Thursday, December 28, 2006


Chicago Real Estate

On the edge of a precipice.

The Chicago Tribune had an article outlining some local real estate woes. Not surprisingly a good deal of the overbuilding is condos. Recently my wife and I decided to move in part because she is due in the spring and we live in a duplex. Stairs and babies don't mix.

A friend of ours named Julia who is an apartment broker was helping us look around. Our one requirement was laundry in unit. We have gotten used to the convenience and, with a new baby, we weren't going to give that up. Julia starting showing us newly completed units which were just beautiful. Frankly, we got spoiled. Eventually we found a place that was 15% more than we are paying now but with many more features. We are in a 2 bedroom, 2 bath with dishwasher and fireplace but it hasn't been renovated in 10 years and everything is looking old. Apartments seem to get much more wear than owner occupied homes. Not that our old place is a dump but in comparison it can't hold up to a new kitchen with granite counter tops. (No more buying ice, it comes straight out of the fridge!) Add a jacuzzi tub, steam shower, a den, and rooms that are 50% bigger than our old apartment. Definitely worth the money.

We will lose our backyard but we never have used it. The people in the other apartments have dogs and don't seem to be very interested in cleaning up afer them. Also, we share an alley with a couple of restaurants and there is a big rat problem. I often hear/see them when I am taking the garbage out. In fact, my wife just spotted one walking around the backyard when I started typing this post. No lie. We also don't use our small deck off the second floor bedroom for the same reason. Not a great view.

Back to the point, we limited our search parameters to condos and we had a wide selection. Often with many amenities I would have never thought possible; oh jacuzzi tub how I will enjoy thee. All for the same price as or slightly higher. Take a look at the apartment section on Craig's List, searchword: Condo. This is not good news for the condo market and should mean rents will be coming down over the next year. Back to the Tribune:

Fitch Ratings, for example, recently said housing is in a fairly severe, multiyear contraction--one that isn't based, as previous slowdowns have been, on rising interest rates and a sharply slowing economy. It's being driven by perceptions, the Fitch analysts said.

"A negative buyer psychology seems to have become pervasive," Fitch reported this month. "The expectation or fear is that home prices have peaked and buying now would be a mistake."

Frustrated condo seller David Waters said he buys that.

"I suppose part of it is people are waiting to see if prices drop even further," said Waters, who, with his wife, Joette, has been trying to sell his Edgewater two-bedroom unit since August, without a single offer despite several price reductions and incentive offers.

"Because experts were predicting [the market slowdown], things tended to snowball," Waters said. "People bought into the fear that it's going to be a tough sell. When people start believing it, it makes it real." [Emphasis added.]

Mr. Waters stated clearly the psychological state that drives booms and busts. That is why it is near impossible to predict the end of a boom or bust using economic theory. A rush to buy or sell an asset like a stock or house often exceeds what is rational considering substitute investments or income. Economists, who aren't caught in the frenzy, can only point out that asset prices are above growth trends.

As the article says, we are in a stand off between buyers and sellers. I don't think the sellers will win. 2007 could be a very bad year.


Steven Pearlstein of WaPo: An Economic Pillar on the Verge of Collapse.


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