Housing Price Forecasts Illinois and Chicago PMSA, May 2015

Presented To

Illinois Association of Realtors From R

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Regional Economics Applications Laboratory, Institute of Government and Public Affairs University of Illinois

May 21, 2015

Contact:

Geoffrey Hewings 217-333-4740 ([email protected]) Xian Fang 217-244-7226 ([email protected])

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Housing Price Forecast: Illinois and Chicago PMSA, May 2015 The Housing Market In April, sales and median prices increased moderately both on a monthly and a yearly basis. 12,822 houses were sold in Illinois, up 10.6% from a month ago and 6.6% from than a year ago. In the Chicago PMSA, 9,155 houses were sold, up 10.5% from a month ago and 7.4% from than a year ago. The median price was $170,000 in Illinois, up 9.7% from April last year; the comparable figure for the Chicago PMSA was $210,000, up 10.5% from this time last year. Sale prices in April 2008 are adjusted to 2015 values so as to calculate the housing price recovery taking into account the effects of inflation. In Illinois, the April 2008 median sale price was $185,000 (in $2008) and $203,849 (in $2015); the current price level was 83% of the 2008 level after adjusting and it was 92% before adjusting. In Chicago PMSA, the April 2008 median sale price is $243,500 (in $2008) and $268,310 (in $2015); and the comparable figure for price recovery in April 2015 is 78% after adjustment and 86% before adjusting. According to average annual growth rates of prices in the past months, it could take between 1.7~2.9 years (21~35 months) for Illinois and 1.5~2.5 years (18~30 months) for the Chicago PMSA to recover to the 2008 levels. The median price forecast still indicates continuous growth in median prices for May, June and July compared to a year ago. In Illinois, the median price is forecast to rise by 8.1% in May, 8.6% in June and 7.8% in July. For the Chicago PMSA, the comparable figures are 10.3% in May, 10.2% in June and 10.5% in July. As a complement to the median housing price index (HPI), the REAL HPI1 forecasts milder growth for both Illinois and the Chicago PMSA. In Illinois, the REAL HPI (Jan 2008=1) is forecast to rise by 5.3% in May, 3.4% in June and 4.7% in July. The comparable figures for the Chicago PMSA are 5.2% in May, 4.8% in June and 4.6% in July. REAL HPI takes housing characteristics into account and constructs comparable “baskets” of homes for each month. The sales forecast for May, June and July 2015 suggests moderate year-over-year growth against stronger monthly growth. Annually for Illinois, the three-month average forecasts point to a change between 4.4% and 5.5%; for the Chicago PMSA, the change will range from 5.7% to 7.2%. On a monthly basis, the three-month average sales are forecast to increase by 8.1%10.1% for Illinois and 8.5%-10.6% for the Chicago PMSA. There were less foreclosure related activities in April. In the Chicago PMSA, the percentage of foreclosed sales (e.g. REOs) among the total sales edged down to 23.0% from 24.8% in March. Foreclosed property sales were 7.3% less than last year, while regular sales were 11.8% more than last year. Furthermore, fewer foreclosures were completed in the courts (66.0% and 12.7% respectively from a year and a month ago). It may be early to conclude this is attributed to the MyCity Modification Program that started on April 1 to assist seriously delinquent homeowners.2 To confirm this expectation, it will be helpful to know if the reduced foreclosure completions are terminated and thus removed from the foreclosure inventory rather than just slowed as a result of delays in processing in the courts. 1 2

REAL HPI was developed by Esteban Lopez and Minshu Du. Contact us for further details. More details about this program are discussed in last report.

