At a minimum, 2008 Democratic Party presidential nominee and current Senator Barack Obama (D-IL) paid $360,738 more than his house in Chicago was worth in 2005. At a maximum, he overpaid by as much as $468,502 for the property where his family now resides.

We base these figures on the results we obtained using the same analytical method we developed to determine that 2008 Democratic Party vice-presidential nominee Senator Joe Biden (D-DE) did not unduly profit from the sale of his previous home in 1996 to an executive with his primary corporate benefactor, nor did Senator Biden unduly benefit in purchasing the property where he currently resides from a political campaign contributor.

That method utilizes regional housing appreciation data from the Office of Federal Housing Enterprise Oversight (OFHEO) to project either the future or past value of a property based upon actual sale data and comparisons to the recorded sale prices of similar properties, or ideally, the recorded sale prices of the same property. Using this method, we can establish whether or not the sale price of a property in question is supported by the change in valuations of other properties in the area at any point in time for which data on the rate of appreciation on real estate exists.

Digging Into History

We began our process by first looking at the purchase of the Kenwood, Illinois properties that were involved in Senator Obama's by their previous owners, from whom he purchased his home, Dr. Frederic Wondisford and Dr. Sally Radovick. The couple purchased both the home and the adjacent property, perhaps now better known as the "Rezko Lot," for their family in 2000, with both properties closing in late August in advance of their beginning new jobs with the University of Chicago's University Medical School in September 2000. Frederic Wondisford was appointed to the position of Professor in Medicine and Chief of the Endocrinology Section at the University Medical Center, while Sally Radovick assumed her new role as Professor in Pediatrics and Section Chief of Pediatric Endocrinology at the University Hospitals. Both are now working at Johns Hopkins in Baltimore, Maryland. We're unable to establish precisely when Dr. Wondisford began his current position there in 2005 (a job offer from Johns Hopkins precipitated the house sale in January 2005), however Dr. Radovick began her current position in December 2006.

In the "very small world" category, we should note that Barack Obama's wife, Michelle, has worked for the University of Chicago Hospitals since 2002. At the time of the real estate transactions, she was serving as the University Hospital's executive director for community affairs. In May 2005, she was promoted to be Vice President for Community and External Affairs.

The Chicago Tribune's online public record database of real estate transactions in Cook County, Illinois indicates that Frederic Wondisford closed on the property with the 6,400 square foot Georgian-style home where the Obama family now lives (5046 S Greenwood Ave) on 25 August 2000 for a price of $825,000, purchasing the property from Alvin Foreman. Dr. Wondisford had closed on the "Rezko Lot" (5048 S Greenwood Ave) two days earlier, completing the purchase of the property from Leonard Budsock for $415,000.

Bloomberg's Timothy J. Burger described Obama's bidding for the house in January 2005:

The Obamas submitted three bids: $1.3 million on Jan. 15, 2005; $1.5 million on Jan. 21; and $1.65 million on Jan. 23, according to a copy of the sale contract shown to Bloomberg News.

The terms of the sale contract specified that the closing date for the sale would occur on 15 June 2005, which coincides with summer vacation for Chicago's schools. We'll use this date as the point in time against which to project our valuation of the properties involved in Senator Obama's purchase of his current home.

Rates of Property Price Appreciation

Since we now have the property prices against which to compare our projected valuations, we next extracted the OFHEO's annualized rates of appreciation for real estate in Chicago for each quarter from 1976Q3 to 2008Q2. We've summarized that data in the chart below for the period from 2000Q3 through 2008Q2, as this period spans the transactions in question:

It occurred to us at this point that these rates of housing appreciation would represent the average rates at which real estate prices changed in Chicago during this period. Since Chicago is large enough to feature local hot and cold spots within its total real estate market, it made sense to attempt to establish if the neighborhood in which these properties are might carry a premium rate of appreciation, on top of the Chicago real estate market average.

For that data, we turned to NeighborhoodScout.com. The properties both fall in the south edge of the area identified as the Woodlawn Ave/49th St neighborhood, in which properties have appreciated at an annualized rate of 3.59% since 1990, well below the average for Chicago.

Because the properties lie at the south edge of this neighborhood, we considered that the price of properties in this zone might more closely follow the appreciation rate of the neighborhood to the south, the 52nd St./Greenwood Ave. neighborhood. Since 1990, that neighborhood featured an average annualized rate of appreciation of 12.16%.

Scanning down that page, we find that the site provides Chicago's city-wide rates of appreciation for a variety of time periods. Since the 5-year datapoint falls into the middle of the period of time in which we're looking at real estate transactions, we used its annualized rate of appreciation of 10.18% as being applicable. Taking the 12.16% rate and subtracting the 10.18% from it gives us an approximate neighborhood premium of 2.0%, which we'll add on top of the base rate for each quarter for the entire city of Chicago.

That's a half percentage point higher than the similar 1990 average annualized rate of appreciation for Chicago real estate, so this figure will likely overestimate the true rate of appreciation for the properties when added to Chicago's average base rate of property price appreciation.

We next created a tool to use Chicago's average quarterly housing rates of appreciation abd the neighborhood premium factor to allow us to project the value of real estate property in Chicago for any period of time from 1976Q3 to 2008Q2. To use the tool, just enter the sale price for the property and it's applicable date, the date for which you wish to project the value of the real estate and finally, the neighborhood premium. We've entered a neighborhood premium of 0.0% as a default value, so the tool will project the valuation for properties based on Chicago's average rates of property price appreciation.

