Real Estate News

As fewer houses sell, the market becomes crowded

By Anna Marie Kukec
akukec@dailyherald.com
Posted Tuesday, June 26, 2007

The highest number of existing homes in two years are sitting on the market in the suburbs — and they’re facing the lowest percentage of sales in recent times, according to figures released by local Realtors.

Existing, single family homes for sale in Arlington Heights, Mount Prospect and Palatine in May, for example, are at their highest level in recent years. May is the traditional start of the selling season. Together, the three communities had 2,126 homes for sale, nearly twice as many as compared to 1,120 in May 2005.

While the number of homes on the market ballooned, the number sold dropped. In May, the percentage of homes sold in those three towns was 7.5 percent, compared to about 13 percent in May 2006 and 22 percent in May 2005.

This spiraling scenario is hauntingly similar in Libertyville, Vernon Hills and Mundelein in Lake County; Naperville, Bloomingdale and Addison in DuPage County; and Elgin, Cary and St. Charles in the Fox Valley.

In many cases, the more homes that were on the market, the fewer were sold, according to numbers obtained through the Broker Metrics database and Stark & Co. The database includes all existing attached and detached homes for sale in the Multiple Listing Service, across all real estate firms.

Potential home buyer Julie Lipovitch, left, points to a house she is looking at in Mount Prospect with real estate agent Alicia Fedro. The number of homes for sale in the suburbs has increased over the last two years.(Mark Welsh/Daily Herald)

“This is the most challenging market I’ve ever seen,” said Connie Hofherr, Starck vice president and broker manager in Mount Prospect. She’s been selling here for about 30 years.

The suburban market here is weaker that what is happening statewide. From January through May, 56,775 homes sold in Illinois, compared to 66,575 homes sold during the same period in 2006, a 14.7 percent drop, according to figures released Monday by the Illinois Association of Realtors.

Veteran Realtors agreed the suburban real estate market has been one of the toughest, and the most unusual, of their careers. It’s unusual because the market has changed both in reality and virtual reality, they said.

Despite relatively low mortgage rates, several negatives have caused a depression in the suburban housing market, which reflects similar problems nationwide. Creeping inflation, a slow economy, layoffs from major local employers, subprime lenders going belly-up, and a high number of foreclosures and bankruptcies all have taken their toll.

Another factor relatively new and growing in popularity for the real estate market is the Internet, they said. Home sellers on the Internet are not tracked by the Broker Metrics database and the Multiple Listing Service used by Realtors.

More than 70 percent of home buyers searched the Internet first rather than going to a Realtor in 2005, compared to about 2 percent in 1995, according to the National Association of Realtors.

While many Realtors use the Internet to provide more house-hunting features and virtual tours, other Web sites offer home sellers the chance to strike out on their own.

One such Web site, ForSaleByOwner.com, launched in 1999 and has grown in popularity. It fact, the site saw a 60 percent spurt just this past year, said Chief Operating Officer Colby Sambrotto.

“There certainly are more people utilizing our model now than they were a year ago,” Sambrotto said. “But this is not the seller’s market it was a year-and-a-half ago. Sticking a sign outside the house just won’t sell the house anymore.”

ForSaleByOwner.com statistics show about 1,000 listings available for the Chicago market. About 50 percent of sellers here indicated they sold their homes, which took an average of 2¨ months.

It’s not all doom and gloom, said Jim Regan, a Realtor for about 35 years with his own firm, National Sunrise Realty, and more recently with Re/Max in the Northwest suburbs.

“Some people are under the impression you can’t in no way sell a house in this market,” Regan said. “But that just isn’t true.”

Realtors and home sellers just need a good approach and the right niche, regardless of market conditions.

“With the right guidance, you can sell. You can’t just sit and wait for things to happen,” Regan said.

Doug Crowe, director of Lombard-based Springboard Group, a real estate education firm and a broadcaster on real estate investment on WIND 560-AM radio, said both buyers and sellers are like deer in the proverbial headlights.

