Effective tonight we are moving the Getting Real blog (you may not have known that was it’s name) to Chicago Now. Chicago Now is a Chicago focused (duh!) online community, owned by the Chicago Tribune and comprised of over 200 blogs which are hand picked by the Tribune folks.

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

With the original home buyer tax credit scheduled to expire at the end of November I fully expected December to really be a slow month in Chicago. My assumption was that a significant amount of housing demand had been pulled forward, not leaving much for subsequent months.

However, when I recently checked new real estate contract activity for December I was blown away by how strong it was.

Contracts in December for Single Family Homes and Condos/Townhouses in Chicago were up 95% and 105% respectively over 2008.

Of course, I was curious as to whether or not certain price ranges had disproportionately been affected so I looked at the price distribution of these contracts.

As you might expect, the 2009 contracts for single family homes were skewed more towards the sub-$200K price range than in 2008 but, nevertheless, some activity above $200K was still stronger than in 2008. However, the big surprise was the amount of activity below $100K – both in 2008 and 2009. The 47% numbers reported above are not an error. I had never looked at that price range before and was shocked at how many single family homes sell in this price range – some as low as $10K. Of course, these are really scary looking properties and I’m not even sure they are habitable.

The story for condos/townhomes is pretty much the same.

In 2009 condo contracts also skewed more towards the sub-$200K range but again activity above $200K was still substantially higher than in 2008.

This is further evidence that the market in Chicago is coming back strong. Granted, the tax credit has been extended, but I would have expected that to have already run its course by the end of November.

With the extreme shortage of real estate in Chicago (yeah, right) I guess it should be no surprise that developers are scooping up every available scrap of land for housing developments.

The Union Row development in the 600 block west of 16th. street may signal a new trend in the gentrification of underpasses and railroad tracks. Check out these photos of the spectacular view of The Dan Ryan and the railroad tracks from these townhomes:

As you can see, the railroad tracks will provide hours of entertainment for the myriads of children who will play on them, while the Union Row homeowners will literally be a short walk from all major forms of transportation.

The underpass will also provide great shade during the afternoon sun, saving lots of cooling dollars during the hot summers.

This view from the underpass should remain unobstructed until a developer decides to actually build a house under the underpass.

Even with the back fence folks will be able to see the train tracks and the Dan Ryan. No need for these folks to get a traffic report in the morning. All they have to do is look out their window.

Not many real estate brokers will tell you what I am about to tell you:

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.