Why Doesn’t the Housing Equation Add Up?

October 20, 2011

Conditions have never seemed more favorable for those interested in buying Chicago real estate, or any real estate, for that matter.

But my equation doesn’t seem to be adding up.

Let’s take a look at the addends and figure out why.

First: Affordability. According to the Illinois Association of REALTORS® latest report, the median home price in the Chicago metropolitan area for September was $160,000. That’s down 8.6 percent compared to the median price of $175,000 in September 2010.

In Illinois, the median home price in September was $136,850, a decrease of 5.6 percent from September 2010.

And nationwide, the median home price was $165,400, which is 3.5 percent lower than the median price during the same month last year.

Second: Mortgage rates. After hitting record lows over the past month, Freddie Mac reported that mortgage rates for the week ending October 20 barely moved from their historically low averages the week prior.

*The 30-year fixed-rate mortgage averaged 4.11 percent after last week’s 4.12 percent.

*The 15-year FRM averaged 3.38 percent from 3.37 percent.

*The 5-year Treasury-indexed adjustable-rate mortgage averaged 3.01 percent from 3.06 percent.

*The 1-year Treasury-indexed ARM averaged 2.94 percent from 2.90 percent.

Third: Inventory. There is certainly no lack of it. From foreclosures and short sales to desperate homeowners ready to make a deal and builders ready to build, practically every block in the Chicago area offers a home for sale.

Add it all up, and it seems like the housing equation should be:

Low Home Prices + Low Mortgage Rates + High Inventory = Active Housing Market

But it is not.

“While interest rates remain historically low and prices compelling,” said Bob Floss, president of the Chicago Association of REALTORS®, “we remain concerned of the overall economic stability of our marketplace with unemployment numbers and job creation still top of mind for so many buyers and homeowners, alike.”

And, with reason. The Illinois Department of Employment Security reported Thursday that unemployment in Illinois increased to 10 percent in September.

The rate rose from a seasonally adjusted 9.9 percent in August, despite the addition of 1,600 new jobs.

But unemployment isn’t our only issue. It seems that even those ready to take the home-buying plunge are having difficulty.

“All year we’ve been discussing the fact that many creditworthy home buyers are being denied mortgages,” said National Association of REALTORS President Ron Phipps. “On top of that, loan limits have been lowered, which means buyers of higher priced homes, including many in more expensive housing markets, now have to pay a higher interest rate for a jumbo mortgage than buyers who can qualify for a conventional loan.

“We need to remove the roadblocks to a housing recovery — not place more obstacles in the way of financially qualified buyers.”

Maybe then the equation will start adding up the way it should.

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