Are most homes STILL underwater?

Despite all the positive news we've been hearing about real estate and despite the definite rebound that has happened over the past three to four years, I still find myself sitting at a lot of kitchen tables delivering disappointing news to our clients about their home's value.

The Chicagoland real estate market overall hit bottom sometime in 2012 and bounced up after that - but the bounce has been in s-l-o-w m-o-t-i-o-n. While other markets across the country saw an enthusiastic rebound, with inventory levels dipping to as little as one or two months of housing supply and holding there for years, our market has simply returned to a sustainable, balanced state, without ever seeing supply levels significantly lower than normal. As such, our recovery has been a barbecue compared to other metro areas' sear - and by that I mean low and slow.

The Case-Shiller Home Price Index, the most reliable macro-level housing data available, gives us the sobering statistics:
- While many other metro areas have seen prices skyrocket to double-digit percentage gains OVER their pre-recession levels, single family home prices in Chicagoland are still about 14% UNDER their pre-recession peak. Only 19 of 163 ZIP codes tracked in Chicagoland are above their pre-recession peak, and most of them are on the near North side of the city.
- Zero ZIP codes in the South and Southwest suburbs have reached their pre-recession peak. None. That means if you bought a home around the peak of the market or during the downfall, anytime from approximately 2005 through 2010, your home value is likely equal to or less than what you paid unless you've made value-add improvements to the home.

Take a look at the graph below, and click on this tool courtesy of Crain's Chicago Business to look up the graph for your ZIP code:



I tend to focus on the positive in most of what I write and talk about with our clients, and the news isn't ALL bad. We do have sustainable inventory levels, modest price appreciation, rejuvenated new construction activity, and the benefit of mortgage interest rates that are still unbelievably low. I just know there are so many people in our market area who are out there thinking, "Why does it seem like all the good real estate news doesn't apply to me?" and I want to assure you that you're not alone, and it's not you, it's the market.

To Improve, or Not to Improve?

To improve, or not to improve? That is the question many home sellers ask themselves when they’re getting their home ready for the market, and rightfully so: The right improvements can pay off big-time, while many others are a total waste. How do you know which is which?

Of course there’s no easy answer, otherwise people wouldn’t have been puzzling over this question since cave men contemplated slapping a new coat of whale oil on the walls. However, I can propose a rule of thumb (with plenty of exceptions, as all good rules of thumb have) that should help guide your decisions.

Repairs pay off; upgrades don’t; updates might.

Making a repair is correcting part of the home that is deficient, defective, nonoperational, or hazardous. A broken window, missing flooring, a dented garage door, a dishwasher that doesn’t turn on, from something as small as burned out light bulbs to something a large as structural problems or a 3-layer roof. Repairs pay off for two reasons. First, these are items that virtually every buyer who sees the home will see the need to correct as soon as they buy the property. This means the demand for the repair is pretty much universal, and any time you can please your entire target market it’s going to pay off. Second, these are items that are likely to come up as repair requests resulting from the buyer’s home inspection. You might as well make these repairs before you list the home so you can maximize the sale price, rather than settle for a lower price because the property needs repairs and then risk having to fix them anyway.

Making an upgrade is replacing anything in the home that serves its intended purpose and doesn’t noticeably detract from the home’s appeal, simply because you think buyers will enjoy a higher level of finish. Upgrades generally do NOT pay off because of two primary reasons.

First, there is a pretty low likelihood that the new thing you put in happens to be the exact new thing the future buyer would have chosen – let’s call this “taste mismatching.” The buyer had no choice in the matter, so the upgrade is unlikely to be worth to them what it would be worth had they chosen it.

The second reason most improvements don’t pay off is that they generally cost more than they’re worth. Just like a car, the moment you take a home improvement item out of the store it converts to garage sale value. Think about it: Take home a $5,000 kitchen appliance package, leave all the pieces in the original packaging, even keep the receipt, then sell them on Craigslist. Are you getting $5,000 for them? Not a chance, not even close. The same goes for windows, flooring, and many other upgrades assuming the existing components were not in disrepair.

Updates are the middle ground where the money is made or lost. Making an update is refinishing or replacing something that serves its intended function but noticeably and negatively detracts from the home’s appeal, either visibly or functionally, generally due to its age. Updates might include replacing Formica counter tops or the early-90’s baby blue bath fixtures, swapping out brass for brushed nickel light fixtures and door hardware, painting old cabinets and replacing the hinges and pulls, and so on. Updates may or may not give you a positive return. Increase your chances of reaping a positive return by selecting projects which meet the following guidelines:

-         -  Low in cost. In general, the higher the cost, the lower likelihood it will pay back. That’s why cleaning and painting are so effective.

