Chicago: no boom means no bust?

“The result of this succession of booms, in so many places has been a massive increase in national home prices over a period of nearly a decade. The boom was tempered somewhat by the fact that some cities never experienced booms. In Atlanta, Charlotte, Chicago, Cleveland, Dallas and Detroit there was no year since 1998 in which real home prices increased by 10% in a year, though even those cities showed some increases.”

— Yale economist Robert J. Shiller, in a paper entitled Understanding Recent Trends in House Prices and Home Ownership (pdf file), delivered at a recent conference sponsored by the Federal Reserve Bank of Kansas City.


  • Odujoko 11 years

    Mr. Shiller is a well respected economist and he has a point that Chicago (among other cities) didn’t have double digit increases in home prices between 1998 and the present.

    But he’s wrong. In July 2006, the NAR said Chicago home prices increased 11.1% in 2001, 10.7% in 2002, 6.4% in 2003, 9.6% in 2004 and 9.7% in 2005. (Warning! PDF!)$FILE/06ILChicago.pdf

    The link also shows that the historical appreciation rate has been 5.6%. Homes in Chicago have appricated fast than the historical average between 2001-2005. Prices went up by 27% between 2003-2005.

    The Chicago gains are nearly double the historical average. Prices will need to stagnate or fall further to revert to the historical mean.

  • Odujoko,

    You need to read more carefully, and think twice before disputing Shiller.

    You’re talking about “home prices” and Shiller is talking about “real home prices,” i.e. adjusted for inflation.

    He’s not wrong. And what reason is there, pray tell, to believe that Chicago prices need to revert to some historical mean?

  • UptownR 11 years

    The historicals really mean nothing in this case, however. Chicago is not the same city that it was 50, 40, 30, or even 10 years ago. We cannot predict the future of home prices based on historical income/home price levels. Some economists like to dwell on this statisitic to show that home prices are inflated, but the comparisons really just show that people are spending more of their income on housing these days. Instead of a “correction”, it’s entirely possible that this could get even worse in the future. The seemingly endless supply of x-urban land is diminishing on the peripery as commutes get longer and longer, and the metropolitan area may start to densify and gross square footage could become less affordable. The short-term trend may be lower home prices, but I believe the long-term trend is not.

  • UptownR 11 years

    I wish we could edit our spelling on this site!

  • Dmac 11 years

    Shiller is usually fairly objective when discussing his reasoning, and he’s no different here. I still think the trend will depend mostly on the local employment picture (yeah, I know – duh!) – but that would more predictive than any other economic measure available today.

  • Jane 11 years

    Remember, although real estate is local, credit markets are global. When they tighten up as they have already, mortgages are harder to get. Which means an inevitable fall of real estate prices. How many people have 20% down for a 30 year fixed rate mortgage on a $500,000 condo?

  • “Inevitable fall of real estate prices”. The only thing inevitable about real estate is that some people on this board are going to comment about real estate and use the word “inevitable”.

    If you know anything about logic or the scientific process, which clearly many of you don’t, the FIRST thing you do is look at the data and THEN form a premise. You don’t form the premise first and then find data to back it up and ignore anything that doesn’t support it.

    I believe Angelina Jolie, Cameron Diaz, and a horde of supermodels will fight to the death over me on my roof. I will start looking for data to support that premise. Give me a few minutes.

  • Dmac 11 years

    I’d buy tickets for that event.

  • Jane 11 years

    irishpirate, speaking of ignoring things that don’t support your argument, I noticed you didn’t read the entire beginning of my post, which provided exactly the data you accused me of leaving out.

    Credit conditions will cause an inevitable fall of real estate prices because mortgages are a lot harder to get. Specifically, the kind of mortgages that allow the purchase of $500,000 homes.

    Now who is coming to predetermined conclusions here?

  • Jane,

    You didn’t provide any data. You made a statement that because credit markets are tightening prices will drop. You then follow up by stating that specifically prices on $500,000 homes will drop because those mortgages will be more difficult to get. Your genius is overwhelming.

    Sit back and watch what the Fed does to interest rates if the economy slows down. What effect will that have? Please tell us and be specific down to 1/10th of one percentage point. Thank you.

  • Odujoko 11 years

    “Sit back and watch what the Fed does to interest rates if the economy slows down. What effect will that have? Please tell us and be specific down to 1/10th of one percentage point. Thank you.”

    Sorry Irish Pirate, the Fed Fund is short term interest rates; the 10 year T-bill is most closely associated with long term mortgage rates. Maybe if you’re talking interest only loans, sometimes those are tied to the prime rate, which is usually a few points higher than and correlated to the fed funds rate. So in short lowering the short term interest rate won’t directly effect the long term rate i.e. and the mortgage market.

  • Pete 11 years

    The federal funds rate has little to nothing to do with mortgage rates. They are set according to LIBOR, which has been steadily increasing and will continue to increase no matter how hard Bernanke tries to pump the economy full of hot air. Besides, credit will tighten regardless of the prevailing interest rates, because banks are less likely to let people get as overextended as they have been for the last few years. MBO investors are starting to actually care about the loans they are buying now that they’ve seen so many people lost money when these loans default. Banks don’t want to keep those crap loans on their books, and nobody will but them anymore, so they quit making them. Therefore housing prices have nowhere to go but down. Irishpirate, I await your insightful reply.

  • Wow,

    the Fed doesn’t have anything to do with mortgage rates. Or perhaps just a wee bit to do with it.

    Housing prices are predetermined to go down.

    Thank both of you for your insightful insights. They are impressively impressive.

    To use the acronym “IE” you both don’t know your respective asses from a hole in the ground.

    When data comes out that supports your wish to see declining home prices you celebrate it. When data comes out that doesn’t support it you come up with many reasons the data is wrong or you accuse the presenter of the data or the compiler of the data of having an agenda. Sometimes that might be true.

    You both speak in “absolutes” as do many of the other doom and gloom types here. You act as if the future is predetermined and only you can see it. I’ve heard better insights in bars from people talking about sports.

    You two really need to go work for the Bush administration. They have lots of openings for absolutests such as yourselves. With a possible military confrontation coming with Iran the President will need your absolute advice.

    Check out the current issue of Chicago Magazine. You will be badmouthing the data on housing prices. Maybe next year prices will drop like you predict. Or perhaps in 2009. There is always 2011.

    The best anyone can do is make an informed guess as to housing prices. Here is mine. Some will go up. Some will go down. The data will be mixed.

  • irishpirate,

    Pete doesn’t even bother to get his basic facts straight.

    LIBOR indexes have varied in performance over the past year and weeks – some are lower, some higher – very modestly higher.