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2012 Short Sale Industry Outlook from Short Sale Commander on Vimeo.

 2012 Forecast Chicago & Suburbs

8 County Metro Area

 Illinois Association Of Realtor Price Forecast

Shadow Inventory

The news caster reported there are 174,000 vacant homes in the Chicago Metro area enough to provide housing for every homeless person/family in the area, and implied maybe this is a good movement since the homes will be occupied and not standing abandoned and deteriorating.

Lien holders are evidently walking away from the properties and not finishing the foreclosure because they don’t want to incur additional costs like utilities, taxes, insurance, repairs, maintenance and housing code violations/fines/liens.

On 12/16/2011 KCM posted a graph on the Months of Shadow Inventory with Chicago ranging between 10-50 months the third highest with NY and DC getting the over 50 month rank. Somewhat validating the $174,000 reported number. I also spoke to one of the leading foreclosure attorneys in Chicago who concurred the trend, especially on Condos. This also explains all the vacant homes we see on a daily basis in just about every market with a Safeguard or LPVS sticker on the door and not for sale. In some neighborhoods it’s close to 1 out 3 per block.

In the Chicago metro area per the MRED MLS for 2011 there were approximately 38,060:  REO’s, Pre-foreclosures and Short sales sold. If the 174,000 number reported is accurate that is 4.57 year supply of homes that may never hit the market and be liquidated under traditional methods because the lien holders are walking away and not taking title. If no one is in title how does it get sold, how does the market recover?

So where do these properties end up? Condemnation, Eminent Domain,  Delinquent Tax Buyers,  Non-Profits, Quit Claim Deed Investors, Home Owner Associations, or do they just sit abandoned deteriorating neighborhoods and providing habitat for  gang bangers, prostitution, drug sales and serial murders. Chicago’s longest running prostitute serial murderer was caught in an abandoned foreclosure, as I recall I think it was 5+ years. Hence now Chicago tears abandoned buildings down.

No wonder Chicago passed an ordinance making the lenders responsible for the property even if they don’t own it yet? 

What would you do if you had 4.57 years of vacant abandoned homes in your back yard?

It will be interesting to see how all this shakes out over the next few years. Even if the above numbers are overstated with only a 1.14 year supply of vacant abandoned homes; that is still not a good thing for a recovering real estate market.

http://www.dbrs.com/about/methodologies

Of particular interest is how the anlaysis identifies additional valuation risk after market decline and property valuation haircuts are applied.

This additional risk can be measured by proper application of  the appraisal process.

Winfield Realty & Consulting Inc. completes a sale ratio sensitivity analysis on every valuation for REO, Short sale, Pre-foreclosure, Refinance, Purchase, Bankruptcy and Tax Asessment Appeal.

A statistical sale ratio study identifies risk imbedded in each property and subsequent market as follows:

• Identifies & quantifies under or over improvements
• Identifies Standard Deviation of  value and/or price
• Measures variance in value and/or price
• Provides a Confidence score
• Evaluates Valuation and/or price Bias
• Identifies a valaution and/or price error rate

The tools are available to better review valuations and prices regardless of assignment type: Mark to Market, Acquisitioin Due Diligence,  Appraisal, BPO, AVM, Retrospective Review Appraisal, Desk Review or Sale Price evaluation.

For further information Please contact me at Kwolf@winfield-realty.com

Realtor Survey completed by Cedit Suisse.  Industry_RealtorSurvey_12-02-11

 Additional posts forthcoming:

• Chicago Suburban MSA Prices Double Dip Forecast 2012
• DBRS Mtg. backed Security Loss Model and Rating Methodology
• On Line Statistical Tool  to measure error rate of:
• BPO
• AVM
• Appraisal
• Sale Price

Thanks

Keith Wolf, SRA

Winfield Realty & Consulting Inc.

Q2 2011 Detached

Q2 2011 Attached

2011 Market Forecast Chicago & Suburbs

REAL Forecast

Attached Year End 2010

Detached Year End 2010

Attached Closed Bank

Detached Bank

2-4 unit bank

zip code bank

BPO not Evaluations.r

What is unclear is if the pattern can be sustained or if it is just a blip resulting from the Federal Home Buyer Tax Credit. We won’t know until the third quarter when all those deals have flushed through the system. We may see a double dip in price decline.