-          - Likely to be desired by most buyers in your area. Go neutral in taste, and aim to match the level of finish you see in competing properties. 

      - Improve curb appeal. Curb appeal projects rank consistently at the top of return on investment.

-          - Have a dramatic visual impact – the uglier the “before,” the better the “after” looks. A perfectly functioning furnace shouldn’t be replaced just because it’s old, unless it’s a converted oil furnace circa 1962 that takes up half of your basement. Then, it just might be worth it to chunk in $2,000 for a new one. Same goes for covering up outlandish paint colors or undoing taste-specific improvements.

-          - Able to be completed using labor and/or materials you can get for below-market prices. For instance, your brother is a carpenter, or you scored a bunch of nice light fixtures from a builder’s surplus and can install them yourself.

In fact, here's an easy-to-use flow chart that will resolve all your home improvement quandaries:

In the end, the best way to answer the question of whether to make improvements will depend greatly on your specific home, your resources, and what’s typical and in-demand for your market area. Your best bet, and an investment that is sure to pay off, is to engage your favorite real estate professional and a home stager for their professional opinion.

Anyone, Anywhere

You know by now that we are your local real estate resource. What you might not know is that we can help just about anyone, anywhere with their real estate needs. Buyers of vacation homes in other states, those relocating into or out of our state, anyone buying or selling real estate across the country even if their move has nothing to do with our local area – we can help them all.

How? In addition to our proven Regional Partnership model which has empowered us to create satisfied clients from Vernon Hills to Manteno, we have also facilitated successful relationships in Indiana, Wisconsin, Arizona, Florida, Wyoming, and more. As a member of the largest real estate company in the country with over 100,000 agents nationwide, we will do the legwork to identify a top-quality agent wherever you or your loved ones need service.

So next time ANYONE you care about has real estate needs, whether near or far, please don’t allow them to fall into the hands of a weak or average professional. Contact us and we’ll make sure they get superior service. Remember our motto: Friends Don’t Let Friends Hire Bad Agents^SM. 

Tips for Selling Your Home Yourself

You might be a little surprised to see a real estate broker post a blog with that headline. It's not a trick, though: There is an article that ran in the Chicago Tribune on Sunday bearing that title, so of course I read it to see what the author had to say, and I can't say I really disagree with any of it.

In fact, by spelling out many of the costs (in time and money) of selling a home yourself, I think the author has inadvertently made a great case for why sellers SHOULD hire a real estate broker. As a FSBO (For Sale By Owner), the author explains that you'll need to:

- Price the home accurately by "visiting comparable homes, pulling public records on recent sales and doing research on the Internet."
- Hire a professional photographer.
- Design and print brochures that "look professional. Make sure all of your copy is clear, accurate, and lists all features of the house." She also references hiring a graphic artist to do some of this work.
- Post information about the house to Pinterest, Instagram, Facebook, and Twitter, including paid advertising on Facebook.
- List the house on major websites such as Zillow, Trulia, and Realtor.com.
- Set up "a simple website for about $500."
- Create and upload a video to YouTube, and/or hire a company to create a professional video tour, then link the video to social media and any other websites where you're advertising.

Take a second to go back over that list and add up the cost in time and the cost in money of researching, selecting, planning, designing, and advertising. Also consider whether you've done a professional-quality job at each of these tasks, and how quickly you've executed each of them. Let's assume that you did all of this quickly, accurately, and with ease, quality, and affordability. I know, it's a bold assumption, but just play along.

So all of the above is done, and now you're home free, right?? Wait, just a few more things:
- Since you've done a great job so far, your phone is now ringing for showings. In fact, it's a little obnoxious that you're a busy enough person and are now trying to manage, accommodate, and keep track of showings during weekdays, evenings, and weekends. A little piece of you wonders who all these people are that you're going to let into your home, whether any of them are thieves, creeps, psychopaths, or bonafide qualified buyers.
- Unless you want to eliminate 88% of potential buyers (that's the percentage of buyers who bought a home in 2013 who were represented by a real estate broker), you'll probably want to offer a commission to a buyer's agent, typically 2.5% of the sale price.
- Once you've received an offer, assuming it came from a buyer who is represented by an agent, you get to negotiate the terms of a 12-page contract against a professional negotiator who knows that contract inside and out. If the buyer DOESN'T have an agent, then you'll be deciding with the buyer on such terms as tax prorations, financing timelines, inspection contingencies, post-closing possession terms, closing cost credits, two pages of sale-of-home contingency terms, and maybe whether the FHA UMIP will be financed or not. All common knowledge, right?

