CNN Money came out with a story today about a Fiserv forecast that home prices will fall another 11.3% nationally by June 2010. Fiserv is a financial information and analysis firm that tracks the housing market among other things.

Having personally declared a bottom to the Chicago housing price decline, I thought I would point out a few things about this forecast:

• It’s a national forecast. Their forecast for Chicago is only for a 4.1% decline over the next 12 months.
• A 4.1% decline is pretty small. That’s within the range of error for these types of forecasts and it might never actually materialize.
• Their forecast is for median prices, which are heavily affected by the mix of houses sold. During this crisis there has been a shift in the mix to lower priced houses and, although that drags the median down, that is independent from price declines of individual houses.

I’m sticking to my original assertion: Chicago home prices have bottomed and there is actually an upward trend now.

• The Case Shiller index for December came out yesterday
  • Home prices are back to December 2003 levels
  • Prices are down 14.3% in the last year
  • Prices are down 18.6% from the peak
• The Illinois Association of Realtors released their sales statistics for January and it shows that home sales are down 24.4% from 2008, which was down from 2007, which was down from 2006.

You can always find these and other statistics along with charts on our Chicago Real Estate Statistics page.

• 4th quarter sales for the city of Chicago declined by 29% from 2007, dropping to 1994/1995 levels. The drop was most significant for condo sales.
• December sales for the Chicago PMSA (primary metropolitan statistical area) came in 16% below December of 2007, which was already 33% below 2006. The decline has slowed somewhat in the last few months.
• The Case Shiller index that tracks home prices (much more accurately than the median prices reported by the real estate organizations and the media) shows that prices in November were down 12.5% from the previous year, are down a total of 16% from the peak, and are back to May 2004 levels.

In light of all this The Chicago Tribune ran a story today about how sellers are finally capitulating and dropping their sales prices.

Unfortunately, the only way to really tell what is going on is to painstakingly examine individual sales and see if the price trend is up or down. I’ve been meaning to do this for a while but in response to a recent debate on Cribchatter I decided to get off my butt and actually do the analysis. I looked at condo sales in Lincoln Park over the last 30 days, where the previous sale had occurred in the last 6 years. I picked Lincoln Park because there has been some evidence that Lincoln Park has been immune to the home price declines and I looked at condos because there are more of those sold than single family homes. Also single family homes in Lincoln Park are more likely to have been renovated from the previous sale.

Well, here’s what I found:

Lower sale prices are highlighted in red and the data is sorted by the date of the previous sale in order to highlight the pattern. Basically we are seeing price declines in the last 3 years, which is similar to what we are seeing in the Case-Shiller numbers for Chicago as a whole. I guess Lincoln Park is not immune after all.

But we know this can’t be true because the home inventory situation in the Near South Side is abysmal. So I went into the MLS to check out the underlying data myself. While the basic statement is technically correct, the data doesn’t at all mean what you think it does. In fact, the data is full of garbage and you know what they say about data: garbage in, garbage out. You see the problem is that the home sales data in Chicago’s Near South Side for this time period includes lots of Museum Park’s new development sales – in particular, sales at 1211 S. Prairie. When you look at the details of those transactions in the MLS you see examples like unit 5002 which closed October 29 at $962,970 while it was listed at $850,500. I think we can all agree that whoever bought this unit probably did not beg the developer to let them pay more than the list price. What really happened is that the final selling price includes lots of upgrades and a parking space that costs an extra $35,000. So a preponderance of these listings is skewing the data.

This is a great example of what happens when you have a computer churn through massive quantities of data without any human review. You get mathematically correct numbers that don’t really mean anything.

1. Most of the data you’ve been fed about housing price changes is grossly misleading
2. Housing is not the great investment that the NAR (National Association of Realtors) wants you to believe

Let me give you some typical examples of the information that is out there on the subject of housing prices and the problems with this information. While the information is usually true in some way it is often misunderstood, and sometimes that is the intention.

Example #1

Two days ago the Tribune ran an article, “Home sales, prices decline statewide; city not as bad”, which stated that the median Chicago condo price in March rose 8% over last year. So what do you think that means? That condos in the city have appreciated 8% in this lousy real estate market? I don’t think so.

All it means is that the median price of a condo which sold in March was 8% higher than the condos that sold a year ago. But that doesn’t mean that the value of condos went up. More than likely it means that the mix of condos which sold this March is skewed more towards expensive condos. Maybe this year there are more 3 bedroom condos being sold and fewer 2 bedroom condos.

Example #2

According to the Tribune’s Real Estate Market Pulse, in Lakeview between 12/1/2002 and 2/28/2003 the median home sales price was $320,000 vs. $245,500 one year prior. Some people would look at the Lakeview data and conclude that housing in Lakeview appreciated by over 30% in one year. However, this is that median problem again.

