negative – i.e. as time goes on sellers in University Commons are getting increasingly desperate and being forced to sell under distressed circumstances.

Having recently listed and sold one of those 21 units (1000 W 15th #414), I can speak first hand of the challenge in selling the lofts there. You just can’t get the traffic. Part of the problem is that University Commons is just not that well known. People looking for lofts in that price range typically think of either the West Loop or the South Loop and may not even be aware that very nice loft options exist in that area. So when you set up the listing you find out that it does not match the criteria of very many people and very few of the people whose criteria do match the listing will express an interest. You have to really work hard to find a buyer.

However, another problem is that the people who bought these units from the developer received a substantial 8 year property tax benefit – e.g. taxes of $1000/year on a $450,000 purchase. Doesn’t sound like a problem? Well, this tax benefit allowed the developer to charge a premium for the condos. But the tax benefit can’t be passed along to the next buyer so that premium is lost upon resale. I think this has contributed mightily to the losses that sellers are experiencing.

The good news is that if you are interested in buying in University Commons there could be bargains to be had because there is a lot of inventory available relative to the rate at which it is selling.

The Crain’s story includes outlooks and analysis from John Burns Real Estate Consulting, Economy.com, First American Core Logic, Realty Trac, and Fiserv Inc., which calculates the Case Shiller home price index. In a nutshell:

• According to John Burns, existing Chicago home sales won’t start to rise until 2011
• According to Fiserv, Single Family Home prices in Chicago will continue to decline another 5.7% before heading back up
• Chicago homes are still expensive relative to incomes. From 1980 to 2000 the median home was 2.6 times the median income but currently that ratio is 3.3 (and that’s down from a peak of 4.2 in 2005)
• The home ownership rate of 69.3% is well above the more normal 65% level. If you believe that the incremental home ownership was driven by reckless lending to people who can’t afford to own a home then you can expect that percentage to drop – the hard way
• The number of foreclosures in Chicago was up 33% in 2009 and that will continue to drag down prices
• More foreclosures are expected because 21% of all Chicago mortgages are underwater
• Unemployment will drive even more foreclosures, with the rate peaking this year at 11.5% from the current 10.6%

Those do seem like pretty compelling arguments. On the other hand, a 5.7% drop isn’t that much, so if you are trying to find the exact bottom of the market you could easily miss it.