Worst Quarter Since 1994

This article was written by Chicago Crain's columnist Alby Gallun. The state of affairs in the residential real estate market has not seen such a significant slow down in this quarter since 1994.


By Alby Gallun
Oct. 29, 2007

Local homebuilders endured more pain and suffering in the third quarter as new-home sales continued a slide that began two years ago.

Residential developers in the Chicago area sold 3,796 homes in the quarter, down 34% from the year-earlier period, according to Schaumburg-based Tracy Cross & Associates Inc. On a seasonally adjusted, annualized basis, sales totaled 15,296 units, down 40% from last year and their lowest level since 1994.

"It's the same old story," says Tracy Cross, president of the real estate consulting firm. "I think we are at the bottom right now. How long it stays in this trough, I'm not so sure."

After a prolonged boom fueled by easy credit and speculative buying, the residential market faltered in 2005 as rising prices and mortgage rates curtailed demand for new homes. More recently, lenders have tightened their loan criteria amid the subprime lending crisis.

The downturn has rippled through the industry, forcing widespread layoffs at homebuilders and subcontractors.

"On our end, it's terrible. It's awful," says Jim Venhuizen, owner and president of Cimarron Construction Inc., a New Lenox-based carpentry contractor that serves the residential market.

Cimarron employs about 25 carpenters now, down from roughly 100 a couple of years ago. Though the firm is still profitable, its net profit margin has shrunk to the low single digits, well below the 10% that is the norm for the carpentry industry, he says. Work is scarce, and homebuilders that do have work for firms like Cimarron are demanding price cuts.

"Everybody's going to be working real cheap for the next year, for sure," Mr. Venhuizen says.

Another apparent victim of the downturn in the new-home market is Neumann Homes Inc., which last week said it plans to file for Chapter 11 bankruptcy protection (ChicagoBusiness.com, Oct. 22).

The Warrenville-based homebuilder, which had 15 subdivisions in the works in Illinois, has laid off most of its employees and closed all of its sales, production and customer service offices.

The new-home business is especially bad in the suburbs, where sales fell 42% in the quarter, to 2,502 units, according to Tracy Cross. Sales in the city fell 14%, to 1,294 units.

A growing number of people who signed contracts to buy new homes are canceling, either because they can no longer qualify for a mortgage or they simply don't want to buy anymore, Mr. Cross says. The average cancellation rate is about 30% now, up from the more typical 15% to 20%, he estimates.

"Some are walking away from earnest money," he says. "Others are coming up with creative ways to get out."

The average Chicago-area new home sold for $416,329 in the third quarter, up 16% from the second quarter. But that number reflects a shift in the sales mix toward expensive condominiums in the city rather than any broader pickup in the market.

Though the downturn is deeper and longer than most observers expected, sales are so low that they can't drop much further, Mr. Cross says. Only 77 of the 817 condo and townhouse developments the firm tracks had eight or more sales during the quarter, and 327 either logged no sales at all or suffered a net loss of sales as buyers canceled contracts.

Cook County Taxes Due December 3

The County has released the new tax due date for the county taxes FY2006 are due December 1, 2007. Since that day is a Saturday they will be actually due that Monday, December 3.

That is the latest date ever recorded due in part to the budget deficits and disputes with the county board. The board budget was recenlty approved which allowed Pappas to begin the issuance of the tax bills.

Rumor has it that 2/3 of the city proeprty taxes will go down (a whopping $100 on average--whippdeedoo) and then will "adjust up" the following year.

Twin Assault

Twin Assault

U.S. President George W. Bush will outline reforms on Friday to help struggling subprime mortgage borrowers, and his central bank chief will deliver a speech which will be pored over for hints of a looming rate cut.

Federal Reserve Chairman Ben Bernanke speaks on "Housing and Monetary Policy" at around 10:00 a.m EDT.

Bush, who will make a statement at the White House an hour later, will announce assistance for homeowners with subprime mortgages to avoid default via changes to the tax code.

"He will also discuss reform efforts to prevent these kinds of problems from arising in the future," a senior U.S. administration official said.

Massive problems with U.S. home loans, stemming from aggressive lending mainly to poor people who have been squeezed as interest rates climbed, have fostered a liquidity crisis around the globe as banks have scrambled to calculate their exposure to the sector.

The risk of a credit squeeze arising from mass mortgage defaults has also raised the prospect of U.S. consumers trimming spending at a rate that could tip the world's largest economy into recession.

Investors have been pinning their hopes on an interest rate cut by the Fed, at its next meeting on September 18, to shore up the U.S. economy and stop the sickness spreading.

Bernanke reiterated on Wednesday the Fed was "prepared to act as needed" to ensure credit market problems do not adversely affect the economy, fuelling speculation the central bank will lower its benchmark federal funds rate from 5.25 percent.

But experts have said the Fed is in no rush to act as it wants to disabuse investors of the idea that it is there to bail out their poor decisions.

European shares rose as investor hopes mounted for dual action from the Fed and the U.S. government. U.S. stock futures pointed to a leap when Wall Street opens.

"It's comforting to investors that Bush and the administration are recognizing that there's a problem, but I still think the subprime mortgage problem is just going to get worse," said Benjamin Halliburton, managing director at Tradition Capital Management in Summit, New Jersey.

"I do think the market is going to have another panic down if Bernanke doesn't signal he'll cut rates in September."

Bush will press for legislation giving state agency the Federal Housing Administration flexibility to help subprime borrowers, including the power to guarantee loans for people at least 90 days behind in mortgage payments to help them avoid foreclosure, the Wall Street Journal reported.