Assuming the contract goes smoothly (don't you just love my assumptions!) - meaning the inspection goes fine, the buyer has no problem obtaining a mortgage in the specified time frame and no problem selling their home, and everybody's happy - you get to the closing table. You take a look at your net proceeds and start to add up the costs - what you paid the buyer's agent, all the advertising, marketing, photos, brochures, websites, etc. - and the time you put into researching every decision every step of the way, showing people the house, and learning about legal concepts you'll probably never use again. And you realize that for little to no extra money, you could have done absolutely ZERO of all of that, and instead just dumped all of it onto a competent pro with a single swipe of a pen.

If you're aware of all this and still believe you're best served by going it alone, then by all means, have at it. Otherwise, just uncap your pen and we'll take care of the rest.

Conventional Wisdom: Overturned

As conventional real estate wisdom has it, sellers should “wait until spring to list your house because there are no buyers during the winter.” Perhaps that was true at one time. If it was, it is no longer. Realtor.com just released a survey of winter buyers that was conducted last month and which shows some very different information. Here’s what they said…

-          When asked about the biggest challenges when searching for a home during winter, the most common answers were that there is not enough inventory within their price range (45 percent of respondents), and that there is not enough inventory on the market (34 percent). The biggest complaint was that there are not enough homes for sale.

·          

-          Among the top reasons consumers are looking to buy a home in winter? 24 percent revealed that they were unable to buy a house during spring or summer. The truth is, there weren’t enough homes for sale this spring and summer to satisfy demand. These buyers wanted to be in their next home by now and are way behind schedule. How would you rate their motivation?

-          If that’s not enough to make you reconsider waiting until spring, consider that 19 percent of those surveyed are planning to purchase this winter using all cash.

What we have then is a lot of buyers who couldn’t find a home during spring or summer, who are complaining there are not enough homes for sale during the winter, and a fifth of them are cash buyers. So if you’re considering selling soon, when would be a good time to do it? Probably right about… now.

Are We in a Seller's Market??

Buyer's market, seller's market... Chances are, you've heard lots of people throwing these terms around without anyone within earshot actually knowing what they mean. Sure, in the general sense, a buyer's market is good for buyers and a seller's market good for seller's. But how, why, and what the hell does it actually mean? Now, I can't define these terms if you're curious about the market for methamphetamines, but if you're talking real estate, I've got you covered.

In the most general sense, for any product or service, one side's market is when there are more people on the other side of the fence than on your side. So a seller's market is when there are more buyers than there are sellers, which means a few things:
- Buyers have fewer choices
- Buyers run into each other more frequently, creating increased competition
- Due to the first two points, buyers find themselves making higher/better offers for any product that substantially meets their requirements, in order to beat out the competition and because there isn't much else to choose from. At the same time, sellers see this happening and price their products higher. These forces result in price increases. Swap the scenarios in this paragraph to envision a  buyer's market.

Ok, now back it up for a second. In order to define buyer's vs. seller's markets in real estate I have to offer a quick lesson in applied math, but I promise I'll keep it short! One of the useful measurements of a market is the absorption rate, which tells us how many homes are selling each month (the number of homes sold over a certain number of months, divided by the number of months). For example, in the past three months in Joliet, 243 homes were sold. So the absorption rate in Joliet over the past three months is 243 / 3 = 81, which means on average 81 homes sell each month. By itself this is not a great indicator of a market, because in Steger there are not even 81 homes available for sale. So to make the absorption rate mean something, we have to factor in the size of the area by dividing the absorption rate into the number of homes that are currently for sale in that area. For example, take Joliet's 577 homes currently for sale and divide it by the absorption rate of 81, and you end up with 7.12. So what is 7.12? We call that the number of months of housing supply. In other words, if no more homes came on the market and homes continued to sell at the current pace, how many months would it take for all of today's inventory to sell? In this case, a little over seven months.

Your next question might be, what does this geeky measurement mean for someone who doesn't care about real estate math? In general, a seller's market is one in which there is less than six months of housing supply, and a buyer's market is one in which there is more than six months of housing supply. (If you're into riding the fence, six months of supply would make it a "balanced market.") Joliet's 7.12 months of supply indicates a market that is mostly balanced but slightly in favor of buyers. And even though in Steger only 28 homes have sold in the past three months, when you divide that into the total active inventory of 65 homes you see there arr 6.96 months of supply in Steger - practically the same as in Joliet.

