Thursday, December 30, 2004

Record run may end, but not gains

Expectations a bit more realistic
Record run may end, but not gains

By Mary Umberger
Chicago Tribune staff reporter
Published December 30, 2004

Wanted: Buyer for North Side condo, owner anxious.

He's so anxious, in fact, that he's knocked $70,000 off the asking price, and if he gets a firm contract before Feb. 4, he'll throw in two tickets to the Super Bowl, which is being played that weekend in Jacksonville, Fla.

In the housing frenzy of recent years, it's seldom been necessary to make such significant price cuts, much less to dangle a Super Bowl carrot at $500 per ticket. But North Side real estate agent Mark Pasquesi, who has the three-bedroom condo now listed at $429,000, says some new strategies are in order.

Not that he thinks real estate's hot streak is over. "We're seeing the same slowdown that's typical for the holidays," says Pasquesi, who expects a New Year's upturn.

He may be right. Industry observers tend to agree that 2005 will be another very good year for real estate, though they say business will be less hectic. That's because it has to be; the pace of four consecutive years of record sales isn't sustainable, they say.

"A lot of buyers have found the home they've been looking for and we can expect a bit of a breather in 2005, which will remain a historically strong year," says David Lereah, chief economist for the National Association of Realtors.

Lereah expects that the 6.94 million existing home sales expected for 2004 will ease to 6.38 million in 2005. He sees newly constructed homes sliding similarly, from 1.18 million in 2004 to 1.13 million in 2005.

But if sales will lighten up, prices won't. Nationally, he predicts price increases of 8 to 9 percent.

Mortgage interest rates, the long-running star of the housing show, are expected to help offset higher prices by increasing slowly and then resting at manageable levels. Various analysts see them finishing 2005 at about 6.5 percent, possibly lower. The typical rate on a 30-year fixed-rate mortgage was around 5.75 percent in late December.

Illinois buyers might find a more palatable price tag, according to John Veneris, president of the Illinois Association of Realtors. "We anticipate that as long as interest rates stay about where they are, we'll see price appreciation in the same areas," he says.

Attractive interest rates are helping to counter price increases for Illinois builders, according to Chris Huecksteadt, director of the Chicago regional office of Metrostudy, a housing research firm.

"Local builders are getting squeezed on all sides: materials costs, development costs and particularly land costs," he said. Local builders may be used to having annual significant sales growth, but overall, their prospects are good, he says.

"We're at 35,000 starts [in the Chicago area in 2004]," he says. "If we could do the same in 2005, that would be a strong year. We might see a slight decline, to 32,000 or 33,000."

Even the market for new condos in downtown Chicago, recently a source of concern because of potential overbuilding, is getting a more positive gloss.

"A couple of years ago, everyone seemed to be doing a new building, and then there was a cool-off as banks started wanting 40 percent of the units to be pre-sold" to justify the financing, says James Kinney, president of Rubloff Residential Real Estate in Chicago.

"Now, once again, there's a lot of upbeat thought. There are a lot of new projects being brought to the table," he says. "With delivery times [on the units for the new buildings] going out to 2008, you have to wonder, again, is that too much inventory? Apparently, a lot of people don't think so."

A recent report from Chicago's Appraisal Research Counselors, which tracks the downtown market, said that high-rise developers were getting those early reservations locked in.

"The outlook for unsold inventory is very favorable," says Gail Lissner, the firm's vice president, who estimates that downtown gained 80,000 residential units in the last 15 years.

For all the bullishness, there are concerns about the market.

The "price bubble" issue, in particular, is getting louder. A federal report in December said home prices nationally increased at an annualized rate of 18.5 percent in the third quarter, the fastest in 25 years.

A December report on home prices in 20 countries by The Economist magazine flatly declared that housing in the U.S. is 30 percent overpriced.

At about the same time, economists at UCLA pronounced that, in California, at least, the bubble is real, with blistering home prices finally beginning to recede. However, the UCLA report expects the bubble to dampen an overall economic recovery there, rather than cause a housing collapse.

Whether a bubble exists is a matter of hot debate in the industry, but few argue that price run-ups are pushing less affluent buyers out of the market.

"In new construction, depending on where you go, you're looking at $180,000 to $200,000 for a real starter home. It wasn't that long ago that it was $150,000," says Huecksteadt, who added that land costs are continually pushing up that price point for first-time buyers.

"If interest rates hold steady, that will keep buyers in the housing market over the next year," Huecksteadt says. "A recipe for disaster would be rapidly rising interest rates and an economy that's losing jobs. Disaster may be too strong a word, but there would be danger."

Some concerns are harder to quantify.

La Grange real estate agent Joan Smothers is seeing a shift in buyers' attitudes. She's surprised by the number of deals falling through, apparently due to shaky consumer confidence.

"Offers are falling apart during the first five days," she says. "They get the homes inspected, and instead of the usual negotiation, with the buyers saying, `Fix this and do that,' now they're saying, `I just don't want to buy it.'

"They just walk away from the deal."

Smothers estimates that 20 percent of recent contracts have dissolved this way. "Now I'm telling sellers they have to be super reasonable. The days of saying, `I don't like that offer, so I'll wait 10 days for another one,' that's not there any more.

"This isn't a bad market. I don't see any hand-wringing," Smothers says. "I'm just telling them that we have to be smarter in 2005. It's going back to normalcy, when you can expect it to take four months for a house to sell."


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