Over the past five years, the average house has increased in value by more than 30 percent.
Are housing prices a bubble that’s going to burst like the stock market? Our money saving expert Ilyce Glink is here to explain the situation.
A few weeks ago we told you Chicago home prices had skyrocketed in the past few years. Some people have earned more than 1,000 percent on their initial down payment investment. But that extraordinary rise in prices has some people saying the housing market is a bubble that’s going to burst.
David Duncan is the chief economist for the mortgage bankers association of America. From his perch, he’s watched housing prices rise far beyond the 3 to 5 average annual appreciation that’s normal for the Midwest.
“What’s happened in the past five years or so is 30 percent or more appreciation in equity,” notes Duncan.
In some Chicago metro neighborhoods, like Lincoln Park and the North Shore, homes have increased in values as much as 30 percent per year since 1997.
“In a year, you could see 40-50 percent appreciation on the purchase price,”said Rick Druker, managing broker of Baird & Warner’s Michigan avenue office. “Chicago real estate has always been a steady market. You can’t say that about either coast, but the Midwest held very firm, very solid.”
But does that mean those homeowners are in for a rude awakening? Duncan doesn’t think so.
“I don’t hold the opinion that there is a price bubble,” said Duncan. “You’ve actually got 3.7 million more households in that next younger group following the boomers, and their homeownership rate is 9 percentage points lower. Fewer homeowners means there’s another bulge coming on the demand side.”
So instead of a bubble, we could see houses prices continue to go up in value.
“The fundamentals support real price growth but not at the level at which they’ve been growing recently,” Duncan concluded.
Which is welcome news for homeowners.
Real estate is a local business, and Duncan says there are communities that could experience a drop in prices. In fact, that’s already happening with some very high priced property in Chicago. What could make prices drop in your neighborhood?
- if a major employer lays off a large number of homeowners in your area, that could cause prices to decline, though perhaps only temporarily.
- the discovery of environmental problems, like poor water quality or radon,
- or the announcement of a new public work project in your neck of the woods, like a highway in your backyard, could cause prices to collapse.
Should you sell your home to lock-in profits? Only if here’s somewhere you want to go or have to go.
How much is your home worth? Check it out at www.domania.com.
Be aware that “comps” on this site could be old and you may not get a completely accurate price assessment.
May 21, 2002