Chicago Housing Prices Fell 2.5 Percent in Q3 2007

The price of a house in Chicago fell 2.5 percent in September, driving home the ongoing impact of the nation’s sub-prime mortgage crisis.

According to the S&P/Case-Shiller U.S. National Home Price Index released Tuesday, Chicago and seven other cities of 20 surveyed saw their lowest annual housing price returns ever recorded. Home prices in Chicago also fell .8 percent from August and 0.2 percent from July.

Nationally, home prices plummeted a record 4.5 percent—the largest annual drop since S&P began the index in 1987. Nationwide prices dropped 1.7 percent from the previous quarter, which also constituted the largest quarterly decrease since 1987.

Paul Kasriel, chief economist at Northern Trust Corp., said the cause of these declines comes down to basic economics.

“The reason that house prices are falling is the reason that any price would fall, and that is if supply exceeds demand,” he said. “It’s basic Economics 101, and now the supply of housing, new and existing, is greater than the demand. One way to bring the market back into equilibrium is to have prices fall.”

And, Kasriel said, the worst is likely far from over. During the housing boom in 2005 and 2006, many people took out two-year adjustable-rate mortgages that start out with artificially low rates. The rates on many of these mortgages are set to soon adjust upward, he said.

“I don’t think we’ve seen the bottom in housing prices by any stretch,” Kasriel said. “I believe entering the New Year we’ll see increasing foreclosures on homes, because we’re entering a period where a large dollar volume of mortgages are due to have interest rate resets. So it’s doubtful the borrower will be able to pay these higher rates.”

The growing number of foreclosures also has made lenders skittish, Kasriel said, likely leading them to cut prices even more and heighten requirements for potential new homeowners who want to borrow money. This could make it harder for these potential new homeowners to buy up the excess of houses on the market.

“Lenders who take homes back in foreclosure are anxious to get rid of these homes, because it costs them to maintain them, and they don’t know where prices are going either,” Kasriel said. “So they would be quicker to cut prices than some regular homeowners would be, and this will create additional downward pressure on housing prices. And at the same time, with foreclosure increases, lenders are fearing losses on future mortgages and may continue to tighten in terms of lending.”

Declining housing prices also affect consumer spending, Kasriel said, especially because during the housing boom, many people had used the extra income from increasing home equity to make purchases.

“A lot of people in recent years have been extracting some of that home equity to help fund their purchases of various consumer durable goods, maybe like big screen TVs, cars, or boats, ” he said. “They’ve been extracting that equity by taking out bigger mortgages. But now that equity is declining, so obviously there is less to take out. Moreover, it’s more difficult to extract because lenders are tightening the terms of mortgage credit. So the decline in house prices is a negative for spending.”

Florida has been one of the hardest-hit states in the nationwide housing crisis, and the cities of Tampa and Miami saw the largest drops in September housing prices, with 11.1 percent and 10 percent declines respectively. Charlotte and Seattle fared best in S&P’s index, with housing prices in both cities increasing 4.7 percent.

But Charlotte, Seattle and other cities that have been harmed less in the housing crisis still have seen some declines, according to information in an S&P press release.

“Consistent with prior 2007 reports, there is no real positive news in today’s data,” Robert J. Shiller, Chief Economist at New Jersey-based MacroMarkets LLC, said in the release. “Most of the metro areas continue to show declining or decelerating returns on both an annual and monthly basis. All 20 metro areas were in decline in September over August. Even the five metro areas that still have positive annual growth rates—Atlanta, Charlotte, Dallas, Portland and Seattle—show continued deceleration in returns.”

Home prices plummet in Chicago, nationwide
by Whitney McFerron