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“I’m a firm believer that [incentives] are a bad move for both the developer and the people buying. There’s no pricing integrity, and you run a real risk of having your unit devalued shortly after you’ve bought it.”
-Alan Lev, president of Belgravia Group and newly minted president of the Home Builders Association of Greater Chicago.
Lev, a 20-year industry veteran, spoke with us today about the state of high-rise development heading into 2008. His comments are at odds with those from a buyer (quoted in today’s Trib) who expects a laundry list of incentives to accompany any future purchase.
Lev says Belgravia has steered clear of incentives, even going so far as to offer safeguards to the buyer that pricing will remain stable. One current development, 565 Quincy, offers a guarantee of credit back to the buyer in the unlikely event that the developer lowers prices.
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{ 30 comments }
what do you think on average i should ask for in regardes to incentives and perks for a 325,000 condo (2bed/2bth) in the west loop. free parking? 10% off purchase price. the developer has only 10 units left sposedly. any negotiation tactics could help also
buyer, Unless the incentives bring the cost of owning down near the cost of renting, they are not enough at this time to consider a purchase in that price range/unit type/location.
Belgravia must be toast without their peak pricing. That might explain the “guarantee” on 565 Quincy; they appear to be going all in. Or do they just not need to sell units? Why else would a supplier of new condos believe that decreased demand should not lead to lower pricing?
Joe 6,
There’s no necessary connection between “decreased demand” and lower pricing. A decrease in aggregate demand might not equate to a sufficient decrease in demand for a particular product to produce lower prices.
Your rent vs own comparison has some validity, but it needs to be far more sophisticated than the simplistic approach that’s typically taken to the question. A static comparison of current costs leaves too much out of the analysis.
Actually decreased demand is a function of prices too high with a given supply. True some products may have more elasticity in price with a given supply and demand, in other words prices can stay relatively stable despite increased supply; coffee, gasoline (at a retail level)are examples of this. But historically home prices adjust quickly to supply and even more to demand. Look to FLA for examples of this. The developers comments above just reflect his opinion of supply and demand. But if demand goes down and/or supply goes up he will have a lot of unsold property if he does not adjust price. Its not rocket science.
Joe Z.
Your argument against basic economics is one sided and I can’t see any way to buy into it. You’re suggesting that a fall off in demand might not spark price decreases because realative to supply, there is still a high demand, just not as high as before. This argument is only true if, when the run up in demand occurred, prices stayed fixed, which simply did not happen.
Now prices falling 10% overnight? Probably not. Falling 5% over the next year or two, very possible. Prices certainly are not going to up anytime soon as evidenced by the latest Case/Schiller numbers which came out a couple days ago. How come no mention of them on Yo?
I agree, there is no “necessary connection” in a general economic sense. But I think that in the case of downtown condos there is a sufficient decrease in demand that developers will lower prices or they will simply not sell in time for them to make their debt obligations. In that case their lenders will take them back and make the necessary price cuts to move inventory. I expect developers to have more unsold units than they currently believe. The current fate of flippers due to the latest round of new unit deliveries will make others walk away from contracts in 2008. This should get very interesting.
No doubt the correct rent/own analysis is sophisticated. Right now there are considerable opportunity costs to deduct for down payments and higher monthly ownership costs. The only way to negate those are through appreciation, and anyone doing the analysis who assumes rising values in the coming years will lose big time.
If there was ever a time to continue renting and wait to buy a condo, it is now.
While it sounds great, I would like to see how restrictive the ‘incentive safeguard’ before I believe him.
Why do I keep envisioning Joe Z as Kevin Bacon in Animal House as he is getting run over by the mob, holding up his hand “Remain Calm, All is Well”
Hey guys, all I’m saying is that the general often says little or nothing about the particular.
I don’t think there’s much of a dispute about the general condition of the housing market or whether prices on the whole are receding.
That tells me exactly nothing useful about whether a particular developer’s product will sell at the current asking prices.
Earth to Lev: So just drop ALL the prices.
There’s no arguing with the Law of Supply and Demand. When there is a glut of a particular commodity, prices have to fall.
Too bad for the bubble-buyers. They gambled and lost, just as we all do from time to time.
Well, they could just rent the units until the market improves…
I can’t help laughing when someone who has a tip jar on her blog to help her “save for the downstroke on her condo” goes all haughty on one of the city’s most successful developers.
