After many years of expansion and growth nationwide, most co-op and condominium markets saw both turbulence and some overall decline in 2018. The market has turned from one favoring sellers to one more hospitable to buyers. Markets like stability—and 2018 was a year marked by uncertainty. This uncertainty can be pegged to several trends, the most prominent of which were fluctuations in interest rates; changes in tax laws thanks to the 2017 tax bill depressing the tax benefits of home ownership; overbuilding (and potential overbuilding); and – despite the generally good employment figures – an undercurrent of declining confidence in the overall economic picture.
“Chicago isn’t one of the cool kids anymore” —at least not according to an article in Crain’s Chicago Business from last October. The Windy City is ranked 49th of 79 markets in the ‘Emerging Trends in Real Estate’ survey, down from 42nd last year. The overall feeling is one of caution. “Wherever they put their money, survey respondents were cautious about the direction of the broader market,” said the article, “wondering how much longer the good times will last. They’re not bracing for a bust, but they can’t see the market going much higher, either.”
According to IllinoisPolicy.org, the reasons behind the stagnation and possible impending decline in the Chicago residential market include outmigration, property taxes, and income taxes—including both Gov. J.B. Pritzker’s new state tax structure, and the still-resonating impact of the change in federal income taxes in 2017. Illinois in general —and Chicago in particular — is one of only 10 of the largest metro areas in the US to experience a decline in population last year.
Property taxes have also skyrocketed in recent years, according to IllinoisPolicy.org, and that has been affecting home affordability for many. Combined with the reduction in deductibility for state and local taxes, local tax burden has had an increasingly dampening effect on the market. Another tax issue is the recent increase in state income taxes by the new governor.
Conversely, some of those fighting the good fight in the field every day may see things a bit differently. Regarding the condominium and co-op market in downtown Chicago and surrounding neighborhoods, Gail Spreen, Senior Vice President of Sales at Jameson Sotheby’s International Realty, says: “2018 was a reasonably good year, though a bit flat. It really depended on the neighborhood. Projections are that 2019 will be similar. We see a 2- to 4-percent increase in prices and volume in the coming year. Things must be priced right to sell. You can’t really push the market, because it’s not there to be pushed. It’s generally more of a buyer’s market.”
Spreen also mentions other trends that reflect the concerns described above about Chicago’s markets. “People are re-evaluating the own versus rent equations in light of the change in tax laws.” Downtown seems to still be the biggest draw, though, and there are healthy sub-markets in River North and the West Loop.
According to Corcoran’s 2018 fourth quarter report: “Market-wide closed sales declined as potential buyers grappled with a confluence of factors that created uncertainty in the market. Buyers’ concerns included rising mortgage interest rates, tax-law reform, volatility in the financial markets, foreign capital restrictions, and political distractions. As a consequence, many prospective buyers are choosing to wait on the sidelines until prices adjust to a more accessible level and other market factors calm.”
Joanna Mayfield Marks, a broker with the New York-based firm Halstead, described the market this way: “In 2018, there were a couple ends of the market that were less impacted. We saw a number of buyers competing in the $700,000-to-$1.5 million segment. There was competition, and even some bidding wars. In the lower and luxury segments, though, we saw fewer buyers, and no bidding wars. What I’m seeing right now is that competition is beginning to return. I’m seeing positive reports about the economy, consumer confidence is better, and interest rates were down at the beginning of the year. So even at the lower end of the market, things appear to be picking up. The truth is that interest rates – even small increments like a quarter point – affect the market. Two-bedroom units seem to be the most competitive right now. There are even multiple bidding situations. Essentially, things look positive.”
“The trajectory of Massachusetts’ skyrocketing real estate market flattened as winter loomed,” reported realestate.boston.com, “leaving some to wonder whether we’re glimpsing the end of a 10-year-long bull run. Like people who predict the end of the Patriots dynasty each year, they will eventually be correct, but real estate experts say we’re not there yet.”
As in other pricey markets, signs on the horizon of a potential end to the Boston real estate fairy tale are centered around tax policy and rising interest rates. Like New York and Illinois, Massachusetts is a high-tax state, and the result of the reduction of property tax deductibility on federal income taxes is beginning to make itself felt. Rising interest rates have also played a role, as buyers are very sensitive to every additional penny of monthly cost, the article continues.
Bobby Woofter, Principal Broker for My Boston Condo, sees the market as very healthy. “There’s so much new industry moving into the area: General Electric, Amazon, and others,” he says. It seems like a new building is going up every week. That makes for a healthy market.” The people who work there need someplace to live. “The luxury boom continues,” Woofter adds.
He does see some dark clouds on the horizon, however. “There may be a lag due to the climbing price point. It can’t just keep going up, passing the last deal. There is more inventory than one year ago on the market – especially luxury – but mid-market is very bullish and competitive.”
One of the unique features that Woofter mentions is the prevalence of small condominium associations in the Boston market and throughout New England. Dominated by three-unit multi-family buildings, owners often see greater value in converting to condominium ownership rather than selling the property as a whole, and the result is a large number of very small associations. “Resale of these units are strong,” Woofter says. “They are typically the ‘starter home.” Even what were once less popular areas like Roxbury are now coming around in this sub-market.
Woofter thinks that Boston is still a robust seller’s market. Available housing stock for sale is still very low, and he isn’t expecting a correction. “Existing zoning regulations don’t provide for new housing,” he says.
Overall, 2018 was a mixed-to-down year for condo and co-op markets nationwide. The general expectation for 2019 is more of the same. Clearly, tax considerations, rate fluctuations, and political uncertainty are major factors going forward. Perhaps the best advice to keep in mind is from Marks: “Markets are not dictated by what you want as the seller, but rather what people are willing to spend – as well as what you’re willing to accept. Sellers like to think about their ‘net’ profits, rather than thinking about what buyers are willing to pay.” In a buyer’s market, it doesn’t work that way.
A J Sidransky is a staff writer/reporter with The Chicagoland Cooperator, and a published novelist.