Prices for Condo and Townhomes in general continue to decline as many buyers in this segment have been hit the hardest by the economic recession.

The Chicago Metro area has a seasonal pattern as follows:

• In March inventory, sales and prices generally increase, sales are usually robust until July.
• July starts vacation time, inventory stays high and contracts fall off as most buyers need to be under contract and must close in August before school starts
• In September after school starts; the market picks back up and is active until the Holiday season begins. Thanksgiving inventory builds and contracts fall off
• Thanksgiving through year end investors are still buying, most end users are in Holiday mode
• In January most everyone hibernates until March, unless they have to move. Some buy at this time of year because prices are soft.

The above pattern is a normal pattern, obviously Federal Incentives or other unusual circumstances like a housing boom or bust can impact the normal pattern.

DePaul University, Chicago recently published a working paper on Property Value Changes in Multi Family Housing and its Implications on Mortgage Lending. (To see a full copy of the Study please see our Blog Site)

DePaul’s study identified direct correlations with 2‐6 unit apt buildings, Single Family Detached and Attached (Condos / Townhomes) housing stock. In summary here is what can be drawn from the Study:

• One in eight (13%) of the rental properties can’t cover their operating expenses either due to falling rents or escalating costs.
• Values for the entire Chicago Metropolitan area 2‐6 unit rental building inventory has fallen by 46% and in Cook County by 61% (we’ve seen this as high 70% in some areas)
• 30% of the areas multi‐family mortgages are at risk of default
• An additional 10‐15% decline in Cook county property values in 2‐6 unit buildings could place approximately $12.5 billion of multi‐family mortgages at risk.
• Multi Family foreclosures have 3‐4 more times of concentration in low to moderate income markets (see our High risk zip code graph on our Blog site).
• The economic recession has had a significant impact on Low and Moderate income households who have seen their incomes the drop considerably
• Job and Income loss is expected to be high in the low to moderate income level for the next 2 years
• Negative Credit growth has caused property values to drop and as property values have dropped it has caused Negative Credit growth to increase.
• Higher income wage earners live in the suburbs or urban fringe of the lower to moderate income wage earners
• As single family housing prices fall making them more affordable it causes multifamily prices and rents to decline, thus a spiraling impact when both are falling.
• The lack of financing due to increased foreclosures and short sales feeds more foreclosures and short sales further depressing prices and impacting credit growth negatively
• The sooner properties are removed from the existing supply the sooner the market will recover.

So what this does this mean for the 2010 Chicago Metropolitan area Market? (see our Blog site for detailed graphs by property type and county)

SINGLE FAMILY DETACHED

• Single Family detached homes for the 8 county Chicago Metropolitan area for the last 6 months increased by 1.8%

However not all areas have similar results for the last 6 months:

The Chicago high risk zip codes have declined ‐11% in the last 6 months for a ‐22% annualized rate of decline. These are the low income areas with a high percentage of section 8 housing.

• Cook county declined by ‐1%
• DeKalb county increased .8 %
• DuPage county increased 1.2%
• Kane county increased .5%
• Kendall county increased 1.6%
• Lake county increased 7%
• McHenry declined ‐3.6%
• Will county increased 1.5%

ATACHED (CONDOS AND TOWNHOMES)

Historically this is the first time home buyer market and typically represents renters escaping tenant life. Many are low to moderate income buyers. As single family prices declined substantially in 2008 and 2009 this housing segment was holding its own.

As single family detached home prices have become more affordable, it created an economic imbalance with Condos and Townhomes, as a result these prices are now falling to reach an economic balance between the two.

Overall prices in the entire 8 county Chicago Metropolitan area for the last 6 months declined by ‐4.5% or ‐9% annually

• The City of Chicago’s high risk zip codes experienced a ‐57.8% decline which annualized is ‐115.6% which is not possible; indicating the rate of decline is front loaded, therefore this rate of decline will most likely tapper off over the next 6 months.
• Cook county declined by ‐2.6%
• DuPage county declined by ‐.3%
• Kane County declined by ‐12.4%
• Kendall declined by ‐2.4%
• Lake increased by .1%
• McHenry declined by ‐5.3%
• Will increased by 4.8%

2-4 UNIT BUILDINGS

Most multifamily apartments are in the city of Chicago and/or Cook county. This is the segment according to the DePaul study that has $12.5 billion in loans at risk of default. We have seen the average property values drop in the last 2 years by as much as 70%.

