Bargains abound with Chicago condo market in 'pause mode'

Chicago's downtown condominium market appears to be in suspended animation, waiting for better economic times to kick-start sales and development, experts say.

Veteran real estate experts are comparing today's real estate market to 1981-1982, the last great downturn, when mortgage rates peaked at 18 percent during the era of Reaganomics and financial deregulation.

Today, benchmark 30-year fixed mortgage rates are very affordable, in the low 6-percent range. However, the sub-prime mortgage crisis has forced lenders to become extremely picky about approving loans.

So why are buyers sitting on the sidelines?

"With so much uncertainty in the financial and real estate markets, potential buyers are confused, cautious, and deferring purchase decisions," said Gail Lissner, vice president of Appraisal Research Counselors. As a result, sales traffic is down overall in the market and conversions of lookers into buyers are way down.

"Considering all of the issues affecting the financial markets along with weak buyer psychology, sizable pullback by the investor, lack of price appreciation, record new-unit deliveries, extensive competition from the resale market, and weak sales volume occurring to date, the challenges in 2008 are substantial," Lissner said.

With the new-construction condo market now in "pause-mode," Lissner said 2008 is a year for absorbing inventory, not creating new inventory.

The total number of new-construction condo deliveries in the downtown market has been growing each year, according to Appraisal Research. In 2004, some 2,500 new units were delivered; in 2007, nearly 4,800 units were delivered. Moreover, 2008 is forecast as a record year for production, with nearly 6,000 units expected to be delivered, followed by nearly 4,200 in 2009.

Despite national housing market, statistics showing sharp declines in real estate resale values, Appraisal Research said statistics for Chicago remain strong for single-family residences and condominiums, showing a 6.64 percent increase in average home prices from 2006 to 2007.

Also on the bright side, Appraisal Research noted that the current buyers' market is forcing developers to give serious purchasers some of the best deals in decades.

"Developers continue to offer a wide range of mortgage programs, frequently through preferred lender programs," Lissner said. "Some developers are also offering mortgage rate buy-downs to interest buyers."

Nearly all developers will offer some sort of perk to entice a buyer to sign a contract, Lissner said. "With the consensus that price discounts are not good for the market, most developers are looking at more creative ways to offer incentives, with the most popular ones being free upgrades, free parking, and free assessments."

As more and more buildings are being completed, developers are going ahead and selecting unit finishes, often choosing upgraded finishes which will enhance the marketability of the unsold units, Lissner said.

"Developers are also selectively discounting individual units, as buildings are nearing completion," Lissner said. "Loss leaders are being used, where developers may discount one particular unit. Once that unit sells, a different unit is selected, while maintaining price in all of the other units in the building."

The Home Front, Don DeBat's weekly real estate column syndicated by DeBat Media Services, unravels the complexities of home buying, mortgage shopping, homeownership, renting, building, renovation and remodeling. For more home-buying information visit his Web site at: www.dondebat.net.