Saturday, July 28, 2007

The Revenge of the Bitter Renters

.....and the return of affordable housing.

Before the late, great real estate boom occurred, I had always believed that the unfettered operation of free markets was the solution to supplying a large and diverse population with its needs and that it would always make the fine-tuned adjustments necessary for buyers and sellers of goods, services, whatever they happened to be, to come together in a way that would satisfy most reasonable needs and desires.

However, my simple faith was sorely tested by the fantastic inflation in housing prices since 2001, never mind that the Fed- driven speculative rampage of the past few years was not the result of "free enterprise", but was the creation of Dr. Greedscam and his accomplices at Fannie Mae and Freddie Mac, the quasi-government agencies that buy home loans in the secondary market, and that kept E-Z money sloshing through the housing market by purchasing millions of high-risk home loans made to unqualified buyers for amounts of money they could not possibly pay back on their incomes.

Well, the market works in strange ways but the Law of Supply and Demand never rests. No amount of Fed finagling and manipulation and industry happy talk will suffice to prop up this massively over-inflated housing market in the face of rapidly tightening credit, cratering sales, record foreclosures, and massive unsold inventory.

The summer selling season is almost over, and it looks it never really ever happened. The buyers are not coming. They either bought at or close to the peak of prices, and are too far underwater on their 80/20 I.O. teaser loans that are now resetting, or they were sidelined by the rapidly escalating prices, and are now confronting a very high bar for first-time home buyers and rapidly tightening credit. Looks like credit is getting so tight that once again, as in the distant past, borrowers will have to prove that they have the ability to pay their mortgages and they might even have to have a down payment.

Imagine that.

It just plain looks as though the supply of Greater Fools has quite dried up, and there aren’t any left to soak up the substantial glut of condos and houses now languishing on the local market. The greedy, the gullible, and the deluded have all bought, using "creative" financing like that referenced above, and are now sitting several feet underwater and confronting the reset of their mortgages, for over one trillion dollars’ worth of mortgages will be resetting in the coming year, half of it by the end of 2007. A trillion dollars’ more in adjustable-rate notes will reset in 2008-2009, which is why many analysts are now calling the bottom of the tanking market in 2009, instead of this year or 2008 as originally projected.

Meanwhile, sales for June dropped 19%* in the Chicago area, as median prices have risen slightly, indicating that the first-time buyers have been blasted out of the water by the prices of modest dwellings and only more affluent buyers remain. Other signs of distress are appearing, such as an elevated rate of suspicious fires in unsold houses in newly-built suburban subdivisions, and most of all, the highest number of foreclosures ever recorded.

And at last the prices are beginning to drop. A couple of weeks ago, I went to view a "soft" condo conversion in the Edgewater neighborhood, and the prices for beautiful, spacious vintage units seemed like a gift compared to the prices of 2005. New mid-rise buildings in Uptown, on Sheridan Road, are 75% vacant after a year on the market. The Sheridan Grande, at 4848 N. Sheridan, appears mostly unoccupied. 4701 N. Sheridan, another newly-constructed mid-rise condo building, is, for some strange reason, no longer decorated with a sign proclaiming 80% SOLD. Or was it 70%? I forget exactly, but the sign disappeared a few months ago.

So at last the "bitter renters", as we who were sidelined by the stratospheric prices, were called, might have a shot at buying nice places at prices reasonably related to their incomes and to local rentals, with sensible, honest fixed-rate mortgages. Maybe I’m feeling a touch of schadenfreude, , but it really, really feels good to see so many attractive condos suddenly within my reach that seemed hopelessly lost to me just two years ago. In fact, the challenge now is check your impulse to leap at the first substantial price drop, because current trends and conditions indicate that you may not be getting a bargain at all but catching a falling knife, as the prices look to trend still lower in the coming months.

Most of all, we will at last have an assured supply of reasonable rentals. The conversion stampede is just about exhausted. Most of all, many recent conversions were of units too small to be considered eligible for sale as condos in any normal market, and as this market reverts to normalcy, many of these units will revert to rental status. This is a warning for prospective buyers of tiny, inadequate condos, but it augers a return to a normal, affordable rental market.

Trust the markets. They may not give you just what you want exactly when you want it and how you want it just because you want it, but left to operate unhindered, they deal out justice, and never more so than in the unraveling of the most absurd manifestation of financial hysteria in human history.

* Chicago Bubble Blog, July 26, 2007 posting, link supplied at right. I tried to link it to this post but it wouldn't work.


The North Coast said...

Here is a little correction to the post.

