Chicagoland Economy

Articles about the economy and consumer tips

As spring rapidly approaches, the Chicagoland economic update is for housing to cost more for many new prospective home buyers. Higher mortgage rates, rising home prices and slow-to-moderate job and income growth threaten to combine for a less than stellar spring home buying season.

The end of 2016 saw home affordability reach its lowest point since 2009, and the home ownership rate dropped to historical lows across the U.S. Some economists feel a cure for the home affordability problem isn’t in the cards for 2017.

 As for the Chicagoland economic update, some economists feel a cure for the home affordability problem isn't in the cards for 2017.

According to a new report issued by Black Knight Financial Services, American homeowners have to pay 22.2% of their median income to meet their mortgage payments on a median priced single family residence. The data is based on a survey of borrowers who have a 30-year fixed rate mortgage. By comparison, the housing bubble of 2005-2006 saw roughly 36% of median incomes to afford a home. Keep in mind that home prices and mortgage interest rates were even higher during that time.

The differences between the housing bubble of slightly more than a decade ago and today’s market are fuel for the most recent Chicagoland economic update. Back in 2005, most borrowers didn’t take out 30-year fixed rate mortgages, preferring to utilize alternate lending programs featuring low- or no-down payments and very low introductory interest rates. In addition, many borrowers took advantage of negative amortization loans allowing the homeowner to postpone payments and add them to the overall loan balance. Many of these “creative” financing options contributed to the housing crash and, as a result, some of these type loans are no longer legally available.

The current 22.2% of median income that the average borrower has to pay today to meet his mortgage payment represents a 10% increase during the fourth quarter of 2016 – the result of a quick rise in post-election mortgage interest rates. The above-mentioned Black Knight report bases their comparisons on 30-year fixed rate mortgages today, making it a more appropriate “apples to apples” comparison if some factor in the mortgage market is responsible for a change in affordability. In 2005-2006 when the home affordability equation was grossly out of line, the mortgage programs available at that time artificially increased the homeowner's buying power and drove up home prices. In actuality, without the creative lending programs and products the housing affordability would be far from sustainable.

In a nutshell, here’s where the Chicagoland economic update has created a cause for concern: With home prices having risen steadily during 2016, they were 7.2% higher across the nation compared from December 2015. The national index at the end of 2016, according to a report from CoreLogic, was 3.9% below the peak housing price pace in April 2006. This year, CoreLogic’s projections are that the national index will rise 4.7% – putting housing prices at a new high level before the end of the year. In addition, other indices that are tracked show that in some regions of the country, prices are already higher than their previous peaks – higher than the last housing boom.

Economists say the central cause of higher prices these days is not solely restricted to low mortgage interest rates, but also to tighter home inventory and record demand from home buyers. The spring buying season is expected by many to be extremely tight. Home builders have increased the number of units under construction, but not by much. In addition, there is expected to be a huge increase in demand on the part of first-time home buyers, especially millennials who have been on the sidelines for the past few years.

As always, time will soon tell. The lower than expected housing inventory levels continue to plague a full-blown housing recovery. That is seen as one of the major culprits in creating and inflating home prices of the homes that are on the market – creating a short supply and a high demand – the very definition of a seller’s market. Ironically, while interest rates do play a factor in the challenges of the spring selling season and beyond, mortgage rates are not expect to rise much higher than the 4.5% level during 2017, a very affordable interest rate – if home prices weren’t expected to rise higher than in 2016. Remember, while interest rates were at all-time market lows for much of the past 12-18 months, even a slight increase to the 4.5%  – or even the 5% threshold is a very good bargain compared to where interest rates have been for much of the last decade.

Nationally, most homes in most real estate markets remain more affordable than those in the housing bubble days. However, the Chicagoland economic truth is that the housing market is currently feeling more pressure in terms of affordability since the recovery began in recent years.

You can find more articles pertaining to the Chicagoland economic update and outlook in the "Economy" section of articles just below Chicagoland Real Estate Categories in the column to your right.

