Q2 Market Real Estate Market Review- Oh That Supply!
Positive Market Activity
Real Estate market activity in the first 6 months of the year remained strong and continued to exceed the market activity for the same period of 2016 and 2015. In the first 6 months for 2017 the number of homes sold in the MRED (Midwest Real Estate Data) service area, which covers most of Northern Illinois, grew by 4.44% in comparison to the same period in 2016. Additionally, the average sales price of the homes increased to nearly $285,000, representing an increase of 4.23%. While these numbers represent strong market activity, it is important to note that the growth in number of transactions as well as of average price, in comparison to the growth in the first six months of 2015/2016, has slowed down.
Overlooking bargains on bigger homes
If you are looking to buy a home in the Chicagoland area, particularly a smaller home with less than 3,000sf, you are in for one frustrating endeavor. Poor selection, high demand and high prices are just some of the issues our clients have been facing this year. On the flipside of that, sellers of homes smaller than 3,000sf are very much enjoying the situation, but not enough of them decide to cash in.
The main reason for the low supply of the smaller and more affordable homes (less than 3,000sf and $400,000) is the fact that there is little to no new construction taking place in this segment. The supply is coming from resale only. In the graph above you will notice that the supply of homes smaller than 3000sf is less than 5 months (meaning that if no homes are added to the inventory the current inventory would sell out in 5 months). The inventor of homes smaller than 2000sf is even lower. Experts say that the healthy balance in the real estate market is between 6-7 months supply of inventory. Many homeowners who currently own smaller homes or condos are hesitant to move onto a bigger property despite the fact that they can get premium for their home and possibly a bargain on a larger home (specifically homes $600,000+). High taxes and investments necessary to improve or maintain larger homes are the main causes of buyers holding off on purchasing larger, more expensive homes. Current supply of inventory in this segment is over nearly 9 months for Cook and Dupage County and over 11 months in Lake County. Due to this reason, the $600,000+ market is very much buyer’s market, despite low interest rates and arguably, good economy. A large majority of our seller clients this year have been people who are moving out of state or selling their investment property, not those who are moving to a bigger place.
In regards to the market outlook we don’t foresee a major shift in the real estate trends. There are talks about the interest rates possibly being increased one more time before the end of the year or in the early 2018. However, the last two increases have not produced a significant impact on the real estate rates. On the other hand it is important to note that the global economy has not suffered from a major correction for some time now. Economists predict a major correction at least once in 10 years, which means that sometime in the next 2-3 years we can expect a major slowdown in the economic growth or even recession. As that is usually followed by the increase in the unemployment rates we can expect to see a slowdown in real estate market activity as well. While owner occupants may put up a fight and resist the price drop, investment properties, particularly residential rental units may see a drop in value as renters may not be able to continue to afford the current sky-high rents.
In summary, real estate market is strong and prices, on average, continue to grow. Anyone looking for a bargain will only be able to find it in the segment of large and expensive homes. Owning real estate is still much better than paying rent, but depending on how the economy performs, that may not hold true for long.
Enterprise Realty Brokers Inc.