Chicago’s housing market has stabilized in 2023 and will continue to grow in 2024.
I will be a tempering voice amongst the mania of YouTubers and real estate commentators.
First, here's what happened to Chicago’s housing market in 2023.
Chicago Housing Market 2023
Crash did not equal correction
Repeat after me: Crash does not equal correction.
2023 was not a repeat of 2008.
The cooling of home sales in 2023, influenced by the Federal Reserve's high-interest rates and rising inflation, does not signify a housing market crash akin to 2008. Despite the widespread predictions by popular YouTubers, 2023 did not mirror the housing market collapse of the past.
A study by the University of Illinois Department of Real Estate reveals mixed growth in median home prices and a decline in sales in 2023 compared to 2022. Illinois and the Chicago PMSA saw growth rates for median sales prices following forecasts in the first half of the year but exceeding them in the second half. However, both regions experienced slower growth in sales prices compared to the previous year, with Illinois showing an annual growth rate between -1.9% and 7.7%, and the Chicago PMSA between -1.5% and 9.6%. Sales growth rates were negative for both Illinois (-34.3% to -8.5%) and the Chicago PMSA (-38.0% to -8.3%), with the Chicago PMSA showing positive growth in foreclosed sales but negative growth in regular sales.
The Bright MLS 2023 Housing Market Forecast predicted a market correction rather than a crash. Home affordability had plummeted during the pandemic years of 2020 and 2021 as home prices soared faster than income growth. In 2023, the market is expected to stabilize with home values leveling off as mortgage rates rise, ensuring a return to a sustainable housing market.
The likelihood of a 2008-like housing crash is minimal due to several safeguards now in place. Stricter mortgage underwriting standards, increased homeowner equity, and low housing inventory contribute to a more resilient housing market, preventing the drastic downturn experienced in the past.
There was more demand for rentals - less buyers that qualify
The rental market was becoming more competitive due to increased demand. Rising mortgage rates have priced many potential buyers out of homeownership, pushing them to remain in the rental sector. A LendingTree survey reveals that nearly 50% of Americans are either renting longer or delaying major home renovations.
Landlords had favorable conditions as The Federal Reserve Bank of Dallas reports that year-over-year rental price growth increased from 5.8% in June 2022 to 8.4% in May 2023, using data from the consumer price index.
Chicago's rental market is particularly robust, with rents surging by 20.7% over the past year, making it one of the fastest-growing rental markets in the country. This growth is driven by high demand, especially from young professionals and tech workers, and is expected to continue.
A less competitive market = more negation power to the buyer
The less competitive housing market in 2023 benefits buyers who can remain patient, as payments often stay consistent despite higher interest rates. Home sales have slowed, and listings are taking longer to sell, returning to more typical market conditions.
Mainstreet President Tim Ryan described 2023 as "a perfect storm for many Illinois buyers," due to rising mortgage rates and low inventory. This environment led to a significant decline in home sales across the Chicago suburbs, with detached home sales dropping by 19.3% and attached home sales by 21.9%.
The steepest declines in detached home sales were seen in suburbs like Inverness (down 45.2%), Justice (down 43.3%), Flossmoor (down 41.9%), and Hinsdale (down 40.3%). Despite these declines, December 2023 showed a positive trend with a 3.9% increase in detached suburban homes under contract.
Investors received good news when the Federal Reserve announced on December 13 that it would pause interest rate increases, with potential rate cuts in 2024. Mortgage rates, which peaked at 7.79% in August 2023, fell to 6.95% by mid-December, their lowest since August 2022.
The intense buying activity of the past two years has calmed, reducing bidding wars and urgency. This allows buyers more time to carefully consider their offers, making the market more favorable for thoughtful decision-making.
2023 indeed was a storm, but a wellspring of opportunities for Chicago investors. Now here’s our predictions for 2024.
Now what will happen in 2024?
The Chicago housing market in 2024 is poised for a dynamic year, influenced by a range of economic, demographic, and regulatory factors.
Higher Home Prices
Experts predict home prices will increase throughout 2024, with Illinois and the Chicago PMSA expected to see median home prices of $272,800 and $324,200, respectively, by December 2024. This represents an 8.4% increase in Illinois and a 12.0% increase in the Chicago PMSA. Fannie Mae anticipates a 4.8% year-over-year rise, while the Mortgage Bankers Association expects a 4.3% increase. The National Association of Realtors projects a more modest rise of just under 2%.
Low home inventory remains a significant issue in the US. If mortgage rates decrease in the second half of 2024, demand might rise, but home prices likely won't drop enough to improve affordability significantly. The Chicago housing market is expected to see moderate growth and stability.
The average price per square foot has risen by 4.2% to approximately $224, reflecting persistent demand. Homes in Chicago typically receive two offers and are sold within an average of 81 days, indicating a competitive market despite fluctuations in sales volume.
The Chicago real estate market is showing signs of stability, with balanced interactions between buyers and sellers.