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Now that a new President sits in the oval office, the Chicagoland economic outlook is on the minds of people in the real estate industry as we enter 2017. Let’s look at three component parts of the economy and how they relate to each other – and what to expect in the real estate market for 2017.

The Stock Market

 The Chicagoland economic outlook is for gradual improvement in all areas of stocks, housing and oil.

Most of the “experts,” if there is such a thing, say they expect modest growth in the market with at least a chance of a correction occurring sometime during the year. Recently, more than a dozen Wall Street firms predicted the S&P 500 index of U.S. large-cap stocks will hit a record level of 2,363 – a growth rate of 5.5%. Analysts say President Donald Trump’s platform of lower corporate taxes, fewer business regulations and increased infrastructure spending has given investors reason to be more optimistic than in recent years.

The S&P 500 started 2016 at slightly over 2,000 and ended 2016 at 2,239 – a return of 9.84%. Actually, including dividends in the mix, the true return was approximately 12.25% – despite a dip in prices right before the end of 2016. The market’s positive attitude is largely the result of the new administration’s promises to be “pro-growth.”

Detractors point to the concern that stocks are overvalued and the bull market will be short-lived. In addition, a strong U.S. dollar could potentially be responsible for fewer jobs if American products are priced too high for global buyers. Nevertheless, just a few days into the Trump presidency, the feeling of optimism on Wall Street continues

Oil Prices
The Chicagoland economic outlook for oil prices in 2017 is for slightly more of the same experienced two years ago in 2015. It’s expected the average price of a barrel of oil will be $52 this year, as forecast by the U.S. Energy Information Administration. That’s nearly $10 more per barrel than the 2016 average price of $43. Crude oil averaged $52 a barrel in 2015.

At over $100 a barrel, oil prices reached an all-time high between 2011 and 2015. The advent of cheap fracking technology throughout the central U.S. was largely responsible for bringing the prices back down in 2015. The additional deposits enabled the U.S. to become an oil exporter – a first in more than nearly 40 years.

Gas Prices
During the first few weeks of 2017, Americans were paying an average of $2.34 per gallon of regular gas – the highest price since 2014 – according to the Automobile Association of America (AAA.) This time last year, the average pump price as $1.99 per gallon. While there is no direct connection between crude oil prices and gas prices, they certainly are related. AAA says that pump prices are affected roughly 2.4 cents per gallon for every $1 movement in the cost of a barrel of crude oil. The Chicagoland economic outlook for gas prices is for pump prices to average $2.10 per gallon in February and as high as $2.30 throughout the rest of 2017. The relatively cheap price of crude oil in 2016 enabled U.S. drivers to pay an average price of $2.14 per gallon of regular gas.

The Housing Market
So, what does all this mean for the housing economy in 2017? More of the same, according to the experts. And that’s a good thing – relatively speaking. CoreLogic, a real estate industry research firm, predicts home values will continue to rise throughout 2017 – at a rate of around 4.7%. Redfin, another online brokerage research firm, forecasts the growth in home prices slightly higher at 5.3%, citing homebuyer demand as being higher today than this time last year.

CoreLogic says home prices increased 7.1% between November 2015 and November 2016. Despite that impressive growth, the increase still ranks approximately 4% less than it was during its peak in 2006. The percentages are averages and area adjusted for inflation.

The Chicagoland economic outlook calls for continued tight inventory challenges. Fewer homes for sale in the marketplace leads to higher prices for those homes on the market – a classic example of supply and demand. When supply is scarce, demand is high and prices are, too. The tight inventory is expected to be especially impactful on first-time home buyers. In addition, as interest rates have increased slightly since the presidential election – and are expected to increase again, leveling off at between 4.2% and 4.7% in 2017 – the cost of mortgage financing will increase, too. However, relatively speaking, interest rates will still remain affordable – just not as affordable as they were 12-18 months ago.

In addition, contributing to the lack of housing inventory, recent research shows that U.S. homeowners with mortgages at lower fixed rates of 4.25% or less are likely to remain in their homes. These homeowners are less apt to sell their homes than their counterparts with higher interest rate mortgages. Although new construction is brisk, it appears to lack the firepower to produce a sufficient number of affordably-priced homes quickly enough to make an impact during 2017.

