Chicago Weekend Fun!

I have lived in Chicago my entire life and I have never seen the real estate and housing market take a crash like it has been doing this summer. Summer is usually the best time to sell or buy a new home or property. This summer of 2007 has been bad for real estate values and home sales in general because of the market crash that has been the results of so many sub-prime mortgages being defaulted on right now, and so many banks and loan companies going bankrupt or having financial problems. It is a little scary actually. I own a small condo in the Near West Chicago Suburbs. It has not increased in value in 2 years. (it may have for a short while but whatever it gained it since lost)

If you know Chicago you know that Oak Park much like Evanston and Chicago itself have been over developed with too many condos. Naperville, Aurora, Minooka and Plainfield have too many newly constructed homes. Over development of these areas has left these towns with thousands of condos for sale and some estimates say that over 40% of them are vacant as they are trying to sell them. TIME magazine even did an article about the housing market bust this week explaining how the 0% down and interest only loans given to people without enough income to cover the regular mortgage payments and who bought larger homes than they could afford has backfired now that so many people are forced to deal with forclosure and bankruptcy. I have to say that even though I am not someone in this situation I have seen it first hand. 2 condos in my building (of 42 units) have been foreclosed on in the past year. The first one took almost a year to re-sell for the bank that foreclosed on it. All you have to do is miss 3 payments and then the bank foreclosed and you have no home. I wonder if people realize it is much more fast and aggressive than if you have credit card debt you don’t pay. These banks are aggressive and will not work out a deal with you. It’s very straightforward, you pay your mortgage or you loose your home.

I also have a distant second cousin who is loosing his home to a foreclosure in the far west suburbs of Chicago. Granted he has been unemployed on and off for years, so buying a home may not have been the right thing to do in the first place, but they have 2 kids and they may have to live with one of their parents for the next several years to recoup the losses from this foreclosure and possible bankruptcy. I wish I could say that it was just them that had bad judgement and made a mistake, but there are thousands of people in the same situation.

I guess the low interest rates led us to a situation where more people wanted to buy property than there were properties available and that drove the demand and prices up year after year in the beginning of the boom. (2001-2002 ish) When companies realized they could flip homes and apartment buildings into condos for resale and make a fat profit within a few months, everyone started doing this. Then when banks and loan companies wanted to continue the high volume of sales and closings on new property sales they opened up and lowered the requirements for these home loans and then let people borrow money against no capital and without any verification of their income. Then those sub-prime loans adjust interest rates in a few years. Ala the 3-1, 5-1, 7-1 ARM type loans (adjustable rate mortgage) that you see listed. Those loans are adjusting now. People are not able to meet payments and the homes are being repossessed by foreclosure and there are more homes on the market than there were when it was just overdeveloped. Oak Park alone has over 500 condos for sale and you can get them CHEAP. Like 150K for a 1 bedroom cheap. That is super cheap. And so there is a market with 2-3x more properties for sale and 1/2 the people who would be able to get financing to buy them. Plus now that there is no demand and a huge surplus (basic supply and demand economics class coming back to me) the home and condo prices in Chicago, Oak Park and everywhere else are coming down. So people are not seeing the increase in value anymore without the demand driving it. Somewhere along the way we decided that this 5-10% value increase every year was a god given right.  It isn’t and a lot of people loose money on real estate that does not gain value over time. So it isn’t always better to buy, unless you plan on paying off your mortgage in full and living there a long time.

30 year fixed mortgages are the only way to go.  In fact the 30 year fixed mortgage and the tax deductible mortgage interest was originally devised not as a get rich quick scheme, but a way to provide for Americans in their retirement. Think about it for a second, do you want to still pay a mortgage or rent housing payment when you are retired and are living on your meager social security payments?  No, no one does, and to survive then, your home has to be paid off. I think that people forget that not having housing payments as a senior citizen is the goal of buying real estate. Not to impress your friends, not to make a ton of money, but to live within your means and provide for your future. 

So, I don’t know when all this housing decline will stop in Chicago or across the United States, but I hope that people reel in their housing expectations because no one is entitled to a fancy house with granite counter-tops and stainless steel appliances. That is a privilege you have to work hard for, it’s not a right.

All that aside, buying a home or condo should be a good thing to do in Chicago or the Chicago Suburbs. In the time I have lived here it has provided to be a good place to live, work, play and raise a family. I have always found that there are more work and entertainment opportunities here than in most places in the Midwest. I have also found that most all the suburban schools are great, and some Chicago schools have gotten a lot better in recent years. The city has cleaned up a lot of neighborhoods, although it lacks action in many others. Most people who live in Chicago or the Suburbs long term can expect a comfortable existence with moderate taxes, plentiful shopping and lots of entertainment, arts and sports teams to attend to. The one downfall of our beloved city is the traffic on the roads and all the pollution, but every city has to deal with that. So, if you are one of those people who has cash on hand to make a down payment on a house or condo and has good credit, well done to you. Don’t be afraid of buying a home or property in Chicago, in the long term it is a good investment as a great place to live, work and raise a family.