2022 in Review - Trends We Will Watch in 2023
We'll leave it to the economists and other pundits to report and contextualize this year's numbers and next year's forecasts.
Here are nine local real estate trends we are watching as we look back on 2022 and ahead to 2023.
1."A/I" will take longer and will become harder to close out.
Just months ago we saw buyers willing to wait in lines to see open houses, pay over-ask, offer to buy "as-is", waive appraisal, waive financing, let the seller choose a closing date, grant rent-free post-closing possession—all in hopes of winning a bidding war.
For the most part, we sailed through contract contingencies on those deals. Sellers stood firm against most buyer requests. Buyers, facing little inventory, bidding wars, and their own fatigue were quick to relent. But for tax prorations, there wasn't a lot of fight.Not so anymore. Buyer negotiating strength is steadily increasing. We expect this trend to continue into the foreseeable future. Buyers are getting more particular. They are asking for "more." Sellers are resistant, but will, to some degree, need to play ball to keep transactions moving forward. Longer inspection lists and larger concessions are to be expected. Brokers who find creative solutions to inspection problems will stand out from the crowd.
2. Many lawyers still have not returned to closing tables IRL. They may never go back.
Sellers, and then sellers' attorneys, stopped going to closings years ago. But the first pandemic wave proved that we could still get closings done if the brokers, lenders, and/or buyers' attorneys go didn't either. Many regulars in the legal community tell me most unapologetically that they will never return to a closing table again.
Sure, remote closings work. And yes, lawyering becomes unquestionably more efficient (profitable) if we do not to have to travel to and from closings or wait around for copies and funding approval. And yes, buyers may even say that they are "OK" with this practice.
When you consider how important—and how scary—this process can be to home buyers, particularly first-timers, in-person attendance at closings just feels right. A growing number of buyers' attorneys recognize this and are returning to closing tables.That's at least until the Secretary of State finalizes rules for RON (virtual remote online notary signings). We expect title companies and lenders will embrace RON and implement it quickly if and when that happens.
Will anyone go to closing once the buyer can sign closing documents electronically? Busy buyers already ask about remote signings, so I am sure this option will be welcome and popular for at least some segment of the market.
Still, I believe that many (most) clients will still want to close live, with their attorney at their side.
Our firm started attending as many closings as we could mid-summer. Barring further pandemic recurrences, we intend to continue this practice into 2023.
3. Stricter lender guidelines did not upset the Chicago condo market as some feared.
Eighteen months ago, the Champlain Towers South condo collapse in Surfside, Florida took 98 lives and destroyed 136 apartments. Last December, residents in the 48 unit Horizon West Condominium in Waukesha, WI were ordered to evacuate due to safety/structural issues. Before that, River City, Kennelly Square and countless other Chicago area condominiums de-converted as the costs of necessary structural repairs exceeded unit owner political will and association financial resources.
So when Fannie Mae and Freddie Mac imposed much tighter restrictions on lending into condominiums, I expected to see more contracts derailed based on condo underwriting issues. Happily, we've seen very few delays and denials so far. We've also seen condo associations becoming more proactive with regard to maintenance schedules and life safety matters. The trend here is positive.
4. iBuyers are out, wholesalers are in.
iBuyers offer the lure of a quick and easy sale for sellers who are in distress, or who are otherwise willing to sell at a below market price in the name of convenience. In 2022 anyway, the iBuyer model did not work at scale. RedfinNow and Zillow Offers are now closed. Opendoor, Flyhome, and Offerpad have all scaled back. We do not expect them to return to the Chicago market any time soon.
But plenty of sellers still will want an "easy way out" on their real estate holdings. Those sellers are very often, elderly, infirm, or in financial distress. Worsening economic conditions will add numbers to their camp.We heard from more potential clients selling to wholesalers this year than ever before. We expect to see more wholesaling activity next year too.
The wholesale idea seems simple enough: get distressed sellers to sell low, find end buyers who are willing to pay more. It's a great deal for the middleman. Maybe the end buyer too. A practical solution for many sellers, but seldom a good deal for them.
Its not just the exiting investors working the wholesale niche. TV infomercials and online sales funnels are inspiring many people to dip a toe in real estate speculation.
Our phone rings more and more often each month with calls from "new" investors interested in putting first deals together. We expect this trend to continue.
5. Hooray for the return of ARMs, HELOCs, and short-term interest rate buydowns.
These are all great tools that help keep affordable home ownership within reach. Given that the average duration of American home ownership is eight years, the five- and ten-year products make a lot of sense.
Temporary interest rate buy-downs are equally intriguing. From time to time, new home builders have offered interest rate concessions when they've needed to clear inventory out. Years ago at a particular condo conversion, developers offered to cover buyers' loan payments for the first two year (anyone remember the 2-2-2?). But I don't think these have been offered widescale to the general public for more than 40 years. Whether the buyer, seller, realtor, or lender pay the buy-down, it can help buyers put off paying higher interest payments.Plus, we've started seeing HELOCs at closings again. Presumably, lenders are going to be more selective than they might have been 15 years ago. Still, I expect to see more double loan packages this spring.
Will interest-only loans make a broader comeback too?
6. Closing costs, like everything else, will continue to rise. Legal fees? Probably not.
Law firms that deliver the highest levels of client care and professional representation (the firms against which we measure ourselves) should rightfully be raising rates. Our costs of business are going up too, just like everybody else.
We raised fees last year and are undecided about 2023. As margins narrow, we may have no choice.
7. Limited representation law firms will continue to outsource and push work down to less skilled workers.
This trend has been building for a couple of years now. In 2022, our firm noticed an uptick of lawyers using off-site, third-party paralegals and clerking services. We've also seen more lawyers shifting work to their title agencies. Oposing attorneys in a surprising number of transactions this year did not participate in necessary negotiations. Many correspondence, emails, and phone calls are deferred to assistants or third-party paralegals. We presume that clients are made aware of the lawyer's limited participation. No doubt, attorneys supervise staff and outside vendors.
More importantly than ever, 2023 home buyers and sellers will need to consider not only what they will pay for legal representation, but also the scope of included services. Not all lawyers are offering the same range of services for home closings.8. Property tax allocations will continue to vex buyers, sellers, and practitioners.
After closing, no attorney wants to hear that a buyer is angry because the tax credit given at closing was insufficient. Many of us go to great lengths to avoid that situation. So we fight with other lawyers for escrows and higher prorations more than any other facet of the contract. As a result, we saw more transactions involved post-closing tax escrows this year than in 2019.
2022 tax prorations were fairly torturous. Following Chicago's triennial reassessment that was complicated by: earlier pandemic influenced adjustments, philosophical differences between county assessor and board of tax appeals, computer and algorithm glitches. and political posturing around the November elections. Consequently, tax bills were released five months late. Some tax bills more than doubled, while others remained curiously low.We expect a less volatile tax cycle for 2022 bills (payable in 2023), but will monitor pronouncements from the City Finance Department, County Assessor, Treasurer, and the Board of Review. And we will continue to vigorously advocate for fair and equitable tax prorations.
9. Our firm optimized staffing in 2022 and we are ready for 2023.
Last summer, we hired Brendan McNicholas as our new closing coordinator. He brings terrific energy and wealth of title company closing experience to the team. Also, James Mosely (our former clerk) graduated from law school, became barred, and is now our newest associate attorney. Clients are giving incredibly positive feedback for him.
Our team is universally hard working, good natured and dedicated to client success. The firm enters 2023 well-positioned to take on new challenges and opportunities.
Happy New Year to all. We hope to see you at the closing table, soon.
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