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.

As I’ve mentioned before, the last thing we need is for the government to prop up inflated home prices. Nevertheless, the NAR came up with their four point housing stimulus plan a while ago, in an attempt to do just that. Last week they emailed realtors with a Call To Action to get them, and their clients, to email their representatives in Washington in support of the handouts. Chicago Association of Realtors President David Hanna is quoted: “Your action has never been so important, now is the time for you to stand up for your industry and demand the changes we need. Every Realtor must participate in this Call to Action, please contact your representatives and urge your peers and clients to as well.”

Here, in a nutshell, is what they are asking for:

1. Make the $7500 tax credit available to all buyers and eliminate the repayment requirement.
2. Make the 2008 FHA, Fannie Mae and Freddie Mac loan limits permanent.
3. Target more funds to mortgage relief and create a federal mortgage interest buy-down program to make below-market rates available.
4. Permanently bar banks from engaging in real estate brokerage and management.

Here, in a nutshell, are the problems with each of the four points:

1. Why should people who make $200K per year get a tax credit from the government? For that matter, why should anyone? The government should not be subsidizing home purchases. Not to mention that this would cost at least $38B per year.
2. As if Fannie and Freddie weren’t already spread too thin.
3. The very existence of Fannie and Freddie is a buy-down program. They effectively lower mortgage rates. In fact, the entire economic bailout program is helping to lower mortgage rates and low mortgage rates is what got us here to begin with.
4. And this will help the economy how? By keeping real estate commissions high? The NAR is positioning this proposal as necessary to keep the banks focused on fixing all their problems. But come on! Could anything be more blatantly anti-competitive?

It’s stuff like this that gives Realtors a bad name.

One such set of rules pertains to the arcane world of IDX and VOW - two different ways for MLS listings to be distributed across the Internet. The rules regarding these two different protocols are so convoluted that I always need to refer back to my notes to remember what the deal is.

IDX stands for Internet Data Exchange and is also known as Broker Reciprocity. Brokers who participate in this program agree to allow each other to display their listings on each other’s Web sites. When a listing is distributed via IDX it can be shown on any Web site without the user needing to register. However, the local MLS may restrict the display of some data fields and the Web site must display the name of the listing broker. OK…with the exception of the data restriction and the fact that brokers can choose not to reciprocate (why in the world wouldn’t everyone reciprocate?), this seems to be the way things should work. So why is there any other way to do business? Because this is real estate and nothing is simple. Hence, there is VOW.

VOW stands for Virtual Office Web site. The idea of VOW is that the Web site is a virtual office of the real estate broker and therefore the broker has established a client relationship with the visitor - provided the visitor has registered. Once the visitor registers, the broker is allowed to interact with that client just like they would if the client walked in the door of their office. They can show them all the information on any listing, whether or not the listing agent is participating in the reciprocity program. Seems to me to be a trivial distinction in order to show consumers something they should have access to without restriction.

When I first started researching the real estate industry the Multiple Listing Service of Northern Illinois (MLSNI) told me that only 60% of the listings were available through IDX in the Chicago area. Therefore, a Web site operator really needed to get users to register in order to show them all the listings. However, since then MLSNI merged with the other local MLS system (MAP) and in the process IDX became the default process. As far as I know this had nothing to do with the recent settlement between the NAR and the DOJ. Today around 97% of the listings are available through IDX. In other words, registration is really not necessary.

So then why do many broker sites still require registration, often with messages like the following when searching on their Web site?

It looks like Remax is only showing their own listings without registration but requiring registration to see anyone else’s listings, under the guise of MLS rules. Just to be clear, it is a flat out lie that the MLS requires registration - a great way to engender trust.

So why is registration required? Because they want your contact information so that they can follow up with you. We would love to follow up with you also but we don’t want registration to stand in the way of you getting what you want right now. We figure that if you would like us to follow up with you you will contact us.

• Master bedroom is 19 x 14
• His office is 22 x 15
• Kitchen is 20 x 20
• Family room is 38 x 36
• Property taxes appear to be about $22,000 per year best I can tell

I wonder if the size of Barack’s office relative to his bedroom is any indication of his priorities.

