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  • Archive for the 'Real Estate' Category

    Recession and Recovery

    Posted by Carl from Chicago on 17th October 2009 (All posts by )

    One of the broad assumptions behind recessions and recoveries is that during the “boom”, excess capacity is built into the system as manufacturers & service providers expand to meet increasing needs (today, and in the future). During the recession, manufacturers & service providers pare back, leaving capacity idle.

    Part of the reason that the recovery (typically) gains steam is that bringing back this idle capacity (both in physical and human capital) is cheaper than building (or training) new, and it allows the economy to “roar” back into high gear. In some high level sense WW2 leveraged all of the physical and human capital that was idled by the great depression; while huge plants were built and millions of workers mobilized much of the initial lift was caused by leveraging what we had that was unused at the time.

    When I look at this “boom” and recession, however, from the point of view of the USA, it doesn’t seem that we over-invested in productive capacity. Much of the investment was in residential real estate and commercial real estate for distribution, retail and services.

    Read the rest of this entry »

    Posted in Chicagoania, Economics & Finance, Real Estate | 12 Comments »

    Lies, Damn Lies, and Assessments

    Posted by Carl from Chicago on 5th October 2009 (All posts by )

    I recently was walking down LaSalle avenue in River North and saw some new construction. Aside from the usual accoutrements such as more bathrooms than bedrooms and everything made of granite, one item REALLY caught my eye:

    Low assessments – $200 / 2009

    Read the rest of this entry »

    Posted in Chicagoania, Humor, Real Estate | 14 Comments »

    The FHA and Impact on Real Estate Values

    Posted by Carl from Chicago on 19th September 2009 (All posts by )

    Today the FHA, the Federal Housing Administration, is a gigantic player in the residential mortgage business. The FHA guarantees mortgages against default, and allows purchases of homes with only a 3.5% down payment, and provides a rock bottom interest rate of near 5%. These lenient terms apply to virtually everyone, even those with poor credit scores and little equity in the home, which are highly correlated with default. This is in addition to the $8000 tax credit the US Government is issuing to first time buyers, which is boosting demand for these sorts of loans.

    This article describes the measures that the agency is taking to reduce the odds of a bailout, but they don’t hit on the core issues of low down payments and not adjusting the interest rates to better reflect the risks on lower credit quality mortgages. These half-hearted measures require a tiny base of assets for mortgage originations (up to $1m from $250,000) and some changes to appraisals… the core issue here is that there were massive amounts of fraudulent mortgages that flooded into the system during the boom and when they went awry the brokers that backed them vanished into the night.

    Many have pointed out that the FHA looms as a likely candidate for government bailout, such as this article from the Washington Post, titled “FHA’s Refusal to Seek Bailout Met With Skepticism

    FHA Commissioner David H. Stevens said Friday that the surplus fund set aside to cover unexpected losses on mortgages backed by the agency will fall below the 2 percent threshold required by Congress when the next fiscal year starts in October.

    Although the reserves had remained well above the minimum required level during the housing boom, the audit last year showed they had shrunk to 3 percent as of Sept. 30, compared with 6.4 percent a year earlier. The fund’s value was estimated at $12.9 billion, down from $21.2 billion the previous year.

    Many stories note that most of the loans that are being done today are backed by the FHA. From this article in the Wall Street Journal titled “No Easy Exit for Government as Housing Market’s Savior

    The Denver home lender sees every day how dependent the housing market has become on the government. At the height of the boom, just 20% of Universal’s mortgages were backed by the Federal Housing Administration, an arm of the government that guarantees loans to borrowers who can’t afford big down payments. Today, the FHA accounts for more than 80% of his business.

    Also note that the US Government is buying most of the securities that are backed by the FHA. Private banks are not interested in purchasing securities with low returns and thus the government secures the loan on the front end, and then repurchases the securities on the other end.

    At the Fed, the question of whether to start dismantling the scaffolding is a dominant one. Since the beginning of the year, the Fed has purchased $836 billion of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, the federal body that securitizes FHA loans. The purchases have helped push down interest rates on mortgages guaranteed by the firms from more than 6.5% last October to 5.15% today, according to HSH Associates, which tracks the mortgage market.

    Read the rest of this entry »

    Posted in Real Estate | 1 Comment »

    Commercial Real Estate Woes

    Posted by Carl from Chicago on 25th April 2009 (All posts by )

    As I walk to work in the morning I pass right by the headquarters of General Growth. General Growth is a corporation that owns over 200 shopping malls throughout the United States, along with other commercial properties. General Growth recently declared bankruptcy, stating that this filing will not impact operations at its properties. From their press release:

    The decision to pursue reorganization under chapter 11 came after extensive efforts to refinance or extend maturing debt outside of chapter 11. Over many months, the Company has endeavored to negotiate with its unsecured and secured creditors to obtain the time needed to develop a long-term solution to the credit crisis facing the Company. Unable to reach an out-of-court consensus, the Company reluctantly concluded that restructuring under the protection of the bankruptcy court was necessary. During the chapter 11 cases, the Company will continue to explore strategic alternatives and search the markets for available sources of capital. The Company intends to pursue a plan of reorganization that extends mortgage maturities and reduces its corporate debt and overall leverage. This will establish a sustainable, long-term capital structure for the Company.

