Sara Benson acquired her first condominium in the city at the peak of the boom, back when speculators traded condos like stocks and the value of some units doubled in as little as a year. It turned out, she paid too much: $24,000.The article continues and compares the 1970's condo mania to today's market:That became clear when she sold the one-bedroom walkup in Buena Park for $13,000 four years later, after the Chicago condo market crashed. It was 1983, a good year for Michael Jackson, whose album "Thriller" was selling a million copies a week, but a bad year for the Chicago condo market, which was suffering from a glut of unsold units and soaring interest rates.
"It was a bloodbath," recalls Ms. Benson, a residential broker who was working as a property appraiser at the time. "So many developers got caught up in the excitement and frenzy of the market."
Back on January 2, 2006 I wrote "However, condos especially in the city itself are likely to fall by over 20% in real dollars within 3 years." The condo market in Chicago is bubblicious and prices are likely to fall by over 30% in real dollars from peak prices real dollar prices.More than a quarter-century after the city's first condo craze — or "condomania," as it was called at the time — Chicago is several years into another condo boom fueled by low interest rates, the growing appeal of city living and plenty of speculative activity. The skeptics see a bubble poised to burst, while market boosters say Chicago exhibits none of the speculative excesses of other markets, like South Florida, Las Vegas and Southern California.
Yet the early 1980s show that the Chicago condo market is not immune to a crash.
To be sure, conditions were different back then: Rates on the average 30-year fixed-rate mortgage hit 18% at one point, vs. a mild 6.5% today. Rates are rising again, but no one expects a reprise of the '80s.
In one respect, however, the market is riskier today. Most developers back then were converting apartments into condos, adding little to the overall supply of housing stock. Today, condo developers mostly are building new high-rises, adding more than 26,000 units, excluding conversions, to the downtown market since 2000, according to Chicago-based real estate consulting firm Appraisal Research Counselors. Another 8,600 units are on the drawing board for this year alone (Crain's, May 15).
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I wonder what those condo's are worth today. Also, it looks like Chicago survived that episode. As I have been saying, real estate is cyclical. Big deal.
ReplyDeleteva_investor,
ReplyDeleteI think a 20% haircut is going to be painful. I don't think that fact its cyclical is going to make anyone feel better. However, I do take your point that over the long-term 10 years or more most people will be alright and may come out ahead. If you have to sell though it will suck.
NOVA Fence Sitter
va_investor,
ReplyDeleteIt is a big deal if you buy at peak or near peak. Think of the price difference. Most people don't live in the same housing unit for 30 years. [Even if you did it would still make sense waiting a few years to buy in the bubble markets].
It is a "big deal" if, in the case of an emergency - job loss or transfer, for example - someone has to sell.
ReplyDeleteHistorically, if one couldn't sell, one could rent out their home. But today rents barely cover 50% of all the home owning expenses in the DC area (mortgage, rising property taxes, insurance, maybe even condo fees).
So those who've bought the past 2-3 years will be in some financial trouble if they need to move.
That's a big deal.
I would not buy now either. I have seen this coming for a few years now and have cautioned friends and relatives. The problems for some bubbleheads is that they didn't buy in 2002 or before due, probably, to fear.
ReplyDeleteHousing was certainly affordable. Now you can only hope for huge price drops and that rising interest rates don't erase the lower costs.
I only care that rents stay firm. I am looking out for myself and freely admit it.
VA Investor,
ReplyDeleteMany "bubbleheads" may not have been in a position to buy before 2002 for many reasons other than fear. In fact, I would bet that the majority of reasons are other than fear. Since 2002 though, a gut reaction of fear to buying into the mania correlates with your emotionally indifferent business analysis so I fail to see why you harp on bubbleheads being so fearful?
As for the article of this particular thread, one of the condo's from 1978/79 is estimated to be worth 500K today. That's from a peak price of 125K the purchaser paid in the late 70's. That amounts to a return of just under 5% annually over the last 30 or so years and includes the recent run up in prices.
My $0.02.
"It is a big deal if you buy at peak or near peak."
ReplyDeleteIs it really? Look at the facts of the article you cite. Assuming the women in Chicago bought her condo at peak prices in 1983, as in the article, then she overpaid by $11,000 (which is only known by hindsight). Now let's assume that that condo's current market value is $250,000 (a reasonable assumption for a 1 br. condo in Buena Park). So, because this person foolishly overpaid for a condo during the peak of a bubble, she now only has gains of $227,000 instead of $239,000. A big deal, I don't think so.
