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Q1 Real Estate Market Update- Good time to be a seller!

The first three months of 2018 proved to be challenging for the Chicagoland real estate market.  While the economy and the job market continued to perform well, the lack of supply of real estate available for sale has reached new lows.  The real estate agents are blaming supply as the most important driver of the slowdown in the number of closed sales in the first three months of the year.  So let’s look at some of the data to see if this theory holds true.

Homes available for sale

At the end of March 2018 there were 33,412 homes available for sale in the region of the market covered by the Midwest Real Estate Data service (MRED), which covers approximately 19 counties of the Northern Illinois and surrounding areas.  This is approximately 16% less homes available for sale in comparison to the same period last year.  At the end of March 2017 there were 39,997 homes available for sale.  Additionally, the number of new homes hitting the market has dropped each of the first three months of the year in comparison to the 2017.

Market Supply

As a consequence of the lack of the new homes on the market, the “month’s supply” measure (indicating how many months would it take to sell out of the current inventory if no new homes are listed) at the end of the March 2018 was 3.1.  This number has been keeping steady since December 2017.  As a reminder, a good, balanced market, is when the “month’s supply” gauge is somewhere between 6-7 months.  The current measure of 3.1 indicates a strong seller’s market.

Average Home Price

In support of the number indicated above is the fact that the average sales price continues to climb up.  At the end of March 2018 the average sales price was $230,000.  This, in comparison to $220,000 the year before, yields a modest 4.5% increase in an average property value.  It is observed that the largest increases in the property values came from the lower priced homes, while the larger homes, particularly in Lake County, have seen stagnant, if not declining prices.  This is mainly due to very high property taxes which are driving away some of the demand for these homes. 

Interest Rates

When talking about the Q1 of 2018 it is difficult not to touch the topic of interest rates.  There was a lot of discussion about interest rates and how the FED has increased, and plans to continue to increase interest rates few more times this year.  While rate hikes by FED are not directly related to mortgage rates, a correlation can be made between the two events.  The mortgage rates have indeed increased and a conventional 30 year mortgage will now cost you somewhere around 4.25-4.5%, depending on the creditworthiness of the borrower.  According to the Freddiemac.com, the average 30 year interest rate at the end of March 2018 was 4.44%, with .5% points, while at the end of March 2017 this rate was 4.2% with the same point percentage.  Clearly, the interest rates are on the rise and this can be considered an impediment for the homebuyer.  However, it is important to note that despite this increase in mortgage rates, the rates are still considered to be some of the lowest in history, and as such, a good deal for the borrower.

Market Activity

All this leads us to a measure of market activity (number of closed sales) for the Q1 of 2018.   Due to all the factors mentioned above, the market activity has indeed subsided in the first three months of this year in comparison to the same period last year.  The number of closed sales in the MRED region in the first three months of the year was 22,556, in comparison to 24,193 in the same period last year.  This yields a 6.8% reduction in closed sales.  While this number can be considered significant, the real estate agents are hopeful that the number of closed sales in 2018 will rebound and at least meet the number of closed sales in 2017.  Realtors are hoping for more seller movement at the end of the school year, which should help the buyers who have been looking for a while to find their perfect home.  And as the interest rates should not be changing significantly at least until June this year, the Q2 of 2018 should be a good time for both buyers and sellers.   

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Chicagoland Real Estate Market- Q1 2017 Summary

What a great start of the year for the Chicagoland real estate market!  Despite the rise in interest rates, the mortgage rates have not increased significantly and remained very much affordable.

Average Price

The number of closed transactions in 2017 is just slightly higher in comparison to the same period last year (25,149 vs 24,777), but the overall dollar volume of the closed transactions has increased significantly.  This indicates that the average price increase for all closed transactions in Q1 is 5.95%.  The average sales price in March alone was $277,693.  Townhouses contributed least to the price increase with an average townhouse increase of 2.9% over last year.  On the flipside, the highest price increase came from condos, where the average price increase was 10.9%.

Quarter 1 2017 2016 2015
Sales $        6,670,773,667 $        6,203,152,076 $        5,665,979,909
Transactions 25,149 24,777 23,665
Average Price $                    265,250 $                    250,359 $                    239,424
Average Price Increase YoY 5.95% 4.57%

Market Time

Average market time for closed properties in Q1 2017 dropped to 103 days, from 111 in 2016.  Townhouses and condos were selling as quickly as 83 days, while homes (defined as detached single dwellings), were selling in 113 days.  Interesting note is that the average market time for larger homes (3000sf+) has increased from 175 days in Q1 2016 to 190 days in Q1 2017.  Homes up to 2000sf, including condos and townhouses, appear to sell the quickest (89 days).

Month’s Supply

Month’s supply graph shows the number of months it would take to sell out the entire inventory of real estate currently on the market, at the current demand, without adding additional inventory.  Supply continues to be the biggest issue and concern in the market currently and it is what is driving the increase in prices.  The supply of real estate continued to shrink over the years and has reached a low of only 3.3 months.  This is the lowest supply in the area in decades.  The decrease came despite the increase in the number of new listings in Q1 of 2017.  The number of new listings hitting the market has increased by 1.2%, but a strong demand continues to absorb any good listings that hit the market.

Conclusion

We expect that the demand for the real estate in Chicago will continue to be strong in the near to medium term.  There is a limited amount of new construction producing the number of properties needed to fill the demand and the high rents are driving more and more millennials to transition into homeownership.  It is expected that the interest rates will continue to rise this year at a slow to moderate rate.  It is feasible that we will see a 30 year mortgage rate reach 5% by the end of the year.  Although this may discourage some buyers from purchasing, it may be balanced by reluctance of the current owners to sell their homes.  The reluctance will likely be the result of current homeowners hesitating to take on a higher interest rate on the new house (come on, who hasn’t locked in a 3.5% rate already??).  We expect that the balance between buyers and sellers will, in the near term, remain similar as it is now, with sellers driving the market.