As usual, the combined effect of these components of the economy will be the determining factor in the Chicagoland economic outlook. If crude oil prices dropped, for example, creating lower gasoline prices, the resulting optimism could be encouraging for the housing industry. Builder confidence would rise, giving them greater opportunity to build more homes at volumes that would make them more affordable. Likewise, a leveling off of the stock market during 2017 would likely mean that U.S. Treasury bond yields would become a popular investment once again, giving the American consumer confidence interest rates would stabilize – making borrowing money more affordable – regardless of what home prices do or don't do.

The bottom line is this: The Chicagoland economic outlook is for gradual improvement in all areas mentioned. There seems to be an optimism in the new administration – although the jury is still out on what campaign promises will and won’t be delivered. As always, time will tell. In the meantime, there’s every reason to think that housing will be at least as good as it was in 2016 – despite the inventory challenges, higher prices and slightly more expensive credit.

You can find more articles pertaining to the Chicagoland economic outlook in the "Economy" section of articles just below Chicagoland Real Estate Categories in the column to your right. Remember to also check us out by finding us on Facebook and following us on Twitter.

The Chicagoland economic outlook will likely become a little bit clearer – or not – now that the presidential election has been decided. And for an election that was largely based on campaign rhetoric regarding the U.S. economy, the nation’s housing concerns have been largely ignored by both candidates. Let’s take a brief look at each party’s view on the housing market and what its economic policies will do to, or for, housing.

Hopefully the Chicagoland economic outlook will likely become a little bit clearer now that the election is finally over.

Keep in mind that not only is the presidential election finally over, but so, too, are the races for both houses of Congress. And while the new President will get the lion’s share of the newfound limelight, much of the economic discussion and legislation will come from the House and Senate. Much of what conversation there was about the housing market revolved around Donald Trump’s contention the financial markets are in dire need of deregulation versus Hillary Clinton’s view that affordable housing was the key component to a continued improvement in the single-family real estate market.

For all the hoopla and economic speculation surrounding the elections, the housing market’s issues are clear and challenging. The questions will be, “In what manner will this new administration deal with bringing much needed reform to mortgage industry giants Fannie Mae and Freddie Mac? While these two behemoths financially back the majority of the nation's mortgage market and earn a hefty profit in the process, they are still under the control of the federal government. As such, they are required to pay the U.S. Treasury Department all of their earnings. This, in turn, spawns additional questions for the new administration and the new Congress. How does the country welcome private capital investment back into the mortgage arena? In addition, how does the U.S. monitor, manage and control the rampant growth of non-bank lending institutions, which currently comprise over half of all new mortgage loans originated in today’s market? Furthermore, what about the borrowers who use these lenders, how do we insure their financial safety? Lastly, what efforts must be undertaken to create and expand more affordable housing opportunities in communities that are underserved and largely forgotten?

During the campaign, both presidential candidates boasted of their efforts to grow the nation's economy. However, each had a different road map showing how growth would occur. Most analysts say the Chicagoland economic outlook as it relates to housing is to provide better opportunities for increased home ownership. With the nation’s homeowner participation rate at or near the lowest level in decades, there’s really only one direction it can go. Increasing home ownership means making mortgage lending more easily accessible to more families – and more affordable – in the face of what many believe will be slightly higher interest rates next year.

Trump’s Republican “platform” – or, at least, one of the planks in it – was his feeling that the Dodd-Frank financial reform bill should be reformed or repealed. For all its supposed safeguards, analysts say the regulatory burden saddled on the mortgage industry by Dodd-Frank and the Consumer Financial Protection Bureau (CFPB) was too restrictive. Opponents of Dodd-Frank contend those regulations have made it more difficult for mortgage lenders to extend credit. The result is the creation of a more restrictive environment for even qualified borrowers to obtain necessary financing.

