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Awaiting the next boom

Experts look for solutions to nation's prolonged housing slump

Caption
(H. Rick Bamman – hbamman@nwherald.com)
CCA Midwest Inc. carpenter Kevin Sullivan works on the site of a multi-family home on Newport Circle in the Cambridge Lakes development in Pingree Grove.

After a nation takes a beating like the one the United States has endured since the housing bubble burst, a couple of logical questions persist.

How will we get out of the woods? And when will it happen?

The general consensus among experts is that we’re far from finished with the housing crisis.

“I think we are in for maybe another two or three years on the bad side of a recovery,” said Professor Thomas Lys, who teaches mergers and acquisitions at Northwestern University’s Kellogg School of Business. “It depends how badly the administration plays. I am rather pessimistic.”

As to the question of how the country can pull itself out of the grips of the housing crisis, experts have a simple answer: more jobs and better consumer confidence.

“We really need jobs to come back,” said Jim Haisler, CEO of the McHenry County Association of Realtors. “Housing is 15 percent of the GDP of the United States, so when that fails or slips, it has an effect across the nation.”

The ripple effect that occurs with a drastic reduction in jobs is high unemployment – which has teetered between 9 percent and 10 percent for the past couple of years. And when people are unemployed and money is scarce, consumer confidence takes a hit.

“Housing has never been cheaper,” Lys said. “Not only are house prices down, but interest rates are so low that the effective cost of housing is very, very low. So that by itself should have created a huge boom in the housing market, and it hasn’t. The problem is not the cost of housing, the problem is that people are pessimistic about the future.”

Ten years ago, the median sale price of a home in McHenry County was $167,000. That year, 5,384 homes were sold in the county.

By 2005, numbers had peaked. That year, 6,309 homes sold in McHenry County, going for a median price of $222,000.

Then the drop began.

Although the median sale price didn’t drop until 2008, the number of homes sold dipped by more than 1,000 in 2006. By 2010, the median home sale price had fallen to $168,250, and only 2,813 homes were sold. Some local Realtors put the median home price at closer to $150,000 in August 2011.

The number of days that homes sit on the market also has increased drastically. In 2005, homes were on the market for an average of 91 days. That time-frame doubled by 2010.

For area boomtowns such as Huntley, building permits began to soar in the late 1990s and early 2000s, jumping from 21 units in 1996 to 1,191 at the peak in 2004.

Building permits in Huntley dropped steadily starting in 2004, hitting the basement in 2009 with only 75 total. Huntley Village President Chuck Sass said that now that the dust has settled, it’s a chance for his village and the area in general to step back and catch their breath.

“Back then, everybody was jumping into the frying pan and fire,” he said. “I can guarantee it won’t go back to what it was. I think instead of the big two-story 4 or 5 bedroom ranches, you’re going to start seeing more creative options. Maybe duplexes or something like that. People’s expectations are going to have to change.”

According to Lys, not only are peoples’ expectations going to need to change, but so are those of the current administration. He said big bailouts and funding employment with a short lifespan are drains on taxpayers and not meaningful for creating lasting jobs.

“People are out of jobs, so we’re going to hire half of the people to dig a hole and the other half to fill it back in,” Lys said. “That’s insanity. Who’s going to pay them? A third group of people is going to pay for this hole digging and hole filling.”

“What this whole approach ignores is that the third group of people aren’t going to keep on investing and spending. What’s clamping down on the economy is that everyone understands that we don’t have enough to pay for these massive bailouts. There’s no question taxes are going to go up. I hope they don’t, and the government should not raise taxes in a recession, but everyone understands someone has to pay for these bailouts.”

Instead of bailout spending, Lys said the president would be wiser to invest in retraining out-of-work Americans.

“What happens in a recession is people lose jobs and have to find new jobs,” he said. “The question is, do they have the right skills, and are they in the right places to take advantage? Even in the recession, it’s not that there are no jobs; it’s that people and jobs aren’t aligned.”

For some, however, the market may be a good thing.

Realtor Elise Livingston of The Livingston Team at Re/Max Plaza in Richmond said that people who kept their noses clean with good credit can get a great home for a very reasonable price.

“This smart new generation of buyers is going to be able to build wealth because of this economy,” Livingston said. “They’re getting into homes that they can afford, using 30 percent of their income or less, and that’s just one income – if it is a married couple buying a home. In 2006, we were seeing kids in their 30s using more than 30 percent of their income on their mortgage. Now, because the prices are so low, 30 percent of one spouse’s income gets the mortgage done and they can afford the mortgage, go out to dinner, go on vacation and put money into savings.”

But the days when weary city mice relocate their brood to the peace and charm of newly built homes in the far northwest suburbs could be gone for now.

“I think that it’s going to be a while before we see developers go and knock down a cornfield 60 miles from downtown and have success with that,” said Eric Landry, director of industrial sector research at Chicago-based investment research company Morningstar.

He said that’s because the Chicago area was one of the worst hit areas in the country. Illinois’ government hasn’t made things any better, he added, causing job growth to stagnate and workers to suffer.

“You’ve got significant tax burdens on corporations in Illinois that would not be the case if that corporation moved 50 miles east to Indiana,” Landry said. “In order to drive housing demand you need jobs. To the degree that higher taxes is a disincentive to either form or remain in Illinois, and that, in turn, hurts the housing market.”

Which brings us back to the main issue at hand – jobs.

“It used to be location, location, location – now it’s jobs, jobs, jobs,” Haisler said.

Without them, the homes and properties on the market will just continue to sit unsold.

“What’s happening now is that people aren’t willing to bet 30 years of their life on a house, they’d rather rent,” Lys said. “The housing market may have been at some point the center of the recession, but now it’s a symptom.”

• Business Editor Chris Freeman contributed to this story.

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