“Sellers don’t want to cut their prices and buyers are afraid that if they buy something now, it will be the same or less in six months,” Crowe said.

“It’s a lot like a Mexican stand-off,” Crowe said. “People are waiting for something to happen. But when the buyers and the sellers aren’t even flinching, nothing happens.”

Good news for Mariners fans, bad news for Tigers faithful. This week, Standard & Poor’s released its S&P/Case-Shiller U.S. National Home Price Index for April 2007 and the news was just about as bad for homeowners in Detroit as it was good for the folks in Seattle. While the Seattle market zoomed up 9.6 percent between April 2006 and April 2007, the Detroit market plunged 9.3 percent.

The composite index and its regional sub-indices use the repeat sales pricing technique to measure housing markets by collecting data on single-family home re-sales, and capturing re-sold sale prices to form sale pairs. Price appreciation or depreciation is more accurately reflected by the change in value of the same properties over time across entire market areas rather than the more volatile median home prices published by the National Association of Realtors.

Of the 20 markets tracked by the indices, 14 showed price decreases and 6 showed price increases. Charlotte was up a healthy 7 percent and close behind was Portland at 6.4 percent. Other markets like Atlanta and Dallas showed modest increases of 2.1 percent and 2 percent, respectively.

Steep declines were experienced in several previously frothy markets with San Diego down 6.7 percent, Washington, D.C., down 5.7 percent and Tampa down 5 percent. The Composite Index of 20 markets was down 2.1 percent overall.

So where are we headed in the future? Investor expectations are reflected in housing-price futures and options traded on the Chicago Mercantile Exchange, which are based on a subset of the S&P/Case-Shiller U.S. National Home Price Indices. These property derivatives are traded on indices for a 10-market index and the component markets of that composite: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, D.C.

Expectations of future price changes are implied by the percentage difference in the index value for the relevant market (most recently published on June 26, 2007, for April 2007 period) and the current price of the four traded futures contracts expiring in August 2007, November 2007, February 2008 or May 2008.

Right now investors are betting on a decline in the composite index of 3.3 percent by the end of the first quarter of 2008 (the futures contract expiring in May 2008 is based on that period). They are most optimistic on the New York area expecting a decline of just 2.3 percent and most pessimistic on Denver with an expected decline of 5.5 percent.

As always, remember that these contracts are new and thinly traded relative to well-established foreign exchange or commodities contracts, and that means they are reflective of the collective wisdom of fewer investors. That said, the market is predicting that price declines in many markets will accelerate over the next year. If only it weren’t so rainy in Seattle!

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With more homeowners facing the possibility of foreclosure, the FBI says mortgage fraud schemes are targeting homeowners seeking financial guidance, and exploiting the home-equity-line-of-credit application process.

The FBI’s latest report on mortgage fraud identifies the top 10 states for mortgage fraud as California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas and Utah.

Mortgage loan originations are expected to fall to $2.28 trillion this year from a high of $3.81 trillion in 2003, which could increase the likelihood that “mortgage fraud perpetrators may take advantage of eager loan originators attempting to generate loans for commission,” the report said.

The FBI cited an estimate by a risk management firm, The Prieston Group, that losses from mortgage fraud schemes perpetrated in 2006 will hit $4.2 billion, not including another $1.2 billion spent on fraud prevention tools.

The most common form of mortgage fraud is illegal property flipping, which often involves false appraisals and other fraudulent loan documents. Because mortgage fraud perpetrators hope to sell their property quickly, “they would likely gravitate towards mortgage loans that offered low and short-term interest rates such as those offered by ARMs (adjustable-rate mortgages),” the report said.

The number of ARM loans containing fraudulent misrepresentations is unknown. The FBI cited an analysis of 3 million loans by BasePoint Analytics, a fraud analytics company that found between 30 percent and 70 percent of early payment defaults (EPDs) are linked to significant misrepresentations in the original loan applications.