While addressing regulatory concerns in the financial industry will likely be an ongoing debate in 2017, neither Trump nor Clinton set forth opinions nor plans to reform the effects Fannie Mae and Freddie Mac have on the mortgage market. It was largely assumed Clinton would have the advantage of adding to – or at a minimum, continuing – the policies of the current Obama administration.

In addition, Clinton mentioned various proposals during her campaign to spur homeownership. Among them were efforts to provide assistance to those in underserved communities with down payments. For example, her plan would provide a federal government matching fund grant of up to $10,000 in savings designed for those households earning less than the median income. That money would be set aside specifically for the purpose of a down payment to purchase a home. Such a policy could encourage some of the nation’s prospective homeowners to save more money, yet it remains to be seen what sort of stimulus that program will have for housing. Some economists contend that what’s missing in the discussion about down payments is the obvious “elephant in the room” – borrowers still need to have an average to above-average credit score to qualify for financing. Many of the households for which the policies are intended will fall short of the required credit scores.

As far as Trump’s policies, his immigration reform stance may still have legs as it reaches Congress for additional discussion during 2017. If efforts are successful to either stem the numbers of immigrants coming to this country or to better enforce the immigration laws currently in place, housing could be affected.

In summary, the housing market is inherently driven by the successes or failures of the nation's economy. Factors such as employment gains, income growth, consumer confidence and the gross domestic product (GDP) not only contribute to – but also have a direct bearing on – the housing market. With the current state of the market being one of high demand, the Chicagoland economic outlook is for that trend to continue. However, the nation’s homebuilders are constructing new homes at a pace that falls short of the demand. In addition, the mortgage lending industry is in dire need of reform. While the housing crisis of less than a decade ago is clearly in the nation’s rear view mirror, a complete recovery is still yet to be realized.

With the new administration and new Congress, we can only hope for needed improvements in the housing sector for both the Chicagoland economic outlook as well as that of the entire U.S.

You can find more articles pertaining to the Chicagoland economic outlook in the "Economy" section of articles just below Chicagoland Real Estate Categories in the column to your right.

Remember to also check us out by finding us on Facebook and following us on Twitter.

The Chicagoland economic market has been battling the notion for some time now that the U.S. is headed for another housing bubble. A repeat of the recession and housing crisis from less than a decade ago is unlikely at best. Yet, there are those that have warned of another housing meltdown like the one that occurred back in 2008. Before you buy into the double-talk, let’s examine a few important comparisons to then and now – and you can draw your own conclusions as to where housing is headed – especially if you’re a real estate investor.

First, it should be noted that individual, select real estate markets certainly aren’t immune to the bubble phenomenon. Each micro-market, as it were, stands somewhat on its own. However, there are few signs on a national level that are serious enough to adversely affect the entire housing industry.

Subprime Mortgages

One of the key ingredients in the housing meltdown recipe back in 2008 was the abundant availability of mortgage money – loaned to just about anybody that wanted some. Experts in the Chicagoland economic market say for another housing collapse to occur, the entire housing market would have to be comprised of these ill-advised – and ill-fated – mortgage loans. While that possibility could certainly arise at some future date “down the road,” today it doesn’t exist. Let’s look at a “then and now” comparison.

Then:  The original loan volume of all subprime loans in 2005 was estimated at nearly $625 billion. Subprime loans are called that because the borrowers have low credit scores or other qualification issues, but were granted the mortgage financing anyway – amplifying their credit risk to the lending institutions.

Now:  There was approximately $56 billion in new subprime loan originations in 2015 – just ten short years later. That’s a reduction of more than 90% in the volume of subprime lending. In 2005, subprime loans accounted for over 20% of the entire mortgage market. Today, they comprise roughly 5%.

New Home Craze

Looking at the Chicagoland economic market.

During the time preceding the housing crisis, the rate of homeownership rose dramatically, fueled in part by easy credit and subprime mortgage lending. Most people weren’t renting, as buying was easier, cheaper and made better long-term financial sense. As a result, housing production reached a peak as supply struggle to keep up with home demand. Here’s another “then and now.”

