Outlook Not Great For Chicago Area Home Prices

About a week ago Zillow/ Pulsenomics came out with their 4th Quarter Home Price Expectations Survey, the results of which are summarized in the graph below (all graphics in this post are clickable for a larger version). The orange line represents the average forecast of the more than 100 real estate experts included in the survey.
There are two main differences between this home price forecast and the one last quarter: 1) the cumulative appreciation out to 2022 has been dialed back from 20.0% to 18.5% and 2) they’ve added another year to their forecast. The cumulative appreciation out to 2023 is 22.4% or 3.3% for just that 6th year. Or, we can look at the average compound appreciation for the 5 years after 2018 since 2018 is kinda in the bag at this point: 3.0% per year. That’s a bit lower than 2018’s 5.8% rate of appreciation.

US Home Price Forecast
The 5 year forecast has been ratcheted back and a forecast for year 6 has been added.

The press release didn’t really provide any insight as to why the survey respondents lowered their forecasts. However, as part of the survey they also asked the respondents for their expectations regarding the home buying activity of different groups of buyers next year relative to 2018. The consensus opinion is that first time home buyers will be more active, repeat buyers will be about the same, and individual investors will be less active. See the summary chart below.
Homebuyer activity forecast
First time home buyers are expected to be more active in 2019 while repeat buyers are expected to be less active.

Chicago Area Home Price Outlook

They also asked each of the survey respondents which 3 real estate markets they expected to outperform the rest of the country and which 3 they expected to underperform. Then they ranked the cities based on their total votes. Guess who came out on the bottom of the very long list?

Expected metro area housing market performance 2019
Chicago was ranked dead last in terms of real estate market performance for 2019.

Zillow believes that many of the cities whose Amazon bids were rejected will actually see extremely vibrant housing markets as a result of the work they preparing their bids. Therefore, they see that pattern in the rankings above – whether it’s really there or not. Zillow senior economist Aaron Terrazas commented:

Amazon ultimately selected two of the country’s most prominent hubs of commerce for their second and third headquarters, but many of the candidate cities that were not ultimately selected could see spillover gains in 2019. The groundwork that they undertook to entice Amazon will also be attractive for smaller employers increasingly strained by high and rising costs in traditional tech hubs. As mortgage rates rise, communities that can offer affordable workforce housing and reasonable commutes are likely to be long-term winners and should expect their housing markets to outperform the nation.

It turns out that the survey’s outlook for Chicago is actually more optimistic than the longer term forecast implied by the Case Shiller home price futures contracts. The graph below and the underlying data was provided by John Dolan who makes the market for these contracts. I look to this market for a proxy for a forecast for Chicago area home prices.
Notice how flat the bids are in the graph below. Well, the midpoint between the bids and the asks is pretty flat also – so much so that the implied home price appreciation over the next 4 years is essentially zero! And that’s despite the fact that over the last 12 months this same index has clocked Chicago area homes gaining 3.0%. So if you don’t agree with this outlook now is your chance to put your money where your mouth is and buy some of these long dated contracts.

Case Shiller Chicago home price index futures prices
The Case Shiller Chicago home price index futures prices are essentially flat over the next 4 years.

Why is the outlook so glum for Chicago? I’ll take a closer look at that next time but I think a lot of the reasons are well understood.
#CaseShiller #ChicagoHomePrices #Pulsenomics
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

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