May 17, 2017
BABY-BOOMERS' INERTIA STYMIES HOUSING MARKET VALUE RECOVERY

ANALYSIS & OPINION BY RUSS STEWART

by RUSS STEWART

To sell or not to sell? That is the question that continues to confound the real estate market in the Chicago area.

Realtors are "busy," said Lisa Kon, managing broker with Baird & Warner in Edgebrook, who said that many renters are in a buying mode and sale prices are rising, but the inventory of available residential properties remains minimal, and demand for those properties is pushing up prices.

There is a continuing shortage of homes on the market. There is a continuing dearth of mortgages, as the application process is rigorous and lengthy, and only those with good credit and a good job get approved. "Buy-ups," meaning selling an existing home with enough profit to manage a 20 percent down payment, are the exception, not the norm - which is first-time buyers. The decade-long foreclosure spike still hasn't concluded, with the "under-waters" still working their way through the system. The condominium market is still soft.

"There has been tolerable recuperation" of home values, said Barry Paoli, broker-owner of Century 21-McMullen. But for Chicago-area owners, that's not good enough. They are waiting total recuperation and then some.

Elsewhere, like in Denver, San Francisco, Oklahoma City, Nashville and Fort Worth, homes have recovered between 90 to 95 percent of their pre-2006 bubble-burst levels, according to Trulia. Not in Chicago. One realtor said that homes outside the Loop are "going for 105 percent of the asking price," but that is still barely 75 percent of the perceived pre-Great Recession value.

One of the favorite aphorisms of military service is "hurry up and wait." And that is exactly what the extraordinarily large pool of existing Chicago-area residential property owners, consisting primarily of aging baby-boomers, is doing: They are waiting for property values to rebound to pre-2006 levels; they are waiting for someplace better to relocate which costs less than what they net on their sale; and, in Chicago, they are waiting for some White Knight to ride to the rescue and cap the city's spending, taxes and pension shortfalls.

Paralysis is the word. And riding to the rescue, albeit somewhat sluggishly, are the millennials, a goodly portion of which have jobs, are married, have (or desire) families, and want to stay close-in to Chicago, not move to McHenry or Oswego. Realtors quantify their demographic as follows:

Baby boomers are now mostly parentless, and their kids are either out of the house or out of college. Except those on the North Shore or gentrified Chicago, most are comfortable, secure, and looking for a soft landing, but need to liquidate and use the equity in their existing residence, not their investments, to move to a gated community, retirement community, or someplace warm. Their homes are not under-water, but their equity is not where they want it to be, and they're waiting.

Millennials are now entering their "responsible" years - good jobs, married, young kids, enduring college debt. If they were born and raised in the Chicago area, and have a job and circle of family and friends here, they want to stay here. Almost 60 percent of all consumer spending now comes from millennials, and, according to local realtors, two-thirds of the home buyers are millennials, and they are not the type who want to be tied-down, and they use public transportation "They (millennials) buy along transportation lines," said Susan Swift, a managing broker for Coldwell-Banker. "If they buy (a home), it's because of affordability and lifestyle, not because of ethnicity." Said Dympna Fay-Hart, a realtor for Century 21-McMullen, "it's not a lifetime commitment." Unlike baby-boomers, for whom a home purchase was usually a lifetime commitment (or at least until they retired), millennials are "just passing through," she said.