The FBI is also alerting lenders about schemes that have emerged during the housing downturn.

Those include foreclosure-rescue fraud scams and schemes involving home-equity-line-of-credit (HELOC) applications.

In foreclosure rescue scams, perpetrators promise homeowners that they can save their homes if they agree to deed transfers and the payment of upfront fees. Such scams often involve forged deeds, and perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal enrichment.

Schemes that exploit the HELOC application process, may involve multiple applications to different lenders for a single property within a short time period. Because property liens may not be recorded for several days or months, lenders may not be aware of other HELOCs taken out against the property. Instead of holding a second lien, lenders may end up with a third, fourth, or fifth lien, and money obtained from the multiple HELOCs may total more than its original purchase price.

HELOC accounts are also being used in check fraud schemes. After securing a HELOC and withdrawing the entire allotted amount, perpetrators use fraudulent checks to pay the balance owed on the HELOC. Before the bank realizes the check is worthless, the perpetrator makes another withdrawal from the HELOC.

A New Jersey couple last year were sentenced to prison and ordered to pay $3.8 million in restitution after being convicted of defrauding Bank of America, Wells Fargo Bank and other major banks in California using such a scheme. Between April 2000 and December 2002, the couple manipulated business and home equity lines of credit extended by the banks to obtain millions of dollars, prosecutors said.

Some lenders have complained that the FBI does not have the resources to adequately investigate suspected cases of mortgage fraud. The Mortgage Bankers Association has requested that Congress set aside $31.25 million over five years to hire more FBI investigators and prosecutors.

An industry-funded group that tracks mortgage fraud, the Mortgage Asset Research Institute (MARI), recently reported a 30 percent increase in suspected mortgage fraud incidents during 2006. The increase was attributed partly to the slowdown in housing markets, which can reveal instances of fraud previously masked by home-price appreciation.

Suspicious activity reports to federal regulators related to mortgage fraud have risen from 3,515 per year in 2000 to more than 28,000 in 2006, which according to the Mortgage Bankers Association, represents losses of about $1 billion. Those numbers likely understate the problem because the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) does not collect reports from lenders regulated at the state level.

The FBI report provides no numbers on the total number suspected cases of mortgage fraud, or of investigations the bureau is conducting. But the report does break down of where FBI investigations are taking place on a regional basis. The FBI said 31 percent of pending mortgage fraud investigations were taking place in the North Central region, 23 percent in the Southeast, 19 percent in the West, 18 percent in the South Central states, and 9 percent in the Northeast.

The report notes that no single regulatory agency is charged with monitoring mortgage fraud, and that combating it “requires the cooperation of law enforcement and industry entities,” including the FBI, the Department of Housing and Urban Development’s Office of Inspector General (HUD-OIG), the IRS, the Postal Inspection Service, and state and local agencies.

The “FBI is proactively working with the mortgage industry in an effort to curb mortgage fraud crimes,” the report said, citing a March 8 memorandum of agreement with the MBA to promote the FBI’s Mortgage Fraud Warning Notice.

The notice states that it is illegal to make false statements about income, assets, debt or matters of identification, or to inflate property value to influence a financial institution’s decisions. The MBA and the FBI are making the notice available to mortgage lenders to use voluntarily to educate consumers and mortgage professionals about the penalties and consequences of mortgage fraud.

SPRINGFIELD, Ill. — May home sales in Illinois rose for the fourth consecutive month in 2007 yet are lower than sales from May 2006. According to the Illinois Association of REALTORS latest report, total home sales (which include single-family and condominiums) were up 10.9 percent in May 2007 to 14,349 homes sold compared to 12,932 homes sold in April 2007. Sales were 18.6 percent below the 17,622 homes sold in May 2006.

The Illinois median home price in May was $205,000, equal to the median price a year earlier. The median is a typical market price where half the homes sold for more, half sold for less.

Year-to-date, sales were down 14.7 percent to 56,775 homes sold January through May 2007 compared to 66,575 homes sold January through May 2006.