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Illinois is building more multifamily units while the media focused attention on the drop in multifamily permits in March. According to Scotsman Guide, in the past few years, multifamily vacancy rates stayed low and the rental growth remained robust while investors were adding more apartment projects. However, many markets have evidenced a slowing down in the construction of multifamily units this year due to the overbuilding in the past. This also varies by region and markets. According to US Census Bureau Building Permits Survey in March, permits for multifamily (>5 units) nationwide decreased by 4.3% compared to last March; however, the comparative figure for Midwest states is an increasing rate of 28.9% and this rate is even higher for Illinois (39.6%). Additional attention is focused on the disputes about the volume of first-time homebuyers.3 An earlier NAR annual survey revealed a large drop in first-time buyers from 40% a decade ago to 33% in 2014. On the other hand, an American Enterprise Institute study revealed that 51% of all loan types are accounted by first-time buyers (those who have not not owned a home for past three years) and this is not declining from two years ago. It is hard to make a simple judgment on which statistic is more valid. However, there are a few things worth noticing to help understand these differences. First, the former has a long history of data dating back to 1981 while the latter only have the most recent years of data. Secondly, the former collects data through survey from which the results could be biased depending on the sample used and who responded, while the latter used the large database of loans that is more complete. Further, their definition of “first-time buyers” is different. The Housing Market – Current Condition 

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In April, sales and median prices increased moderately both on a monthly and yearly basis. 12,822 houses were sold in Illinois, up 10.6% from a month ago and 6.6% from than a year ago. In the Chicago PMSA, 9,155 houses were sold, up 10.5% from a month ago and 7.4% from than a year ago. The median price was $170,000 in Illinois, up 9.7% from April last year; the comparable figure for the Chicago PMSA was $210,000, up 10.5% from this time last year. (Reference: Illinois and Chicago PMSA Total Home Sales and Median Home Sales Price figures; Forecast for May 2015 report table) In April, for the Chicago PMSA, the percentage of foreclosed sales (e.g. REOs) among the total sales was 23.0%, edging down slightly from last month (24.8%). 7,277 regular sales were made, 11.8% more than last year. 1,825 foreclosed properties were sold, 7.3% less than last year. The median price was $235,000 for regular property sales, 6.8% higher than last year; the comparable figure for the foreclosed properties was $129,000, up 7.6% from this time last year. In April, at the latest average annual pending sales rate, Illinois had enough housing inventory for 5.1 months4 (down from 5.6 months a year ago). In the Chicago PMSA, the comparable figure was 3.8 months (a slight decrease from 4.2 months a year ago). Months of supply are increasing for homes in all price ranges above $200K and decreasing for

http://www.scotsmanguide.com/News/2015/04/Study-suggests-no-shortage-of-first-timehomebuyers/?utm_source=TopNews050115&utm_medium=email&utm_campaign=TopNews 4 Months’ supply of inventory is defined as inventory of homes for sale at the end of the month divided by the average monthly pending sales in the last twelve months.

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homes below $200K in both Illinois and the Chicago PMSA. (Reference: Illinois and Chicago PMSA Annual Months’ Supply by Price Range figures) In April, market shares of homes priced below $100K dropped by more than 5.0% compared to a year ago, while market shares of homes in all other price ranges increased with different degrees. For example, in Illinois, homes priced below $100K held a market share that decreased to 25.4% from 30.1% a year ago; for homes priced between $200K~300K, the comparative figure increased to 19.5% from 16.8% a year ago. (Reference: Illinois and Chicago PMSA Price Stratification figures)