I found the following photo of the Obama house on Flickr:

The empty lot on the left of the house is owned by Tony Rezko and has been the subject of much speculation regarding the relationship between Tony and Barack. The two properties were purchased from the same seller and closed on the same day, June 15, 2005. Subsequently, the Obamas purchased a strip of the empty lot from the Rezkos in order to expand their yard.

The Obamas got their home for $1.65 MM compared to a listing price of $1.95 MM. From the public release of the Obama’s tax return for 2007 we know that they deducted $58K of mortgage interest. So I assume they put a fair amount down on the purchase. The CCRD site has no record of this transaction. Perhaps it wasn’t recorded or some legal maneuver was used to avoid the public record. I do know that the transaction was done through a trust to maintain Obama’s privacy. So much for that idea.

I found a very interesting article from someone who lived in the Obama house many years ago. He provides an in depth description of the history of the house and what it looks like on the inside.

The picture above was obviously taken well before Obama won the nomination. The secret service and the Chicago police had not yet taken over the neighborhood. I drove past this area a few weeks ago and noted a couple of interesting things. First, there are signs on 50th St. about a mile away from the intersection with Greenwood requesting all trucks to divert. That seems reasonable except that I didn’t see any capability to enforce that displayed. Once you get to the intersection they have concrete barricades set up on Greenwood to prevent any vehicle from approaching the house and there were numerous Chicago police cars and officers manning the entrances. I didn’t see any donut eating.

If the Obamas decide to sell the place - it’s going to be vacant for the next 4 years - I would be happy to cut them a great deal on the commissions. I suggest that as part of the realtor vetting process the secret service should administer a lie detector test to any prospective realtors.

For those not familiar with Chicago here is a map showing where the house is:

Special Thanks

Special thanks to David Dalka, who runs an Internet Marketing strategy blog, for suggesting this post.

Article reprinted with the permission of Geno A. Tucci, Sr.

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.

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.

Please read this post, draw your own preliminary conclusions, and then follow the link to another article on this subject.  I promise you will not be disappointed.  See if your conclusions change after following the link at the end of the post.

There are two essential sets of documents in most real estate transactions.  First, of course, is the written contract itself.  This contract ranks among the most significant legal papers in a person’s life.  Next to a divorce settlement, the real estate contract is probably the most used legal document in most American’s lives.  As a matter of course, we like to recommend that clients retain legal counsel to negotiate sticking points like tax apportionment and also to generally understand the essential terms of the contract.  If the tax apportionment or other aspect of the contract is not right, significant financial damage can result.

The second essential set of documents in a real estate transaction has to do with the loan.  This includes the promissory note itself and the security interest – the mortgage.  Whose job is it to advise the client on the small print in the loan?  Is the real estate agent to handle this?  Most certainly not!  How about the mortgage broker?  Nope.  Not her job either.  The broker simply brings the lender and the client together, outlining the important figures of the loan.   Among the first recommendations of the broker ought to be that the client should retain counsel to help her understand the nature of the loan rights and obligations.

Anybody who tells you that the mortgage broker ought to counsel the client on the loan paperwork needs a lesson in licensing, ethics and the practice of law.  How can a broker, whose compensation depends on the closing of the loan, pretend to counsel the client on that very loan?   Last time I checked, most states laws say you need something called a law license to advise a client of these contractual matters.  Second, every competent attorney knows that you can represent either the lender or the borrower, but never both!  It’s the client’s independent attorney who ought to counsel the client about the small print, the elements of the promissory note and mortgage instrument.  I will argue that it is the failure of borrowers to secure adequate counsel on loans that is largely responsible for the current mortgage crisis gripping our country.

How many lawyers do you know who properly advise their clients on the loan documents?  Isn’t it true that the borrower’s first exposure to the promissory note and the mortgage instrument is during closing?  Aren’t most closings now accomplished by paralegals with the buyer’s attorney showing up at the end just to give the final okay?  When a lawyer charges a fire-sale rate for a real estate “closing”, what level of service are people expecting to occur?  How can we as professionals encourage our clients to engage the necessary experts (and compensate them appropriately) to assist in fully understanding these essential elements of the real estate transaction?  After developing your own conclusions, follow this link to another story on this very issue.  Then return here and leave a comment if you wish!