Then: Sales of new single-family homes reached nearly 1.28 million in 2005. According to the U.S. Census Bureau that’s the highest level in the more than 52-year history that particular statistic has been tracked. A great deal of the growth in sales was the result of investors and other real estate speculators taking advantage of, once again, readily available and easy-to-get credit.

Now:  The number of new single-family homes sold in 2015 was 500,000. That represented a 61% decrease from the highest level. In addition, it was 30% less than the previous 51-year average of Census Bureau data. To further put the number in perspective, there were only 490,000 new home sales way back in 1968! By the way, the American population increased during that 47-year period by more than 120 million people.

After the housing crash, the following occurred:  There was a market surplus of single-family properties, and once-plentiful mortgage availability changed drastically. The result was a severe drop in buyer demand. Naturally, real estate investors in the Chicagoland economic market exhibited the same lackluster interest.

Local Bubbles

Some real estate markets, including the Chicagoland economic market, rebounded well following the recession and housing crisis. Economists point to natural demand created by employment and population growth. Other real estate markets fared even better – at least until the bubble burst. One case in point is the phenomenon that occurred few years ago in the downtown Miami condominium market. Investor demand – primarily from Latin America – caused a spike in condo prices and growth in construction. Experts say the supply of condos in downtown Miami increased by 8,000 units. With a stronger U.S. dollar forcing less investor interest, the last year or so has seen a glut of condos available for sale – experts say roughly 3,500 units – representing nearly 2.5 years of inventory. Sluggish sales created by the oversupply has caused sale prices to fall 6% during the spring and summer of this year.

Higher Interest Rates

While interest rate increases are still part of the bubble talk double-talk in the Chicagoland economic market, so far the Federal Reserve has only slightly increased rates – by less than .25%. These economic facts remain:  The economy is relatively soft as a result of slower-than-expected GDP growth, low personal savings rates, low homeownership rates and only a slightly improved jobs market. And while raising interest rates could stifle or stagnate what growth the economy has enjoyed, it's pretty safe to assume, the Fed will raise rates at some point in the not-too-distant future.

How will rising rates affect you? As an investor, it can affect both your homeownership and your rental property portfolio. While an increase in the Fed funds rate doesn’t immediately equate to a comparable increase in mortgage rates, fewer people will buy or borrow. For landlords, an interest rate increase may actually be a good thing since it would likely drive more potential tenants to the rental market, keeping them on the home buying sidelines a little while longer.

Real estate investors should be aware of the downsides of a rising interest rate market. If your properties are mortgaged – especially with a short-term loan or adjustable rate mortgage – consider refinancing or paying off the loan. Investors should be cautious of what exit strategies they employ in a rising rate environment. Should you sell to another investor who may need financing, you may need to adjust your asking price. Simply put, the reason you’re selling is that you may not be able to make the numbers as attractive as they once were – and the new investor may feel the same way. If at all possible, investors selling properties during a rising rate market should find a cash buyer.

You can find more articles pertaining to the Chicagoland economic market in the "Economy" section of articles just below Chicagoland Real Estate Categories in the column to your right.

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The Chicagoland economy and housing, of course, is a subset of the national economy and housing market. As such, it’s important to keep abreast of recent changes and future trends in the economy – and how they will ultimately affect the overall housing market. Let’s examine five areas of interest in the economy and what we can expect in the coming months.

Interest Rates

The Federal Reserve recently opted not to increase short-term interest rates – at least for now. Despite Fed Chair Janet Yellen’s suggestion that the potential for a slight uptick has increased in recent months, the biggest action the Fed took was a notable inaction. While there were few clues about when the Fed may raise interest rates again, some economists say a rate increase could occur sometime soon. However, in the absence of improved economic indicators over the next several weeks, any rate hike could be delayed until closer to the end of the year. As a reminder, any expected increases in the Fed interest rates will probably do little to impact long-term mortgage interest rates available in the Chicagoland economy and housing.

Home Sales

The Chicagoland economy and housing market has recently endured a mixture of bad news and good news regarding home sales.

