by Jamey Dunn
Five years after the real estate market collapsed and the country fell into the Great Recession, Illinois’ housing market is showing signs of recovery.
Home sales in Illinois were up 28.5 percent in July, compared with July 2012. The median sale price of $169,000 had increased by 14.2 percent, and properties were on average selling 22 days faster than they did at the same time last year. The statistics available for 2013 show a 23.6 percent increase in sales, compared with last year. In Chicago and the collar counties, home sales had increased by 36.1 percent in July when compared with July 2012, and the median sale price of $201,075 had jumped by 25 percent. “We’re now in over two years of month-over-month increases in the median sale price in the state,” says Michael Oldenettel, president of the Illinois Association of Realtors.
Chicago is an important component of the overall housing market in Illinois. “It’s just like politics: The population, the number of Realtors, everything is north of I-80,” Oldenettel says. But real estate professionals in other parts of the state say they are seeing positive developments, as well.
“The housing market across the board has actually gotten healthier. All segments are seeing activity,” says Robert Huber, who is a real estate agent with Coldwell Banker in downstate Peru. He says the volume of home sales in his area has increased, but the number of properties on the market means that growth in sales prices is slow. “We’ve got inventory. We’ve got inventory over and above buyer activity.”
Huber says it can be harder for sellers to adjust to that change. “They’re stuck on high numbers, and they can’t do anything about that,” he says. “They’re still not able to get that 2006 number today.” And he says buyers are still looking for a bargain. “I think the buyers’ expectations are that they are going to get a bit of a deal, and they’re acting accordingly in terms of the offer that they make.”
But, Huber says, as more buyers enter the market, the tables are slowly turning.
“It’s starting to shift back to a bit of a seller’s market. ... There’s a lessening in the strength that a buyer might have at the negotiating table because there are just more buyers in the market than there were before.”
Geoffrey Hewings, director of the Regional Economics Applications Laboratory in the Institute of Government and Public Affairs at the University of Illinois, says consumers’ perception that the market is improving is part of the reason more are jumping in. People who have been considering buying a house are springing into action with the hopes of getting a good deal before property values increase. “You have a period, when people think that the market is starting to recover, that people enter the market very rapidly.” He says that prospect and interest rates on borrowing that are slowly creeping up are “probably providing most of the fuel that is propelling the market recovery at the present time.”
Huber agrees that the worry of paying more later is driving some buyers to act. “There’s that fear factor of the cost of buying that home being even greater come 2014.”
Hewings said those buyers may be correct that it isn’t too late to catch the market-upswing house and watch equity grow in their purchases as property values rebound. “It’s probably still a reasonably good deal if you’re thinking about entering the housing market right now.”
Real estate agents in southern Illinois say positive things are happening there, too. “We are seeing a recovery,” says Richard Davis, president of the Marion-based Egyptian Board of Realtors. He says for his region, recent sales numbers are up by about 10 percent when compared with the same six months last year. The average listing price has increased, and the time that houses spend on the market has gone down.
However, he said, “We are not back to the level that we enjoyed prior to the Great Recession when it hit in 2008.” Davis says southern Illinois tends to lag behind the rest of the state on economic trends, but he is confident it will catch up eventually.
“Everything happens on the East Coast and the West Coast sooner than it does in the Midwest. Well, everything happens in the big market of Chicago sooner than it does in the rest of the state,” Oldenettel says.
If some parts of the state are seeing a slower recovery in housing prices than the Chicago area, at least they have less ground to make up. Downstate markets did not experience the major spikes in property values that some Chicago and suburban markets did. Because of that, they did not fall as far when the bottom dropped out. “We didn’t see the big increases in equities to see the big decreases in downward pressure,” Oldenettel says of central Illinois. “We didn’t have a 30 percent drop. We’ve had about an 8 percent drop.”
In the Chicago region, some markets were hit by a 30 to 40 percent drop in property values when the housing bubble burst. While prices have not regained those pre-recession peaks, the most recent numbers show that sale prices in the city have hit their highest level since 2008. The Regional Economics Applications Laboratory predicts that the median sales prices for the Chicago area and the state as a whole will continue to increase through the end of this month, which is the time covered by the group’s report.
Investors and cash buyers are snapping up properties in sure-to-recover areas of the city, such as Chicago’s loop, and relatively newly hot neighborhoods, such as Logan Square. They are also purchasing distressed properties in less trendy areas and creating rental stock that is in some cases being leased by families that lost their homes through foreclosures in the same neighborhoods.
“That is part of what is driving that demand in single-family rental homes,” says Geoff Smith, executive director of the Institute for Housing Studies at DePaul University. Those former homeowners want to stay in the communities that they have been a part of, and they want to keep their children in the same schools.
A recent report from the institute found that roughly half of all buyers in Cook County in 2012 bought with cash. That may seem like a surprising statistic, but it mirrors the national trend. A recent analysis from economists at the Goldman Sachs Group found that more than half of all home purchases in the country in 2012 and this year were made without mortgage financing. Before the housing market toppled, cash purchases made up an estimated 20 percent of all sales.
