Chicago Housing Market: Predictions for Investors in 2018

Asking someone to predict what the housing market will do 12 months into the future is a lot like asking them to predict who will win the World Series next year. They might get lucky, but there’s also a good chance they’ll get it wrong.

Remember the housing crash of 2008? Everyone from home buyers to investors and even the financial industry had full confidence in the housing market in the years leading up to the crash but the bottom fell out from under us. When it comes to predicting how the market is likely to behave six to 12 months down the line, we should take a good look at the data we currently have in hand in order to analyze the emerging trends and make reasonable predictions.

With that in mind, here’s how the local market fared in 2017—and how real estate investors may be able to benefit from current Chicago housing market trends that are expected to continue into 2018 and beyond.

The Chicago Housing Market Trends of 2017

Chicago’s housing market was forecasted to be one of the worst in the country in 2017. Realtor.com predicted that the Windy City would perform the worst out of America’s 100 largest metropolitan areas. Prices were expected to rise by just a couple of percentage points and the number of homes sold was expected to increase at a similarly sluggish rate. But, did the year play out as expected?

The majority of Chicago neighborhoods experienced a fall in average home prices sold between May and August 2017, according to data by Trulia.

The sale prices of homes rose in August, but sales volume simultaneously went down.

Chicago remained the only global financial center to have an undervalued housing market throughout 2017, according to the annual UBS Global Real Estate Bubble Index, with prices remaining 30% below their 2006 peak.

Unfortunately for homeowners, Chicago lived up to its billing as one of the worst housing markets in 2017. Price increases were slow or nonexistent and sales volumes low, with the market remaining undervalued throughout the year. This was better news for investors, however, who were still able to pick up undervalued properties almost a decade after the crash.

Housing Market Predictions for Chicago Investors in 2018

With the trends of 2017 still fresh in our minds, let’s look ahead to what 2018 might have in store for investors in Chicago’s housing market–and how you can prepare.

Tax Reform Will Impact Recovery—and Inventory

Illinois could face a substantial exodus of homebuyers in 2018 that will have a significant impact on demand from home buyers. When the new federal tax bill comes into play, effectively decreasing the amount of state and local property taxes (SALT) that can be deducted, citizens of high-tax states, like Illinois, are expected to look elsewhere when it comes to buying property. In fact, one-third of 900 survey respondents said they would consider moving if they can no longer deduct state, local, and property taxes, according to a study by Redfin, A limit on tax deductions related to homeownership could be particularly damaging for the Chicago housing market given the close proximity of two low-tax states, Wisconsin and Indiana. Even homeowners that work in Chicago’s city center could move to the outskirts of the Chicagoland area, which includes neighborhoods outside the state, and commute into the city every day.

If the demand for housing shifts or decreases, Chicago’s long road to a housing market recovery may grow even longer as decreased demand from homebuyers will hit both sales prices and sales volumes across the city. There is some good news, however, as this shift may be offset by additional new legislation within the tax reform bill. Unmarried homeowners will receive up to $250,000 of relief from the capital gains tax if they sell a home they have lived in for two of the five previous years. Couples can receive up to $500,000 of tax relief. However, despite this benefit for home sellers, limits on SALT deductions are likely to have only a moderate impact given that most homeowners use their property as their primary residence.

Tax reform is both good and bad news for Chicago investors in 2018. While a buyer’s market may allow you to pick up properties at a discount, a limit on tax deductions will increase the overhead of running a real estate business. You may consider offloading properties from your portfolio while prices are a known factor to increase liquidity and be ready for further investment in 2018 if the market dips again.

Millennials Will Continue to Dominate the Housing Market

Millennials dominated the housing market in 2017. Nearly half of all Cook County mortgages and 41% of all Chicago mortgages were taken out by under 35s last year. However, according to a study last year, nearly 40% of Chicago’s Millennials have yet to leave the nest at all. That means there are thousands of Chicago Millennials who have yet to rent or buy their own home. This year could see an even larger population of Millennial home buyers.

In fact, Chicago was ranked as the 5th most popular city for Millennials to make an adventure move to. It’s not hard to see why: Chicago is a national leader when it comes to corporate investment and is one of the frontrunners for Amazon’s new HQ2. More jobs equal more opportunities for Millennials who want to live in one of America’s big cities but have been priced out of New York and San Francisco. To put this into perspective, CNN estimates that a $50k salary in Chicago equates to a similar lifestyle as earning almost $96k in Manhattan.

As more and more Millennials enter the Chicago housing market in one form or another, several things may happen:

  • Rents in the city center and surrounding neighborhoods will continue to increase, buoyed by growing demand.
  • Most Millennials who choose to rent will want to do so near the city center in order to remain close to the action of Chicago’s downtown.
  • When they come to settle down, however, many Millennials will head to the suburbs in search of a great deal. Some neighborhoods, such as Wicker Park and Logan Square, are already Millennial hotspots. And others, like Humboldt Park, are expected to enjoy growing popularity as well.
  • Prices may increase faster than average in both the city center and the suburbs as Millennials look to settle down within a community of like-minded people.

But what do all of these trends and predictions mean for investors? For some looking to jump into the real estate market before it peaks, identifying which neighborhoods will become Millennial hotspots will be key. For home investors who like to buy, renovate, and rent investment properties, understanding how to renovate and market to Millennials will drive success.

The Rise of the Chicago Suburbs

We can confidently expect to see continued growth in many of Chicago’s suburban areas. While demand for city center properties will always be strong, this upward trend will price even more Millenials out of Chicago’s city center lifestyle, particularly those who are starting to think about settling down and buying their first property. In some areas, the change is already happening. Both Skokie and Morton Grove are perfect examples of the kind of small, suburban communities that we would expect Millennials to flock to. Both are already experiencing positive year-over-year growth in their respective median sales prices.

Chicago’s suburbs are an excellent place to focus your investing effort on in 2018. Not only are sales prices significantly cheaper than in the city center, but the odds of finding cheaper, distressed properties ripe for renovation are much greater. Of course, any renovations should be targeted toward Millennials if you want to achieve the best possible ROI.

Finding the Right Deals to Grow Your Portfolio in 2018

When you’re new to real estate investing, getting a foothold in the housing market can be hard. But, HomeVestors® aims to make it as easy as possible. In addition to blogs and resources that can be accessed by its HomeVestors® franchisees for free, HomeVestors also provides Development Agents to each independently owned and operated franchisee. These are experienced investors who have already had success in your local market and who can offer help and advice. Think of them as your guide on your real estate investment journey. For more information on how to become a HomeVestors® franchisee, get in touch today.

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