Va Investor is right. Real estate is long term. Bubblehead commparisons of YOY or MOM real estate prices and inventory makes for entertaining theories of doom and gloom, but it doesn't much matter to long term investors or owners.
"I wonder what those condo's are worth today. Also, it looks like Chicago survived that episode. As I have been saying, real estate is cyclical. Big deal."
ReplyDelete20 years is a long time to hold onto a one-bdrm condo. I would outgrow it by then.
Downslides are painful, everyone cannot hang on. And many have to sell at a loss, because they cannot "time the market", it works both ways, going in and getting out.
D in DC,
ReplyDeleteI agree that real estate is long term and if you can afford your purchase for 5-10 years it really doesn't matter.
Where I do see a problem is that many people that bought only 2-3 years ago, couldn't afford their own places were they to have to buy again today. These people were the market just 2-3 years ago. Inflation, wage growth, and basic fundamentals don't support such a rapid rise in price. This makes me a housing price bear.
I don't care if the market drops, corrects or moves sideways, I just don't think it'll continue up until forces move to get home prices back in line with historical trends.
I suspect that'll be about the time VA_Investor finds his next bargain.
My $0.02.
mytwocents,
ReplyDeleteI get your 5% return argument. This, of course, is "worst csae" (buying at the peak).
I see it from a different perspective. As an investor, my tenant(s) have bought the place for me. I probably would have had it paid off in 15 years and would have been positive for many years now.
I am not saying that this is the optimal investment - but I'll take it. I am no genius when it comes to the stock market.
From the article
ReplyDelete"...prices are going to have to adjust. It's a commodity."
Truer words were never spoken.
Folks, historical analasys shows that housing appreciates at the rate of inflation (around 3% a year). These gains go WAY beyond inflation. They have to correct.
You need to calculate real value of money. 23 years from 83 to 06. If it's just 3% return, then 11000 becomes 210000. So just putting the cash in the bank will produce extra 210000, which is the real difference now, not the 11000.
ReplyDeleteAnon 9:19 AM,
ReplyDeleteYou are not factoring in leverage or cost of renting alternative housing. A huge hole in your analysis.
The buyer of the 500K condo I mentioned made 34,500 off the first 2 flips and could have made about 37,500 more were he to sell vs refinance the 500K place in 1978-ish.
ReplyDeletePlopped into stocks in 1978 earning 8%/yr would have resulted in nearly $650K by 2006.
$650K vs $500K. Disclaimer, this is a real rough comparison. Doesn't include rental income or housing costs during that time. Also doesn't include lowering the starting amount if taxes/home sale costs were included...
Just a mental exercise.
My $0.02.
va investor and you other guys who say "real estate is a long term investment" are missing a key point.
ReplyDeletethe purpose of investing is to make money, preferable more than the next guy.
while real estate is typically a long term investment, current market conditions have resulted in buyers willing to pay $2 for $1 bills. smart investors benefit from such folly by accepting the $2, saying 'thank you,' and repurchasing similar dollar bills when they sell for $1 again (or preferably less).
to do otherwise is to accept mediocre investment performance, and thats not what a smart investor accepts.
successful investors don't confuse intrinsic value with market value.
When the bubble hit condos a couple years ago, I was more sure than ever that we had a bubble.
ReplyDeleteI live in a rented apartment, as I have for 14 years. Apartment living isn't bad; it has advantages (no maintenance, property responsibility, or yard work) and disadvantages (neighbors right on top of you).
Condos seem to add a lot of the disadvantages to apartments (the maintenance and responsibility for the property) but still have all the disadvantages, like neighbors who decide you really ought to hear a bass drum thumping at 2:00 in the morning.
Unless a condo were truly cheaper than an apartment on a month to month basis, AND I was getting it so dirt cheap that selling it wouldn't be an issue, I have no idea why anyone would be interested. And it seems that any decent condo has a high condo fee.
Unfortunately, I think a lot of new condo owners are discovering what I just said, but from the vantage point of condo owners stuck in a high-priced, unsellable condo, rather than a renter observing from afar like me.
