Industry Insider: Prudential American Heritage
Just a few years ago, parents worried their children might never be able to afford to buy a home because prices had gotten so high. But that is no longer a worry, according to Frank Ramljak, managing broker with Prudential American Heritage in Elk Grove Village.
“The affordability index today is the highest it has ever been since the index was started in 1970 or 1971. With prices as low as they are and fixed interest rates ranging from 4.5 to 4.75 percent, and adjustable rate mortgages in the 3s, a very large percentage of the population can afford to buy a house.
“The average selling price for Chicago-area houses at the height of the market in 2006 was in the $250,000 to $350,000 range. Today the range for the average selling price is $150,000 to $250,000,” Ramljak said.
On a recent evening, he said, one of his agents was showing five homes in Schaumburg and Streamwood. All featured three bedrooms and two baths and none of them was listed for more than $200,000.
Consequently, first-time buyers are finally venturing into the marketplace. Realtors are seeing quite a bit of activity in the lower price ranges. Open houses are busy again. But buyers are still being quite cautious, looking at lots of houses before they make a decision.
“This is such a good time for first-time buyers, so the outlook is not all doom and gloom. We are selling houses because there are some incredible deals out there,” Ramljak said.
In fact, National Association of Realtors figures show that at the height of the market in 2005, there were 7 million real estate transactions nationwide. The association projects this year there will be 5 million sales nationwide.
What are you seeing in the current Chicago area real estate market?#147;It is definitely a buyer#146;s market. We have 12 months of inventory on the market today in most suburbs, which is twice as much as we would like to see. In addition, prices are down 30 to 35 percent from their peak, which we hit in the first or second quarter of 2006.#148;The problem, Ramljak says, is standard listings must compete with both short sales and foreclosures, and, on average, short sales are selling for 10 percent less than normal listings and foreclosures are selling for 20 to 30 percent lower than normal listings.In addition, bank appraisers are using those prices as comparables when they are deciding whether or not to lend buyers money. This can make a house not #147;appraise out#148; at a higher price, even if a buyer is willing to pay more for a particular home.#147;In this way foreclosures and short sales in a marketplace definitely hurt the other listings. But since these are actual sales, I don#146;t see how you can tell bank appraisers to ignore them.#148;How are sellers handling the new reality?They are having good luck when they #147;make sure their home wins the beauty contest#148; by making cosmetic changes and staging the home with fancy towels, plants and even tables set for dinner. When you combine those efforts with a good price, #147;we see lots of activity and offers,#148; Ramljak said.Consequently, many sellers who still have equity in their homes and are planning to buy another home are just choosing to go ahead and move because they know that they can make up the loss they are suffering on their current home by buying their new home at a discount, Ramljak said.The problems occur when people do not have enough money to pay off their current mortgage and also have money for a down payment on that new home.Some sellers are choosing to rent out their homes rather than sell them because they know there is a demand for rentals from the people who have lost their homes to foreclosures and short sales and won#146;t be able to qualify for another mortgage for four or five years, he said.Are short sales and foreclosures finally moving through the system?#147;I recently saw a statistic that said there have been between 14 and 18 million foreclosures nationwide and that only 4 million of those have yet been processed.#148;Banks are getting better about responding to buyers#146; offers on foreclosures because they already own the property and most banks have appointed a decision-maker who can respond to an offer in a day or two, he said. Many buyers are very attracted to the low prices offered by foreclosures, now that answers are forthcoming in a timely manner.Short sales are still laborious, however. Ramljak said it still takes two to four months to get an answer on an offer for them. #147;You can get a good deal on a short sale, but you have to be patient.#148;Consequently, Prudential American Heritage agents ask potential buyers to deposit their earnest money, get their home inspection and go through the attorney approval process before they hear back from the bank, so that everything will be ready to go once they do get an answer. On the other side, they ask their sellers who list a short sale to take the home off the market so the bank only has one offer to consider.What still needs to happen for the residential real estate market here to rebound once and for all?#147;The banks need to work their way through the backlog of foreclosures and with all those questions that arose about the way they did their paperwork, the properties haven#146;t been getting on the market as fast as everyone would like.#147;Those foreclosures will keep all real estate prices down for awhile, but I feel that the market will correct itself without any help from the federal government. It will just take some time.#148;He asked a banker friend recently how much longer it would take for the foreclosures to progress through the system and was told it would probably be 2014 before they have all worked their way through.#147;But lots of people feel that they have waited long enough to sell their current home. They want to get on with their life by moving to the Sun Belt or whatever. So they are now choosing to just take a loss on their home and move on with their lives.#148;So with those houses coming onto the market and interest rates remaining so good, Ramljak hopes young buyers will realize the opportunity that is presenting itself and will start the dominoes falling.