Non-traditional buyers such as cash-paid workers are finding the path to a home steeper now than in the past. Back in the halcyon days of the 1990s and early 2000s, 80/20 loans proliferated, with an 80 percent mortgage, a 20 percent equity loan, multiple buyers, zero money down, minimal lender paperwork, and no social security numbers required. Property values increased 10 percent annually, so buyers were expected to "flip" quickly, make a 10 to 20 percent profit, and buy-up to a better home; and realtors, lawyers and mortgage brokers were rolling in dough. After 2006, real estate firms lost 25 to 40 percent of their agents, and values dropped 25 to 40 percent for homes and up to 50 to 60 percent for condos, largely because the market was awash with foreclosures, and marginal 80/20 purchasers could not swing their proverbial "nut" of principal, interest, taxes and insurance on two loans.
Then there were the McMansions, so-called "spec" investors and builders who bought, knocked-down, and then built palatial $700,000-$1 million homes on small lots in Chicago and the suburbs, expecting a $200,000 payout. The $6,000-plus a month nut for the builders, and for any later buyers, soon prompted defaults, but the banks didn't promptly foreclose, since it was better to have a freeloading occupant, as putting the property for sale would further glut the market and depress prices. Those properties are now finally exiting the foreclosure pipe.
That whole market share has been obliterated, due to the bank collapse and consolidation, wage stagnation, and the general perception that owing a residence just is not what it used to be. Property taxes go up, crime goes up, maintenance and expenses go up, but not property values. Property ownership is a net loser, not a nest egg.

In Chicago, property owners have been hit with a 29.5 percent tax on water and sewer bills to save one city pension fund, a 56.6 percent increase on telephone and cell phones to save another pension fund, and an $838 million property tax increase to save police, firefighter and teachers' pension funds, which will continue for 5 years. Even as a renter, the landlords will pass-through these expenses to the tenant. And renting a house or condo is as expensive as owning one, which at least have tax write-offs.

"People have to live somewhere," said one realtor, "and schools are the primary determinant, not rising home values." The problem, said Fay-Hart, is that buyers want home in "mint" condition, with contemporary upgrades and amenities, not the retro which characterizes a lot of boomers' homes. "(Buyers) want move-in ready homes, and are not going to spend $50-60,000 for upgrades to make the home habitable," she said.

"If the price is below $300,000, it (the home) gets sold in the first few days," said Nicole Haajdu, a broker agent with Dream Town, especially in, she said, Edison Park, Norwood Park, Jefferson Park and Norridge. But $300,000 is, to many, a giveaway.

New listings, said Baird & Warner's Kon, are down 4 percent because, she said, the market is renters to buyers, not buyers to buyers, and sellers find offerings unacceptable. "It's a bottleneck," Kon said, with renting Millennials from Lincoln Park, Wicker Park, Lincoln Square, West Loop and the Loop looking to bail. "Millennials have no problem downsizing," said Swift, "but there's no place to downsize to."

"There is a captive audience," said Paoli, meaning city workers. They have to live in Chicago, and about 30 to 35 percent of the 41st Ward's voters are first responders or city workers, or retirees, who have no option or desire to move or relocate. Sales, Paoli said, have surged only 2 percent in areas like Edison Park, which is clogged with city employees. "People aren't moving," he said, because their floor price is at least $400,000.

In the suburbs like Skokie, the market is brisk, especially for condos. Swift said the Skokie, Morton Grove, Niles housing market is booming. Just a decade ago, condos in those towns were barely above $100,000; not they're pushing $200,000, and current owners are looking to bail and buy homes. The suburban condo market is robust.

The influx of Polish immigrants during the 1980s and early 1990s changed the ethnic composition and political composition of Chicago's Northwest Side, and the housing market. Chicago's Belmont-Central area was the locus and focus, and Polish immigrants quickly spread into Niles, Park Ridge and Norridge. The immigrants came to America to make money, to flip their homes, to buy and sell within 24 months, not to settle and stay. When the 2006 collapse came, they were in the first foreclosure wave, and many have returned to Poland.

Also, according to one realtor, there has been a huge Chicago Polish emigration to northwest Indiana and southeast Wisconsin, around Racine and Kenosha.

"Quality of life" drives population movement. People get out of neighborhoods or suburbs where that quality is poor or unsafe, but they need someplace to go. Those who live in the "better" areas, like baby-boomers or younger parents with kids in school, are disinclined to relocate. Staying put has more appeal, regardless of maintenance costs.

"The market is coming back," said Swift. The real estate market is not coming back quick enough or satisfyingly enough. Expect doldrums to prevail for the foreseeable future, but there may be a boom by 2018, when the boomers finally decide to bail.

E-mail russ@russstewart.com or visit his Web site at www.russstewart.com.