Recovery Q&A with Dr. Geoffrey J.D. Hewings, Interim Head for the Department of Economics at the University of Illinois in Urbana-Champaign
What is the main difference that you see in the real estate industry this year, compared to previous years? In Chicago, there have been 12 months of positive sales growth (year over year) in the housing market; however, prices have not recovered and, in Chicago, they are still trending down, albeit at a very slow pace (compared to one year ago).
What changes do you expect to remain a part of the real estate industry? Due diligence in mortgage applications is back in style. Appraising is under greater scrutiny and it is likely that homeownership rates will not recover to their peak (but unsustainable) levels of 2006-2007.
Are there any aspects of the industry that you think are gone for good? Hopefully the new legislation will keep participants in the game and thus generate a greater commitment from Realtors, brokers, lenders and buyers to ensure creditworthiness. Zero percent down may be gone, but business cycles are just that and a new generation with no direct experience of the past recession may be emboldened to launch new, imaginative instruments and thus initiate a new housing cycle.
How should real estate agents change their strategies for the current market? It is going to be harder to identify buyers. In the past, up to one in four households moved each year – half of them within the same county and the other half either moved in or out. This turnover provided the “fuel” for the real estate price escalation. The “within county moves” were often generated by people upgrading. This is likely to be quieter for a while as households appraise the economy carefully and consider whether they want to take on more debt. Moves in and out of counties are likely to be smaller until the economy picks up; the U.S. has a very efficient labor market whose mobility has been made possible in large part by the efficiency of the housing market. With unemployment rates above 10 percent in many states, the incentives to move have diminished. Even retirees are staying in the Midwest in anticipation of receiving higher prices for their homes before moving to Florida or Arizona. This lack of mobility has diminished demand for housing in retiree markets, sending prices down at record rates.
Regarding Chicagoland, would you say the worst is behind us? The national economy has created only 120,000 jobs in the private sector in the last two months. Chicago has lost over 100,000 jobs in this recession and it is not clear that a rapid recovery is likely either in the nation or locally. The Chicago Business Activity Index continues to suggest a slow long-term upswing but it is likely that there will be periods in which the local economy stumbles.
Are there any industry innovations born of these economic times? The main innovation in the housing market might be the realization that wealth can be ephemeral. Realtors will need to stress other attributes of homeownership apart from the promise of the home becoming an unfettered piggybank.
How will we know that we have “recovered”? Right now, time on the market is around eight to nine months in Chicago. At the height of the downturn, time on the market was over 14 months. In years past, two to four months was considered a market in equilibrium. When we return to these levels for several months, we will have a reasonable expectation that recovery has occurred.
Dr. Geoffrey J.D. Hewings is the director of Regional Economics Applications Laboratory and interim head for the Department of Economics at the University of Illinois in Urbana-Champaign. He can be reached at 217.333.4740.