The Chicago market is quite fascinating. According to the OFHEO 3Q 2005 Report the 5 year price appreciation for homes in the Chicago area was 47% and the one year rate stood at 9%. Chicago's price appreciation rate is strong but not stratospheric like many metro areas in California or Florida. Like many other parts of the country job and wage growth over the past five years has been anemic (weak). The price appreciation rate is quite varied depending on the neighborhood and type of property.
Condos have sprouted like weeds in the metropolitan area. The above picture is of a new condo development in the Lakeview neighborhood.
In the past few months the Chicago residential market has declined in terms of sales. According to the Chicago Tribune:
So what will happen with prices in the next 3 years? Is Chicago a bubble market?
And in Chicago, a North Side real estate agent confirmed the trend in his territory.
"Even adjusting for the weather, home sales have been slower than normal the last three months," said Mario Greco of Rubloff Residential Properties' Lincoln Park office.
"A lot of people have been fence-sitting. Some have been worried about the talk of a bubble, but it won't happen in Chicago," Greco said.
He noted that resale prices in North Side areas like Lincoln Park, Bucktown and Wrigleyville are rising at a lower rate than the national average of 13.2 percent in November.
In the Chicago area the median price of a single-family home rose 11.2 percent from November 2004, to $267,000, while median condo prices increased 7.8 percent, to $208,000, according to the Illinois Association of Realtors.
"But sales should bump up in the traditional spring market because of pent-up demand. After all, mortgage interest rates of 6 to 6.5 percent are not bad rates," Greco said.
Home sales dropped 0.9 percent statewide from November 2004. But despite the decline, sales were headed for a record for the fourth year in a row, according to the Illinois Realtors.
But while condo sales were up 7.4 percent in the Chicago area, sales of single-family homes fell 3.1 percent.
The slowdown in sales, however, may not apply to all areas around Chicago, particularly the southwest suburbs.
"The area that includes Plainfield, Joliet and Aurora is one of the 15 hottest markets in the nation. We're not seeing a slowing," said Judy Gardner, who owns a real estate firm in Joliet.
"Some prices have increased $30,000 to $50,000 in the last eight months. The average home sells in about 30 days, but others have gone in a day or two, even just after Christmas," Gardner said.
Based on the rate of business now, she predicts that 2006 "is going to be a banner year. Even if mortgage rates go higher, people will buy because of the creative financing that's available."
In Chicago, though, the picture is less rosy.
"In the resale market, people have inflated expectations about what their property is worth. They may have to bring prices down a bit. But there will be no big slippage in prices," he predicted.
Overall I do not think the Chicago metro area is a bubble market. The typical house is unlikely to decline in price by 20% in real dollars from its peak price in the next 3 years. However, condos especially in the city itself are likely to fall by over 20% in real dollars within 3 years. Certain 'hot' neighborhoods that have experienced very strong price appreciation may fall more then 20% in real dollars. Chicago, is certainly not as bubblicious as San Diego, nevertheless declining real prices will be a reality for the Chicago metro area in the coming years.