Page 8 - Chicago Cooperator Winter 2019

8 THE CHICAGOLAND COOPERATOR
—WINTER 2019
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Florida, California, and select markets in
Texas and Colorado, among others. Ac-
cording to him, “2019 has been about taxes,
especially in high-tax areas. The change in
the SALT deduction that went into effect
last year played havoc in the purchase mar-
ket because it caps deductions at $10,000.
It slowed down New York and its suburbs
before anywhere else. In general, Califor-
nia tends to run a year behind New York
in trends, and we are seeing similar trends
pick up there now.”
Sensitivity to Interest Rates
Another major factor in real estate sales
markets is the price of money itself. Most
buyers (though not all) borrow substan-
tially to purchase a home, especially in the
starter market. When interest rates—aka
the cost of money—rise, monthly car-
rying costs become higher. That change
in financing cost can depress or inflate a
market. When rates fall, buyers can afford
more; when they rise, prices inevitably fall.
“Mortgage rates falling a full point over
the past year have mitigated damage from
the effect of the reduction in SALT deduc-
tions,” says Miller. “What’s really important
when we look at housing trends is that most
people look at prices first, but that’s sort of
low-hanging fruit when it comes to trends.
One should look at sales activity and in-
ventory first. Offering prices take 12 to 24
months to show a pattern after sales and
inventory do their thing. We saw inventory
rise in 2018. In 2019, we saw prices begin to
slide. In 2020 we will see more of that. But
ultimately, the effects of the SALT reduc-
tions were skewed by the drop in interest
rates for home mortgages. Overall, the situ-
ation is not as bad as it could have been.”
The Deepest Cut
The most pronounced change, accord-
ing to Miller, has come at the top of the
market—the so-called luxury sector—in all
areas of the nation. In places like New York
City and Miami, the top end of the market
was overbuilt to begin with, and there was
far too much inventory. Many of these units
are not moving.
Miller notes that inventory in New
York’s Westchester and Fairfield counties
is more stable, mostly due to low interest
rates, but their high end is still off. The area
overall is slowing, and pricing are slipping.
Not all segments are showing the same soft-
ening, but in the aggregate sales are down
and prices are up—though the starter mar-
ket for first home purchases is still strong
due to lower interest rates. Miller believes
the overall market will stay like this for a
couple of years, unless there is a sudden
rise in interest rates, which might cause a
short-term burst with buyers getting in to
beat the rising rates.
“The bottom line,” says Miller, “is that
sellers still haven’t gotten the memo.” They
are still clinging to the price they thought
they would get a couple years ago. It takes
sellers longer than the rest of the market to
adjust to new forces and factors.
Chicago
“Chicago is a big place with specific
neighborhoods—over 250 of them,” says
Maureen Sweeney, a well known Windy
City real estate appraiser. “Each sub-market
is unique. In general, the condo market has
been steady this past year. What I’m hear-
ing from realtors and agents is that units
are experiencing more days-on-market,
and that we have a lot of new construction
coming on-line, particularly in the luxury
sector.” That increase in supply, combined
with for-sale units already experiencing a
longer sales cycle, could be something of
a canary in the coalmine. It may be that a
buyer’s market is coming to Chicago, if it
hasn’t arrived already.
Another trend that may be more com-
mon in Chicago than elsewhere is de-
conversion—the return of condominium
properties to rental status. Many factors
can combine to propel a property from
individual unit ownership back to rental
that have nothing to do with current mar-
ket supply and demand. In Chicago, those
factors include such disparate influences
as long-term ground leases that have come
due and whose renewal would increase car-
rying costs to unsustainable levels. Other
causes could be substantial deferred main-
tenance in older buildings, and low levels of
owner-occupancy. That said, deconversion
can have repercussions within the market
that can pressure prices in either direc-
tion. Removal of units from the market re-
duces overall inventory, which would firm
up prices, but the psychological impact of
units exiting the market can cause potential
investors to doubt the future appreciation
and value of their investment.
Sweeney sees 2020 as uncertain. “We are
beginning to see a softening in the market,”
she says. Due to the intricacies of Illinois
tax policy and law, residents are only now
beginning to see the impact of the SALT
deduction changes made in the 2017 tax
law. Like other high tax areas, the cap on
deductions to $10,000 will negatively im-
pact after-tax costs for homeownership.
Boston
Of the market in and around Boston,
Miller says, “The downtown market is still
booming—it’s one of the fastest moving
markets in the country.” The condo and
townhouse market there continues to show
low inventory and high sales. It does fluc-
tuate over the years, but for the most part
affordability is the main issue.
According to Bobby Woofter, principal
agent for My Boston Condo, “Lower inter-
est rates have buoyed the market in 2019.
But sales are lower, and inventory is up
nonetheless. Prices rose quickly over the
past decade, and today’s buyers aren’t find-
ing deals as good as they once did. There
is also lots of stock in the luxury market,
which is a bit overbuilt.”
2019-2020...
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