Can it Last?
Despite concerns about a deflating real-estate bubble, local home prices continue their steady rise. Will Midwestern moderation help preserve the gains made in Chicago’s housing market?
Our Annual Survey of House Prices
Over the past year, talk of a real-estate bubble has confounded house-rich homeowners across the country. Locally, Chicago's annual look at the area's housing market (see below for links to our housing charts) reveals a region where prices continue to rise steadily. But still the questions hang there: Is there a bubble, and if so, will it burst-and when? Is all the extra value that hous-es and condos have built up since the late 1990s going to drain right back out of them?
Worried homeowners in the city and suburbs can take comfort in these four words: you live in Chicago. Buoyant as it has been so far this decade, the area housing market has yet to overturn one long-held truth of Chicago real estate: here in the middle of the country, people don't go to the extremes they do on the Atlantic and Pacific coasts.
True, prices in and around Chicago have risen to a seemingly ridiculous point compared with what buyers were paying even a mere five years ago. On the magazine's current chart, for instance, there are nine city neighborhoods or suburbs where homes sold for an average of over $1 million; in 2000, there were only two. Or consider another statistic: in 2002, there were, for the first time, more than 1,000 homes here that sold for $1 million or more; three years later, the number of sales at that level has already doubled (see Deal Estate).
In comparison with places like Florida, California, and Nevada, though, the Chicago market is a sluggard. In June, the Office of Federal Housing Enterprise Oversight reported that prices in Bakersfield, California, rose by 33.7 percent from the first quarter of 2004 through the first quarter of 2005, the survey's top increase. The national average, among 265 areas measured, was 12.5 percent; Chicago ranked 103rd, with a one-year price increase of 10.57 percent. For once it may pay to be below average. As Diane Swonk, chief economist at Mesirow Financial, puts it: "We participated in the party, but not so much that we'll have much of a hangover in the morning."
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If rising interest rates combine with some shock to the economy to deflate house prices, say Swonk and others, Chicago-area homeowners should not take as big a hit as folks in those highflying regions. "We feel there will be no bubble in Illinois because we haven't experienced a rapid appreciation like the East and West coasts," says John Veneris, president of the Illinois Association of Realtors and a Downers Grove real-estate broker.
And it's not just Midwestern conservatism holding Chicago back. Whacks to the city's financial sector-such as the Bank One/JP Morgan merger and the wobbles at the insurance giant Aon-have kept Chicago "an economic laggard," Swonk says. "We are recovering nicely, but not as well as other parts of the country. That's a mixed bag, because it means Chicago is, as a result, less susceptible to a major downturn."
If the nation's real-estate market does start to droop, Chicago homeowners will most likely see a slowdown. Prices will rise less, or perhaps not at all, for a few years as the market gradually adjusts. Richard Rosen, an economist with the Federal Reserve Bank of Chicago, compares it to the spike in gas prices. "When prices go up, people grumble, but except at the margins, it doesn't affect their driving much," he says. "In the long run, they may buy a different kind of car, but they keep driving."
|Can It Last - Introduction|
Charts - Chicago Detached Housing
Charts - Chicago Townhomes, Condos, etc.
Charts - Suburbs (Addison to Elmwood Park)
Charts - Suburbs (Evanston to Libertyville)
Charts - Suburbs (Lincolnshire to Richton Park)
Charts - Suburbs (Riverdale to Zion)
Can it Last? - Methods and Sources