2018 Chicago Real Estate Market Outlook
by Dan Cuckovic, Managing Broker, Enterprise Realty Brokers
Last year was a great year for real estate and the US economy overall. Interest rates remained low, the job market continued to improve resulting in the lowest unemployment rate in decades, real estate sales continued to improve and the prices of homes continued to grow. As the rental prices continued to remain high, the idea of homeownership appealed to many. The biggest issue for realtors in 2017 was the supply of homes.
The question at hand; how is the 2018 going to look like?
First, the impact of tax reform
The new tax reform made several tax changes that directly impact the homeowner. Capping the property tax deduction to $10,000 per year and reducing the level of mortgage on which you can deduct interest from $1,000,000 to $750,000 will definitely not sit well with the homeowners owning larger and more expensive homes. Unfortunately, as Illinois is a state with a higher property tax structure, these changes impact many of the Chicagoland owners. These changes may directly impact the prices of some of the more expensive homes and, at best, will slow down the value appreciation of those homes.
The impact of rising interest rates
According to Dr. Joe Kirchner, Senior Economist with Realtor.com, the average 30 year conforming interest rate in 2018 will be 4.6%. Considering that the same rate at the beginning of the year is hovering around 4%, it is expected that, by the end of 2018, this rate will be near 5%. The rise in interest rates will drive buyers to purchase more affordable homes, putting pressure on the high priced properties. This will be offset somewhat by the fact that the tax cuts should produce a higher take-home income for the average American.
The impact of new construction
New construction is on the rise, but still far apart from the levels seen in the late 2000’s. Furthermore, the new construction is generally taking place in high-end markets, and in the Chicagoland specifically, in the $600k+ market. The answer as to why this is happening is simple; builders are trying to take less risk by building homes with higher profit margins. However, it is expected that, as the market in the $600k+ market get saturated, builders will be forced to take on more risk with building lower priced new construction homes.
The impact of rental market
According to Realtor.com the rental market in general has been seeing stagnating price levels for some time now. Rental prices have soared in 2014/2015 and early 2016, but have not moved much higher since. The explanation to this may be in the fact that the wages have not followed the steep increase in housing costs. Nonetheless, the Chicagoland area is still considered to be the market with a strong rental demand, mainly driven by millennials who are hesitant to enter into the homeownership.
The impact of supply
Supply of real estate remains the biggest issue for homebuyers and realtors in the market currently. As the level of new constructions is still low and the prices of homes have increased over the last few years, the current homeowners are having trouble making a decision to move into a bigger home or a different area, leaving fewer opportunities available to the new homebuyers.
So, how is the 2018 Chicagoland real estate market going to look like?
– The supply will remain an issue, particularly in the $600k or less segment of the market. Acting quickly and making a fair offer may be your ticket to buying the home that you really wanted.
– Buying early in the year may result in smaller portion of your monthly payment going towards the interest. This will help you, the buyer, pay off that home sooner or give you an ability to buy the larger home you always wanted.
– If you are a homeowner looking to get yourself a larger home, this may be a good time do to so. The demand for your home will be high, while the demand for the higher priced homes is relatively stable. This may give you a possible opportunity to get a bargain on a larger home while receiving a premium on your sale.
– If you are still renting, you probably need to reconsider your options. While there is nothing wrong with renting, owning a home is still more affordable in the long run. Buying your next home before the interest rates go up may be one of the best investment decisions you ever made.
Dan Cuckovic, Managing Broker
Enterprise Realty Brokers