Is the Housing Market Slowing Down?

As the Coronavirus pandemic took hold of our society back in March, 2020, and the Governor issued his executive orders effectively shutting everything down, the outlook for real estate sales looked bleak. As an attorney whose practice involves a lot of buying and selling of residential properties in the south side of the Chicago metropolitan area, I felt it immediately. There was nothing that could be done. Realtors couldn’t show houses in person. Property inspectors couldn’t do their jobs. Title companies were closed. Government offices shut their doors. The immediate result of the COVID shutdown was that my business ground to a complete halt. 

Of course, we adjusted. Zoom meetings replaced face to face appointments. Title companies offered curbside service. Realtors showed houses through virtual tours. The Real estate market gradually began to recover. 

I can’t say exactly when I noticed it. But sometime in the third quarter of 2020, things erupted. Suddenly, there was a need to buy houses like I had not seen at any other time in my 31 years of practicing law. The market got “hot,” even in neighborhoods where you would have never dreamed to connect the words “hot” and “market.” I ended up having the most productive quarter (at least real estate-wise) in the 12 years I have been in business for myself. This trend carried into the first quarter of 2021. 

What in the world caused this? I expected the pandemic to lead to a falloff in business like what happened during the “crash” of 2008-09, when real estate prices fell far and fast, leading to a significant market slow down. But the opposite happened. Prices increased – significantly. Demand increased – significantly. It was a seller’s market, and the market was anything but slow. 

It might be because mortgage interest rates were at record lows. It could be that after being cooped up in lockdown, people reacted to the gradual re-opening of society with a flourish of spending, which included housing. I also think that after people discovered that they could work remotely, and that their employers would accept it, the need to be close to the job (i.e. downtown Chicago) was deemphasized, and people sought to escape from high priced apartments to a low interest mortgage in suburban and other outlying areas where real estate values were more reasonable. COVID-19 seemed to cause a paradigm shift that benefited the real estate market. 

There were trends already in place before the pandemic struck that helped fuel this. In my experience, people have generally sought to move out of the city limits of Chicago to escape the higher cost of living and relocate to the suburbs. Increasing crime rates, safety concerns, and a desire for better schools also contributed to this exodus. These people tended to buy homes in the Chicago suburbs far enough away from where had been living in the City to experience the savings and the escape, but still to be close enough for convenience to where they worked and the neighborhood haunts they frequented. 

Meanwhile, a lot of suburban homeowners, sick of sky-high real estate taxes, were choosing to move as well. The trend on the south side of Chicago was to see these people relocate to Indiana, where the real estate taxes were more reasonable, and the perception of “country living” and “wide open spaces” was more prevalent. 

This steady stream of selling/buying was already a pattern when the post-shutdown boom burst forth. New buyers flooded the market and snapped up the available inventory, resulting in a severe shortage of available houses. From April 2020 to April 2021, the number of available housing units declined by 50%. Newly constructed houses were also less plentiful. A sharp increase in the cost of building materials has led to a severe decrease in the availability of new construction. (New construction, at least in Cook County, has been in short supply for a long time. This is the result of the 2008-09 crash, when new-home start-ups were put on hold. The plunge in values and the unavailability of credit dealt a severe blow to the local new construction industry from which, in my opinion, it has never quite recovered).

This critical tilt in supply verses demand, of course, led to a steep increase in prices. In Cook County, home prices are up 18.1% compared to last year. Despite the limited supply, June 2021’s total home sales were up 58% from the previous year. The current average time a house spends on the market is 11 days, compared to 33 days last year. 

This all felt insane. It led to things I’ve never seen before, like houses receiving multiple full price offers on the day it was listed.  Bidding wars. Contract offers with “escalation clauses” – where a potential buyer is willing to increase their bid should other higher offers be received. 

We’ve been riding an amazing wave of potent prosperity. 

BUT – (brace yourselves!) we are starting to see things beginning to change. 

First, my practice area is primarily focused in the south suburbs and the City’s south side. For years, real estate values here have never quite competed with the rest of the County. I can’t calculate a “regional” rate, but I don’t think the price increases have been nearly as high as other areas of the County. Market activity has certainly increased, but the kind of return experienced in places like the north suburbs, or the northwestern United States is NOT happening here.

And there is evidence of the market slowing down. Interest rates are rising – slowly, but they are rising. The rate for a 30-year mortgage bottomed out in April 2020 at around 2.65%. As of the end of July, this same rate is up to 3.28%. This is still very competitive, and most of my banking/lender friends predict rates will stay stable for the rest of the year. But even this small up-tic has caused many buyers to be more selective, and the “feeding frenzy” atmosphere of the last year seems less intense. Plus, if we watch the news, any kind of political upheaval or a spike in the COVID delta variant could mean economic instability. Interest rates could suddenly move up, and there is little we could do about it. 

The tight market also seems to be coming loose. For the last two months, the number of houses listed for sale on internet sites like Zillow and Realtor.com is up by 12%. So there appears to be more housing units available for buyers. The lapse of federal stimulus programs will also be a contributing factor. The foreclosure moratorium just expired last month, and the mortgage forbearance program will expire September 30. Homeowners protected by these federal stimuluses who are still in financial trouble will invariably sell their homes (or lose them), increasing the housing inventory. 

The ultimate result of these latest trends means buyers don’t have to overbid on a house they want, because the likelihood another house will be out there is more certain. It’s this last point that I see as the biggest factor in the real estate market slowing down. Home buyers are wising up and are simply more reluctant to overpay for a home. With the sharp rise in the cost of construction materials, even the idea of buying a less expensive “fixer upper” is less appealing. The trend towards higher inflation in the economy generally will cause home buyers to tighten their belts and want to spend less. 

But even if the market slows down, the pandemic trends remain. By all indications, home prices will continue to rise. Corelogic (a company that provides business intelligence) predicts that home prices will increase by an additional 3.2% by June of 2022. The day-to-day experiences of the realtors I regularly work with show that homes are still selling almost as fast as they are put on the market. But the bidding wars or contracts at above list price are becoming less and less. The Corelogic people also point out that we are hitting a point where most millennials (defined as those born between 1989 and 1993) are moving into their thirties – which is the age when most first-time home buyers take the plunge. So, a steady stream of first-time buyers will be joining in. 

In the end, I think this all adds up to a less insane but still robust real estate market. The pre-pandemic nomadic trends of city-to-suburb, suburb-to-Indiana (or some other part of Illinois or elsewhere), combined with still-competitive mortgage rates and the COVID inspired concept of remote employment allowing for people to move to more affordable housing far from their urban workplaces will mean the market will stay very active, if not quite as “hot” as it used to be. Here at John R. Russell, Ltd., along with the highly skilled real estate professionals I regularly work with, we can help you make sense of these market trends to successfully buy or sell your home. 

(Special thanks to Lance Lambert’s August 5th article in Fortune magazine, “There’s a Big Shift Happening in the Housing Market,” for many of the statistics cited and inspiration for analysis).