Example #3

In late 2006 and early 2007 the NAR ran an ad campaign that stated, among other things, that “Housing is a great investment, with average home valuations increasing 88 percent in the last 10 years”. That works out to 6.5% per year on average (keep that number in mind for later). Of course, this 10 year period just happened to coincide with the most outrageous 10 year period of housing appreciation in the nation’s history, for which we are now paying the price. Unfortunately, they’re implying that home buyers can expect that appreciation going forward, which is absurd. This self-serving information appears to be intentionally misleading. But isn’t that the point of advertising?

Example #4

In late 2005 the Tribune published a map showing home price appreciation for each of the Chicago communities and some of the surrounding suburbs. One of the communities they highlighted was Uptown, where they claimed home prices had appreciated on average by 9% per year over 10 years, which is huge. In addition, they showed the 1996 price of a home (presumably the average?) as $121,918 and the 2005 price of a home as $265,000.

This example is interesting because not only does it suffer from the median or average problem that I’ve already addressed, but it also suffers from a math error that seems to recur throughout this map. The percentage change is wrong. For Uptown, given those home prices the average appreciation rate (if you can call it that) actually works out to 8.1% per year.

The Correct Way to Analyze Housing Price Trends

Fortunately, there is a more robust way to track housing prices. The S&P/Case-Shiller home price index tracks repeat sales of homes so that they can really tell if homes are appreciating and by how much. This index has been calculated for 20 metropolitan areas and Chicago is one of them, going back to January 1987. For each metropolitan area they calculate the index for low, middle, and high price tiers, along with a composite index.

The Chicago metropolitan area is defined broadly to include the counties of Cook, DuPage, McHenry, Kane, Kendall, Lake, and Will. In this area the pricing tiers are defined as:

• Low – Under $227,766
• Middle – $227,766 – $348,054
• High – Above $348,054

Here is what the data shows:

There are several points to note in this graph:

• Data for the individual tiers are not available prior to January 1992
• The lower priced tiers have appreciated more rapidly than the higher priced tiers. This makes sense in light of the “innovations” in subprime lending that spurred growth at the lower end of the market.
• The Chicago housing market peaked in September 2006, right around the time that the NAR came out with their great investment campaign. Since then prices have declined 9.1%. I guess it wasn’t such a great investment after all.

Speaking of investments, how has Chicago real estate performed as an investment? Case-Shiller provides comparisons of various asset classes such as stocks, bonds, commodities, and housing over the last 10 years, which has been a stellar time period for housing. I won’t bother to show you how Chicago real estate compared to stocks because we all know that stocks haven’t done that well during this time period. However, comparing Chicago real estate to bonds is a different story:

Basically, over this time period, you would have ended up slightly better off had you invested in bonds vs. Chicago real estate. However, there is a bit more to the story:

• The average appreciation of Chicago real estate from January 1987 to December 1998 was 3.7% per year.
• Starting in 1999 people thought they were rich (remember the tech bubble?) and they went on a home buying spree. In addition, this is approximately when subprime lending really took off.
• From January 1999 through the peak in September 2006 the growth rate jumped to 8.3% per year.
• To put all these percentages in perspective Robert Shiller (of the Case-Shiller Index) analyzed home prices going back to 1890. For the first 100 or so years of that time frame his data shows that the average appreciation of homes, after adjusting for inflation, was….are you ready for this? Zero!

Nevertheless, someone will always say “But I’ve owned my house for 3 years and my equity has doubled”. OK…but that has to do with leverage, and in the good ol’ days that leverage was 5:1. Since then it has sometimes been infinite. So if your house appreciates by 20% and you are leveraged 5:1 then your equity doubles. Of course, leverage works both ways. If your home depreciates by 20% then you are wiped out, and this has happened to a few people lately. It happened to me in New Jersey in 1993 (actually, I lost double my equity). However, if you like leverage, you can leverage investments in stocks, bonds, or commodities as well. It’s a great way to lose your ass.

OK. So why is a real estate broker telling you all this? Shouldn’t I be convincing you to buy, buy, buy? For one, I am sickened by the self-serving analysis of the real estate industry and I want to set Lucid Realty apart from this madness. Secondly, I want to make a really important point: Your house is not an investment. It is a place to live. Don’t buy a home primarily because of some perceived investment opportunity. You may or may not realize it. Of course, I’m not suggesting that you shouldn’t try to find the best value when shopping for a house. After all, that’s where we come in. It’s just that some people make the mistake of letting the perceived investment opportunity overshadow other considerations. Let me put it another way: what kind of investment is your car? And before answering that remind yourself that you don’t (normally) sleep there at night.

If you want an investment, there are plenty of much simpler ways to invest your money. And if you want a real estate investment then look to income producing property that you subject to rigorous financial analysis. In the meantime, if you want a place to tuck your kids into bed at night or have a group of close friends over please give us a call.