The following chart illustrates how our method would project the value of Obama's home given the starting point of when the Wondisfords originally purchased the house, showing both the average rate of appreciation for Chicago and our 2.0% neighborhood "premium" added to Chicago's property price appreciation rate:

In using the tool, we find that with a 2.0% rate of appreciation, Obama's first bid of $1.3 million for the house is very reasonable, less than $2000 away from our projected valuation. But to get to Barack Obama's final bid and purchase price of $1.65 million, the neighborhood property premium would need to be set to roughly 7.85%. That would be 7.85% on top of the average annualized rate of property price appreciation in Chicago during that period of 7.85%, for a combined compound annualized growth rate of 15.7%.

It would then appear that the Wondisfords doubled their money on the property in the 4.75 years that they owned it. A phenomenal rate of return that well outpaces the average seen in all the surrounding properties.

The question is why is that the case with the house that Obama bought?

A Fixer Upper?

As we saw with Senator Biden's previous home, major renovations over the history of his ownership help fill the gap in explaining why the historic property grew more than six-fold in price from when he bought it for $185,000 in 1975 to when he sold it for $1.2 million in 1996.

Could major renovations explain the gap we observe in what Obama paid for the home and the valuation we project for it based on its previous sale price?

The answer is no. Here's the explanation in Senator Obama's own words, which he provided in discussing the circumstances surrounding his interaction with Tony Rezko in purchasing the property, as recorded by the Chicago Sun-Times on 15 March 2008 (emphasis ours):

... Michelle and I talk about it, and we decide is there somebody that we should - there are some people we should talk to who know more about the real estate market in Kenwood - because we had never purchased a house before. Tony was a developer in that area, was active in that area, owned lots in that area and had developed in that area. So, I don't recall whether I called him, whether we saw each other, whether it was something that was already scheduled, I don't remember the exact circumstances. But I did bring to his attention, we are looking at this house. We are interested in it. I'd love for us to give your opinion on it.

He got the address, and I think he may have looked at it separate and apart from me when he was in the neighborhood. . . . The upshot is that we found out the person who had renovated the house six years earlier was also the person who had an option on the lot, and that person had worked for Rezko, and so he knew him and was an active developer.

With Senator Obama shopping for the home in January 2005, "six years earlier" would place the major renovation work the house had undergone into 1998 and 1999, long before the Wondisfords purchased the properties. As such, the $825,000 that Dr. Wondisford paid for the house in 2000 would fully incorporate the value of the renovation.

Either Senator Obama is phenomenally wrong on when the renovation work occurred or he was taken to the cleaners in what could only be described as phenomenally poor judgment over his own fiscal matters. Alternatively, there may be an as yet unknown explanation for the discrepancy between what Barack Obama paid for his house and our projection of its value given what we know of its sale history and the rate of growth in Chicago's real estate market.

The Rezko Lot

By contrast, what we know of the transactions involving the "Rezko Lot" demonstrates the strength of our analytical method. We've already established that the property closed on 25 August 2000 for $415,000. As a coinciding part of Obama's transaction to purchase the house, the lot was purchased in Tony Rezko's wife's name, with the transaction closing on 15 June 2005 for $625,000. Here's Bloomberg's Timothy J. Burger description of the subsequent history of the "Rezko Lot":

In January 2006, Rita Rezko sold the Obamas one-sixth of the lot, for $104,500, to expand their yard. She later sold the rest of the land to Michael Sreenan, who said by e-mail yesterday that he bought it in late December 2006 for $575,000.

Using those figures, we did the math to project the value of the property both forwards and backwards in time from the respective transaction dates, taking the valuations for the pieces, as they were later sold off, to compare to the whole. Our results are summarized in the following chart:

Here, we see that the valuation of the chart closely follows our projected valuations. What's more, we find that the property does not show any evidence of any neighborhood premium beyond that we might expect for the average Chicago real estate property.

The contrast between the recorded sale prices of the "Rezko Lot" and our projected valuations and what we observe in the valuation of Barack Obama's house with what he paid for it is simply startling. More unsettling is the lack of a visible neighborhood premium in the rate of appreciation for the Rezko lot. With the lot being immediately adjacent to the lot with the 6,400 square foot house purchased by Senator Obama, and nearer the south edge of the neighborhood, the valuation of the lot should reflect a similar premium rate of appreciation. That it did not, nor appears to ever have, provides further indication that Senator Obama's paid far more for his home than he should have.

Without that premium rate of appreciation on the "Rezko Lot," we're more inclined to accept the higher figure of $468,502 as the amount by which Barack Obama overpaid for his property. At 28.4% of his apparently inflated purchase price, that's one hell of a markup. Without evidence justifying that high figure, the house that Obama bought and especially the price he paid for it are proof of phenomenally poor judgment involving the largest financial transaction of his life.

Previously on Political Calculations

Barack Obama's Big Mac Attack

Our tongue-in-cheek look into the negotiations and transactions surrounding Senator Obama's purchase of his current home - kind of a fun introduction to the relative valuations involved, all in the context of a trip to McDonald's!

Does Senator Joe Biden Have a House Problem? (Part 1)

We looked into suggestions that Senator Biden unduly benefited from the purchase of the property where he built his current home. We introduced our analytical method for projecting the value of real estate properties in this post.

Does Senator Joe Biden Have a House Problem? (Part 2)

Here, we looked into long-standing allegations that have dogged Senator Biden regarding whether or not he unduly profited from the sale of his previous home in 1996. We originally couldn't make a determination, but thanks to one of our intrepid readers, we were able to find that he did not. Also, where we first built a tool to do the math!

Labels: economics, politics, real estate

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