GOOD NEWS, BAD NEWS

Japanese Finance Minister Fukushiro Nukaga said he had been told by U.S. Treasury Secretary Henry Paulson global economic fundamentals were strong, but that it may take some time for adjustments in markets to take place.

International Monetary Fund First Deputy Managing Director John Lipsky said market turmoil would dent but not derail world growth, but that it was too soon to declare the troubles over.

"Central bank action so far has been appropriate but market turbulence has not fully receded," Lipsky told Reuters on the sidelines of a gathering of central bankers and economists in Jackson Hole, Wyoming.

It is there that Bernanke will speak later.

There were plenty of signs the crisis was far from over.

Rates for three-month sterling hit their highest in 8-1/2 years and rates for other currencies also surged, reflecting persistently strong demand for cash from financial institutions.

Australia's central bank struggled to ease upward pressure on some market interest rates as renewed trouble in the global commercial paper market made institutions reluctant to lend.

Deutsche Bank (DBKGn.DE: Quote, Profile, Research) has shut down its London proprietary credit trading desk and is laying off some of the team, a source familiar with the matter said.

Earlier this month a source close to the bank said Deutsche was set to ditch its credit relative-value trading strategy -- used by the London desk -- after losses of about $135 million.

Deutsche Bank declined to comment. It has said nothing so far about any losses stemming from credit market tremors.

Britain's Barclays Plc (BARC.L: Quote, Profile, Research), meanwhile, turned to the Bank of England as the lender of last resort for the second time this month after at technical breakdown in the British clearing system, a source close to the matter said.

Barclays declined to confirm it had used the borrowing facility but said in a statement it was "flush with liquidity".

Mike Peacock

LONDON (Reuters)

Technorati Tags: bush, bernanke, subprime, policy, change

Free Chicago MLS Property Search Services

Here is a link to the newest MLS map search service I offer all of my clients and non-clients. Its a fast and effective search tool which allows you to enter your search parameters, drag a box over the area you are looking at and at the click of a button all the properties in that search area are shown including a scroll over feature where the picture and short info (price, bedrooms, baths, picture) pops up. Then click on that to get more info on that property.

Just one more way I am helping bring the latest tools in the industry to each of my clients (or future clients). Email login is required but that is the limit to the obligation you have to my company.

Enjoy and as always feel free to call me when you are ready to start making appointments to start seeing some of these properties in person. I will include my neighborhood market analysis and review all of my buyer services.

Market Pressure Cooker Good ?

This article written on CNNMoney.com site is interesting and while the general gist of the article is a bit slanted towards polyanna (the market jitters from last week and the US Fed $37 billion cash infusion is good for the market) doesn't really address the fact that this could be a major negative for the real estate market....I at least do agree that this will thin the heard of buyers and bring only the best qualifying buyers to the table/ At least I'd like to think so.

I like when the market puts pressure on the industry as a whole and weeds out the trouble spots like buyers who shouldn't be buying or realtors who shouldn't be selling...

What do you think??

Who can't get a mortgage now

Buyers with good credit and a down payment will make out well - all others, prepare to pay.

By Steve Hargreaves, CNNMoney.com staff writer

August 11 2007: 3:15 PM EDT

NEW YORK (CNNMoney.com) -- The stock market is going crazy. Hedge funds are going under. But for the average American looking for a home loan, the crisis in the subprime mortgage market may actually be good news.

"Not only is it nothing to worry about, it's an absolute positive," said Loni Graiver, president of the Maine-based Cumberland County Mortgage. "Not only have [home] valuations come down, but [interest rates] are still historically low."

Rates on 30-year fixed loans dipped last week, to 6.41 percent, according to the Mortgage Banker's Association.

In addition, tightened lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices.

The one catch is this: You've got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).

Those characteristics basically define someone who qualifies for a loan through a government program like Fannie Mae, which makes up about 50 percent of all outstanding mortgages, according to Guy Cecala, publisher of the industry newsletter Inside Mortgage Finance.

Graiver said to expect to pay a down payment of at least 10 percent, and have a FICO credit score of 620 or higher in order to get a rate between 6.2 and 7.5 percent. Perhaps 90 percent of home buyers qualify for that prime rate, although if you want a rate below 7 percent you probably need a FICO score above 660.

To get the best deal, "plan on coming to my office with your tax returns and a down payment," said Bob Mouton, President of the Long Island-based American Mortgage Group.

If you're among the 10 percent of people with credit scores below 620 who need a subprime mortgage, things could get tricky.

"To a large extent, they are going to find that no one wants to lend to them," said Steve Habetz, president of Threshold Mortgage in Westport, Conn. "Those loans are being eliminated from the marketplace."

Someone with a credit score of 600 might have to pay as much as 9.5 percent, according to FICO, which provides lenders with borrowers' credit ratings.

You could also run into trouble if your loan is for more than $417,00, the maximum amount that can be channeled through a government lender. Loans over $417,000 are considered "jumbo" mortgages, which have recently seen rates jump due to a perceived increase in risk.

Mouton said money for subprime loans is still there, but be prepared to pay interest rates of 8 or 9 percent on them, compared to just over 7 up until recently.

Eugene Choi and Rich Bouchner, owners of Commodore Mortgage Group, say they've had to scramble to get loans for clients in the New York area that didn't meet the traditional criteria.

One was a waitress who made decent money at a high end restaurant, but couldn't prove it because so much of her pay was in cash tips.

Another was a young lawyer, making nearly $200,000 in the city but who didn't have the money saved for the down payment on a $800,000 Manhattan condo.

"A lot of people who should have qualified for credit are getting squeezed out of the market," said Bouchner. "Our lenders are turning off the spigot so quickly, these loans might not be here tomorrow."