A Redskins fan
I meant to say condos lose the advantages but add the disadvantages of renting an apartment.
ReplyDeleteA Redskins fan
john fontaine,
ReplyDeleteYou are far more energetic than I am. Give me a long-term (lifetime?) renter and I'll charge undermarket rents for the next 2 decades. I'm lazy and don't care about the highest and best use of my money.
I'm not going to go to the trouble of moving in and out of the market (there are many costs to this that you have failed to consider). Am I stupid? No. Foolish? Maybe.
I am set financially due to real estate. Could I have more? Sure. Do I care? No. I'd rather enjoy life than deal with buying, selling, new tenants etc.
I make my money going in.
"The problems for some bubbleheads is that they didn't buy in 2002 or before due, probably, to fear."
ReplyDeleteHow about too young, just graduated law school right before 9/11 when jobs were scarce? Not all of us didn't buy due to fear.
I bought in my 2nd yr of law school. I had switched to night school and was working full time. I was 24.
ReplyDeleteAnonymous said...
ReplyDelete"The problems for some bubbleheads is that they didn't buy in 2002 or before due, probably, to fear."
I was in college in a state I didn't care to stay in. And I wasn't making enough at my summer internships to even consider buying.
Good midwest graph...
ReplyDeletehttp://www.housingbubblebust.com/OFHEO/OFHEO-MidWest.html
va investor - you said "I'm lazy and don't care about the highest and best use of my money."
ReplyDeleteThats fine if thats what you want to do. However, suggesting that others take the self-described "lazy" long-term approach is a disservice to others given today's abnormally high prices. Its not the best advice for people looking to maximize their investment results.
And if you really wanted to be lazy, you'd sell now and put the money in CD's. I'll bet the present value of cash flows from selling today will far surpass those you'll achieve from holding another ten years and selling then (this assumption is predicated on my belief that we have 2016 prices today).
One last question. If you're so "lazy" why do you work so hard as a realtor?
John,
ReplyDeleteI've never been a realtor. Used to be a lawyer, but haven't worked in 16 yrs. Home with the kid - who will be off to college in a year.
I am not telling anyone what THEY should do with their finances, only describing my attitude. I like my "lazy" plan. You do what's best for you.
so what do u guys suggest a first time homebuyer do. wait and hold a cash position or buy in, btw im in northern va. Prices still r sky high around here.
ReplyDeleteAnon (2:06)asked:
ReplyDelete"so what do u guys suggest a first time homebuyer do. wait and hold a cash position or buy in, btw im in northern va. Prices still r sky high around here."
First I suggest you decide whether you are looking for an investment or a home. Using words like "cash position" and "buy in" sounds like you are thinking like an investor. But, you use the word "homebuyer" which would indicate you are looking for a home to live in. If it is the first (i.e., you are looking to invest), then I would say that I don't believe this is the time to "invest" in real estate. Though some investments can be longterm (like Va_Investor's) and as such short term returns not matter, from an investment viewpoint why not wait a few months to a year for the market to settle down further to see if there are any bargains to be had. If you are instead wondering if this is a good time or bad time to become a homeowner, then you need to understand that there are no good or bad times to become a homeowner. Under any market conditions you should be able to work out something that is affordable for you and allows you to claim the tranquility, stability, and pride of home ownership that only someown who owns the roof over his/her head can experience. It doesn't matter if the place is a dump in the worse part of town or a mansion in the best, the feelings that come with homeownership can't be quantified like the "return on investment" that an investor requires. And if it is "being a homeowner" that you are looking for, then just go out there and do ... whether you overpaid by 10 - 15% or underpaid by 10 - 15% won't make a difference monetarily or in any other way. Owning the roof over one's head is different from looking for a return on your money, and your circumstances are not the same as anyone else's ... so even monetarily, you can't assume you will save money by waiting for a drop in prices. I know I wouldn't have had I decided to wait ... And the pride and security felt by knowing what is mine is mine? Priceless!
"Land holds a unique and pivotal position in social, political, environmental and economic theory."
ReplyDelete"Since land is fixed in supply, as more land is demanded by people the rent will increase proportionally. Demand is the sole determinant of land rent. Changes in land rent and land taxes have no impact on the supply of land, because the land supply is fixed and cannot be significantly expanded. "
http://www.henrygeorge.org/ted.htm
You mean the "mercedes C Class (?).