Laaaaaaaaaaaaguh, Zekas, LAUGH but after prices drop 50 percent Laura’s tip jar may have enough in it to purchase an upgraded carpet pad.
Or perhaps not.
No one has mentioned what effect if any drastically lower interest rates may have on the market.
I certainly don’t know but I am certain 6 top notch University of Chicago trained economists who just happen to visit this site will let us know. Expect at least 4 different answers and the two that are close will be mere chance.
Supply and demand in terms of housing can come into some rough balance relatively quickly. If things aren’t selling building will eventually grind to a near halt and banks won’t finance any new developments. I think that can be seen in some area of the larger national market and even parts of the “Chicago Metro” market.
Now for those of you expecting huge drops in prices in the healthier parts of the city market I suspect you will be waiting for a long time. Perhaps forever. It may happen, but the future is difficult to see it is and lotsa stuff can change the dynamics of the Chicago housing market.
Zekas basically agrees that the overall housing market is weak. What he also believes is that how that impacts a particular development will vary.
Some of you remind me of a guy I know who has been waiting nearly 20 years to buy in his native Oak Park. He has been saying prices have been overvalued there since the late 80’s and he refused to take an interest in a building that was willed to him and his siblings. He caused a huge family fight because he KNEW what the future was. He wanted the cash and to sit it out. He is still sitting. His siblings are now much wealthier and he is still keeping the local Forest Park barstools warm hoping someone will take pity on him and invite him over for the holidays.
My informed impression is that in this down market healthier neighborhoods in the city have not seen much in terms of price drops and the market times have gone up. Things still seem to be selling, but at a slower pace. Now part of that may be that some sellers have given up and plan to wait to sell.
It may be that we have seen the bottom of the housing slump and few recognize it. I kind of doubt it, but typically few recognize it when it happens. Perhaps it will be slow for a few more years. Perhaps actions by the Fed will cause impacts that none of us can foresee.
I recall a few geniuses on this site a few months back saying that the fed had no impact on mortgage interest rates. I’ll remember that as I do the paperwork for my refi and wait patiently in line behind a wave of others.
irishpirate,
The people here who are most confident about the future direction of the housing market are, to put the most charitable interpretation on it, naive, preening know-nothings.
People like yourself who know a bit are far less confident of what the future holds and less prone to generalization.
The “banks will liquididate the units” scenario that a number of our commenters envision may or may not play out in selected instances. I know that when the market crashed on me several of my lenders worked with me to structure deals that allowed me to rent units until the market came back – 5 years later. That crash in the early 80s saw a lot more workouts than liquidations.
Every aspect of this market plays out against a very complex legal and institutional backdrop which makes those of us who have more than a passing familiarity with it even more hesitant to make predictions. Market forces are only a small part of a very large picture.
As for predicting bottoms, well – I was about to buy some Yahoo stock the other day but hesitated since I thought it would go a bit further south. Is there anyone who doesn’t know what happened today?
There’s a difference between adjusting pricing to reflect the quality of the product and a wholesale write-down of the market.
I have been amazed that real estate buyers haven’t seemed to appropriately differentiate between quality buildings in great locations and so-so construction in marginal locations.
Everything boomed in recent times.
Now that reality is sinking in, properties values will begin to reflect the relative underlying value. Quality construction in great locations shouldn’t have to take the same hit as shoddy construction in fringe areas.
Quality product by reputable developers (like Lev and others) won’t need the kind of buyer incentives that the weaker projects will.
The biggest incentives will show up on projects that were overpriced to begin with or from developers who are in financial trouble. I wouldn’t want to buy into either situation.
I’d rather pay full price for quality than get a “bargain” on a can of worms!
Prices will drop 15 to 20 percent in most of Chicago from 2005 highs. Too many factors are putting way too much pressure on prices i.e. foreclosures up, flippers unable to flip. Large inventories, less qualified buyers due to tighter lending standards. Whoever thinks the fed cutting rates is the the solution to the housing crisis is retarded. Housing ownership is at an all time high in the US and most of these people shouldn’t have been able to buy with their income and credit score.
Check out this article from business week…the chart alone will help those who have no common sense.
I’m guessing that M.P. is referring to this cover story from last week’s Business Week.
I’d love to have the M.P.’s of the world tell us what their qualifications – if any – are for making such sweeping pronouncements. Have any of them ever even bought a home?
MP,
anyone past the age of ten who uses “retarded” as an insult is not worth listening to.
