On The Real Estate Market

By Jeff

Dear friends, every time I turn on the news these days all I hear about are the “mortgage meltdown” and the declining real estate market. I think that the media is painting a very incomplete picture of what is going on, and it has left many of you confused. Hopefully I can paint a clearer picture. First of all, real estate is a market that rises and falls like any other market. It is a much localized one. The markets in California, Florida and Las Vegas have little effect on the Chicago market. The media statistics are national. Chicago is faring better than most cities. We have an expanding job market and are making the transition from an American City to an international one. The market is also segmented by price range and neighborhood. The market in the $5,000,000+ has been very good lately, while the entry level market (-$180,000) has been stagnant. Some neighborhoods are still “hot” like the south Loop and others are just dead on the vine.

To help you understand what’s going on let’s use Charles Dickens analogy of real estate past, present and future. So why was the market so “hot” to begin with? I attribute this to population and “easy money”. The US population in 1990 was 248,000,000. In 2005 it was estimated at just over 300,000,000, an increase of over 20% in fifteen years, one of the largest increases ever. One reason for this is that people are living longer healthier lives than ever before. This has allowed many elderly to maintain their place of residence. Another population factor is generation X. Born between 1966 and 1980 these are the children of the baby boomers. While not as big as their parent’s generation, they are still a huge generation none the less. They entered the housing market in the 1990s and early 2000s en masse. One of the reasons for the recent slowdown is that this generation is now marrying and combining households. Immigration has also been a contributing factor to population growth. 16% of the US population in now foreign born.

The other factor that I mentioned earlier is “easy money”. I saw this first hand ten years ago while working in the car business. In 1997 the car market was “on fire” the reason for this was a new concept known as automobile leasing. For as little as $190 a month one could lease a car for three years instead of having a $400 car payment over five years. The leases where based on the estimated depreciated value of the car after three years, this known as the residual. In 2000-2001 these cars came off lease and the used car market was flooded with cars. Many leasing companies lost $2000-$3000 per car when these cars did not meet their residual value at auction. The same has been happening in real estate. In 1990 a relative bought her first condo, she had to put 10% down, and pay prepaid interest known as points. In 1999 when I bought my first condo, I had to put 5% down. Two years ago I worked several deals with 100% financing with 3% back at closing, or a 103% loan to value. Now I have a theory about “easy money” as it applies to college tuition. In 1970 a friend of the family was able to putting himself through the University of Chicago flipping burgers. One could not do this today. The easy availability of student loans has caused tuition to skyrocket. I feel for these kids now getting out of school with $100,000+ in student loans. Not a very good way to start life. “Easy money” has stimulated demand and contributed to the rising cost of real estate.

A third factor that I haven’t mentioned earlier is the “bandwagon”. I have a friend who bought a two bedroom two bathroom condo pre-construction in Lakeview for $250,000. When the unit was completed it was worth $400,000. A lot of other people jumped on the bandwagon and thought they could make money this way. This also stimulated demand and caused prices to rise.

Now the market is in an adjustment period, so prices are declining. From everything read and heard it should continue to do so for the next couple of years. After that prices should stabilize. About 2020 the market should begin to heat up again. At this time generation Z, the children of generation X, will enter the market. Generation Z is a big one, because parents are now choosing to have three and four children instead of one or two, like the boomers did. Recent advances in fertility have also contributed to this boom.