Good news for Chicago buyers & sellers

The economic stimulus package--proposed last week by congress and the President--would seek to raise the limit on loans available for purchase by the government (Fannie May & Freddie Mac.) The current limit for such loans is $417,ooo. The plan seeks to raise that cap to $625,000.

This is important in a high priced market like Chicago's. Loans that can't be backed by the federal government (those currently above the $417K cap,) carry a higher interest rate than those that can--often more than a 1% difference. This move will make it easier and cheaper for Chicago buyers to get affordable loans. In a city where a 2 bedroom condo can easily run at $400 and above, this should help get buyers buying again. That, of course, if great news for sellers in those markets.

Monthly To-Do Checklist

The Tribune ran a wonderful article in Thursday's Your Place section. It featured a monthly "to-do" list for homeowners. Staying on top of the regular maintenance is so critical to protecting your investment.

Click here to view the entire calendar of routine, easy maintenance items.

Timing the market

I've had a number of people--both active clients and casual acquaintances--express an interest in buying but also trepidation about purchasing a home in an unstable market. Their reasoning is centered around two ideas: 1) housing prices may continue to fall so they will lose money on their investment and 2) if they wait just a while longer, prices will fall and they could get a better "deal." On the surface, this line of thought might appear sound, if not prudent. However, there are several holes in these theories--at least as they apply to the Chicago market.

First, for those concerned about their investment: real estate is a flexible market and while we are currently seeing a dip in yearly appreciation, the long term prospects of investing in a home are good. Neighborhoods throughout the city have seen wonderful appreciation rates over the past 5 and 10 year periods. Unless you are planning on selling your new home in the next 1-3 years, you will most likely see it appreciate a respectable amount: at least enough to not lose money on your initial investment.

Secondly, trying to "time" the market can be a risky proposition. Remember that your monthly mortgage amount is determined by your interest rates as much--or more than--the purchase price. If rates begin to rise in the spring (as they typically do,) they could offset any price reductions offered by sellers. Quite literally, a seller might decrease his asking price by $10,000 but if rates rise even 1/2 a point the buyer's monthly payment actually increases. It can be a lose/lose proposition that leaves neither party happy.

When does remodeling make sense?

Many of today's homeowners are choosing to stay in their homes for a few more years rather than try to sell in a slower market. Quite a few of those homeowners are considering remodeling their current home with two goals in mind: make the home more accommodating for the next few years and add value that will be recouped when they do sell down the road. An extensive survey from Remodeling Magazine offers some insight as to which remodeling projects reap the most reward in resale value.

The survey is broken down regionally so, for our purposes I will look at the East North Central region where Chicago sits.

Here are some of the most common additions in a mid-range price, along with the percentage of cost recouped in a resale of the home:

Bathroom 68.2%
Deck (wood) 85.6
2nd story 78.3

As for remodeling, here is how some of the most popular projects recouped their expenses:

Bathroom 80.9%
Major Kitchen 79.3
Minor Kitchen 82.7
Basement 80.9

And finally, here are some numbers for replacement projects:
New Roof 61.9%
Siding 85.5
Windows 77.8

The old adage is that home buyers look at "kitchens and bathrooms." This evidence suggests that the cost of updating these rooms tends to be money well spent. Of course, each situation is different and professional consultation is highly recommended. If you have questions about a remodeling project you are considering and how it will affect your home's value, don't hesitate to contact me.

Rates Drop

The 30-year fixed-rate average sank to 5.82 percent, and the 15-year fixed rate fell to 5.4 percent. The 1-year adjustable held at 5.53 percent.

That's good news if you want to buy a home...

The Nadir of Short Sales

I've written a lot about short sales in the last few months. While they certainly remain an option for distressed homeowners, they are not without their frustrations--for the seller, buyer and agents. Two examples from the last few weeks:

1. On one of my short sale listings, the bank rejected the contract (at $195K,) saying that the property was worth at least $235K and they wouldn't take anything less. Unfortunately, the property simply will not sell at that price. If it was worth $235K, it would have flown off the market in April when it was listed at $229K. The bank has put my seller in the impossible position of demanding more than the property is worth.
   
2. I have just taken another short sale listing and have been informed by the bank that the maximum will pay in brokers commissions is 4%--substantially less than the industry standard of 6% which was listed on the contract. This will no doubt affect the amount of traffic we receive (many buyers' agents don't appreciate getting paid less than industry standard for their work and simply won't show the listing.) Realtors provide the valuable service of facilitating the sale of property and our commission is the price of doing business. By cutting that commission, the bank has again put my seller in an impossible position.
   

If either or both of these properties goes into foreclosure, the bank will receive far less than they would have had the homes sold with a short sale discount. This is a lose, lose, lose situation for everyone.

Real Estate Facts to Consider

There has been plenty of negative news about the state of the market right now. Much of it is justified but also overblown. Here are some things to consider that may bring some perspective on the soft market we are seeing today.

• Even though national housing prices are likely to dip around two percent this year, 2007 will still be the 5th best housing year on record.
• The East and West Coast typically flex higher and lower than the middle of the country, so it's not surprising that when the housing boom started back in 2002, prices skyrocketed in California and Florida, while going flat in other places.
• Rapid price gains are unsustainable, and will always overcorrect before settling back to normal rates of appreciation.
• Those believing that price gains would go on forever are the ones who were likeliest to get hurt -- speculators and homebuyers who bought beyond their true means.
• Most foreclosures and delinquencies are concentrated in the subprime market, and those who qualify for conventional financing are still seeing extremely favorable interest rates.
• Homeownership is not a quick in and out purchase like stocks. Wealth is built over the long term, which is one reason why homebuying is heavily subsidized by tax savings and generous loan programs that enable people to get into homes without large downpayments.
• Stocks and houses aren't the same. Over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield nearly $24,000. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5 percent would return nearly 5 times the stock market return, or over $110,000.
• While some markets have reported major losses in home values, they also have extenuating circumstances such as major job loss as is the case in Detroit, or overspeculation, as in parts of Florida. For many communities, home values are going up, not down.

I would also emphasize that real estate remains a "local" game. If you have questions concerning your market, consult a professional in your area.