By Jacquelyn Ryan
March 22, 2010
Justin Kawa is the new face of the depressed real estate market. The young marketing executive's two-bedroom condo in the upscale neighborhood of Lincoln Park, which he put on the market for $359,000 last month, is now offered at $349,000, and he may have to lower the price even more.
“We’ve had tons of showings but no offers,“ said Kawa. Many people who looked at his condo put bids on nearby condos, many of which were priced less.
Kawa, 29, and a friend, purchased the condo in July 2005 for $333,0000. The two-bedroom, two-bathroom walk-up is in a vintage building and has a roof deck. They had thought they would be able to sell it for about $380,000 in 2008. Little did they know the housing crisis would spread to their neighborhood.
Welcome to the foreclosure crisis in upscale neighborhoods such as Lincoln Park. It's playing out just as the experts said it would, with foreclosed homes depressing selling prices of nearby properties. And it's a hardship on these upscale sellers in ways similar to their lower-income brethren.
“It is affecting Lincoln Park,” said Quentin Green, real estate expert and owner of Lincoln Park Homes Ltd. “I think you’ll see it affect Lincoln Park even more now. There are homes in foreclosure.”
In the Lincoln Park neighborhood, foreclosures shot up 103.2 percent in the second half of 2009, according to the Woodstock Institute.
In fact, the number of foreclosures in swanky neighborhoods throughout Cook County last month drove the county’s foreclosures to highest level since the recession began with a total of 4,426 in one month, up 76 percent from 2,517 in the previous month and up a whooping 703 percent from 551 in September last year, according to RealtyTrac.
“I would be terrified if I had to sell my house right now. I’m thankful that I don’t have to sell,” said Green. “It’s an act of god to get some of these products sold.”
Green said he recently saw a Lincoln Park home that would have sold for at least $1.5 million in a normal market, sell for $1.2 million in this economic downturn.
Christian Chase of Chase Real Estate, specializing in foreclosure investments, said he’s seen this scenario play out across the city, including the suburbs.
“In the higher end market, we absolutely are seeing a surge in those types of properties right now,” said Chase.
He saw it up close with a foreclosed property in Naperville that he purchased from the bank that held the mortgage. “It was a property that might have sold at the height of the mark in 2007 for $563,000 that now the bank is letting it go at $371,000,” said Chase. “That’s a substantial discount on a property that’s in good shape.”
Home prices are dropping
With so many foreclosed homes on the market at depressed prices, sellers whose homes are not in foreclosure are being forced to drop their asking prices substantially to compete in the market.
On the whole, the average foreclosed home price is $90,513 in Chicago, according to RealtyTrac.
Home prices in Chicago have fallen dramatically since the real estate crisis began in 2007, with most homes in the city of Chicago down about a third of what they were worth at the peak in 2006, according to the Chicago Association of Realtors.
One stark case, said Green, can be seen in the building at 2625 N. Clark St. in Lincoln Park, where condos are selling for only a fraction of the price they sold for in 2005. Unit #1504, a one-bedroom, one-bathroom unit, was purchased for $304,500 in August 2005. It was put on the market for $234,900 in March 2008. It is now listed for $209,900.
Other prime areas like the Gold Coast and Near North areas, zip code 60611, now boast a 56.65 percent difference in home prices for foreclosures and non-foreclosure properties. The average sales price there last month was $441,857 but foreclosed homes went for $191,563, according to RealtyTrac.
The greatest savings for potential homebuyers or investors can be found in the Irving Park/North Center/Roscoe Village area, zip code 60618, where the average price of a foreclosed home -- $121,400 -- is more than 60 percent below the average sales price for a non-foreclosed home of $321,313, RealtyTrac said.
Moody’s Economy.com chief real estate economist Celia Chen anticipates all home prices will continue to decline, with so much inventory out on the market and more homes anticipated to go on the market soon. She estimated a 7 percent decline nationwide in home prices but only a 5 percent decline here in Illinois.
In swanky areas, the situation is a little bit more complicated.
There aren’t any government programs for high-end homeowners, such as those in Lincoln Park, and especially for anyone who bought homes on speculation and not as a primary residence. But homebuyers in these neighborhoods typically feel fairly secure that their property values will hold up, even during an economic recession.
Auctions picking up steam
Foreclosure auctions have been an increasing source of home sales even in these neighborhoods, with all foreclosure auctions in Chicago totaling more than $1 billion over the past two years, according to the Neighborhood Stabilization Project.
But even at auctions, fewer people can qualify for mortgages, fewer people are buying, and fewer people are willing to pay the asking price, said Rick Levin, owner of Chicago-based foreclosure auction company Rick Levin & Associates.
Dismal conditions have “forced us to be extremely upfront and candid about the realities of the current marketplace,” said Levin.
Before the recession, the gap between what sellers wanted to be paid and what buyers wanted to pay was typically about 10 percent. Now, it’s about a 20 percent gap, he said.
“Nobody is totally comfortable with what something is worth,” said Levin. “Real-world demonstration of the value of something is becoming more desirable than ever, hence the auction.”
Knowing the right price has been one of the most difficult aspects of the real estate market recently, as the brave who dare to put their homes up for sale now know.
Sellers have thought, “Well, I need to list it 10 percent higher,” because buyers will want to haggle down the price, Green said.
“That’s the stupidest thing you can do,” said Green, who encourages sellers to price their homes at the current market rate.
He has another piece of advice, too. “Think twice if you do want to sell it. You have to have it in mint condition and be aggressive with your price,” he said.
The problem, experts say, is that sellers who are underwater on their homes—even in tony neighborhoods—are not spending the money on updating their homes to keep them in tip-top shape.
“It’s like pouring perfume on a pig,” said Chase.
More foreclosures on the horizon
The foreclosure crisis and depressed market will continue to plague these high-end neighborhoods as unemployment remains high and another wave of adjustable-rate mortgages reset in the coming two years.
Mortgage delinquencies, those that are more than 60 days behind on their payments, are also on the rise, suggesting more foreclosures to come.
Illinois had a 6.57 percent mortgage delinquency rate in the fourth quarter of 2009, according to the most recent numbers available from TransUnion. The national average was 6.89 percent, with Nevada and Florida posting the highest delinquency rates of 16.19 percent and 14.93 percent, respectively.
But Chen does not believe there will be a large second wave of foreclosures as many homeowners who received adjustable rate mortgages in 2006 or 2007 come up for rate adjustments.
“There will be a small increase,” she said. But “for the most part, many of those people [with adjustable-rate mortgages] have already refinanced.”
Indeed, Kawa and his friend have refinanced their Lincoln Park mortgage twice and are now paying only $1,720 in mortgage payments each month, compared with $1,940 previously.
That’s given Kawa enough breathing room that if the condo doesn’t sell by April, he has decided to keep it and take on a new roommate to help cover costs. But he has learned a lesson about purchasing real estate.
“Now after going through the experience, I wouldn’t buy a place as an investment. I’d buy because you want to stay,” said Kawa.
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