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Friday, January 11, 2008


chicago listing times

while data for national markets is fairly easier to come by, i'm interested too in chicagoland specifically because i live here and explicitly sold a condo in 2006 with the expectation of buying a house back at some future point while renting in the meantime. and market-specific data is not always so easy to come by or evaluate.

to be sure, realtytrac and have been quality sources. the outline has been one where the median chicagoland home, which sold at $310k in june 2006, has fallen to $285k (-8.0%) -- and the first quartile has moved from $455k to $425k (-6.7%) in the same span. prices have fallen 4.9% and 4.0% in both catagories respectively in the last year, and 2.7 and 2.1% in the last three months.

this paints a picture of accelerating price declines -- annualized change for median homes moving from 5.1% to 4.9% to 10.2% -- for 75th percentile homes from 4.1% to 4.0% to 8.1%. this makes some sense, considering the advent of the second-half credit crunch in july, which has radically altered lending standards.

but one might ask why values haven't declined more. certainly this isn't miami or bakersfield -- there probably won't be a 70% fall here. but chicago is a long way out of its historical relationships of price-to-rent (250 in 3q2007 vs approximately 185 in 2001-2003, a 35% premium), price-to-income (4.0 vs 2.8, a 43% premium), and percent income to mortgage payment (25.1 to 19.0, a 32% premium). all of these would require a 25-30% fall in home prices just to come into line.

so a correction is needed and has come. has this been a fast correction so far or slow?

some of chicago's midwestern contemporaries are experiencing a demographic exodus that has hit them harder than it has chicago. detroit (YoY median price decline -15.6%) and cleveland (-8.2%) are good examples. detroit metro area's population gain from 2000 to 2005 was +0.8%; cleveland, down (-1.0%). chicago, on the other hand, managed to grow by +3.8%.

midwestern cities that grew better -- indianapolis, for example, which grew 7.6% over the five years -- are down in home price (-2.1%) YoY and basically flat from 2006, but may never really have experienced much of a price bubble at all to judge from affordability metrics. kansas city and minneapolis may be similar cases, where prices seemed to keep in line with rents and incomes.

the closest case of population growth might be saint louis, which grew 3.0% from 2000 to 2005. the inflation of home price metrics there indicate something like a 15% premium that should come out -- significantly less than in chicago. and yet, prices there are falling faster than here.

it should be said that i'm doing nothing here to consider the extent of overbuilding vis-a-vis the population. where big price premium expansion was most considerable, or where the cost of building was lowest -- in essence, where profitability was greatest -- it's reasonable to expect the worst overbuilding. (that's almost certainly chicago in the midwest.) the extent of that malinvestment is a major factor in determining the extent and speed of price declines by market.

but what seems certain is that it hasn't been anything like a sufficient correction. this paper from altos research via housing wire may indicate that midwestern price declines haven't been nearly enough. the five longest average listing times by metro region are miami (143 days), detroit (136), minneapolis (136), chicago (133) and cleveland (127). the next two are las vegas (126) and tampa (123). (saint louis and indianapolis are not considered.)

the non-midwestern cities here were epicenters of housing excess with massive overbuilding and oversupply problems, and few argue that huge further declines are avoidable.

is the same true for chicago and the others, where the true extent of price increases may have been masked by relatively poor underlying demography which would in the absence of a housing bubble have forced broadly declining house prices over the last several years -- a difference that will now be made up by surprisingly large median home price deflation?

and is that now being reflected in very long listing times and a refusal of the market to clear, indicating a steep demand dropoff at current price levels even in markets where price appreciation was quite moderate compared to places like san diego or miami?

and does that foretell a significantly faster pace of price decline in 2008 for midwestern metro markets like chicago?

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