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. Still, 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 2018—and how real estate investors may be able to benefit from current Chicago housing market trends that are expected to continue into 2019 and beyond.
The Chicago Housing Market Trends of 2018
In terms of sales, Chicago’s housing market was forecasted to fall flat in 2018 by Realtor.com. At a projected increase of only 2.57%, prices weren’t expected to fare much better. These predictions weren’t great, but they were certainly an improvement from the year before. The data at that time pointed toward the Windy City performing the worst out of America’s 100 largest metropolitan areas. And, in 2017, that is what happened. But, did 2018 play out as expected? Not exactly.
Fortunately for homeowners, Chicago’s market didn’t flatline. But, it also didn’t see the same gains that many other U.S. cities did. Still, though price increases were slow, they were double what was previously predicted. Sales volumes remained low, however, and the market stayed undervalued throughout the year. It certainly wasn’t all bad for investors, though, who were still able to pick up good deals almost a decade after the crash as long as they had an effective lead-generating strategy for finding off-market properties at below-market prices.
Housing Market Predictions for Chicago Investors in 2019
With the trends of 2018 still fresh in our minds, let’s look ahead to what 2019 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 another substantial exodus of homebuyers in 2019 that will have a significant impact on demand. With the new federal tax bill in 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. The new limits on tax deductions related to homeownership are particularly damaging for the Chicago housing market given the close proximity of two low-tax states, Wisconsin and Indiana.
Even homeowners who 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. In fact, this has already started happening. Under threat of the new tax bill, 156 people a day left Chicago for other cities like Austin and Atlanta in 2017 alone. By year-end 2018, Chicago lost 45,000 more residents, many of whom could no longer deduct state, local, and property taxes. If the demand for housing decreases, Chicago’s long road to a housing market recovery may grow even longer.
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.
So, tax reform is both good and bad news for Chicago investors in 2019. 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 selling investment properties from your portfolio while prices are a known factor to increase liquidity and be ready for further investment in 2019 if the market dips again.
Millennials Will Continue to Dominate the Housing Market
Millennials dominated the housing market in 2018, just as they did the previous year., and will continue to do so A significant number of all Cook County and Chicago mortgages were taken out by under-35s in 2017 and 2018. And, it’s no wonder since they make up nearly a quarter of the population for the Chicagoland area. However, large numbers of Chicago’s Millennials haven’t left the nest at all. That means there are thousands of Chicago Millennials who have yet to rent or buy their own home. So, this year could see an even larger population of Millennial home buyers entering the market, especially with more parents entering the picture to help with down payments and pay loans on their behalf. The possibility of HB 2192 passing and effectively lifting the ban on rent control could make home buying a more attractive option for cash-strapped Millennials, too.
Additionally, despite Chicago’s overall decline in population, it remains a popular city for Millennials to move to—especially “older” Millennials just over 35. It’s not hard to see why: Chicago is a national leader when it comes to corporate investment, globalization, and technology. More jobs equals 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, unless and until HB 2192 passes and lawmakers allow for, or enact, rent control.
- 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 enjoying growing popularity as well.
- Both rental and home sales 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 your investments this year? If you’re looking to jump into the real estate market before it peaks, identifying which neighborhoods will become Millennial hotspots is key. And, if you buy, renovate, and sell homes, understanding how to market those properties to Millennials will help to drive your success forward. If, on the other hand, you choose to rent out your Chicago investments, it’s not a bad idea to keep an eye on the direction that current real estate-related legislation moves. You don’t want to get stuck holding a property with a rental rate that barely covers your costs to operate, or you could be left holding the bag.
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 Oak Park and Buffalo Grove are perfect examples of the kind of small, suburban communities that we would expect Millennials to flock to. Both have already experienced 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 2019. Not only are sales prices significantly lower than in the city center, but the odds of finding 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 2019
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 some of the best real estate investing tools and resources, HomeVestors also provides Development Agents to each independently owned and operated franchisee. These are experienced investors who have already had success in local markets, like Chicago, and who can offer help and advice no matter what’s trending. Think of them as a guide for your real estate investment journey. For more information on how to become a Chicago-area HomeVestors® franchisee, get in touch today.
Each franchise is independently owned and operated