ReplyDelete"DC_Too merely recognizes that salespeople,"
ReplyDeletedc_too refers to herself in the third person! LOL!
"than it is to become an un-documented immigrant day laborer? Think about it."
ReplyDeleteExcept for that whole deal with sneaking into the country, which claims untold numbers of lives each year in places like the AZ desert alone. Unlike obtaining an RE license, which only claims, um, no lives per year.
Hey, anyone remember whatever happened to David's rule about making false accusations against people? He seems to have forgotten about that rule. Or at least he's forgotten about it when the person being slandered isn't him.
ReplyDeleteHow about some consistency David?
DC_too, When you try to undermine the credibilty of the messenger because you can't rationally dispute the message, you make it obviously clear that your assertions have been discredited. Thank you for admitting, albeit in your own childish way, that you are wrong.
ReplyDeleteI suggest renting. It's what I do, and it makes me very happy. Don't get me wrong- I do intend to buy someday, in a place and at a time of reasonable prices. Until then, I am living well, building a lot of equity (in equities and savings accounts, not leveraged bets on DC area real estate), and enjoying my life. If I lost my job tomorrow, I would have years to find another one. I can go out to a nice restaurant without worrying about making a house payment. And in my spare time, I track financial bubbles. For me, it is a good life, and I am in no hurry to change it, much less at the cost of my retirement or financial security.
ReplyDeleteA Redskins fan
why do bubbleheads always try to minimize real estate owners' large profits from long term appreciation by stating that they could have earned a larger return by investing in the stock market? Sorry I don't believe you. If you were such a great stock investor, than you wouldn't be a bitter renter.
ReplyDelete"can go out to a nice restaurant without worrying about making a house payment."
ReplyDeleteRenters in suburbia typically think Olive Garden is a "nice restaurant." Does this apply to you?
"I can go out to a nice restaurant without worrying about making a house payment."
ReplyDeleteIf dropping $120 for dinner for two at a restaurant is something you would otherwise "worry about" if you weren't renting, you aren't in a position to afford a home of your own.
Redskin fan,
ReplyDeleteHad you bought a few years ago your mortgage would be the same as your rent. And you wouldn't have to worry about your next meal.
You said that you are a longtime renter. Why?
Lance is a real estate tout/agent/analyst/severely underworked in any case. Who else but real estate cheerleaders talk and write like he does?
ReplyDeleteAnd saying so is not "attacking the messenger." It's merely relaying a fact. As Lance knows, users can be traced from this blog.
yeah bill, all those who disagree with you and the other bubbleheads are part of some vast conspiracy out there that exists only to keep you from having a place to call home so that you can move out of your mommy's basement ... And those men in white coats that keep coming around looking for you?? ... well, just pretend their the Good Humour Man coming to bring you an ice cream!
ReplyDeleteLOL. A lot to respond to. Whenever anyone points out that renting is often a better, happier, more fiscally prudent choice, owners get really upset.
ReplyDelete- discounting appreciation of houses. Not at all. But historically, house prices don't move up very quickly. And simply comparing buy and sell prices doesn't get you all the maintenance and upgrade expenses, closing costs, and all the taxes and insurance you paid over the years. Yes, houses had quite a run from 2001-2005 (approximately). Energy and other stocks did as well. The difference is, I believe energy stocks are actually worth closer to what they sell at today, and may go up more, while houses are no scarcer and no better than four years ago. Moreover, I can own a diversified, non-leveraged portfolio of stocks. (Stocks certainly have bubbles also, though, as 1996-2000 showed).
And if you are going to talk about the benefits of appreciation, you need to talk about the risk of depreciation as well. A $100,000 loss of value on a $500,000 house, or more on a more expensive house, could easily wipe out ten years of principal payments under some loans. That would mean that such an owner was in reality, a renter, but a renter with responsibility for maintenance, insurance, and taxes.
- do I think Olive Garden is a nice restaurant? LOL. Now you are equating fiscal prudence with a preference for chain restaurants. I haven't been to Olive Garden in many years, but I bet it is better than the ramen many ARM-enslaved "owners" are eating.
