Chicago Real Estate: Welcome to the Plus Side

Prairie Avenue in ChicagoThe Chicago housing market has taken longer to recover than some other major metro areas. It still has a long way to go yet. But lately, it seems as though the ‘R’ word might be on the horizon.

You can pick your own ‘R’ word. Recovery, rebound and resurrection will all suffice.

Though it’s too early to announce a prolonged positive trend, recent data coming out of the Chicago real estate market seems positive.

Chicago is not the worst housing market in the country [sidelong glance toward Atlanta]. But it’s miles from being the best. For instance, between April 2011 and April 2012, home prices in the Chicago metro area fell by 5.6%. This is according to the latest data in the Case-Shiller/S&P Home Price Index.

Pricing data for the first quarter of 2012 didn’t inspire confidence either. From February to March of this year, for example, Chicago area home prices dropped by 2.5%. This number is not seasonally adjusted, by the way. When adjusting for seasonal patterns, the February-to-March decline was only 1.1%. But it’s still a decline.

In light of these ongoing struggles in the Chicago real estate market, I am pleased to present the following market update.

Chicago Home Prices Shows Signs of Stability

From March to April 2012, Chicago home prices rose in both the seasonally adjusted (SA) and non-seasonally adjusted (NSA) categories. The SA gain was 0.5%, compared to the NSA gain of 1.1%. While both numbers are positive, the SA number may be a more accurate indicator of true market conditions. That’s because it removes the statistical influence of seasonal patterns, such as the usual summer surge in home-buying activity.

Granted, 0.5% is not a huge gain. Nor is 1.1%, for that matter. What’s more important here is the shift that seems to be taking place. For months, home prices in the Chicago metro real estate market have been falling. A few months ago, prices nearly reached their lowest point since 2000. To quote the March 2012 Case-Shiller report: “In addition to the three composites, five cities — Atlanta, Chicago, Las Vegas, New York and Portland — also saw average home prices hit new lows.”

I’m not trying to beat a dead horse here. I just want to put the recent numbers into a broader context. This is the first bit of good news to come out of the Chicago real estate in a long while. If I were a Chicago homeowner, real estate agent or investor, I’d be very interested to see what’s in the next report from Case-Shiller. It’s too soon to call this a positive trend. Right now, it’s more of a blip. But future reports could shed light on a trend toward stability, or even appreciation. Time will tell.

Foreclosures could dampen the nascent recovery in the Chicago housing market. According to RealtyTrac, foreclosure filings in the Chicago area rose by 27% between June 2011 and 2012. That means another mini-wave of distressed properties could be hitting the market soon. This would drive up inventory and put downward pressure on home prices.

But even if such a wave does happen, it will be a good thing in the long run. There has long been a “shadow inventory” of distressed properties hurting the housing market. Much of it is the result of the foreclosure freeze that occurred in 2011, when all of the major banks were being investigated for lax paperwork.

“Foreclosures were in full delay mode in 2011,” said Brandon Moore, CEO of RealtyTrac, a company that compiles foreclosure data. “Lenders and servicers are slowly but surely catching up with the backlog of delinquent loans that under normal circumstances would have started the foreclosure process last year.”

The 2011 stall in foreclosure processing created a backlog of distressed properties. If the Chicago real estate market is ever going to reach a state of normalcy, these properties must be process and resold more efficiently. So what looks like a negative trend for the housing market may actually be a good thing. At least, when you take the long view of the housing market.

Positives: Housing Affordability and Mortgage Rates

Mortgage rates and affordability should help drive recovery in the Chicago housing market, for the foreseeable future. A recent report by the Center for Housing Policy showed that housing has become more affordable for both buyers and renters in the Chicago area.

During the first quarter of 2011, a home buyer would have needed an annual income of around $51,000 to qualify for a median-priced home. A year later, the qualifying income dropped to around $44,600. So, from a pricing standpoint, homeownership was available to a larger audience in the first part of 2012.

Mortgages are also incredibly affordable these days. The average rate for a 30-year fixed-rate mortgage hit 3.56% last week, another record low. This combination of affordable housing and financing should bring more buyers into the market going forward.

Foreclosures and unemployment could be the two biggest hurdles for recovery in the Chicago housing market. But for the first time in years, it might actually be reasonable to use the word “recovery” in the same sentence with “Chicago.” And that’s a step in the right direction.

Thanks to the following organizations for providing data and insight:

  • Case-Shiller/S&P Home Price Index
  • National Housing Conference (NHC)
  • The Center for Housing Policy
  • National Association of Home Builders (NAHB)
  • RealtyTrac, LLC

Disclaimer: This story contains forward-looking statements about the real estate market, home prices, mortgage rates, etc. These statements represent the author’s opinions and should not be viewed as facts. We make no claims or guarantees about the future of this or any other housing market in the United States.