Fewer Condos To Choose From Could Support Prices

As I've mentioned before Chicago home sellers have become so frustrated with the record low home prices that many have just abandoned the idea of selling any time soon. They have either decided to stay put under less than ideal circumstances or they are becoming landlords - even if it means losing money every month. Consequently, home inventories in the Chicago market have sunk to the lowest levels in 4 years (as long as I've been tracking them) when measured on a months of supply basis.

We regularly track the inventories of 2 - 3 bedroom condos across Chicago and in select neighborhoods. As the graph below shows August ended with less than a 10 month supply - less than half of what it was last August.

Given these low condo inventory levels I don't think it's any surprise that the Case Shiller home price index for condos in Chicago has actually been rising during the last 3 months - up almost 10%. If you took Economics 101 you know that when supply goes down prices go up.

However, last week Crains reported on the downtown Chicago condo glut, pointing out that several high profile buildings were only about half sold after several years and could take another 4 years to sell out. So how do I reconcile this opposing information? Well, unfortunately, my analysis is based upon data from the MLS and a lot of the developers' units that are for sale are not on the MLS - yet. So my data is off when it comes to the downtown area. Also, the Crain's article is focusing only on the downtown area whereas my data looks at the entire city where there aren't as many new units for sale.

So I think my inventory analysis reflects the current state of affairs fairly accurately with one key exception and the conclusion remains valid: tight inventory levels should prevent prices from dropping further. But note that I didn't say that prices would rise, even though they have recently. You know all those would-be sellers that won't put their homes on the market? There are a lot of them and they are just waiting for the first sign of rising prices to pull the trigger. And as they do they will keep prices from rising too much. In addition, if the country sinks into another recession all bets are off. Unemployed people don't make very good buyers.

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