Chicago Housing Market: A Good Time To Buy Property?

Is it a good time to buy property in Chicago? Chicago Housing Market

As someone who is not only bullish on buying real estate, but also bullish on buying real estate in non-coastal cities (heartland, Sunbelt) due to technology and demographic trends, the Chicago housing market is an intriguing one.

Chicago is the 3rd largest city in America and property prices are dirt cheap in comparison to cities such as New York City, Boston, Los Angeles, Seattle, and San Francisco. Jobs are plentiful and there certainly seems to be economic growth in the region.

But before we get too excited about the Chicago property market, let's look at some negatives from three Financial Samurai readers who live and own property in Chicago. Financial Samurai was started in 2009 and is one of the top independently owned personal finance sites in the world with over one million visitors a month.

Chicago Housing Market: Why It's Not A Good Time To Buy

Joe writes why he's a seller of the Chicago Housing Market:

I sold my personal Chicago real estate. This market is a bit broken with a bankrupt city (think teacher's pensions) and taxes spiraling out of control.  Regardless of what you think of him, Mr. Trump hates Chicago, and made sure that everybody with high real estate taxes pays dearly.

There are still some amazing deals, but be super careful not to overpay. 2018 was probably the tippy top in most areas of the city for this cycle. Although I do acknowledge that there are still a few hot neighborhoods that are still increasing substantially in value. Google has helped.  

I just don't see any reason why the decline here won't be slow and painful in broad terms.  Even Walgreens who just moved their HQ downtown, which was supposed to be a housing demand driver, just announced some big job cuts.

For full disclosure, I did a crowdfunding commercial deal here in the city. But it had a huge tax incentive and historic credits. So it was positioned well, regardless of Chicago's structural flaws.

Peter writes why he also doesn't not want to buy the Chicago Housing Market,

I would echo Joe's concerns. The city being bankrupt is a huge red flag. The state is in similarly dire straights.

You are comparing current rents, current taxes and current mortgage rates.

What happens when taxes go up on rich homeowners to bail out the city/state. That is going to eat into any valuation.

I would look for real estate investments elsewhere and keep renting in Chicago. Taking a levered bet in an insolvent municipality with no desire to change is like playing Russian roulette

Chicago Housing Market Trends

Susan writes why she is leaving Chicago and selling her property,

We love Chicago but we plan to move back to the south over the next few years to be closer to family. I do have a stable job. Many of my friends in Chicago in professional services who should be buying houses are choosing to rent for essentially the same reasons:

– Since 2000, Chicago home prices have grown 44% while inflation in the same period is 46%
– Illinois is in absolute dire straits with $200B in pension debt, mostly unfunded (and the state cannot declare bankruptcy!)
– Income taxes are going to go up next year
– Cook County property taxes, already the second-highest in the country, are likely to increase

Chicago Housing Market: Why Now Is The Time To Buy

Now that we've heard from three people on why now is not a good time to buy property in Chicago, let's get a positive viewpoint on the Chicago real estate. The housing market is strong and won't crash any time soon.

David writes why he wants to buy Chicago property,

I have thought about this as well and have come to the conclusion that despite all the issues with the city and state Chicago isn’t going away.

  • It’s the third-largest city in the country and despite a declining population it is almost entirely focused on the less desirable neighborhoods on the south and west sides.
  • Strong economic activity in the downtown with the fastest-growing downtown in the country
  • Top tier global city that still maintains an affordable cost of living
  • Top-ranked city for attracting tech workers “Chicago’s tech market has seen a lot of organic growth and a tremendous amount of growth from coastal companies expanding here, particularly firms from California,” said Brad Serot, vice chairman with CBRE and member of the firm’s tech and media practice group. “Labor has been the big driver of this.”
  • Chicago remains more affordable when compared to coastal cities. The annual cost for a 500-employee, 75,000-square-foot office in Chicago is approximately $40 million, far below the most expensive markets of San Francisco ($59M), New York ($55M), Washington D.C. ($51M) and Seattle ($50M).
  • Migration isn’t due to tax reasons. When residents with incomes of $100,000 or more leave Chicago, they often head for New York City, San Francisco, Seattle and Los Angeles — all places with higher taxes.