Lower mortgage rates
Buyers are getting relief as mortgage rates dip below 7%. Freddie Mac reported a 30-year fixed-rate mortgage (FRM) at 6.78% and a 15-year FRM at 6.07% as of July 25, 2024. Lower mortgage rates result from cooling inflation and market expectations of future Federal Reserve rate cuts, according to Sam Khater, Freddie Mac’s chief economist.
Despite a 10% year-over-year increase in new listings, the housing market remains sluggish, partly due to high housing costs. During the four weeks ending May 12, the median home sale price rose 4.7% to $386,951, and the median asking price increased 6.6% to $418,455, both marking new highs for May. This stagnation is unusual for the time of year, according to Redfin.
Lower mortgage rates and gradually improving housing supply are positive signs for the market. Aspiring homeowners are advised to shop around for the best mortgage rates, as they can vary widely between lenders. While current rates are significantly lower than the 1981 record high of 18.63%, borrowers still face varying rates, with the average 30-year fixed-rate mortgage at 7.475% and refinance loans at 8.136%, according to Money's daily rate survey.
Multifamily Properties Are Stronger Now
Multifamily properties in Chicago suburbs remain a strong investment opportunity due to consistent rental demand, particularly in areas with good schools and amenities. Investors should be cautious of property tax assessments, which can significantly impact operating expenses and profitability.
The Chicago multifamily market has undergone significant changes influenced by economic factors and demographic shifts. The pandemic and subsequent economic conditions have tested the sector's resilience, especially in urban core areas like downtown and River North. These areas faced substantial challenges due to the health crisis and civil unrest, leading to a decline in popularity for smaller studio apartments and a rise in demand for larger suburban units with more space and access to outdoor areas.
Despite these challenges, the rental market for multifamily properties remains robust, with stable occupancy rates and rising rents due to tight home inventories. There is an anticipated increase in transaction volume in the second half of 2024 as prices normalize. This suggests continued adaptation to changing demographic trends and economic conditions within the market.
Developers and investors are likely to focus on properties with strong local amenities and those located in highly rated school districts, which generally have higher tenant retention and above-market rent growth.
Property Tax Assessments affect both homeowners and investors
Property tax assessments significantly impact the Chicago housing market, with frequent reassessments leading to fluctuating property tax bills. In 2024, Cook County Assessor Fritz Kaegi's major reassessments resulted in substantial increases in property tax bills, especially in the south and southwest suburbs. Homeowners in these areas have seen an average rise of 30%, the largest increase in over 30 years, due to recalculated property values and a shift in the tax burden from commercial to residential properties.
The Cook County Assessor’s Office stated that its office has found a 31% increase in total assessed value in Chicago from 2018 to 2021, with non-residential property values growing by 56%. These figures affect property tax bills released in 2024.
Property owners are likely to challenge their assessments, leading to increased appeals and potential adjustments.
And the most certain of our predictions is..
The suburbs are the hottest in Chicago real estate!
The trend of suburbanization continues as families seek more space and better schools. The rise of remote work and ongoing crime issues in Chicago drive increased migration to suburban and rural markets, further contributing to growth in these areas.
Several Chicago suburbs are experiencing growth as residents seek suburban living with good amenities and schools. They are also becoming more attractive due to their affordability and accessibility to urban centers.
Suburbs with strong fundamentals, such as great schools and vibrant areas with shopping and dining, will continue to thrive. The COVID-19 pandemic initially boosted farther outlying markets, but as companies bring employees back to the office, suburbs with easy access to the city remain in demand. Established suburbs offering shorter commutes and holding their value will be more desirable as investments.
In the Chicagoland, inventory increased by 2.1%, and the median price rose 9.1% to $330,000. However, home sales decreased by 1.3% year over year in May. But in downtown Chicago, home sales fell by 2.4%, with inventory decreasing by 5.2% and the median price rising 8.1% to $362,000.
The suburbs have seen rising prices for a year straight. The median sales price for a detached suburban home reached $400,000 in May, a 9.6% increase from the previous year, while attached home sales fell by 2.4%, with prices rising 11.3% to $238,000.
Suburban prices continue to climb, with detached home prices increasing by 9.8% and attached home prices rising by 14%. Despite the rising prices, the market remains active due to pent-up demand from first-time buyers and those needing to move due to life changes. Detached home prices in the suburbs reached a median of $370,000, with a decrease in the number of homes sold and a shorter time on the market.
Millennials and first-time buyers are major drivers of the market, seeking more space and better affordability in the suburbs. As the largest group of workers in America, millennials are entering their prime home-buying years, contributing significantly to the demand for suburban homes.
Conclusion
In 2023, mortgage rates soared, but we are still far from reaching historical highs. Those unable to buy homes are turning to rentals, allowing investors to benefit from steady rental income while paying off their mortgages. Despite fears of a housing market bubble, a crash is unlikely due to the ongoing shortage of housing inventory in the US, which keeps prices steady.
The Chicago housing market is showing strong resilience and growth potential for 2024. The market is stabilizing with increasing home values and robust rental demand. The multifamily sector remains robust, with high occupancy rates and rising rents as more residents opt to rent. Chicago's suburban market is also heating up, offering long-term growth and appreciation opportunities with diverse neighborhoods, strong rental demand, and a stable economy.
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