“Overall sales are improving each month and we are still seeing positive gains in the median home sale price in many market areas in the state despite the overall housing market adjustment we are experiencing. Illinois REALTORS are reporting homes that are priced correctly and in move-in condition are selling,” said Robert Zoretich, president of the Illinois Association of REALTORS. “We continue to be in a strong buyers’ market with interest rates inching up and inventory levels giving buyers a greater variety of homes. Sellers are gradually becoming more realistic and flexible in the pricing of their properties.”

The monthly average commitment rate for a 30-year, fixed-rate mortgage for the North Central region was 6.29 percent in May 2007, up 0.06 points from the 6.23 average rate during the previous month, according to the Federal Home Loan Mortgage Corporation. Last year in May it averaged 6.70 percent.

The statewide average home price in May was $259,357, up 1.3 percent from $256,066 a year earlier.

In the Chicagoland Primary Metropolitan Statistical Area (PMSA), home sales totaled 9,750 in May 2007, down 20.7 percent from 12,295 home sales in the same month last year.

The median home price for the Chicagoland PMSA was $252,388, up 1.2 percent from $249,500 in May 2006. The average home price for Chicagoland was $317,452, up 2.5 percent from $309,643 in May 2006.

“A basic fundamental driving housing demand is employment and the jobs picture has been improving in Illinois over the last few months,” said Zoretich, broker-owner of Zoretich Realty Group in Chicago. “Economists from the National Association of REALTORS anticipate sales activity to improve by the end of the year while home sales should remain about even.”

Sales and price information is generated from a survey of Multiple Listing Service sales reported by 35 participating Illinois REALTOR local boards and associations. The Chicagoland PMSA, as defined by the U.S. Census Bureau, includes the counties of Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry and Will.

The Illinois Association of REALTORS is a voluntary trade association whose over 60,000 members are engaged in all facets of the real estate industry. In addition to serving the professional needs of its members, the Illinois Association of REALTORS works to protect the rights of private property owners in the state by recommending and promoting legislation that safeguards and advances the interest of real property ownership.

DEAR BOB: Our house is owned under my living-trust name. If I survive my husband, will the basis for the house be stepped up to market value as of the date of his death? Should I add my husband’s living trust to the deed? –Eliza W.

DEAR ELIZA: If the title to your house is in the name of your living trust and it is not a joint living trust with your husband, if he dies before you do, there’s nothing for you to inherit. Therefore, you won’t receive any stepped-up basis to market value on the date of his death.

However, if you and your husband have a joint living trust and he dies first, in a common-law state you will receive a new stepped-up basis to market value for the 50 percent inherited from your husband. But if the residence is held in a community property state with both spouse names on the living trust, if your husband dies first then you receive a new 100 percent stepped-up basis to market value.

For readers not familiar with the two major benefits of holding real estate titles in your living trust they are (1) avoidance of probate costs and delays, and (2) management of the property by the successor trustee if the original trustor becomes incapacitated, such as with Alzheimer’s disease or a severe stroke.

Please consult a local attorney who specializes in living trusts. It sounds like you need to change the title to your house to include your husband.

WHEN INVOLUNTARY CONVERSION INSURANCE MONEY ISN’T TAXED

DEAR BOB: My wife and I own a single-family rental house that was severely damaged by an accidental fire caused by our tenant. The house will have to be demolished and rebuilt. Our landlord insurance policy is expected to pay both the costs of rebuilding and our rental income losses for up to 12 months after the fire. We realize the rental income will be taxable in the years received. But what are the tax effects of receipt of the remaining insurance proceeds to rebuild? –Peter R.

DEAR PETER: The situation you describe is an Internal Revenue Code 1033 involuntary conversion. You have up to two years after the end of the tax year in which the conversion loss occurred to either rebuild or reinvest the insurance proceeds tax-free in a similar use property.