More Reasons To Buy Chicago Real Estate

Rather than shorting the Chicago housing market by renting I plan to purchase a two-bedroom condo in the downtown area for ~350K despite having the ability to purchase a much more expensive property.

  • Rent for a similar place would be roughly $2,750 per month which provides savings of ~$185 per month
  • Assumes 5-Year Hold, 0% Appreciation, $450 HOA fee, 1.5% annually for Insurance and Repairs, 2.32% Property Tax, 3% Closing Costs on the Buy
  • Also included 6% Closing Costs on Sale despite planning to hold this property much longer than 5-Years as will use as a rental once I am ready to move
  • Even if property values were to decrease or property taxes were to increase there would still be a buffer over renting
  • On a per Sq. Ft. basis you can buy an existing downtown apartment at approx. 50%  of what it would cost to build new with construction costs continuing to rise
  • Eventually, will look to buy a larger home and if the market goes down the cost of the next purchase will also be cheaper
Chicago rents increasing

Opportunity In Chicago Real Estate

Chicago needs to fix its budget and bring new economic confidence to its residents. Their property taxes are high, but their property prices are incredibly cheap. It's becoming a buyer's market in Chicago, which means more opportunities to get a bargain. The stock market is strong and interest rates are low, which means affordability is up.

According to Zillow, the median Chicago real estate price has risen from about $155,000 in 2012 up to $229,000 as of January 2021 for a 47% increase. For those of you who think Chicago real estate can't increase in value, the data clearly shows otherwise.

Chicago real estate prices going up

Despite the 47% increase in home prices since 2012, $229,000 is still dirt cheap compared to a $1.6 million median home price in San Francisco. Is the median San Francisco household income 7.5X greater than the median Chicago household income? No!

The median household income in Chicago is $68,403 according to the Department of Numbers, Illinois. While the median household income in San Francisco is only $110,800 according to Data USA SF. In other words, the median SF household income is only 60% higher, yet the median home price is 750% higher.

Overview Of The Chicago Housing Market

Here is a brief overview of the Chicago Housing Market as of 2022.

  • Chicago is a mid-range city on the national affordability index.
  • 53% of Chicago households are rented.
  • Most rents have held steady for the past 3 years.
  • The average rent for a 3 bedroom house is $2,000 per month, but now is increasing.
  • The most expensive areas in which to rent are: Near North Side, the Loop and Near West Side at an average of up to or over $6,000 per month.
  • The most affordable areas are New City, Pullman, and Riverdale at an average of $1,200 per month.

Chicago Housing Market Is Good Value

Chicago real estate is a bargain and with the rise of technology, more employees are working remotely in lower cost areas of the country. Further, big companies like Uber, Google, and Facebook are expanding to cheaper parts of the country.

Given these trends, I'm a net buyer of Chicago real estate. I would start off investing in Chicago real estate through real estate crowdfunding first. You can invest as little as $10 with Fundrise, the best real estate crowdfunding platform today. It's free to sign up and explore the various commercial real estate deals.

Fundrise Real Estate Crowdfunding Properties

Another great platform is CrowdStreet, which focuses on individual commercial property in 18-hour cities. Valuations are cheaper and cap rates are higher in 18-hour cities. As an accredited investor, you can build your own select real estate portfolio with CrowdStreet.

Both platforms started in 2012 and are fantastic gateways for retail investors to diversify their real estate holdings. At the same time, investors can surgically invest in different parts of the country without the hassle of being a landlord.

Real estate crowdfunding funnel

Real Estate Is A Hedge In An Inflationary Environment

When it comes to real estate investing, it's also good to start small and work your way up. With real estate crowdfunding, you don't need to leverage up and buy a single property. You can buy small fractions of various properties in areas you desire.

Only if you're looking for a primary residence should you consider taking on a mortgage to buy it. Just make sure to live in it for at least 5-10 years to smooth out the cycles. Once you know for sure you love the area long-term, then you can consider buying rental properties.

Here's a post on the best cities to buy real estate today. The Chicago Housing Market is good value, but price appreciation is much slower than coastal city real estate markets. With mortgage rates going up, the housing market overall should cool through 2023. But I still expect prices to go up in 2022 and 2022 given low inventory.