A few years ago, when the market was in free-fall, in most suburbs there 20+ months of supply. As of the last three months or so, I rarely see them over 10. In one neighborhood in far northwestern Joliet (Greywall Club), where I have a listing that is under contract and ready to close on Friday, the market is like I've never seen it. In the past six months, 12 homes have sold and another 12 are under contract, but only one is available. Take the 12 sold divided by the six-month time period and you get an absorption rate of  2, meaning 2 homes sell each month in this neighborhood. Divide the single active listing by the absorption rate of 2, and you get one-half of one month of housing supply. That's a seller's market to the extreme. And the 12 pending sales show this number won't be going up anytime soon. Case in point: When I listed that home, on my recommendation my client priced her home at the same amount as one down the street which was under contract but was slightly larger and a few years newer. We had a signed contract in less than 30 days for 95% of her asking price. The numbers indicated this neighborhood was in high demand and short supply, and the theory proved true - this sale is rock-solid evidence that prices in that neighborhood are on the rise.

That's not the only place where prices are finally starting to rise, though. Unfortunately, the Chicagoland area is the last major metropolitan area to turn the corner of the housing rebound, but maybe we were just carrying the nation's weight on our broad shoulders. In any event, check out the following data.

MS = Months of supply (remember, <6 = seller's market, >6 = buyer's market)
Median = Median home sale price
'12/'13 = Data covering the three months leading up to 6/3/12 or 6/3/13

                        MS'12   MS'13   % change     Median'12   Median'13    % change
Richton Park    10.44    4.94        -53%             $60,657      $95,000       +57%
Matteson          11.31    5.90        -48%           $124,500    $115,000         -8%
Homewood      10.00    4.98        -50%           $116,800    $130,000       +11%
Orland Park       9.46    7.78        -18%           $258,000    $275,000         +7%
Tinley Park        9.62     6.72        -30%           $210,500    $205,000         -3%
New Lenox       11.17   7.84        -30%           $255,000    $242,200         -5%

The most positive change has been in Richton Park, where since one year ago the months of supply have dropped to half of their year-ago number and the median sale price has increased by a whopping 57%. In all of the areas surveyed, months of supply are significantly less than compared to one year ago. And in three of the areas, median prices have already begun to rise. It's no coincidence that two of the three areas that have experienced the biggest drop in supply have also experience the largest price increases. The others will soon follow.

Back to the question, then, about whether this is a seller's market. Real estate markets are extremely localized, so I never like to paint with broad strokes, but in some areas, yes, this is a seller's market. In other areas where it is still leaning towards buyers, it doesn't appear things will remain that way for long.

Congratulations, we're getting out of this mess.

Pricing in a Declining Market

That's the title I give to a discussion I have with sellers before listing their home for sale. I long for the day when I can skip that discussion, but for the time being it is a crucial part of selling a home. Sellers commonly take the approach of, "Let's see how much I can get first, then we can drop the price." I can absolutely relate to the thought process that produces that statement as I have sold property myself and thought the same thing. As a real estate professional, however, I can tell you that statement is downright dangerous. There are three reasons sellers are hurting themselves by taking that approach, backed up by mountains of data.

Reason #1: The first three weeks on the market are the most precious. That's a known fact in the real estate community, and although it's founded in buyer psychology it's statistically proven. This is when all the buyers who have been searching for a home see your listing come on the market. If they look at the listing or perhaps schedule a showing and determine the home is overpriced, you've most likely lost that buyer for good. Because no matter how many times they see your listing pop up, such as with every price drop, they will always see it as that overpriced house they looked at awhile back. You remember that old adage about first impressions, right? If you lose the buyers who are already looking at the time you list, then you have to wait for new buyers to enter the market and hope one of them notices your listing. Would you guess there is a greater number of buyers currently searching for homes in your area than the number of new buyers who will enter the market in your area in the next month? If you guessed yes, you guessed right. Best to capitalize on that opportunity as a well-priced new listing.

Reason #2: As your market time ticks up and you repeatedly drop your price, your home becomes less appealing to buyers and you lose negotiating leverage. What do you think are two of the most common questions asked by buyers during a showing? How long has it been on the market, and how much have they dropped their price. In fact, buyers don't even need to ask anymore because that information is now visible to buyers on the MLS listing. Which of these two identical houses do you think generates more interest and urgency in a buyer:

• House A, which has been on the market 125 days and has dropped their price from $199,900 to $164,900, or... 
• House B, which just came on the market 8 days ago and is asking $164,900? 