If your loss exceeds the insurance proceeds, you may qualify for a casualty loss business deduction on the excess loss. For details, please consult your tax adviser.

LEGAL REMEDY FOR A NOISY NEIGHBOR

DEAR BOB: My friend has a neighbor who plays very loud music outdoors. Because of a disability, my friend is severely affected by the vibrations. His homeowners association refuses to help. No other home is close enough to be affected by the noise. Is this a “private nuisance” that I have read about in your column? Does the fact he is disabled offer any special recourse? –Stephen O.

DEAR STEPHEN: You are correct about this being a private nuisance. Presumably your friend has politely asked the neighbor to keep the noise down, but without results. His next recourse is a private nuisance abatement lawsuit against the neighbor.

Your friend should consult a local real estate attorney for details. The disability doesn’t create any special legal advantage.

HIGH RISKS OF BUYING PRE-CONSTRUCTION OUT-OF-TOWN

DEAR BOB: About a year ago, I had an opportunity to buy into a pre-construction out-of-town development. I checked out the local market, which at that time was a “hot” seller’s market. So I invested a $25,000 deposit on a fourplex. Unfortunately, the developer was a crook who filed Chapter 7 bankruptcy. Is there any way to get my $25,000 back? –Todd Y.

DEAR TODD: If you are a regular reader of this column, you know I do not recommend investing in real estate that is more than an hour’s drive from your home. The reason is then you can easily see, touch, smell, and watch it.

You didn’t “invest” $25,000 in that out-of-town project. You speculated when you turned over your $25,000 to the developer.

Some states, such as California, require pre-construction deposits be held in a trust or escrow account so the developer can’t use those funds. Apparently, that didn’t happen or the developer’s bankruptcy trustee would have informed you.

What did you learn from this expensive lesson? (1) Don’t invest out-of-town (2) with people you don’t know and (3) who control your money. In the future, I suggest investing (not speculating) close to home where you can inspect the property before purchase.

USE SAVINGS TO PAY OFF EXPENSIVE HOME EQUITY CREDIT LINE

DEAR BOB: Is it worth cashing out my mutual funds (earning about 5 percent) and my savings account (earning 4.25 percent) to pay off my home equity credit line (HELOC), which is locked at 7.5 percent interest? I like the security of the mutual funds and having cash in a savings account. If I decide to pay off my HELOC, I was told it is better to pay it off slowly over six months rather than all at once. Is that true? –Brad K.

DEAR BRAD: Earning 4 percent to 5 percent (about 3 percent to 4 percent after taxes) interest income, and paying 7.5 interest (around 5 percent after tax deductions) makes no sense. Pay off your HELOC.

If you need the funds for an emergency or home improvements, you can always write a check on your HELOC and borrow the money again. It doesn’t matter for your FICO (Fair Isaac Corp.) credit score whether you pay off the HELOC all at once or gradually. By paying off your HELOC, your FICO score should improve.

REASON FOR HOME SALE AFTER 22 MONTHS IS VERY IMPORTANT

DEAR BOB: My husband and I lived in our home for 22 months before selling it. He reads the tax law to mean that we get a tax exemption for the time spent in our house. For example, if we lived in it 12 months, we would get 50 percent of the $500,000 exemption for a married couple. Is this correct or will we owe tax on our sale profit? –Michelle F.

DEAR MICHELLE: It’s a shame you didn’t wait to sell until after 24 months of ownership and occupancy to obtain the full $500,000 tax exemption.

Your husband conveniently misunderstood Internal Revenue Code 121. To qualify for a principal-residence-sale partial exemption, the reason for the sale must be one of those specified in the tax code and its regulations.

What was your reason for selling your home after only 22 months of ownership and occupancy? Was it due to a job location change, health reasons, or “unforeseen circumstances” such as divorce, job loss, multiple births, etc?

If your reason for the early sale qualifies, then you may be eligible for a partial tax exemption up to 22/24 (11/12) of the $500,000 exemption for a married couple (up to $250,000 for a single home seller).

