Market Inflections: The Yin and Yang of Supply and Demand

The real estate market is performing as analysts predicted. Since the Fed began raising rates in June of 2022, deceleration has set in with many buyers and would-be sellers pressing pause. February ushered in an inflection in home prices and sales volume. Nationwide, in February, prices fell year-over-year (YOY) for the first time since 2012, driven largely by a market recalibration in the West which experienced explosive price gains during the pandemic.

Prices across the country are still substantially ahead of where they were at the onset of 2020. The Case-Shiller national home price index, which tracks month-over-month pricing trends, recently reported that aggregate pricing declines are just 3 percent off the peak index which had risen 43 percent since the end of 2019.

The other inflection represents a positive injection in market activity. After 13 months of sales declines, February represented the third month of growth in pending sales. The market is showing its legs as the demand for housing is overriding buyer reluctance to fluctuating but persistently higher mortgage rates than we have been accustomed to.

A LOOK AT CHICAGO

Similar to national trends, as pricing gains contract, there are markets across Chicagoland that continue to show resilience. Typically, they are found in neighborhoods that were undervalued and in areas where more buyers want to live. An illustration of the primacy of demand and the limitations of supply:

• Across Chicago, through February YTD, Median Sales Prices are down 4.5 percent for Single-Family Homes and 4.1 percent for condos; Closed and Pending Sales are down double-digits across the board.
• In Lincoln Park, Median Sales Prices are up 4 percent for Single Families but are tracking down 6.6 percent for condos. Worth bearing in mind the greater range of condo sizes and price points. There were just 12 closed sales of homes versus 91 closed sales of condos through February, representing sales declines of 61 percent and 49 percent, respectively. Limited inventory is suppressing the market’s appetite for Single-Family Homes and larger, turnkey condos in this neighborhood.
• New Construction offerings, relative affordability and popularity among Millennials and Gen Z buyers are driving growth on Chicago’s Near West Side, composed of trendy neighborhoods like West Loop and Fulton Market and revitalizing ones around United Center, Tri-Taylor and University Village. Median Sales Prices have jumped 28 percent YTD to $460,000 while Closed Sales Volume has fallen 46 percent.

These numbers offer a glimpse into the variegated market we are experiencing in Chicago and beyond. Limited supply of desirable inventory is curtailing market performance in areas where buyers want to live. And higher interest rates are discouraging other buyers from entering the fray, including trade-up buyers who would be unloading more inventory but who are handcuffed to historically low mortgage rates.

Inventory is increasing, but we need a great deal more. Levels are still nearly 50 percent lower than before the pandemic. Analysts from Moody’s to Realtor.com project home shortages ranging from 1.6 million to over 5 million units. With homeowners staying longer in their homes and construction levels persisting below the 52-year, new-unit average for 14 years, low supply will remain the predominant market challenge. There is opportunity for developers, sellers and buyers willing to seize it.

As always, I would be delighted to address any questions you have about the market.

Sincerely, Cadey