The Housing Market – Forecast and Future Condition 

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The median price forecast still indicates continuous growth in median prices for May, June and July compared to a year ago. In Illinois, the median price is forecast to rise by 8.1% in May, 8.6% in June and 7.8% in July. For the Chicago PMSA, the comparable figures are 10.3% in May, 10.2% in June and 10.5% in July. (Reference: Forecast for May 2015 report table) As a complement to the median housing price index (HPI), the REAL HPI5 forecasts milder growth for both Illinois and the Chicago PMSA. In Illinois, the REAL HPI (Jan 2008=1) is forecast to rise by 5.3% in May, 3.4% in June and 4.7% in July. The comparable figures for the Chicago PMSA are 5.2% in May, 4.8% in June and 4.6% in July. REAL HPI takes housing characteristics into account and constructs comparable “baskets” of homes for each month. (Reference: Housing Price Index) The sales forecast for May, June and July 2015 suggests moderate year-over-year growth against stronger monthly growth. Annually for Illinois, the three-month average forecasts point to a change between 4.4% and 5.5%; for the Chicago PMSA, the change will range from 5.7% to 7.2%. On a monthly basis, the three-month average sales are forecast to increase by 8.1%-10.1% for Illinois and 8.5%-10.6% for the Chicago PMSA. (Reference: Forecast for May 2015 report table) The pending home sales index6 is a leading indicator based on contract signings. This April, homes put under contract increased for both Illinois and the Chicago PMSA. The pending home sales index is 186.1 (2008=100) in Illinois, up 5.3% from last month and 8.3% from a year ago. In the Chicago PMSA, the comparable figure is 224.2, up 6.7% from a month ago and 16.1% from a year ago. (Reference: Illinois and Chicago PMSA Pending Home Sales Index figure) In April 2015, 2,488 houses were newly filed for foreclosure in the Chicago PMSA (down 9.0% and 4.0% respectively from a year and a month ago). 1,675 foreclosures were completed7 (down 66.0% and 12.7% respectively from a year and a month ago). As of April 2015, there are 33,453 homes at some stage of foreclosure — the foreclosure inventory. The average inventory change rates 8 were 0.41% in the past 6 months, -1.5% in the last 12 months and -3.7% in the last 24 months. Given the 12-month and 24-month rate of change, the foreclosure inventory would return to the pre-bubble levels9 by June 2020 and May 2017

REAL HPI was developed by Esteban Lopez and Minshu Du. Contact us for further details. The base level (100) of pending home sales is the average pending home sales of year 2008. 7 Including estimated foreclosure completions that are missing in the data. 8 The range of months used for calculating the average change rates are modified from the 6/12/24 months’ scenarios to 3/6/9 months’ scenarios since Aug 2014. 9 Average foreclosure inventory from 1997-2005 6

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respectively. According to the positive 6-month rate, the inventory will never recover (Reference: Chicago PMSA Foreclosure Activity and Inventory figures). The Economy 

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In April 2015, according to the Bureau of Labor Statistics (BLS) Employment Situation report, the national unemployment rate edged down to 5.4% and nonfarm payroll jobs experienced gains of 223,000 jobs. Among all industries, professional and business services added the most jobs (+62,000), followed by health care (+45,000) and construction (+45,000) and. In March 2015, according to the Illinois Department of Employment Security (IDES) news release, the Illinois unemployment rate kept unchanged at 6.0%. A total of 1,800 non-farm payroll jobs were shed. Two sectors received the largest job gains: Trade, Transportation and Utilities (+4,200), and Construction (+3,600); three sectors that received the largest job losses are: Leisure and Hospitality (-4,900), Financial Activities (-2,400), and Other Services (-1,900). In March 2015, the one-year-ahead forecast for Illinois indicates that the non-farm employment will increase at a rate between 1.01% and 1.12%, corresponding to job gains between 59,700 and 66,000. The total gains are forecast to be contributed by seven out of ten sectors: trade, education and health (2.13%; 19,100), transportation and utilities (1.30%; 15,500), professional and business services (1.46%; 13,500), leisure and hospitality (1.93%; 10,800), construction (4.82%; 10,300), government (0.29%; 2,400) and other services (0.28%; 700).

Longer-term Outlook 

In April, the University of Michigan Consumer Sentiment Index increased to 95.0, second highest since 2007. Low inflation, low interest rates and slowly improving market conditions were reported as the drivers. However, the Conference Board Consumer Confidence index was reported declining to 95.2 from 101.4 in March, sluggish job growth and uncertainty about the short-term outlook were the causes.

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The Chicago Business Activity Index (CBAI) decreased to 96.3 in March from 101.6 in February. The fall is attributed to negative job growth in the manufacturing sector in the Chicago area.

