.....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.
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.