Looks like we have WAY more than 70,000 places for sale. I just checked Zip realty this minute and there are now over 105,000 residential properties for sale in the Chicago area.

ceedub said...

Define 'too small for condo sale'. I follow most of your rant, but that part leaves me stumped...

The North Coast said...

Too small means anything under 600 sq ft- the type of place that would never accomodate a permanent life and that feels always like a temporary arrangement. The type of housing that was built strictly to be rental and that you can't wait to move out of.

Places like these were not considered eligible for conversion when the condo mania first took off, and even after they have been converted, they tend to devolve into rental property after they age. A studio apt is just not HOME.

I believe we will be witnessing a major shift away from the mentality of the past 30 years and back to the traditional view of a house as a hedge against inflation and a repository of personal values, that you bought in order to have something to call your own after 30 years of payments- not something you bought as a money-making instrument, and certainly not something you used to finance consumer purchases.

Some people have pointed out that homebuying these days simply amounts to a permanent rental situation, and that most people never arrive at true home ownership.

I think we are about to see a shift back to fiscal conservatism and that people will once again look for real value when they buy a house. (For the purposes of this discussion, a condo is a house). They will be looking to stay permanently, and they will be looking for something that will feel like a real home. A place where you can have the family for Christmas, or that will accomodate your kids when you have them. Most of all, a place that's at least as good as the rental you were living in. There should be some joy in the deal; you shouldn't feel like you're taking a big step down in the world when you go from rental to purchase.

ceedub said...


I only lived in one studio in my life, and I swore to do whatever it took to never end up in one again.

The North Coast said...

Same here.

That's why the idea of BUYING one staggers me. Why would anybody ante up nearly twice the rent on a 4-room to buy a place that's so small you have store your vacuum cleaner under the bed, which is your living room sofa? One room, maybe 2 closets, and one exit.

formul8 said...

BUYING a studio is completely stupid.

One of the California blogs showed a 485sq ft studio with nice granit counter tops, recessed lighting, very nice wood flooring, etc (I mean top of the line everything!) list for $450,000 in I think Irvine.

Yes folks, your own room for $450K.

The North Coast said...

That makes 1200 W. Pratt look cheap, doesn't it?

Never mind that there are some large differences between Rogers Park and Irvine, notably in median income, but also in crime rates, climate, schools, and overall liveability, that favor Irvine. There are very few OC suburbs as beautiful or liveable.

I figure if affluent folks in Irvine don't feel property there is worth more than $250-280 a sq ft, than that much is lunacy for Rogers Park.

acid said...

Open letter to Craig (since he doesn't post my more damaging criticism on his blog):

When I tell you, as a neighbor, that the way you carry yourself may put you on the business end of a lawsuit or restraining order, that isn't a threat. It's neighborly advice. I've read your blog on and off for years now, and you are starting to slip. You are losing it. You are one stupid move away from being the scum you try to cover on your own blog.

You should thank me for tirelessly trying to bring you back to reality and keep you from crossing the wrong person.

The North Coast said...

Acid, I don't know how often Craig stops by this blog, but you are welcome to post what you want as long as it is not a threat, or slander, or really offensive.

People are welcome to their opinions, whatever they may be.

Anonymous said...

I will agree with you on the housing slump and the drop in condo prices, but now both owners and renters find themselves in a quandry.

Not being able to sell, many owners are renting. Before I say this, allow me to restate that I am a renter as are many good, hard working people.

That being said, many condo owners are now being subjected to renters who are not desirable, primarily because the owner in their rush to cover one mortgage did not do the proper background/criminal checks. Their condo laws never covered this issue and now they are dealing with the consequences.

Secondly the space of these original rental units has been bastardized to add a second or third bedroom, where it didn't exist before. I inheriteted a good bit of my parents furniture when they moved into a smaller home. The bulk of it is antiques that I will not store or sell. The old one and two bedrooms in this neighborhood, afforded adequate space. The remodeled condos do not.

Most of these condos were badly remodeled wich means new owners are socked with special assesments for repairs within a year. Take my clients on Fargo, for example, who are having to have all porches repaired in a development that is probably three years old. They have also recently paid special assesments for rooofing and tuckpointing.

Finally, rents have gone up in a neighborhood, where a family of three or more will now have a hard time finding adequate space. 700 square feet makes an adequate one bedroom, but a pathetically small two bedroom and that is what the market is featuring these days. Fine for you and me who don't have a family, but where is the renter who does have a family to go?

Natas said...


The North Coast said...

Margo, I agree with your post.