- if you can't drop $120 for a dinner for two... etc. This is a fascinating comment. I think it is intended as an insult. But really, I might be inclined to agree. If you don't have tons of spare income, you should NOT be owning. However, since I believe that, I also believe that a significant portion of buyers the last couple years SHOULD NOT HAVE BOUGHT. Since they often did so anyway with loans that allow them to make payments now and not later, I believe we are in a bubble. If the only people buying were people who could drop $120 a week for restaurants without going into debt, THERE WOULD BE NO BUBBLE.
- if I had bought a few years ago, I would now be paying less. This is factually incorrect. O.k., maybe if I had bought in 1995 or something. But anyone who bought with an ARM loan (as I read more than half of DC buyers last year did) is going to get a higher payment. And all property payments do adjust upwards for taxes, insurance, utilities, and condo fees, things that are all included in my rent (and are less since they are divided up among many- for example, the owner of my apartment building pays taxes on his profits, NOT on each apartment as if it were a condo). Moreover, rents have been flat or with small increases during the duration of the bubble. My own increases have been small enough that I suspect they merely cover increased utilities and labor costs, costs that I would not avoid (and may even be more) as an "owner."
I have crunched the numbers every year for four years. "Owning" has never made sense. And I am very glad I am not an "owner" right now, worried about what would happen if I lost my job or how I am going to pay off my credit card since I can't afford to pay cash at the Sizzler.
A Redskins fan
Redskins fan said: "If the only people buying were people who could drop $120 a week for restaurants without going into debt, THERE WOULD BE NO BUBBLE."
ReplyDeleteguy, if you can't drop $120 a week on them ... i.e., $17.14 per day if you are single or $8.57 per day if you are a couple, you really should evaluate if the DC area is for you. Some places have sunshine --- as in free beaches, others have quiet living --- as in say some city such as Atlanta, DC has an exciting nightlife and GREAT restaurants. If you can't earn enough to at least be able to enjoy the restaurants than DC is not for you. Ditto with the real estate here.
Redskins fan,
ReplyDeleteYour calculations are based on an assumption you should re-evaluate: Rents don't increase based on the same factors that drive housing prices to increase. I.e., whatever has driven housing prices to increase as much as it has will eventually cause rents to increase accordingly ... yes, there may be a lag, but it'll come. And even if you believe that 100% of the increase was due to speculative forces (i.e.,flippers and the like), then those same forces will eventually affect the rent that the landlord must charge to cover his basic costs (including the effects of speculation on the cost of the property he is renting you.) On the DC Bubble blog some article was posted a while back showing how historically rents don't budge when folks are out buying real estate (i.e., your 'bubble') 'cause there just isn't enough demand to allow the landlords to justify raising rents. But once folks stop looking to buy, there are so many of them looking to rent (including foreclosed folks ..) or continuing to rent (the bubble heads), that rents skyrocket in short order. Remember, the bottom line is that when you are paying rent, you are paying all the landlord's costs (i.e., what it would have cost you to pay for the housing had you bought it when he/she bought it) PLUS a nice little profit for him. Now, how can that possibly be cheaper than if you had just bought it yourself?
In'gin warrior fan said: "if the only people buying were people who could drop $120 "
ReplyDeleteYet he cannot do that AND make his car payment in the same month.
I read it here myself: "financing a car is a saavy financial move" LOL! Houses aren't investments, CARS are where its at, baby!
"Remember, the bottom line is that when you are paying rent, you are paying all the landlord's costs"
ReplyDeleteLance, you're failing to account for all the old, nasty apartment buildings. Rents will remain moderate in those places, which is likely where most bubbleheads live.
lance-
ReplyDeleteI can pay my landlord a couple thousand bucks a year in profits, or I can pay the flipper several hundred thousand in paper profits, then turn around and sign a contract to pay a mortgage banker tens of thousands in profits every year for 30 years. I think I'll pay the landlord.
I don't see rents skyrocketing in the DC area. But if they do go up (and they will somewhat), they can still go up a lot and yet
1) I will still be saving a lot of money with my current income
2) it will still be cheaper to rent if house prices stay the same.
However, there is so much more housing in the DC area than 5 years ago, I find it difficult to believe rents will "skyrocket." In downtown Silver Spring, where I live, there are a lot of new projects that have gone up or are finishing up. There is a LOT more housing than five years ago. And at some point, Federal spending will have to slow, crimping demand in the DC area.
