In a year where Chicago housing has seen double digit increases in home values and many homeowners have experienced rekindled confidence around owning their home, the end of 2013 did not finished up with the same strength that it began. More specifically, after nearly three straight years of increasing residential real estate sales, the last three months of 2013 experienced decreases and slowing momentum.
As statistics roll in, this slowing momentum is being seen in the declining number of contracts and decreasing pending home sales both of which lack the stamina in the fourth quarter that were commonplace in the second and third quarters of 2013. While it is not uncommon to experience a seasonal slowdown this time of year, the down-shifting of the housing market feels even more pronounced because Chicago has experienced the largest annual increase in housing values since before the market crash.
Contributing to slowing momentum is the fact that approximately 35 percent of all Chicago residential sales in 2013 were distressed per Midwest Real Estate Data and 1 in 5 Chicago-area homes are still underwater according to CoreLogic. Clearly, the Chicago housing market is not firing on all cylinders and many are still locked-out of the recovery.
Although figures may vary, CoreLogic indicated that 6.4mm homes in the U.S. are still underwater, meaning 13 percent of the market has a mortgage value greater than their home value. Even worse, an additional 20 percent of the market is ‘under-equitied,’ meaning their ownership stake, or equity in their home, is less than 5 percent. Therefore, a full one-third of homeowners are limited, if not restricted, from participating in the improving housing market.
Despite the broader trend of an improving housing market, foreclosure sales nationwide were on pace to increase by nearly 13 percent in 2013 compared to 2012, according to RealtyTrac. Locally, Chicago-area foreclosure activity has mirrored this increasing trend according to Benjamin De Los Monteros of Cherry Picker Investments, a foreclosure acquisition specialist.
One reason that foreclosures have increased was due to banks losing interest in short sales as a preferred disposition method in favor of foreclosure auction sales because home prices have risen, noted Daren Blomquist of RealtyTrac. In October 2013, short sales accounted for only 5.3 percent of total residential sales nationwide compared to 11.2 percent in October 2012.
One additional factor weighing down potential home buyers is sales prices. Sales prices have gone up 20 percent over the last couple years while home buyer’s wages have only gone up about 3 percent. Therefore it is not surprising that the current rate of homeownership is about where it was 10 years ago before the bubble started inflating. The National Association of Realtors Home Affordability Index dropped to a 5 year low in 2013 as home affordability has declined for the first time since 1995.
At some point in the near future, homeowners, the majority of which do have positive equity in their homes, will resume their activity of finding a new home and selling their existing home (for a profit) and the 2014 housing market will climb out of this slow period that is now being experienced. Until then, enjoy how pretty Chicago looks with new-fallen fluffy snow.
Contributor Michael Hobbs, SRA, LEED GA is President of PahRoo Appraisal & Consultancy, a real estate valuation firm specializing in residential and commercial properties in Chicago’s favorite neighborhoods.