I wish like hell that the raging boom of the past five years had never happened and I'm relieved it's over while we still have a handful of really beautiful, intact courtyards and flats left in the neighborhood.

The boom has left a legacy of really bad buildings, both rehabbed and newly constructed, that we will be stuck with for another 50 years.

So many lovely, irreplaceable buildings have been utterly destroyed by tasteless gut rehabs. My former apt. at 1528 W Fargo is a case in point. I occupied a large 4 room 1 bed there, well-kept and well-heated, and absolutely beautiful, with well-proportioned rooms, ample closets, beautiful cove moldings and elegant French windows in the living room. I moved when the new ownership obtained a condo permit and rented to really questionable people just to keep the revenue rolling in. I was glad to get off Fargo in any case.

What was done to the place was criminal. It was gutted, and a 2 bed 2 bath went into the footprint of my old place. The baths were built to trailer specs, and the place was malevolently clean-walled and opened up, like a cheap tract house in Harvard or someplace. You couldn't look at these places now and have any idea how beautiful they were.

Another atrocity at the exquisite 1507 W. Birchwood building that once had some of the finest millwork in a neighborhood full of it. What is there now is a nightmare of Circa 1985 Yuppie Gestunk, a horror show of exposed bricks and open ductwork and can lights.

There are many others, these 2 being among my favorites, that have been destroyed. The condo buyers have no idea what was once there.

Now that I can at last buy, I'm wary as hell. Yes, many of these condos will revert to rental, especially really tiny ones that had no business being condos to begin with. They will be improved, but you will have whole buildings owned by seperate investers who have varying degrees of competence as landlords, mostly none at all. Buyer beware-most of these condos are not going to make it as condos. 1200 W. Pratt is already offering the tiny little "condos" as rentals.

We will be a while recovering from this spate of lunacy. It will take a while for things to find their proper level again.

Ryne said...

Morning! I was wondering if you where able to read Craigs blog (broken heart of RP) I went there signed in and was told nicely that I "was not invited" what gives?

The North Coast said...

I got the same thing... it appears I'm not on the "invited readers" list.

I think he made some kind of mistake. I don't know what to say other than that.

It's not like Craig not to want people reading his blog.

Ryne said...

Thats what I thought! Both you & I post comments that mostly support Craigs views, not like those who post to cause problems or attack Craig! I guess will have to wait & see! Hey at least we have oneanother!! LOL!

Catherine on Eastlake said...

can i join in the love sandwich? LOL

i hope craig is ok. i'm going through withdrawals not having the 'broken' site up. i emailed him asking for permission if that's what it takes to continue reading. did any of you try that yet? maybe that is part of the 'truth' seeking mission he could be on... to see whose who and what's what. i can dig that. he's been getting lots of creepy threats from posters that are truly hateful. i can hardly blame him for taking a new tact.

have a great day!


Anonymous said...

Craig was the recipient of a very cruel prank. I just posted on my site about this. He knows it's a prank but is understandably a little outraged.

If I had gotten this email and video first thing in the morning, it would have scared the stuffing out of me too.

I would imagine, once the edge wears off a bit, he'll reopen it.

See my post at http://rogersparkdog.blogspot.com/

Anonymous said...

Wonder if under Illinois law this prank would constitute as cyber stalking, a topic both Tom and Toni have been addressing....hmmmmm!!!!

Anonymous said...

1528 Fargo? I think you used to live in the building I am talking about!

The North Coast said...

Yes, Margot, the lovely, vaguely French golden brick 24 unit courtyard.

It was beautiful when I lived there. All that was needed was new baths and kitchens. Maybe enhance the wiring. Redo the roof.

I can't even stand to look at the place.

It was a wonderful, well-run building my first 3 years there. I loved it.The managers were a warm couple who hand-picked all the tenants, who were totally diverse. We had great friendships.

But when the elderly owner sold the place in 2000, the first thing the new ownership did was fire him. The second thing they did was apply for a condo permit. The third thing they did was fill vacant units with really trashy, and SCARY people. Suddenly, our trash was spilling over in back, and there were cellphone conversations in the hallway at 3 AM. Leases were not renewed and the place was going month to month, which is always a good tipoff.

Now it's a tacky, crappy, tasteless rehab, overpriced as hell to boot. I wouldn't mind if they had rehabbed it properly, and kept the vintage details, as has been done with buildings like 2019 W Greenleaf, a truly great rehab.

But now I cry everytime I pass the place.

Anonymous said...

Another tasteful rehab appears to be 1434 N. Lunt next to Heartland. Original exterior details have been maintained and units have nice vintage style trim & moldings.