Steady Freddy; Enjoy your piece of the Chicago housing rock

By Sally Duros

What’s the state of the housing market?

“About a year ago somebody blew a whistle that only dogs and buyers
heard and the economy came to a screeching halt,” said Karl (Chip)
Case, Professor of Economics at Wellesley College, regarded by some
as one of the leading real estate economists in the nation.

At that, the crowd of about 100 or so real estate executives
erupted with laughter.

There was no wailing or gnashing of teeth. Thankfully.

You never know what to expect with a panel topic called: “Now that
the roof has blown off the housing market,” but the audience were
members of the Urban Land Institute, a 34,000-plus association of
community builders. As the people who develop and redevelop
neighborhoods, business districts and communities across the U.S.
and around the world, they’ve been “here” before.

The “here” being housing downturns, corrections and recessions,
these people are not easily phased. Members of the ULI were meeting
last week in Chicago. And they were having a good time enjoying our
city.

“If you look at the coasts, housing prices go up and down,” Case
told me in an interview after the panel. “Housing prices have big
booms followed by busts. But that’s not Chicago,” he said.

“You look at Chicago, and it’s steady as a rock.”

Why is that?

“I don’t know, but I think it’s in part because the supply is more
elastic,” Case said. “On the coast it takes longer to get things
built.”

The difference between here and the coasts, Case said, is that if
demand for housing goes up, and you build it quickly enough, you
don’t get much of a price increase. In the Northeast, supply is
very slow to respond, and this artificially increases the price
whenever a boom occurs.

In the Chicago area, the supply of housing responds quickly when
demand goes up, keeping prices reasonable.

“In Chicago – the market never really goes down. It just keeps on
going until maybe,” and here Case hesitated “now — where the whole
nation is impacted, not just regions. Chicago has been remarkably
stable — and it’s been sober.”

It’s true, here in Chicago we don’t have that bi-coastal ebullient
appreciation. I don’t have that many friends, (OK, any) who bought
a house for $50,000, sold it for $240,000, then traded up to a $1.3
million McMansion. Most of ’em bought and held and raised their
families there.

Now my empty-nester friends with the big, beautiful vintage houses
are thinking of taking in boarders. That’s just the way we are —
frugal.

It does happen, I know, that people make millions off their homes,
and I know people who’ve had that good fortune, but Chip’s right,
it’s not an everyday event in Chicago.

Chicagoans have done well if they’ve bought a house and stayed with
it.

“Anyone who bought a house in California in the past 10 years,
certainly in the past 20 years, is a multimillionaire,” Case said.
“They made more money living in their houses than they made
working. Now that’s not true in Chicago.”

What can I say? Darn!

“But what you have avoided is the roller coaster,” he said. “This
has been quite a ride for the past 25 years.”

There’s even more good news for steady Freddy Chicago. We are the
city of buy and hold, not only for us, but for investors from
around the world.

Case says that we are the only Midwestern city that is a trophy
city for investors, the good kind of investors who put down roots
in the places where they buy. Case said investors from Saudi
Arabia, Taiwan and Germany are putting their money here. “None from
these countries is buying in St. Louis,” he said.

In his presentation, Case added up the numbers on wealth created
nationwide by the booms and boomlets of the past five years.

Here are a few numbers:

The value of all U.S. housing stock today is between $24 trillion
and $26 trillion.

The increase just between 2000-2005 was $10 trillion — that’s
one-quarter of the entire financial wealth of the United States.

Most of that wealth was generated on the coasts. Fifty percent of
the housing value of the United States is in the Northeast and
California.

But here’s the bad news. Case thinks the sluggish housing market is
increasing the likelihood that we will have a recession. And that’s
the point of view shared by the other economist on the panel: Mark
M. Zandi, chief economist and co-founder of Moody’s Economy.com,
Westchester, Pa.

Zandi showed a persuasive set of slides dubbed “The Housing market
fault line.”

Among them, Illinois was depicted as having an expanding economy
and as a place where more than 19 percent of originated loans in
2005 were subprime.

“Chicago’s housing market is OK,” Zandi said in an interview after
the panel discussion. “It is not nearly as troubled as California
or Florida. . . although there was some overbuilding here.

“In Chicago investor demand was strong. Prices were frothy.
Affordability is now a bit of a problem for many homeowners,” he
said. “So there is an adjustment in the Chicago market, but it’s
modest compared with Florida or California. It can’t be dismissed,
but it’s not nearly as significant as in other places.”

He said the subprime market will affect Chicago most significantly
if mortgage credit becomes less available and investors in mortgage
securities became more cautious.

So what should our political leaders do — if anything –about our
unsettled subprime mortgage market and the thousands of homeowners
here who could lose their homes?