The Chicagoland economy and housing market has recently endured a mixture of bad news and good news regarding home sales. The bad news is existing home sales continued to suffer, while the good news is new home sales have performed extremely well.  A recently published report by the U.S. Census Bureau showed total sales of new single-family homes increased 12.4% compared to the previous month. In addition, sales were a whopping 31.3% higher than this time last year – the highest level since the fall of 2007.

Existing home sales comprise a higher percentage of the nation’s total real estate and housing activity. While new home sales flourished, sales of existing homes fell 3.2% from the previous month and are down 1.6% year-to-date, according to the National Association of Realtors (NAR). Ironically, mortgage interest rates are near all-time lows, helping to keep housing affordable in the face of increased home prices. Both the Census Bureau report and the NAR report listed low home inventory as ongoing problems. Limited existing home inventory has been characterized as the culprit in the decrease in sales in that category.

While home sales in the Chicagoland economy and housing market are expected to end the year on a high note – largely the result of a robust spring selling season – the housing market won’t reach its maximum potential this year. It’s clearly a case of supply not meeting demand. New construction, too, has failed to add enough units to the marketplace to keep pace with demand. Low inventory puts constraints on what willing buyers have available to purchase. In addition, new and existing homes that are selling are selling faster – and for more money. This usually means there are home buyers waiting in the wings to purchase when a wider variety and better choices become available.

Gross Domestic Product (GDP)

A recent report of the Bureau of Economic Analysis (BEA) revised the U.S. gross domestic product (GDP) downward for the second quarter of the year. After the first quarter’s growth of nearly 1% (0.8%), the BEA reduced the GDP growth to 1.1% annualized for the second quarter. Contributing to the downward revision were less-than-spectacular exports, which were also bumped down slightly. Imports were revised upward, however, and the relationship between exports and imports – as one economist explains it – all but cancels out each other. While exports are an economic growth plus, imports tend to stifle expansion. The bottom line:  Revisions to the U.S. trade activity made little impact on improving the nation’s economy.

Business investment has now declined for three consecutive quarters. For their part, economic analysts continue to fret about business investment – especially since the recent trend of declining numbers represents the first time the U.S. has experienced three consecutive declining quarters in nearly seven years. Business investment is typically a good indicator of gains in productivity, which in turn produces profits for corporations and fuels greater earnings for the labor sector. Naturally, when wages improve, so do consumer confidence and spending.

Consumer Sentiment

A report recently published by the University of Michigan Surveys of Consumers stated U.S. consumer sentiment had fallen to its lowest point in five months. While the drop was only 0.2% over the previous month, it was down 2.3% for the year. University economists said the decrease in consumer sentiment was due, in part, to higher than expected expenses and smaller than anticipated gains in income – especially as they relate to younger aged households.

While economists stopped short of indicating to what degree the looming presidential election concerns have on the impact of consumer sentiment, there’s reason to suspect there is an effect. Consumers, for the most part, may be satisfied with their current financial situation, however they are concerned about the future and what changes – good and bad – the election results will bring over time.  Among the concerns are the outlook for interest rates, tax considerations and global markets. Despite most consumers agreeing that a recovering job market, record low interest rates, steady incomes and an improving stock market all contribute to their financial health, few anticipate the current state of the Chicagoland economy and housing to continue.

The Job Market

The recently announced merger between beer makers Anheuser-Busch and SABMiller to create the largest brewing company in the world will eliminate thousands of jobs across the globe. While it may not immediately affect you – unless you’re an employee of one of these two companies – there are some potential ramifications. Economists believe the layoffs resulting from the merger could increase a slowly growing nationwide trend of companies trimming their workforces. A layoff report published by a respected employment consulting firm said that layoffs increased 19% during the month of July – for the second consecutive month. To put that into perspective, however, layoffs from January through June were down 8.7% compared to the same period last year. While the July layoffs were notable, there’s no immediate concern wholesale layoffs will continue. It is, nevertheless, worth keeping an eye on in the Chicagoland economy and housing, as well as elsewhere.

You can find more articles pertaining to the Chicagoland  economy in the "Economy" section of articles just below Chicagoland Real Estate Categories in the column to your right.

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