Chicago Market Forecasts for 2019
Now that the weather forecast is starting to look up again, here are some snapshots about the real estate market forecast in Chicago and nationwide. A number of recent clients I’ve taken out have made comments like “A recession is coming.” Is there actually a basis to that? I don't pretend to have a crystal ball or a high degree of economics expertise. A lot of this material below is a month old now as it is turn of the year material. Redfin has kept me busy as they promised and I'm just getting a chance to work through some it more (since no one wants to tour during a polar vortex).
From Redfin’s Chief Economist (National level)
This national-level forecast from Redfin’s chief economist, Daryl Fairweather, predicts slower price/home-value growth at 3% compared to recent years. He says there is even a possibility of negative price growth for the first time since 2011. He also states that 2019 has begun with a 5% greater supply of homes than at the beginning of 2018. This analysis assumes continued a continued rise in mortgage rates, which may not be as strong as expected when this was written based on more recent info: http://www.mortgagenewsdaily.com/consumer_rates/897397.aspx
This forecast is for the national level rather than being specific to Chicago. Chicago has low inventory (available homes to buy) relative to most markets. Still, the trend of lower prices and more homes on the market is a good indicator for buyers and indicative of a more neutral market after last year was such a strong seller’s market (meaning it was good for the seller).
From First American’s Chief Economist (National level)
This is an interview rather than a general forecast, but Mark Fleming also highlights inventory being relatively low (even if improving) compared to historical levels. This is coupled with increasing demand from millennial buyers. He also predicts rising mortgage rates to mid 5% and qualifies this as perhaps not being as bad as previously predicted. In line with material presented at the Chicago Association of Realtors market outlook, he speaks of coastal cities in the NE and west coast being hit harder by a slowing market relative to lower priced markets.
These arguments again do not speak specifically for Chicago, but it’s helpful context for gauging the market here.
Chicago Association of Realtors 2019 Market Outlook
The material on CAR’s page is perhaps the best data available for the Chicago market, and it shows both the presenter’s slides and has recordings of their presentations. Danielle Hale is the chief economist for Realtor.com and her material is largely national level. Brandon Svec is with CoStar, which is a go-to in the commercial real estate world. His material is more tailored to Chicago.
Some items of note from Danielle Hale’s presentation were that 2018 saw mortgage rates behave as predicted from their previous year’s forecast, that housing inventory will start to grow again after record lows, and that millennials will be major contributors to housing demand and growth in ownership rates (like other national level forecasts). She predicts millennials to be 45% of mortgage buyers and that 2020 will be the peak time of millennials buying. She noted that Chicago is drawing high numbers of younger buyers relative to other markets and said Chicago has a home-ownership rate of 64% relative to 65% statewide in Illinois. Among millennials, the ownership rate is 42%.
Brandon Svec made a number of interesting points. Many speak of population decline in Illinois, but he pointed out that Chicago itself experienced net positive population growth in 2018 as natural/household growth overwhelmed out-migration. However, this is not the case on Chicago’s south side where he shared a population decline of 160,000 since the year 2000 likely due to less investment in neighborhoods. He shared that most areas in Chicago have experienced rising prices, but at a slower place than before. Housing inventory growth has flattened in late 2018. He shared that some of the fastest growing areas are in suburbs near the city. Downtown Chicago is experiencing the largest growth in jobs, and this growth is as fast as coastal cities. He observed that jobs tend to stay downtown even as people move to suburbs (which fits my experience of many clients valuing proximity to transportation downtown).
He shared that a decline in home ownership rate to 64% appears to be done dropping, but it is not trending upwards yet. He cited 10,000 households formed and 9,000 new rental units built in Chicago which has maintained pressure on inventory. Many of these built units are downtown and along the north lakeshore up to Evanston (see his slides for helpful diagrams). The potential of rent control imposed by law is something he described as “not positive in any way.” He predicted rising rental rates and along with them (and a contributing factor) rising property taxes over 10-15 years. Near the beginning of his presentation he warned that the city and state’s fiscal situation cannot be overlooked, and that this is the biggest challenge to Chicago’s market.
Dire Projections from IllinoisPolicy.org
This article calls attention to Illinois’ tax situation. Overall the article has a much gloomier tone and the political nature of the website should be taken into account. While the article’s title suggests its forecast primarily relates to the city of Chicago, much of its explanation relies on statewide trends rather than city data. It predicts a 2% decline in sales prices whereas other forecasts predict an increase of roughly that amount, and it also claims net population decline in Chicago from older 2-16-2017 data whereas previously cited findings say otherwise from 2018 data. Its figure of low home sales relative to other major markets does not seem to interact with inventory considerations and a relatively large portion of Chicago’s housing being condos rather than single family homes relative to many places. Nevertheless, along with its flawed argumentation it still observes the higher tax burden in Illinois as growing 43% faster than average home values. This figure is at least better at reflecting the city as it is based on data from Cook County rather than the state as a whole, but it is still a fairly large geography and no one is arguing that property taxes in Chicago are tough either way.
Additional Groaning About Property Tax Figures
This article zeroes in on property tax increase since 2000, and perhaps the most helpful summarizing figure is this: property taxes were 4.3% of household income on average in 2000, and they are about 7% as of 2017 in Cook County. This compares to median household income growing from $46k to $61k in the same time frame. By my math that’s at 63% tax growth compared to 33% income growth and not “three times” as much, but still hefty.
To summarize, some of the major factors involved in the Chicago housing market are inventory of homes for sale (expected to increase slightly), expected price growth (expected to be slower compared to recent years), and property tax projections (expected to continue rising). The first two of these work in a favor of home-buyers right now. Property taxes indirectly affect prices both of purchases and rentals as the cost of ownership increases and affordability changes for the owner or landlord. Though it’s tempting to give into a doom-and-gloom mentality and even more frustrating as one reads about exposed violations in government offices to which tax funds go to, I imagine for the vast majority of people who call Chicago home and prefer the trade-offs of city living it will not be so significant a factor by itself to warrant a move. For those considering renting vs buying on financial merits alone, buying still offers security against rising rents in addition to lifestyle factors. Kind of like the winter, rising taxes is something the city (and state) will have to weather together unless policy changes bring sunnier skies that way.