If rents do skyrocket, though, I will simply move somewhere else. There are still many parts of the country where housing is reasonably priced. I am not going to enslave myself for 2-3 times what a property is worth. I love Maryland and the DC area, and I don't want to move, but I won't be forced to be house poor and stay here either.
As for $120 a week on restaurants, that is $6240 a year in after tax income. How many households in the DC area can spend that much a year on going out? If you believe that only people that can should buy houses (and I am not necessarily disagreeing with you- you might be right), then FAR fewer people would have bought homes in the DC area in the last few years.
A Redskins fan
"Lance, you're failing to account for all the old, nasty apartment buildings. Rents will remain moderate in those places, which is likely where most bubbleheads live."
ReplyDeleteMake an apples to apples comparison, and the bubbleheads are right. Compare an "old, nasty" apartment building to say, an older, nastier rambler that needs new pipes and a new roof, and you have to pay for it, but it will cost you half a million in current condition. Or compare a new apartment building to a new condo development. Either way, I think you will find that renting is a better deal- at least I did.
A Redskins fan
Lance,
ReplyDeleteRedskins fan already pointed out your narrow interpretation of the $120/wk on meals. And he's already reasserted that an apples to apples comparison remains valid in the renting is cheaper than housing thread.
I would further point out that the market forces that cause houses to rise will not immediately impact rents the way you suggest. Your assertion that increased property values will be effectively passed on to renters is a pretty big stretch.
A successful landlord will be cash flow positive from the get go. That can't happen at today's prices because the asset is way too expensive. If someone tries to start their business now they will fail. It will be someone like VA Investor who has owned for quite a while, with much lower expenses, that will be able to undercut his new competitor and get the higher qualified renter.
My $0.02.
"downtown Silver Spring". LOL!
ReplyDeletenice
Lance, I second and re-emphasize mytwocents' point, which is you make a grossly erroneous assumption: that landlords can pass through increased costs to tenants.
ReplyDeleteThat assumption is wrong because it, in turn, assumes that housing stock is constant.
Your assumption breaks down when a number of speculators get into any given market, buying up properties in the hopes of becoming the next real estate mogul. As long as there are buyers at a certain price, builders will build.
If, as a result of speculative buying, the amount of homes/condos begins to exceed the demand, then the market is overbuilt and both home prices and/or rents may go down, because there are simply too many properties and not enough human beings to fill them. Only time and decreased new housing stock corrects this.
A good example of this is Chicago, where rents have remain basically flat for five years (they have decreased in real, rather than nominal terms). Yet property values have gone up 50% or so. All of those new owner-landlords have not been able to pass through that increased cost, because wage growth has been slow, and there has been no (or slightly negative) population growth.
Rents are tied primarily to job and income growth. House prices are usually the same -- except in period of speculative excess premised on overuse of leverage.
Redskins fan, you're right on - both about renting, and about energy.
I'd like to point out the errors in Redskins Fan's arguments re the benefits or renting vs. buying, but I wouldn't because people like me need lifelong renters like Redskins Fan to pay my mortgage on my investment property (which, by the way, I puchased in 2001 and is cash flow positive, so you're wrong that you'd have to have bought in 1995 for it to make financial sense).
ReplyDeleteI'm just an average American trying to raise my kids and live a happy life. We relocated due to work at the wrong time. It wasn't fear that kept us from buying in 2003, it was total and complete unnafordability for homes not worthy of their price. I live in a swanky town where my kids attend nationally ranked schools. Most homes here are in gated neighborhoods. Average maintenance HOAs are about $600 quarterly. I rent and pay only for electric, cable and phone. In the meantime I sock my savings in renting in high yield. I still have plenty for vacations, and $120 dinners.
ReplyDeleteHomes around here are languishing on the market and prices are starting to come down. Not unusual to see a $100K drop in price after 80 days on the market. Still, way overpriced. We will see how things are in November when insurance is due to go through the roof. We are holding out for a home outside a gated HOA money pit. We are in no hurry and regardless of what some realtors here say, I am certain that there will be no change in our economy or public mindset that will bring back the crazy RE buying and investing that just ended. Prices may stagnate but I bet they will fall soon and will continue to do so for a few years. The only talking heads I pay attention to are iTulip.
My cars are paid for and I have no credit debt. That's life!
http://chicagobubbleblog.blogspot.com/
ReplyDelete