However, if you sold your home for other reasons, such as moving to a better neighborhood or a bigger house, then you don’t qualify for a partial exemption and your capital gain is fully taxable. For details, please consult your tax adviser.

OWNER’S TITLE INSURANCE POLICY IS BEST PROTECTON FOR BUYER

DEAR BOB: We are in the process of trying to buy a house from a couple involved in a nasty divorce. They each have “street fighter” divorce lawyers who use one tactic after another to delay the sale closing. Just when we get close to a closing date, it gets postponed. The latest tactic is we will only get two quitclaim deeds, one signed by the ex-wife and one signed by the ex-husband. Is this dangerous for us? –Ryan T.

DEAR RYAN: No. Quitclaim deeds are very common in divorce situations. Neither ex-spouse wants to make any warranties or representations as to the condition of the property title.

Your best protection is to obtain an owner’s title insurance policy from a reputable title insurance company. Read it very carefully to be certain there are no liens or encumbrances you weren’t expecting. It is perfectly safe to accept a quitclaim deed if you also receive an owner’s title insurance policy.

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For 23 years, Robert Bruss has written the weekly syndicated “Real Estate Mailbag” question and answer real estate column, the “Real Estate Notebook” feature on real estate trends, “Real Estate Law and You” about recent court decisions affecting real estate and “Real Estate Book Review” features.

Sometimes called the “Dear Abby of real estate”, Bruss publishes two monthly newsletters, the Robert Bruss Real Estate Law Newsletter and the Robert Bruss National Real Estate Newsletter. He is the author of The Smart Investor’s Guide to Real Estate, The California Foreclosure Book - How to Earn Big Profits From California Foreclosure and Distressed Properties and co-author with Dr. William Pivar of the college textbook California Real Estate Law (4th edition).

Bruss received his Juris Doctorate degree from the University of California’s Hastings College of Law in San Francisco.

Bruss is a California Real Estate attorney and a real estate broker as well as a former director of the National Association of Real Estate Editors. Bruss is the winner of the 1997 Norman Woest Outstanding California Real Estate Educator Award.

NEW ORLEANS (AP) — Allstate Insurance settled a post-trial legal dispute with a policyholder who was awarded more than $2.8 million by a federal jury over Hurricane Katrina damage, a company spokesman and a lawyer for the homeowner said Thursday.

Terms of the agreement between Allstate and policyholder Robert Weiss weren’t disclosed.

“There’s really nothing left to be done in the case except finalize the settlement,” said Richard Trahant, a lawyer for Weiss.

On April 16, jurors sided with Weiss and decided that the Northbrook, Ill.-based insurer didn’t pay him enough money to cover wind damage to his Slidell home. Allstate blamed most of the damage on Katrina’s storm surge, which wasn’t covered by its homeowner policies.

After the trial, the company asked U.S. District Court Judge Sarah Vance to order a new trial or reduce the jury’s “irrational verdict.”

The verdict was the first among the hundreds of lawsuits that Louisiana policyholders filed against their insurers in federal court in Katrina’s aftermath.

“The jury’s verdict in this case is clearly the product of passion and prejudice and is not supported by the evidence,” Allstate attorney Judy Barrassso wrote, adding that the jury’s award exceeded the limits of Weiss’ policy.

Weiss’ attorneys said the evidence supported the verdict.

Vance, who presided over the trial, hadn’t ruled on Allstate’s post-trial motions before the two sides reached their undisclosed agreement.

The jury concluded that Allstate owed Weiss $561,600 for wind damage to his home and its contents, plus another $2.25 million in damages and penalties for not paying the claim quickly enough following the Aug. 29, 2005, storm.

Weiss had a federal flood insurance policy that paid for some of the damage to his home. He also had an Allstate homeowner policy with limits of $343,000 for the dwelling and $240,100 for personal property. Allstate Insurance Co. already had paid him $29,483 for structural damage and $14,787 for additional living expenses.