The housing boom saw speculative prices in the 400% range. None of these prices were ever sustainable as many of the tenants in these properties were section 8. Income levels and rents did not increase to support the debt coverage and operating expenses. Prices in this segment had now where to go but down regardless of the National Housing Bust. In many areas they have re‐treated to 2001 levels.

• In all 8 counties prices declined by ‐7.2% for a ‐14.4% annualized rate of decline
• The high risk zip codes decline by ‐6.1% or ‐12% annualized.
• We saw the worst of this segments price decline in 2008 and 2009.
• Overall Cook county saw a ‐6.7% decline in the last 6 months

SUPPLY AND DEMAND

• Bank owned inventory is shrinking and being replaced with Short sale inventory, this has no positive impact on supply, demand or price stabilization.
• A Short Sale is an occupied foreclosure ; but the Lien Holder just does not have title yet or had to mark the debt to market or sustain losses and costs similar to foreclosing
• The at risk housing stock is the same, the supply of distressed inventory has not changed, therefore the correlation identified in the DePaul housing study regarding falling prices and negative credit expansion has not changed.
• Therefore an increase in Short sale activity is no different than in increase in the numbers if foreclosures converting to Bank owned with one major exception. The Short Sale process takes much longer to liquidate excess inventory therefore extending the time line for full recovery.
• When we look at the supply of existing homes to those sold and add the new inventory of homes recently listed the number of months of inventory has actually increased.

Summary

• We expect prices to stabilize for Single Family Detached homes in the core suburban and urban areas in 2010
• By stabilization we mean prices will bounce around between negative and positive on a quarter by quarter basis, but the general trend will be increasing.
• Full price recovery is not anticipated until 2014 shortened or pro‐longed by the Financial MTG Market crisis with it returning to solvency providing liquidity via Mortgage Backed Securities trading in the secondary market without government intervention (see Depaul University study).
• Prices for Condos and Townhomes are expected to decline until they reach a price balance with single family detached homes and/or the economy recovers allowing low to moderate income buyers to be able to afford homes and get their loans approved. (negative growth ends)
• Loan Underwriting will eventually return to normalcy, but it may take 3‐4 years.
• Prices in the 2-4 unit family market are not expected to return to housing boom levels in the low income areas. These prices were never sustainable as it was all speculation and/or related loan fraud.
• New construction is slowly recovering in the in‐fill areas adjacent to suburban and urban areas.
• New construction in the outlying rural to suburban areas is still at a standstill as many of these builders have gone into Bankruptcy, unemployment in the construction trades is at 26%.
• Every new home built impacts at least 52 additional economic enterprises encompassing: all building trades, home decorators, home furnishing, home improvement, insurance companies, financing, title companies, landscapers, schools, police, fireman ,retail shopping… and all the related business they touch.
• Full Housing price  recovery does not take place until the New Construction market recovers.

Buying a foreclosure is a dynamic process and what worked one time may not work the next. This web site has links to as many foreclosure web sites that we are aware of, and that are useful. Many web sites have a big list, but the properties have been sold for months. But before we begin you need to have some basic terminology, so please read the following:

Foreclosure: this is a process that takes place when the borrower defaults on the loan.

Judicial Sale: this is where the loan in default is auctioned at the court house steps.

Judicial Deed: this is the deed that is issued by the Court at the auction. See “Types of Deeds” for more information.

REO or OREO: stands for Real Estate Owned or Other Real Estate Owned by the Bank. The foreclosure process is over, the loan was sold to the highest bidder (typically the Bank), the Bank was issued a Judicial Deed, and now the Bank is the owner of the property and has rights to sell the property to recapture their investment.

Arearage: this is the dollar amount plus costs the prior borrower is in arears, or has not paid to the Bank.

Total Debt: this is the amount the Bank typically bids at the foreclosure sale, it typically includes the Arearage.

Short Sale: this is where the Bank allows the current owner to sell the property for less than they owe on it or for less than its market value.

Asset Manager: this is the person at the Bank that is responsible for managing the asset (loan or REO/OREO) while the Bank still has an interest in the property. They are king, they hold the key to the gold. They are typically paid on commission with a monthly bonus, catch them at the right time and they will deal.