Reading the Tea Leaves

Market Spotlight: Chicago

Photo: Steve Geer / www.istockphoto.com For all its reputation as the Windy City, Chicago has had a more stable housing market lately than other cities. Its large population (more than 9.5 million in the greater metro area, putting it No. 3 nationwide) and economic breadth (along with its role as a corporate headquarters town, it’s also No. 3 in popularity for hosting large conventions) made Chicago too big to experience rapid price appreciation during the recent housing boom; median existing home price appreciation peaked at 10% in 2005, according to the National Association of Realtors. And now that the market has turned, Chicago also has the benefit of not seeing the same scale of housing decline that has occurred in many of what were previously considered “hot markets.”

Permit issuance has fallen off in Chicago from 2005’s peak of 53,908 total annual permits. Rising new-home inventories are likely to cause a further pullback in construction activity as the unsettled housing market continues to struggle. Convenience is starting to become a dominant force in how Chicago residents choose a new home, with new condominium sales outpacing new single-family detached sales in recent months and with suburban condo units close to transit lines selling particularly well. In fact, though total permit issuance is declining, the trend is entirely due to a fall-off in single-family issuances. Multifamily permits have been on the rise, and are expected to continue to slowly increase over the next several years as convenient, affordable, higher-density housing closer to the city center has significant lifestyle advantages over more expensive single-family units that may require a lengthy commute.

Employment growth in Chicago has been fairly stable over the past two years, with an annual peak growth of 1.3% in 2006 that is expected to wane in 2007 mainly due to continued weakness in the manufacturing and information sectors. More than 40% of the workforce is in one of the service industries, which include professional and business services, educational and health services, leisure and hospitality services, and others. In the long term, the diversity of Chicago’s economy should lead to relatively stable employment conditions over the next several years.

While Chicago may not see any explosive economic growth, the long-term future for the metro area is relatively bright. The size of the city and its regional significance as a hub of trade and commerce will ensure a degree of stability, and while the mature industrialized nature of the metro area is not likely to change, it should sustain a steady amount of housing demand for years and decades to come.

–Jonathan Dienhart