“The housing recovery continues with solid gains in prices and sales anticipated for the next three months,” noted Geoffrey J.D. Hewings, Director of the Regional Economics Applications Laboratory. “The influence of foreclosed properties on the Chicago metropolitan market as a whole seems to be diminishing in aggregate although important at the very local level.

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Forecast for May 2015 report PERCENTAGE CHANGE FOR THE TOTAL NUMBER OF SALES Annual

Monthly

Illinois

Chicago PMSA

Illinois

Chicago PMSA

Feb-15

0.3%

0.9%

0.5%

-0.1%

Mar-15

14.8%

13.3%

44.4%

44.6%

Apr-15

6.6%

7.4%

10.6%

10.5%

7.7%

7.7%

17.5%

17.3%

3 Month Avg.

SUMMARY OF THE FORECAST INTERVALS FOR THE TOTAL NUMBER OF SALES Annual Illinois

Monthly Chicago PMSA

Illinois

Chicago PMSA

May-15

5.3%

6.6%

7.8%

9.7%

15.7%

19.6%

16.8%

21.0%

Jun-15

1.8%

2.2%

3.3%

4.1%

7.8%

9.8%

8.9%

11.2%

Jul-15

6.3%

7.9%

6.4%

8.0%

2.4%

3.0%

1.6%

2.0%

4.4%

5.5%

5.7%

7.2%

8.1%

10.1%

8.5%

10.6%

3 Month Avg.

SUMMARY OF THE FORECAST FOR THE MEDIAN PRICE Illinois

Chicago PMSA

Illinois

Chicago PMSA

Feb-15

$149,000

$175,000

Jan-14

$135,800

$163,000

Mar-15

$165,000

$202,000

Feb-14

$132,350

$155,500

Apr-15

$170,000

$210,000

Mar-14

$148,000

$175,000

May-15

$181,151

$228,293

Apr-14

$155,000

$190,000

Jun-15

$194,701

$242,403

May-14

$167,500

$207,000

Jul-15

$192,921

$240,987

Jun-14

$179,350

$220,000

ANNUAL PERCENTAGE CHANGE OF THE MEDIAN PRICE Illinois

Chicago PMSA

Illinois

Chicago PMSA

Feb-15

12.6%

12.5%

Jan-14

8.6%

16.4%

Mar-15

11.5%

15.4%

Feb-14

6.7%

11.1%

Apr-15

9.7%

10.5%

Mar-14

10.0%

12.9%

May-15

8.1%

10.3%

Apr-14

6.9%

9.9%

Jun-15

8.6%

10.2%

May-14

8.1%

13.1%

Jul-15

7.8%

10.5%

Jun-14

5.5%

7.3%

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Median Prices and Recovery Illinois April 2008 Median Price April 2015 Median Price Price Ratio (April 15/April 08)

[$2008] $185,000 $153,919 Adjusted Unadjusted

[$2015] $203,849 $170,000 0.83 0.92

Chicago PMSA [$2008] [$2015] $243,500 $268,310 $190,135 $210,000 Adjusted 0.78 Unadjusted 0.86

Recovery Forecasts using Annually Growth Rates

Current Month Past 3 months Past 6 months Past 9 months Past 12 months

Illinois Annual Recovery Rate*

Chicago PMSA Years to Recover**

Recovery Rate

Years to Recover

9.7% 11.3% 8.8% 7.1% 6.5%

2.0 1.7 2.2 2.7 2.9

10.5% 12.9% 9.2% 7.8% 7.7%

1.8 1.5 2.1 2.5 2.5

*Annual recovery rate is the average of annual change rates in past months ** Years to recover is calculated using the following formula: PriceApril2015*(1+recovery rate)^years=PriceApril2008. Prices used in the formula are inflation adjusted. The recovery rate is applied as a constant annual change rate to recoup the differences between the current month and its corresponding month in 2008.

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