Downtown Chicago Condominium Market Snapshot

Are buyers returning to the condominium market? While the sales volume continues at very thin levels, there has been a recent uptick in sales activity as prospective buyers are sensing that pricing has now reached levels which are rather enticing. With the discounted pricing now being offered by sellers in the market along with the first-time home buyer tax credit and low mortgage rates, buyers appear to be more confident in making purchasing decisions. In addition, the rise in the Dow since the beginning of 2009 has helped buyer psychology, as buyers are already witnessing a recovery in the stock market which could help the housing market.

Buyer Traffic is Up:

On a weekly basis, Appraisal Research Counselors surveys the sales and prospective buyer traffic in a wide range of new condominium developments throughout the city of Chicago, with many located in the Downtown and Near North Side submarkets. Notably, since the spring of 2009, there has been an increase in the number of people visiting these sales centers along with an increase in the number of new sales contracts being reported. On a year-over-year comparison, 2009 started out weaker than 2008, but has surpassed 2008 since May. In general, discounted pricing is playing a big factor in this increase in sales, as these buyers are price-driven, looking for the best value opportunities.

The First Time Buyer is Back:

Based upon the transactions which are occurring, it is apparent that the recovery is starting at the entry level segment of the market. This group of buyers is not burdened with an existing residence to sell, providing them with the freedom to purchase. In addition, demand from first-time buyers is also being strengthened by the government’s first-time homebuyer tax credit, along with the availability of FHA financing with 3.5 percent down payments.

In general, the higher priced homes and condominiums in the market are experiencing less of this increase in demand; thus, this higher price segment of the market is still waiting for the “trickle up effect” which is beginning at the lower end of the market. With only 15% of the new development sales during 2009 achieved in luxury buildings ($500+ PSF) tracked by Appraisal Research Counselors Downtown Chicago Residential Benchmark Reports, the lower priced product is leading the market in terms of sales velocity. This trend is also seen in the statistics for the Downtown market from MRED LLC (the multiple listing service) with a mix of transactions including both new construction sales and sales of existing properties:

At the current pace of sales for residences reported in the multiple listing service, there is approximately a one year supply of lower priced inventory (under $500,000), with a 1.5 year supply of the $500,000-$999,999 inventory, and a nearly 3.5 year supply of the $1,000,000+ inventory. Even within these price categories, individual buildings and individual locations continue to function independently, with some buildings and locations exhibiting stronger demand than others.

Wave of New Construction Activity Ending:

The Downtown Chicago housing market has doubled in size during the past 15 years, with the tremendous surge of new construction activity which has taken place recently. However, developers are no longer pursuing new development deals nor are lenders interested in financing new construction projects. While 18,500 new condo units have been completed since 2006 in Downtown Chicago, only 600 units will be completed in 2010 and less than 100 units are currently under construction for completion in 2011.

We do not expect to see development occur again on any large scale basis in the near term, although the timing will depend upon how rapidly the current unsold inventory is absorbed. At the present level of sales velocity, this will be a slow process, with the market now adapting to a more moderate level of sales activity than had been experienced during 2005-2007.

Currently, sales velocity is still slow and there is a sizable amount of unsold inventory available for sale, including both new and resale residences. However, the supply of new inventory is now capped at what is already delivered or currently under construction, and supply and demand for housing will eventually return to more balanced levels. Thus, these market conditions provide some excellent buying opportunities for informed and patient purchasers who are looking for a longer term acquisition.

Gail Lissner, CRE, SRA
Vice President
Appraisal Research Counselors
www.AppraisalResearch.com