“I see regulatory response,” Zandi said. “There’s room for
legislators to get involved in assisting these negotiations among
different groups of investors.”

He said the incentives for those people who are buying triple-A,
double-A, single-A pieces of securities are very different from
those who are buying the lower tranches of mortgage-backed
securities.

“That will be a place for somebody to get involved – a senator or a
congressman,” Zandi said. “I don’t think I would do it
legislatively, but I would try to get people into a room and start
talking about how to solve this problem.”

“It’s all subprime. It’s just a matter of who gets paid first,” he
said. “Things are evolving very rapidly and there are a lot of
moving parts.”

part because the supply is more elastic,” Case said. “On the coast
it takes longer to get things built.”

The difference between here and the coasts, Case said, is that if
demand for housing goes up, and you build it quickly enough, you
don’t get much of a price increase. In the Northeast, supply is
very slow to respond, and this artificially increases the price
whenever a boom occurs.

In the Chicago area, the supply of housing responds quickly when
demand goes up, keeping prices reasonable.

“In Chicago – the market never really goes down. It just keeps on
going until maybe,” and here Case hesitated “now — where the whole
nation is impacted, not just regions. Chicago has been remarkably
stable — and it’s been sober.”

It’s true, here in Chicago we don’t have that bi-coastal ebullient
appreciation. I don’t have that many friends, (OK, any) who bought
a house for $50,000, sold it for $240,000, then traded up to a $1.3
million McMansion. Most of ’em bought and held and raised their
families there.

Now my empty-nester friends with the big, beautiful vintage houses
are thinking of taking in boarders. That’s just the way we are —
frugal.

It does happen, I know, that people make millions off their homes,
and I know people who’ve had that good fortune, but Chip’s right,
it’s not an everyday event in Chicago.

Chicagoans have done well if they’ve bought a house and stayed with
it.

“Anyone who bought a house in California in the past 10 years,
certainly in the past 20 years, is a multimillionaire,” Case said.
“They made more money living in their houses than they made
working. Now that’s not true in Chicago.”

What can I say? Darn!

“But what you have avoided is the roller coaster,” he said. “This
has been quite a ride for the past 25 years.”

There’s even more good news for steady Freddy Chicago. We are the
city of buy and hold, not only for us, but for investors from
around the world.

Case says that we are the only Midwestern city that is a trophy
city for investors, the good kind of investors who put down roots
in the places where they buy. Case said investors from Saudi
Arabia, Taiwan and Germany are putting their money here. “None from
these countries is buying in St. Louis,” he said.

In his presentation, Case added up the numbers on wealth created
nationwide by the booms and boomlets of the past five years.

Here are a few numbers:

The value of all U.S. housing stock today is between $24 trillion
and $26 trillion.

The increase just between 2000-2005 was $10 trillion — that’s
one-quarter of the entire financial wealth of the United States.

Most of that wealth was generated on the coasts. Fifty percent of
the housing value of the United States is in the Northeast and
California.

But here’s the bad news. Case thinks the sluggish housing market is
increasing the likelihood that we will have a recession. And that’s
the point of view shared by the other economist on the panel: Mark
M. Zandi, chief economist and co-founder of Moody’s Economy.com,
Westchester, Pa.

Zandi showed a persuasive set of slides dubbed “The Housing market
fault line.”

Among them, Illinois was depicted as having an expanding economy
and as a place where more than 19 percent of originated loans in
2005 were subprime.

“Chicago’s housing market is OK,” Zandi said in an interview after
the panel discussion. “It is not nearly as troubled as California
or Florida. . . although there was some overbuilding here.

“In Chicago investor demand was strong. Prices were frothy.
Affordability is now a bit of a problem for many homeowners,” he
said. “So there is an adjustment in the Chicago market, but it’s
modest compared with Florida or California. It can’t be dismissed,
but it’s not nearly as significant as in other places.”

He said the subprime market will affect Chicago most significantly
if mortgage credit becomes less available and investors in mortgage
securities became more cautious.

So what should our political leaders do — if anything –about our
unsettled subprime mortgage market and the thousands of homeowners
here who could lose their homes?

“I see regulatory response,” Zandi said. “There’s room for
legislators to get involved in assisting these negotiations among
different groups of investors.”

He said the incentives for those people who are buying triple-A,
double-A, single-A pieces of securities are very different from
those who are buying the lower tranches of mortgage-backed
securities.

“That will be a place for somebody to get involved – a senator or a
congressman,” Zandi said. “I don’t think I would do it
legislatively, but I would try to get people into a room and start
talking about how to solve this problem.”

“It’s all subprime. It’s just a matter of who gets paid first,” he
said. “Things are evolving very rapidly and there are a lot of
moving parts.”

Credit: The Chicago Sun-Times -COPYRIGHT- © 2007 Chicago Sun-Times.