September 25, 2024
HOUSING MARKET UPTICKS BUT "BUBBLE BURST" AWAITS

Those who do not learn from history are doomed to repeat them. The Federal Reserve Board’s (Fed) prime rate cut of one-half point on Sept. 19 is already spurring an uptick in the housing market, according to veteran Northwest Side realtor Dympna Fay-Hart.

Buyers, she said, are much more willing to accept a mortgage with interest in the 5 percent range than in the 6 percent range, especially given the expectation that the Fed will cut the rate by another two points in 2025, bringing it down to the 3 percent range where it was pre-COVID. If there is another cut new buyers can refinance at the lower rate.

“We will have a very good 4th quarter,” she added, with a lot of buyers getting pre-approval letters before making an offer, which gives them an edge in closing the deal. But five problems loom:

First, sellers have unrealistic expectations about their property’s value.  One seller of a house in Norwood Park wanted it listed for $700,000, Fay-Hart said. The property was a 1920s-vintage brick bungalow. Large 1890s-1910s frame houses in Edison Park, Old Norwood Park, Portage Park and north Park Ridge are going for 700-900K. By comparison post-WWII brick bungalows are going for 350-450K in Niles, Des Plaines, Norridge, Harwood Heights and neighborhoods like Oriole Park, Gladstone Park and north of Devon. In south Park Ridge they go for 500K.

Condominiums are in the 250-275K range, but conversions from apartments only draw about 200K. Demand for 2- and 3-flats persist, since they generate income, but sellers are demanding 800K-plus. Thanks to Amazon, local retail stores, except restaurants and fast-food joints, are nearly extinct and that includes malls. The Milwaukee Ave. corridor, from Golf-Mill southward to beyond Six Corners is a picture of retail desolation. The median rent in Chicago and suburbs is $1,500 and in hot areas closer to the Lakefront up to $3,000-a month.

Sellers want to cash-in. $700K might be tolerable, but not to first-time buyers or those selling/buying with little equity. A 600K loan-to-value at 5 percent interest would have a principal, interest, taxes, and insurance (PITI) of around $4,000-a month. That’s beyond the reach of many renters.

Second, lenders are getting greedy, just like during the 2007-08 Wall Street meltdown and recession, caused by lenders giving marginal buyers 80/20 loans with no money down; that meant a mortgage for 80 percent of the purchase price and another 20 as a loan on the equity, which was expected to increase and cover a mandatory balloon refinance 3 years later. The loans were then bundled and sold as AAA-rated investments. When defaults began to proliferate the big banks’ stock collapsed and a fed bailout ensued.

At present lenders/banks are investing their depositors’ funds in U.S. Treasury bills, notes and bonds which pay interest of 1.75-2.5 percent, and they pay 1-2 percent interest to their depositors, giving them a narrow profit. What they really want is a revival of the mortgage market so they can stick their borrowers with a 5.5 percent mortgage and make a 3 percent-plus profit.

To this end lenders are lowering the standards of creditworthiness. I was an attorney for 44 years and did over 2,000 closings and the greatest impediment for a buyer was current credit card debt.  But a bad credit score, a foreclosure or persistent late rent payments was a killer. The old yardstick was that no more than 28-33 percent of disposable income be spent on housing – the PITI nut. No more. A buyer can have PITI and consumer debt up to 45 percent of GROSS income.

That’s insanity. You’re supposed to fit auto payments and insurance, groceries, utilities, gas, kids’ expenses/tuition/sports, dining out, recreation and vacations into the remaining 55 percent? What about an unforeseen expense?  This bubble, like that in 2007-08, will burst. Lenders don’t care. The feds will bail them out. Credit card interest is near 20 percent APR and “brand” cards – you know, the ones on TV who promise “cash back” on every transaction -- can amount to 30 percent APR.

And home and auto insurance companies, who really cleaned-up during COVID when the insured weren’t driving, have been hit with a barrage of weather-related claims and are passing that along to their customers.

Third, property taxes in Chicago will go up at least 15-20 percent in 2025. The city is running a $1.3 billion deficit in the 2024 budget of $16.6 billion due to the illegal migrant influx.  If Harris-Walz wins, the city budget will balloon by $1.4 billion every year until 2028.

Fourth, the presidential outcome may be a factor. Some might want to buy now before a Trump win boosts everything, including home values. Others may see a Harris win as ominous, with an economic slowdown, and decide to buy/sell now. Who knows?

Fifth, the great realtor commission squabble: The ancient model for real estate transactions is that the seller pays a commission, usually 5 percent to the listing broker/agent. That was split 50/50 with the buyer’s agent. Not anymore. A federal court ruled that it is an antitrust violation to have the seller pay the buyer’s agent, and that the buyer has to pay his/her own agent’s commission. That adds to the buyer’s closing costs.

Word got around. Sellers figured they should pay NO commission to the buyer’s agent and less than 5 percent to their agent. Buyers figured they should pay zero to their agent as it is a seller’s cost. So now every contract has to have a separate subcontract stipulating who pays how much to their realtors. “It’s a war zone out there,” said Fay-Hart. “We’ve all become used car salesmen.”

RETENTION JUDGES BALLOT: Cook County has 24 Appellate Court justices and 400 Circuit Court judges, with 220 of the latter being elected countywide and 180 in the 20 subcircuits. Once elected each Circuit judge must stand for “retention” every 6th year on a non-partisan ballot buried at the very bottom of the ballot (although this year the Chicago elected school board candidates are below them).

There are 77 judges up for retention on Nov. 5 and their ballot positions are numbered  201 through 355. That’s going to take some time.

The vote is YES or NO and the judges are booted off the bench if they don’t get 60 percent in the affirmative – which almost never happens. 98 percent of the voters have no clue as to who these people are and their level of competence. They only get bounced if caught in some personal scandal or egregious courtroom misbehavior and only if it is highly publicized. To be sure, the system is a crude form of term-limitation.

What is unfathomable is that the progressive Left, which was all-in for eliminating cash bail, hasn’t discovered the joy of eliminating a whole bunch of judges. Just think of it: 77 judges gone in an instant. 75 judge-less Circuit courtrooms. Hundreds of litigants and defendants crammed into the other --- courtrooms. Total chaos. All it takes is 41 percent, and there is always a built-in 35 percent of contrarians who always vote NO.

The county Democrats have put out a flyer proclaiming that “our rights and freedoms are under attack.” Of course they are, especially in the traffic, housing, divorce and criminal divisions. It then urges that “we keep qualified, experienced and independent judges.” Give me a break. Virtually all of the 77 judges got on the bench because they were slated by the Democrats, and now they are dependent on Democratic organizations to get retained.

I must confess that I have always voted NO on every judge on every retention ballot. Unlike the frat boys in “Animal House,” it wasn’t just a stupid and futile gesture. For me it was payback. Judges are pampered and some, but not all, are imperious, surrounded by obsequious clerks and lawyers, and who think they’re God’s gift to jurisprudence. Lawyers are just trying to make a living but some judges revel in making it difficult.

So I’m going to JUST VOTE NO on 73 judges, the exceptions being Diann Marsalek,  (we went to the same law school), Tom McGuire, Stephanie Saltouros and Appellate justice Thomas Hoffman. They are good.

As for the rest I am going to make a stupid and futile gesture and vote no.

As for the presidential race in Illinois, which Trump will lose by nearly 500,000 votes, this situation also requires a really futile and stupid gesture: I’m voting for Trump. How’s that for conjecture?

Read more Analysis & Opinion from Russ Stewart at Russstewart.com

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