Here’s that link. I can’t wait to hear from you!

Thomas G. Besore
Attorney at Law
540 N. Lake Shore Drive #315
Chicago, Illinois  60611

(312) 265-6272 Telephone
(312) 276-8558 Facsimile
www.besore.com

Real Estate, Estate Planning and Contractual Matters
Corporate and Individual Representation
Serving Chicago and the Suburbs

The stock market reacted quickly - to the tune of wiping out $1.2 trillion of wealth in one day. As some commentators have noted this is more than the amount of money being considered for the bailout.

What I find frustrating in all this is the lack of understanding about this bailout package. For instance, people talk as though $700B is the cost of the plan. But it’s not. It’s just the amount of money being put at risk. The cost will be the amount of money lost between what the government pays for the assets and what they can ultimately sell them for. By many accounts the cost will be negative - i.e. the government will actually make money on the deal.

The other bizzare attitude is summed up in the following photo, taken from an article on the Time Magazine site:

As if bailing out a bank is not bailing out the people?

Frederic Mishkin, a former Federal Reserve Board Governor (I took a money markets class from him in business school) had a great story to tell on one of the Sunday talk shows this last weekend.  His grandfather owned a store when the stock market crashed in 1929. His grandfather delighted in the fact that those wall street guys got what they deserved. One year later his grandfather was out of business.

For starters, like most people, I am outraged that the government has to step in and clean up a mess in the private sector. I love the fact that Lehman died an unnatural death and would love to see even more of the culprits bite the dust. However, I believe Paulson and Bernanke when they tell us that without some intervention we will experience a catastrophe of biblical proportions:

Real wrath of God type stuff.
Fire and brimstone coming down from the skies! Rivers and seas boiling!
Forty years of darkness! Earthquakes, volcanoes…
The dead rising from the grave!
Human sacrifice, dogs and cats living together… mass hysteria!

But do we give them a blank check? Well, the American people and congress have spoken and the answer is No! Here are some of the modifications being sought:

Execute this program on the installment plan, with additional draw downs needing approval. I like this idea, but maybe for different reasons than intended.  No one can know what the real need is but if they give Treasury $700 B then $700 B will be spent. One of my concerns is that the government isn’t merely trying to avoid a depression but they are also trying to avoid a recession. But a recession might actually be healthy for the economy in the long run. So if they have to go back for approval periodically that could discourage them from going overboard.

Take equity stakes in the companies being helped. Seems like a good idea to me. Look at Warren Buffet. He just negotiated a sweet deal with Goldman because he’s the  800 pound gorrilla. Well the US government is the 2000 pound gorilla and should be able to get an even sweeter deal. Besides, this bailout needs to be painful for those who screwed up.

Cap executive compensation within rescued companies. Now normally I would abhor the government influencing executive compensation, regardless of how outrageous it is. But this time it’s different. These companies are taking government money so it can’t be siphoned off into executives’ pockets. Besides, under my pain theory these CEOs need to suffer from their mistakes. There will probably even be a side benefit to a compensation cap. It will prevent CEOs from taking advantage of the taxpayer dollars if they don’t really need the help.

And I’m not the least bit worried about there being a talent shortage because I think these executive types are over-rated anyway. There are a lot of smart people out there waiting in the wings to jump in and take over for $400,000 per year. I don’t subscribe to the view that you have to have a celebrity CEO. In fact, I suspect that the celebrity types are not as smart as the underpaid quiet types. They got us into this mess.

Provide oversight. I have no idea how this would work but in principle it sounds like a good idea.

Helping distressed homeowners. This is the one that concerns me the most. As if this proposal doesn’t already help homeowners by propping up home prices? I’m OK with modifying the bankruptcy laws slightly but what more do they want?

Aside from this last add-on, by and large, the political process seems to be working. The key question that is still up in the air is how to set the purchase price for these assets. That issue alone could make or break this deal for the American taxpayer.