[New Crain's Chicago Business article provides a great overview of the challenges facing the housing sector going forward. Source: Crain's Chicago Business, February 1, 2010].

Perry Bigelow, CEO of Aurora-based developer Bigelow Homes, says, "We're not at all optimistic." Photo: Erik Unge

by Alby Gallun

The Chicago housing market is still years away from a full recovery, as foreclosures, high unemployment and a tight lending climate hinder a comeback.

Chicago-area existing-home sales will begin rising again this year, hitting about 95,000 units in 2013, according to a forecast by Irvine, Calif.-based John Burns Real Estate Consulting. That's well short of the levels seen during the housing boom from the late 1990s to 2005, the boom's peak, when 146,082 homes sold. And while a tax credit and foreclosure sales have breathed some life into the market, the firm projects new-home sales will fall even further this year.

"We're not at all optimistic," says Perry Bigelow, CEO of Aurora-based developer Bigelow Homes. "There are just too many difficult things that have piled up on us."

The housing boom boosted the local economy over the past decade, fueling job growth in sectors like construction and mortgage lending and spurring consumer spending as rising home values made people feel wealthier. The new data show that the sector won't likely provide that kind of fuel for growth in the foreseeable future. Chicago homeowners will have to get used to a new reality, where selling a house routinely takes six months or more and home appreciation just barely outpaces inflation.

With sales sluggish, home prices will continue a decline that began in 2006, according to Brookfield,Wis.-based Fiserv Inc., which calculates the widely followed S&P/Case-Shiller Home Price Index. An index of Chicago-area single-family home prices will fall 5.7% from third-quarter 2009 to third-quarter 2010 and edge up 1.2% over the following year, Fiserv Chief Economist David Stiff says.

In addition to the supply-and-demand problems plaguing the housing market, other indicators point to fundamental imbalances that will likely take longer to correct.

Homes here are still expensive compared to incomes, suggesting that prices have to fall more or incomes have to rise for the market to reach equilibrium. The median home price was 3.3 times the median income in the Chicago area in the third quarter, down from a peak of 4.2 in 2005, but still above the average of 2.6 from 1980 to 2000, according to Fiserv.

Moreover, the local homeownership rate — 69.3% in the third quarter — is still well above historic levels, according to the U.S. Census Bureau. The rate was in the mid-60% range in the mid-1990s.

Homeownership is likely to fall as fewer people qualify for mortgages. Other people, especially twentysomethings, who a few years ago would have been in the market for their first home, may think twice about buying.

"I think people are looking differently at homeownership," says John McIlwain, senior resident fellow at the Urban Land Institute in Washington, D.C. "You have learned that housing prices can go down. You've learned that (owning a house) is not necessarily the best way to build wealth."

The good news, such as it is: Residential construction has ground to a halt, and demand, weak as it may be, is finally starting to catch up with supply. In addition, near-record low interest rates have made homes more affordable, and the federal tax credit for first-time homebuyers has boosted sales of lower-priced properties.

The $8,000 tax credit "was a great help to us," Mr. Bigelow says. His firm sold about 15 homes last year at Hometown Aurora, a 1,288-unit project in Aurora where units sell for $150,000 to $300,000.

But the tax credit, which was extended and expanded last year, expires at the end of April. And lenders remain wary of all but the most creditworthy buyers, depressing demand. Sales are especially weak at the high end of the market, where the impact of the tax credit has been limited.

John Burns projects that new-home sales will drop another 47% this year, to 4,000 units. It predicts 12,000 sales in 2013, about the same level as in 1998.