Most of you who predict the doom and gloom scenarios for real estate may be right. I kinda doubt it though.
More than anything else the comments are motivated by jealousy and the hope that prices drop enough so they may actually purchase something. I suspect few of you have actually ever purchased real estate. Now for some of you that may be out of fear or lack of income. For others it may be in the hope that prices will drop dramatically.
Even if prices drop dramatically, which I doubt, few of you would buy anything. You will still be waiting for further drops or that winning lottery ticket.
As for the Business Week story did you notice that one of the economists referred to has dramatically changed his views of where the market was going? A few months back he thought the worst was over. Now he thinks it is ahead. What will he think in July? Maybe something entirely different.
In the last 70 year there has never been a nationwide average drop in housing prices anywhere near what you folks hope for. That doesn’t mean it can’t or won’t happen. It just means it ain’t a good bet and is worse than my grammar.
A big drop here is possible.
I lived in Toronto through the 90-91 recession. Home and condo prices did actually drop 30%. An overheated market had led developers to overbuild and lots of speculators to buy multiple condo units in hope of making a killing on the flips.
There was lots of anguish in the market. The flippers got burned and some developers went under, but most owners were OK (unless they panicked and sold at the bottom or were forced to sell because of some reason beyond their control — death, divorce, job loss, etc.)
But within 5 years, market forces and an improving economy led to a recovery and everyone who held on made out fine. The upside was that a lot of people were able to enter the market during the price dip.
So a 10, 20, or 30% reduction in overpriced markets can happen. (But it won’t be across-the-board – prime properties will not take as big a hit as the marginal ones.)
Who knows what will happen in Chicago in the near future? (Probably not any of us!)
W.W.
Anything is possible. And, as you note, most of it is unknowable. And lots of it is unlikely. To paraphrase an old saying, “economists have successfully predicted 9 of the last 5 bubbles.”
I’ve previously phrased one of your arguments in a slightly different fashion: marginal areas are much more likely to be affected than prime areas.
It is possible for prime properties to take a sizable hit, and I’ve seen it happen in isolated instances in Chicago. Here’s an example.
In the mid-80s the price of single-family homes in DePaul doubled and in some cases tripled in a very short time span. This occurred largely because the perception of the area changed rapidly and a surge in demand coincided with a very thin supply of homes. The market wasn’t broad enough to establish solid price levels. By about 1990 the supply increased markedly (that meant to several 100 homes from several dozen) and demand diminished, largely as a result of an economic slowdown. Homes that had been purchased for $800k resold for $500k. In a number of instances a relo company / the buyer’s employer took the economic hit rather than the buyer.
As you point out, when a buyer enters and exits the cycle sometimes made all the difference. I sold my gut-rehabbed home on Seminary for $275k in 1979 – a very high price at the time. My buyer sold in the late 80s for about $800k to a buyer who put it on the market about 2 years ago for $1.7M. II didn’t follow it past then, but I suspect it sold for somewhat less than $1.7.
My point? All markets are very local and very specific. In most of the prime areas of Chicago within the past half dozen years we’ve seen price levels that did not inflate rapidly and were established at fairly deep levels of supply and demand. That’s an argument for relative price stability in those areas. Not, necessarily, a conclusive argument.
Irishpirate,
The best take I’ve seen on what gives with some of our commenters is Everybody Sucks – Gawker and the rage of the creative underclass
“It’s that old story of haves and have-nots, rewritten once again.”
Irishpirate,
I agree we haven’t seen a large drop of 20 to 30 percent in homeprices in 70 years, but we have also not had a housing boom where the average price rises over 30 percent as it did from 2000 to 2007. We are in uncharted territory in terms of overvaluation. The glut of luxury property will not go away overnight, especially with developers raising prices rather than dropping prices to increas sales?
In addition to luxury properties (1 million and up) the market place of potential buyers at the 400 to 500 K price range has substantially dropped due to tightened lending standards.
P.S.
Why is it you have to say
“I suspect few of you have actually ever purchased real estate. Now for some of you that may be out of fear or lack of income.”
I have been looking to purchase a home since 2005 but I will not chase a bullish market. Anyone who purchased real estate in the last 18 months most likely regrets it.
My MMA/savings acct. will earn me 5 percent annually while your piece of property will probably lose you 5 percent of more annually atleast for the next few years.
M.P.
Share with us the specifics on one or two of the properties that you passed on in 2005.
How are they doing today? How would your life have been worse had you bought?