    I am not an expert on the commercial property industry but am starting to learn more about it since it has an integral impact on the skyline of Chicago and many other cities around the country. Essentially the commercial property industry purchases properties mainly with debt, puts in a bit of equity, runs the properties, and then plans to sell them at a profit to another commercial property company. With low interest rates, easy lending terms, and many buyers, there has been an immense run up in commercial property, and companies like General Growth were flying high. GGP’s stock traded near $80 over the last couple of years, before collapsing near zero as the debt markets seized up.

    The downfall of the commercial property industry, however, is the fact that many of the loans need to be “rolled over” every few years. On your home, for instance, you may have a 30 year mortgage. The debt on the commercial property industry, on the other hand, rolls over usually within 5 years. Given that a typical company has many projects, in the next 12-18 months many of these sorts of companies are finding loans coming due and they have no way to raise the money (except at punitively high interest rates, if they can find money at all), so they are all starting to go bankrupt and fall like dominoes. It doesn’t help that many of these enterprises bought properties in the go-go years of 2005-8, when prices were rising all the time and there were bidding wars – it is likely most / all of those properties today are worth less than they were purchased for which makes obtaining new financing even more difficult (try to refinance your home loan for more than the current market value of your home… it isn’t happening).
    Read the rest of this entry »

    Posted in Business, Chicagoania, Real Estate | 2 Comments »

    Real Estate Bust in a Microcosm

    Posted by Carl from Chicago on 8th February 2009 (All posts by )

    Since the weather here in Chicago is usually so unfavorable, people love to go outside as soon as there is a break in the gloom. One of my favorite pastimes is to sit outside and have a drink, catch a little sun, and watch the world go by. It is even better if there is at least semi-edible bar food (I am not too picky).

    When I lived in Wicker Park / Bucktown there is a local bar called “Northside” that has a great front deck near a busy intersection and it was fun to sit out there on a Friday afternoon or Saturday and just relax. Here in River North there are some outdoor spaces but I liked to take a walk up to a place called “Melvin B’s” that had a nice deck outside in the V*agra Triangle.
    Read the rest of this entry »

    Posted in Chicagoania, Real Estate | 4 Comments »

    Defining the Family Down

    Posted by Ginny on 18th December 2008 (All posts by )

    Taranto links, with some irony, a NYTimes article emphasizing one aspect of census news, an increased percentage of black children live within a family:

    Demographers said such a trend might be partly attributable to the growing proportion of immigrants in the nation’s black population. It may have been driven, too, by the values of an emerging black middle class, a trend that could be jeopardized by the current economic meltdown.
    The Census Bureau attributed an indeterminate amount of the increase to revised definitions adopted in 2007, which identify as parents any man and woman living together, whether or not they are married or the child’s biological parents.

    We suspect the third “indeterminate” reason is key and the news may not be all that great. But how do we know? Taranto has fun with this, but it has serious implications. It appears a combination of “political correctness” (ah, he says he loves the child; isn’t that the same as being a father – even better, perhaps?) and post modernism (words can mean whatever the hell we want them to, so can traditions, so can biology).

    Read the rest of this entry »

    Posted in Human Behavior, Real Estate | 3 Comments »

    Hitler Foreclosed

    Posted by Jonathan on 18th November 2008 (All posts by )

    My vintage Camaro SS!

    Let me be merely the latest to post this (via Chicago boy JC and Clusterstock):

    Posted in Humor, Markets and Trading, Real Estate, Video | Comments Off on Hitler Foreclosed

    Gentrification… and the Lie of History

    Posted by Carl from Chicago on 17th November 2008 (All posts by )

    In the NY Times this weekend they had an article about a one man show by Danny Hoch. The topic of his show was gentrification, and how it impacted natives of New York City. In the article they reviewed him and he had the following quote:

    “I did a lot of community arts work through the 90’s, really believing that we were making a difference socially…. Within the last 10 or 15 years, those communities have virtually been erased.”

    On a seemingly unrelated line, there is a history of the neighborhood that I live in, the River North neighborhood in Chicago. Here is a link to a document summarizing River North history, notably its time as a manufacturing area called “Smokey Hollow”. This article summarizes the demographic changes in the Near North neighborhood of Chicago by decade.

    These types of documents talk about the history of a neighborhood as if it was continuous, with links between each era. However, the reality of urban areas like River North (and the New York of Mr.Hoch) is really quite different. Aside from some projects just north of Chicago Avenue near Cabrini Green, the neighborhood has turned over to a degree that most US residents would find astounding. There are literally no individuals living in River North that were even here ten to fifteen years ago.

    Read the rest of this entry »

    Posted in Chicagoania, History, Real Estate | 7 Comments »

    Leverage and the Housing Bubble

    Posted by Carl from Chicago on 16th November 2008 (All posts by )

    The housing bust has been well chronicled elsewhere and I won’t add much to it by summarizing it; let’s assume that readers of this blog know the outlines (and details) of the story. But while everyone has learned the (often bitter) lesson that housing doesn’t always go up, it also comes down, they haven’t fully digested other elements of the financial picture. High LEVERAGE on a flat or declining investment makes the “buy” vs. “rent” even more skewed away from “buying”.
    Read the rest of this entry »

    Posted in Business, Real Estate | 29 Comments »