Over the past two decades, the real estate market has benefitted most localities. As the Baby Boom went on a home-buying tear, prices doubled in many local markets.
Even though the ’echo generation’ and a record number of new immigrants are poised to move the U.S. onto the second leg of its gigantic real estate expansion, there are two roadblocks now standing in the way: lender insufficiency and world oil prices.
Back in 2005, home prices were due for a price adjustment. But instead of prices slowing, they accelerated in many popular markets.
The popularity of mortgage securities caused lenders to invent the ’no doc’ loan. Mortgage terms in general became way too creative. Many in the securitization market stopped paying attention to credit, because, they argued, American housing prices always go up. There was hardly a regulator in sight.
Now the capital markets are spooked.
Falling prices and borrower credit risk have captured the attention of the market and the general public. And yet, we believe the demand for home and condo units is going to be very good.
Getting these younger households to qualify for credit is not going to be easy. Many lenders are out of the market, if not just plain out of business.
And now, suddenly, huge oil price increases are being baked into the cost of the new economy. With housing prices flat or falling and with transportation costs soaring, many localities are going to have to keep an eye on what happens to their residential tax base over the next decade.
If you take a look at three bellwether mid-size cities in Illinois, the formula for their recent success offers insight into some key factors to watch.
Aurora, Joliet, and Elgin were each ’country towns’ that boomed when the gigantic Chicago metropolis sprawled out to their doorsteps. These towns have grown by at least a third since 1990. (See sidebar for more details.)
Each town has benefitted especially from the wave of immigration that has lifted local populations in most regions of the country.
In addition, these three cities enjoy several advantages, two of which are linked to their location. First of all, the towns grew because of the diversity of nearby job opportunities that have been created in modern exurban locations. Workers commute to work in every direction.
Second, the towns are each located on the transportation ’spoke system’ that radiates out from Chicago’s rail center. So at least some of the jobs in each of these towns are available via mass transit.
Moderate homeownership prices have also encouraged growth in these communities. Detached homes prices in each town are not far from $200,000; condo prices are somewhere around $175,000. While these are still not ’cheap’ prices, they certainly fall well below East or West Coast prices.
In the past two years, as prices have had to adjust substantially in ’hot spots,’ home prices in exurban Illinois have mostly gone flat.
Local officials in every region of the U.S. have cause to worry about the current homeownership credit crunch. It will affect price trends for real estate, beyond what needed to be adjusted.
And now, with oil costs affecting household incomes, it looks like our entire real estate system is at risk. Real estate flourished on the last leg of the housing boom due to households trading up the price ladder.
With this current lending fiasco, sales on starter homes have been seriously affected. Sales are off 50% in most markets.
For sure, we need some practical solutions for this big new generation of buyers. Prices are adjusting as they should; but no one expected how weakened the lending system would become.
Not only is the real estate market at risk, but the entire system of state and local government is vulnerable. Determining blame for the lending fiasco is less important than finding practical solutions to what now ails this gigantic industry.
A major new piece of ’stimulus’ housing legislation is being considered by the U.S. Congress. It could be a significant piece of legislation, including provisions advocated by nearly all segments of the American housing industry including builders, lenders, federal housing agencies, realtors, the municipal bond industry, and local communities. We should know by the end of the summer what this legislation holds for the American real estate industry, as well as for American communities in general.
About the Author
Peter Fugiel, Ph.D., is a realtor with Keller Williams & Fox Associates on Chicago’s north side. His housing research web site, Chicago Realtyscape.com, provides a detailed look at the Chicago real estate market. For more information about specific properties, visit Peter’s Keller Williams real estate site.
Prior to joining Keller Williams, Peter was a vice president and senior housing analyst with Nuveen Investments for many years. At Nuveen, he specialized in housing development financings and mortgage pools in all regions of the country.
NEW_SECTIONSnapshot: Three Illinois Cities Benefit from Immigration, Location, and Moderate Housing PricesEND_SUPP_HDR
These mid-size bellwether cities were “country towns” that boomed when the gigantic Chicago metropolis sprawled out to their doorsteps. Each of these communities has grown by at least one third since 1990.
Aurora, Illinois
Population (1)
Population (2003): 162, 184
Population growth (1990-2003): greater than 50%
Price trends (2)
Median home sales price (2007): $212,000
Median condo sales price (2007): $178,000
Current home listing price (6/23/2008): $219,000
Current condo listing price (6/23/2008): $185,000
Sales trends (3)
Number of homes sold (2007): 1,533
Number of homes sold (2003): 2,329
Number of condo units sold (2007): 445
Number of condo units sold (2003): 822
Elgin, Illinois
Population (1)
Population (2003): 97,117
Population growth (1990-2003): greater than 25%
Price trends (2)
Median home sales price (2007): $230,000
Median condo sales price (2007): $187,000
Current home listing price (6/23/2008): $250,000
Current condo listing price (6/23/2008): $201,000
Sales trends (3)
Number of homes sold (2007): 822
Number of homes sold (2003): 1,271
Number of condo units sold (2007): 385
Number of condo units sold (2003): 463
Joliet, Illinois
Population (1)
Population (2003): 112,352
Population growth (1990-2003): greater than 50%
Price trends (2)
Median home sales price (2007): $165,000
Median condo sales price (2007): $161,000
Current home listing price (6/23/2008): $180,000
Current condo listing price (6/23/2008): $175,000
Sales trends (3)
Number of homes sold (2007): 1,021
Number of homes sold (2003): 1,235
Number of condo units sold (2007): 235
Number of condo units sold (2003): 212
Sources:
(1) U.S. Census State & County Quick Facts
(2) Midwest Real Estate Data LLC (numbers rounded)
(3) Chicago Association of Realtors – FastStats