In short, the answer is yes. But why is this happening? Is it letting up any time soon? And what does it mean for real estate investors?
Since 2017, our team at Touchstone Group has steadily compiled and analyzed data on every neighborhood in the city of Chicago and every surrounding suburb. We look at year-over-year price changes, the housing affordability index, appreciation, time-on-market, and other key factors.
Courtland Townsley, our managing partner, first noticed the shift in the market last fall. Here’s what he had to say about the softening in luxury real estate.
When did you first notice this was a trend to watch?
Last fall, I noticed there was extremely low supply across the board of available inventory. Prices were not increasing at a rate that was commensurate with such low supply, something we’re still seeing today. As a result, it’s forcing homebuyers out of the market — there is a disequilibrium between supply and demand.
What caused this downtrend?
A number of factors, including population decline, the fact that people are moving farther south in the U.S., and lack of supply in inventory. Plus, in high end homes, high end home buyers have always been harder to find.
This trend has been in the works for awhile. From 2009 to 2014, there were fewer higher-end homes for sale because sellers were waiting out the [economic crash]. Then at the beginning of 2015, there was an influx of supply because the people who were holding started to put their homes for sale.
As that supply started to come in the market, there was an increase in price. [The price increase] leveled off mid-2016, and that influx of supply has outpaced demand. So we’ve seen price drops and additional market time. Luxury properties saw a softer seller’s market.
But shouldn’t a softer seller’s market mean that buyers are snapping up deals on luxury properties?
Typically, this would be the case. However, there has been an apprehension from homebuying among Millennials, whose age group, historically, would be buying their first or second home by now. Also, Millennials prefer flexibility, amenities, and lifestyle, which has inhibited demand for homes in the city. On top of that, there are sellers who are waiting for better market to list. We’re in a time when there’s not enough demand and not enough supply.
Where are we seeing the impact of this softening the most in Chicagoland?
In the neighborhoods you likely think of when you think luxury properties. Northbrook has been stagnant for 3 years. Deerfield, Glenview, and Lake Forest have plateaued. We’ve seen price depreciation in the Loop (a 4.3% price drop, year-over-year), yet there are far fewer units than prior to the economic crash. Sales prices are dropping even though there isn’t as much supply. Even Lincoln Park is historically low — we’ve seen only a 3.7% average increase in price from a year ago. In a normal market, that number would be closer to 10%.
Is this a trend local to Chicagoland? Or are you also seeing it on a national scale?
This trend is city dependent. Chicago and New York are getting hit the hardest. But we are seeing growth in markets in the southern urban areas.
For more on what this trend means for investors (and brokers) in the short and long term, check back with us next Monday for Part 2!
Learn more about Touchstone Group’s investor services here.