The Chicagoland Real Estate Report

Apartments in the Chicago metro region haven't been on my radar for quite a number of years, but my interest perked up when I came across an article, Falling Values Slam Apartment Owners, in the Chicago Sun-Times this morning. Here are some of the conclusions he found:

Falling property values in Cook County have put about $13 billion in multifamily mortgages at risk of default, about 30 percent of the total debt. Most of the risky loans are tied up in buildings with six units or fewer.

Foreclosures of apartment buildings fall heaviest on poor neighborhoods. For the 2-6 unit buildings, the foreclosure rate in 2009 was 13.9 percent for poor neighborhoods vs. 4.2 percent for regions with high incomes. For larger buildings, the comparative foreclosure rates were 7.8 percent and 2.1 percent last year.

Within Chicago, rents don't cover operating costs for about 74,000 apartments, or one in eight of all units.

The article confirmed what I had thought was inevitable back when I was helping a fellow agent and apartment owner back in 2005: apartment buyers were overpaying and there would be a day of reckoning for them.

Back then he was looking at 6 to 8 unit buildings to purchase for potential condo conversion and/or to buy-and-hold for appreciation. The properties that I analyzed with him (there had to have been 12 to 15) all had one financial feature that I remember clearly, low Cap Rates. I know that the Cap Rate (NOI/Sale Price) is not the only statistic for valuing apartment buildings, but I also knew that Cap Rates at about 4.5% to 5.5% were pretty much unsustainable.

According to statistics from DePaul University published in the article, that day of reckoning for Chicago apartment owners in low income neighborhoods started in 2007, but just recently started for high income neighborhoods in 2009:

I did some quick research in my own backyard in a blog post about buying an apartment in downtown Joliet, Illinois:

The MRED MLS shows 69, 2+ unit properties for sale in Joliet, but I looked at the 6 that were 4+ units or more. From the information I can find, none of them appear to be in foreclosure, but from the limited financial information available I was able to determine the cap rate (NOI/Asking Price). All 6 were above 7.5% with a couple near 10%.

That tells me that at least a few sellers are pricing their units attractively for cash flow purposes. That is something that we weren't seeing 3 to 6 years ago and the reason why some apartment owners are now facing foreclosure.

I guess I should give my buddy a call and hope he took a pass on some of those apartment albatrosses we looked at many years ago.

I was reading an article, 14 Scary Facts About The US Real Estate Nightmare, that is guaranteed to give most real estate agents heartburn. Dropped in at #6 was a blurb that real estate searches are down about 20% from last June till June 2010 (date of article).

Knowing that I had read something similar, but more in-depth, I went about searching Google to find some corroborating evidence of this decline. Google was no luck, but my bookmarks bailed me out with a saved link to an article by the Notorious R.O.B. titled Something Wicked, This Way Comes: Housing Market Signals in which he expresses his misgivings about the housing recovery.

Notorious, who runs a brilliant blog if I may say so, cited a blog post from Hitwise, the web traffic analysis company. The meat of the article relating to real estate searches was:

First, Hitwise reports that year-over-year visits to websites in the Real Estate category are down 22% for April of 2010, and that is 11 consecutive months of traffic decline:

That there is a pretty steep curve...

However, Hitwise also reports that visits to "Home & Apt Rental" websites are up 45% in April 2010 year-over-year, and that represents the tenth consecutive month of increases.

WOW!

I strongly recommend that you read the rest of Notorious' article as you will come away smarter for it, but as a real estate agent who is very dependent on Internet leads, the issue of declining Internet searches got me to thinking.

Here are some of the questions (and maybe answers) I came away with:

• Why the drop-off in May 09? The industry has been in distress since early 2008 at a minimum. Were the 08 numbers OK because 07 was brutal (Hitwise doesn't provide 07) or is there some other hidden consumer online search characteristic in play?
• Pouting is not going to make the eyeballs come back, so how am I going to tailor my SEO so I am doing a better job of attracting a dwindling pool of online real estate searchers?
• Perception is reality and potentially many internet searchers BELIEVE that they cannot afford to buy a home and that they must rent. How can I change that perception?
• And combining on the last 2 points, maybe I need to be optimizing for keywords targeted at renters and converting qualified renters to qualified buyers.

I would certainly welcome your opinions on this ominous phenomenon of disappearing eyeballs.

This is my initial re-foray into blogging on AR with my first post on the Chicagoland Real Estate Report. I am republishing a post I just put up on DISCOVER! Joliet Homes, my local blog about Joliet, IL real estate. I am excited to be joining the active ranks of bloggers on AR and look forward to your comments and opinions. Here goes:

I believe it was Mark Twain who said "Lies, damned lies, and statistics". Mr. Twain, if I have my history correct, was implying that numbers can be very persuasive and that statistics often are used to support weak arguments.

So it was this afternoon that I was looking at the new Housing Scorecard that the Obama Administration had published in June that is going to be taking a monthly look at the national housing outlook (insert snide comment about lack of life here).

As I was perusing the 11 page pdf, I found a chart that on first glance encouraged me and then, on further reflection, tickled me in a darkly humorous manner. Let me explain:

The chart, on Page 7 of the pdf, is titled "Home Equity Up More than $1 Trillion Since First Quarter 2009". This my friends is a good thing. As you can see in an excerpt of the chart shown below, in Q1 of 2009 collective home equity was around $5 Trillion and now one year later it is safely above $6 Trillion.

Hooray for equity! Unfortunately, though, the chart is a little larger than the one that I excerpted above. The complete chart is shown below:

As you can see, home equity is off quite a bit since Q1 of 2006, where according to the chart, it was around $13 Trillion. That chart, if the illustrator had been given some type of truth serum, might have been better titled "Home Equity Down Over 50% Since First Quarter 2006".

Lies, damned lies, and statistics.

NOTE: I wrote this not to criticize the current administration nor to pine for the days of inflated housing values, but to illustrate that housing news is too often delivered with a rose tint. We all want the outlook to improve, but tilting the outlook won't improve its trajectory.