The houses are identical and listed for exactly the same price, but House A looks like a desperate seller and House B looks like a listing that might get snatched up if the buyer doesn't make a move immediately. That also means House B is more likely to get a higher offer whereas House A will attract low-ball offers and have a difficult time negotiating them up. Ironically, the seller of House A has actually diminished the amount they can get for their home by trying to get more for it.

Reason #3: If you're not priced right when you list and the median value of homes in your area is still declining, you are faced with the challenge of dropping your price at a faster rate than the rate of market decline. The primary problem with that is that we don't know at any given point how quickly the market is declining. Contract prices are private until the sale closes, at which point 30 to 90 days have passed since the buyer made their buying decision. Since then, your toughest competition has lowered their asking prices. That means in a declining market, even if you price your home for exactly the amount the identical home next door just sold for, you are priced too high because you're at a "three months ago" price.

Consider the graph below. This shows a [hypothetical] listing that comes on the market for $149,900 at a time when it was actually worth $125,000. They drop their price $5,000 here, $10,000 here, wincing each time at the money they're losing. Meanwhile, the market has continued to decline. At the end of 12 months, there will be a very frustrated seller and an unsold house. They have dropped their asking price by 20% since they listed, but to no avail because the market value of the house has fallen by the same rate over the same time period and they started above the curve. Even with slightly more aggressive price drops they may not have caught up - they would have had to drop from $149,900 to $129,900 within 60 days of listing in order to have a shot at being "priced right," and I don't know too many people who are ready to stomach a perceived loss of that size, that quickly.

By contrast, consider the next graph as an example of how it SHOULD look:

Here, the seller actually gets more for their house than they would have in the first example - they sell for about $125,000 now, instead of being stuck with the house for a year until it's worth only $100,000. Just like with Reason #2, pricing too high will result in selling your home for less.

As I mentioned before, the primary problem with this whole scenario is that nobody knows exactly where that green curve is until three months later, at which point value has already been lost. We do have information about how declining markets work, though, so if we (seller + broker) take that information seriously and adopt an aggressive approach to pricing, you can beat your competition and sell your home for the highest possible price.

Your Home Is Not An Investment

I spoke with a new buyer yesterday, and one of the first questions I asked was, "Are you looking to purchase a home or investment property?" The buyer said, "Both." She wasn't talking about buying two houses - she wanted one house to serve both purposes. Anyone else see something wrong with this picture?

I had to get a little more specific by asking the buyer whether she intended to live in the property or not, at which point we determined she was, in fact, looking for a home. The difference is if you live in it, it's your home. If you bought it with the intent to flip it or rent it out - strictly for potential financial reward - it's an investment. But her attitude that her home ought to be equal parts "place to live" and "investment vehicle" has become increasingly common if not prevalent among current and prospective homeowners.

The wild fluctuation in prices and market conditions throughout the recent real estate boom and bust has perverted mainstream America's idea of the purpose a home serves in our lives. Many of us have been fooled into believing our home is an investment account, a commodity to be bought and sold based on market fluctuations. Your home doesn't have a stock ticker symbol, it's not traded on the NYSE, and it is a very illiquid asset. While it's true your home may gain or lose value over time, the primary purpose of owning a home is not - or at least shouldn't be - to make money. 

I've had a number of seller clients close recently for just about the same price they bought the house for, 10+ years ago. After you factor in selling costs, which are substantial, on paper it's a financial loss. But those clients have enjoyed their homes for over a decade, created lasting memories, molded the home to fit their lifestyle, and yes, reaped some financial benefit in the form of tax deductions too. They may not have come out ahead on the resale of the property, but ask them if they gained in other ways from living there and I'll bet their answer is yes.

People have historically bought and sold homes as a lifestyle decision. That means you buy a home when your family's needs change. That includes upsizing and downsizing, marriage and divorce, having children and emptying the nest, bringing in or kicking out extended family, retiring, relocating, or simply looking for a place to settle down. Obviously there ARE financial implications to owning a home, but we would do best to get away from the mindset of putting those implications above our families' needs. Especially now that most experts are predicting a relatively flat market for the foreseeable future, if you're buying or selling a home with dollar signs at top of mind, I'd recommend you reconsider.