Home prices keep defying gravity

Home prices keep defying gravity

  • By Dennis Rodkin Credit: Bloomberg
  • 04/10/24

Two years ago this month, when super-charged inflation had jacked up the cost of everything from two-by-fours to eggs to houses, the Federal Reserve began raising interest rates to put a lid on price growth.

Lumber prices went down. Egg prices went down (but then back up because of bird flu).

House prices, particularly in the Chicago area, kept going up. The median price of homes sold in the nine-county Chicago metro area was up more than 10% in the first two months of 2024. In January, the median price was 10.1% higher than a year earlier, and in February it was 10.3% higher than a year earlier. That's nearly five percentage points above the nationwide price increase in February. 

“We’re going against historical norms,” said Matt Silver, a broker at Corcoran Urban Real Estate in Chicago and president of Illinois Realtors, a statewide professional association. “There used to be two or three paths” — i.e., raise interest rates and kill off demand or reduce interest rates and spark demand — “but it feels like we’re blazing a different pathway now.”

House prices are defying gravity. The long-term impact of that isn’t known yet, but Tassos Malliaris, professor of economics and finance in the Quinlan School of Business at Loyola University, says he can see one clearly: People who need to buy, such as those passing through lifecycle portals like having children, will buy less house.

“It’s the same thing people do with cars and vacations,” he said. “We want to go to Paris, but it’s too expensive, so we’re going to Michigan.”

Those who don’t absolutely have to buy may do it anyway. Some have gains they want to spend from the stock market, which is about to finish its strongest first quarter since 2019.

Others, Malliaris said, recognize that with no big downward shocks on the horizon and interest rates unlikely to slide back to pandemic levels anytime soon, “it’s less expensive to buy now than it’s going to be in the future.”  

Rising home prices may also have an impact on the presidential election. In a race where each side believes only its guy can properly steward the U.S. economy, about 52% of homeowners and renters say housing affordability will be a factor in how they vote in November, according to a Redfin report released earlier this month.

“While the economy is strong on paper, a lot of families aren’t feeling the benefits because they’re struggling to afford the house they want or already live in,” Daryl Fairweather, Redfin’s chief economist, said in prepared comments on the report. “As a result, many feel stuck, unable to make their desired moves and life upgrades.”

Malliaris said he’s seen the resentment, though he didn’t connect it to the presidential race. “Younger people in their late 20s and 30s feel that while their parents and grandparents were able to buy reasonably priced homes,” he said, “they cannot.”

To them, he has some advice: Be patient. “At some point, these older homeowners, people like me, will have to let go of those homes,” Malliaris said. The rising generation is smaller in number than the baby boomers, he noted, so “in terms of demand, these younger buyers will be in a good position.”

Silver said buyers who’ve faced ever-higher prices have at least two rationales for going ahead rather than sitting the market out. One: “They’re making money” and believe, especially after COVID shifted what we need from a home, that spending that money to get the house they want is smart. Two: While it’s startling to see interest rates rise higher than they’ve been since the dawn of the 21st century, it’s congealed into normalcy.

“These are the rates now,” Silver said.

How much more expensive are homes now, four years after COVID changed everything? According to data from Illinois Realtors, the metro-area median home price was $320,000 in February, traditionally one of the weakest months in our cold-climate market. Prior to the COVID era, the metro-area median never went higher than $265,000, even during the fast and furious summer months, when prices are usually the highest of the year.  

The data for the city looks different. The February median price in Chicago, $330,000, is not so far above is pre-pandemic levels. The median price was $315,000 or more in summer months in both 2018 and 2019.

These are just a few of the data points that show Chicago-area home prices have been defying gravity. There are others, including a map from ResiClub that shows home prices have flattened or gone down since their 2022 peak but have risen in all Chicago-area counties, as well as those in northwest Indiana and southeast Wisconsin.

The causes include:

• The region’s long-term affordability relative to other big metros

• Homeowners uninterested in selling because they have mortgages with pandemic-era interest rates, as little as half the rate they’d get now

• A low inventory of homes for sale when buyers still need to buy because of lifecycle reasons like marriage, children and divorce

• Prices that never rose to bubbly levels and as a result haven’t gone slack

• High employment figures that breed buying power

Along with all of those, there’s “optimism,” Malliaris said. Pessimism swept in when both interest rates and talk of a recession were rising, Malliaris says, but “what’s currently moving the housing market is optimism that the U.S. economy will most likely avoid a hard landing.”

Dennis Rodkin
By Dennis Rodkin

Dennis Rodkin is a senior reporter covering residential real estate for Crain’s Chicago Business. He joined Crain’s in 2014 and has been covering real estate in Chicago since 1991.

Chicago Business

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