Smith says it is reasonable to assume that many of those buyers are investors, either looking to flip properties or to earn income by renting them out. But quantifying how many of the cash buyers are investors versus buyers who plan to live in the homes is difficult. “We can’t really discern if they are investors or not investors,” he says.
The Chicago Tribune reported that Waypoint Homes Realty Trust, based in Oakland Calif., bought its first investment property in Chicago in July. According to the report, the company intends to buy as many as 100 homes per month in the city within the next year. Waypoint is purchasing moderately priced homes that now fall below the average median sale price in the city, fixing them up and then renting them out. Doug Brien, the company’s co-founder and managing director, told the Tribune that many of the company’s renters are former homeowners. Waypoint has purchased thousands of homes across the country and turned them into rental properties.
At least one investment group is getting into the Chicago market via a federal pilot program. The Federal Housing Finance Agency sold more than 90 Chicago properties held by Fannie Mae to a New-York-based private equity firm, The Cogsville Group. “With the shifting fundamentals in the housing markets, single-family residential is fast becoming an important asset class, and we believe our experience and knowledge of local dynamics will benefit us in achieving economies of scale in Chicago and other markets across the country, Donald Cogsville, CEO of The Cogsville Group, said in a news release. Under the deal, the group must rent out the purchased properties. The FHFA plans to continue making bulk sales in areas of the country that have high concentrations of bank-owned properties and growing rental demand.
Smith says the lack of affordable rental property in some parts of Chicago and the suburbs has left many families rent-burdened. “More households are renting, and a lot of those rental households are making less money than they were in 2007, but rents have not gone down,” he says. “That’s one story line that I think is important to think of when you’re talking about the housing market.”
While it has to be an emotional blow to former homeowners to pay steep rents on previously foreclosed homes in their neighborhood, these investments are part of what has helped Chicago home prices stabilize. “It’s not good that people are losing their homes, but if the properties can then be put back into productive use, occupied, sold to owner-occupants or with renters in place, as a productive use contributing to the good of the neighborhood, that would be one benefit,” says Spencer Cowan, vice president of research at the Chicago-based Woodstock Institute.
As housing sales and property values are on the upswing in Chicago and many areas of the state, some communities were so devastated by the foreclosure crisis that it is difficult to imagine their recovery. According to a new report from the Woodstock Institute, foreclosure filings are down to pre-2008 levels. But some Chicago neighborhoods, such as West Garfield Park and Roseland, have seen a high number of foreclosures and properties sitting vacant for long periods.
These concentrated numbers of long-term vacancies can wreak havoc on neighborhoods’ recovery prospects by dragging down property values and deterring buyers. “Unless they’re put back into productive use, unless they’re reoccupied, that can have serious adverse consequences for the neighborhood,” Cowan says. “These are the neighborhoods that were disproportionately negatively impacted from the beginning of the foreclosure crisis. They were areas that were targeted for predatory lending and have seen very high levels of foreclosure.” Last year, Bank of America agreed to pay a $335 million settlement after it was revealed that its acquisition, Countrywide Financial, had steered minority borrowers toward subprime loans, despite borrowers’ solid credit histories. “Even though there is some good news in the reduction of the number of new [foreclosure] filings, we have to keep in mind — and it’s important to remember — that there are still large areas in this city that have been negatively affected on many dimensions and will need a long time to recover.”
Smith says that what such neighborhoods need to recover lies outside of the real estate market. “It really goes beyond just the housing stock. It goes beyond access of credit.” He says that demand needs to be built because under current conditions, “people just don’t want to live there.” Smith says community development projects and investment in schools, public safety, infrastructure and parks would be key to helping create that demand.
He adds that in some Illinois markets, the idea of returning to the property values that existed before 2008 may be unrealistic. He says those home prices were likely unsustainable. “In the weaker markets, you saw a much bigger increase over that period, the run up of the bubble, so you saw a much bigger crash.” Now, he says, the question must be asked: “What does a recovery look like in those areas?”
Hewings says the way we view the housing market in relation to the economy has been turned upside down. “During the early parts of the 2000s, the housing market was a leading indicator for the economy.” New construction created direct jobs and supported the manufacturing of goods, materials and fixtures for the homes. Home sales funneled money to lawyers, inspectors and others. But, he says, the power of home sales as a predictive economic driver has weakened. “We’ve seen most of that dissipate. Now, I think it would be fair to say that the economy is going to be a lead indicator of the housing market.”
Smith says that although the statistics indicate that the housing market is improving in Illinois, it’s complicated. “I think there’s still a lot of X factors out there before we can be comfortable that the market is really recovering,” he says. “We kind of need to have some time pass first before we declare victory.” He says there is not a lot of inventory in the Chicago area because many people still owe more than their homes are worth. “They don’t want to take a loss, and they don’t want to go into foreclosure. So they are just sort of sitting on the sidelines waiting for recovery.”
If property values continue to rise, those homeowners may decide to sell. The new glut of properties could drive down costs that Smith says are probably artificially inflated because of the lack of houses available for purchase.
“Is that going to cause a big kind of a stall in the recovery?” he asks. That is just one of the potential bumps the state faces on the still-long road to a stable housing market.
Illinois Issues, October 2013