You sound more like a home investor than a home buyer. Most home buyers likely don’t regret their decision – they own a home.
Joe,
Many many people are bitter over their purchases over the last few years. Have you not seen the headlines of lawsuits against realtors, developers, etc. People saw home buying as a get rich quick scheme and when the well ran dry they have to blame someone other than themselves for their poor decisions.
I looked at properties in lakeview and lincoln park, mostly small condo complexes or 3-flats. If I would have purchased I would own a home, it would be worth less than it is worth today, and yes I would regret my decision. Because although I like the idea of owning a home, I like the idea of not losing money more.
M.P.
I was hoping for specific examples of what you passed on – address, price, date.
“Because although I like the idea of owning a home, I like the idea of not losing money more.”
You’d only lose money if you bought & then quickly resold. You can’t escape the reality of business cycles, things heat up, things cool down – if one really wants a long-time, over the years the eact purchase price becomes less and less relevant.
Take Joe’s example of the $279K house which later sold for 800K – would it really have made that big of a deal if the fellow who bought it from him had paid $260K or $300K? In the long run, the difference in the mortgage payment gets nullified by inflation, meanwhile, you have a home you can customize for your life.
Carter,
It would have made a difference to my then wife if the buyer had paid an extra $25k! She would have pushed hard for a Benz instead of settling for an Audi.
There’s something about buying a home that inspires absolute terror and panic among a large number of first-timers. Many undergo what’s called “analysis paralysis” in the corporate sphere, and some never emerge from it.
MP,
you said this in reference to my enlightening and profound comment:
(“P.S.
Why is it you have to say
“I suspect few of you have actually ever purchased real estate. Now for some of you that may be out of fear or lack of income.”)
I said it because it is true. Not much is clear to me in life, but that much is.
By the way if you had bought in Lincoln Park Or Lake View in 2005 or 2006 you likely would be able to sell the place today for a similar or slightly higher price. Overall prices have not dropped yet. The market times have increased, but if you look at median sales prices they have actually gone up. Now that may be a function of higher priced units selling relatively better than lower priced units. The weakness that the overall Chicago market is displaying now is in the lower priced units. Which is different than most conventional wisdom would have predicted. I certainly wouldn’t have guessed that.
These facts that some people state such as “prices have dropped 15%” are not evident in many neighborhoods. Now if you spend some time looking and find a seller who needs to sell quickly you will likely get a good deal. That means making a decision and not waiting for this near mythical time when all prices drop and you can jump in and get your price. My suggestion get a real estate brokers license and join the MLS and start looking. If you take classes you can have a license in a matter of months and be your own broker. The commission you save or make will likely make the hassle worth it.
Now I don’t know when the market will bottom out. It may have already. We may get a false bottom and then another later bottom. We may be about to see a slow steady rise in prices. I don’t know and I got news for you nobody else knows.
I also know people who bought in 2007 and they are happy with their purchase. They got a good price at the time and seemingly could sell the place for around the same price if they had to. Perhaps more. Since they don’t plan on selling for 6-7 years it really doesn’t matter and they are much happier owning than renting. Their is a pride in ownership and also a sense of “adulthood” that many people seek.
In the past when I’ve bought real estate I always looked at trying to get better than average long term appreciation. It didn’t really matter to me what the property would be worth 12 months down the road. Now 12 years down the road…….that mattered to me.
By the way MP, since price appreciation seems to be your only criteria I suggest you look to the “3rd tier” neighborhoods in the city for potential growth. Short term Lincoln Park and Lake View may hold their own price wise, but long term the Garfield Park, near south side, Albany Park, Avondale, etc neighborhoods offer better values now and almost certainly better long term appreciation potential.
The time to buy in Lincoln Park and Lake View solely for appreciation potential is long past. In the 90’s Bucktown/Wicker Park and Uptown generally had the best price appreciation. In this decade and beyond it will likely be the neighborhoods beyond those.
Go to South Shore young man as some wag named Greeley might say if he were alive today.
you’re right Joe, but in one case I think we lost a house as we had hardballed them too far, and they reneged and took the house off the market after thinking about it more (well, other story is there was a shiftless son and daughter involved, and the realtor told us they were bullying their mom to stay as they didn’t want to actually have to move and pay rent, reasonable from their perspective, I’m sure). I’m still happier now as we got a lucky break, but looking back/forward I don’t think in the big picture paying $310 instead of $330 would really break the bank.
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