As home prices keep growing,
Chicago buyers wonder, "What bubble?"

Home prices in 2005 appear to be strapped to the space shuttle and headed for the stratosphere.

Boosted by skyrocketing home prices on the East and West coasts, home resale values nationwide increased a hefty annual rate of 13.2 percent from the second quarter of 2004 through the second quarter of 2005, according to Freddie Mac’s quarterly Conventional Mortgage Home Price Survey.

During the last 12 months, home values in the Midwestern states of Illinois, Indiana, Michigan, Ohio and Wisconsin increased 7 percent. During the past five years, Midwestern home values increased 31.3 percent.

In downtown Chicago, housing analyst Appraisal Research Counselors reported that the one-year rise in condominium values was 7 percent in six key zip codes – 60601, 60605, 60606, 60607, 60610 and 60611. Over the past three years, downtown condo values have risen 23.4 percent, and prices have shot up 33.7 percent over the last five years.

Particular niches show even greater appreciation. In the Gold Coast, River North and Old Town, for example, single-family home values skyrocketed 28 percent to an average sale price of more than $1.2 million during the first half of 2005, according to the Chicago Association of Realtors. To the north of those neighborhoods, in Lincoln Park, single-family home values rose 14 percent from January to June of 2005.

“Chicago’s market has been picking up,” said Gail Lissner, vice president of Appraisal Research. “With lots of construction cranes and signs advertising new residences for sale, media pundits have implied that Chicago’s downtown market may be on the verge of a bubble.”

Although downtown Chicago is clearly one of the hottest markets in the nation, Lissner reasoned that, “The rapid price change is more a function of higher quality homes and condos coming to market than of rampant appreciation.”

The Freddie Mac home price survey focused the spotlight on affordable home loan rates as the biggest factor fueling the recent appreciation in home resale values.

“The steady decline of fixed mortgage rates during the second quarter helped to propel home sales higher and drive up house prices,” said Frank Nothaft, Freddie Mac vice president and chief economist.

According to Freddie Mac’s Primary Mortgage Market Survey, the weekly average rate for 30-year fixed-rate mortgages fell from a high of 6.04 percent during the week of March 31 to a low of 5.53 percent in the week of June 30.

“As a result, home sales in the second quarter soared to an annualized record level of 7.62 million units,” Nothaft said.

The Freddie Mac home price survey continues to show strong growth, primarily along the East Coast and West Coast – areas where populations are growing rapidly, job growth is strong and land scarcity is pushing up the cost of housing.

The Pacific states led the nation in annual house price appreciation, growing at a rate of 21.1 percent during the past year. The South Atlantic states were second, with a growth rate of 17.3 percent, followed by the Middle Atlantic states, which grew at a slightly slower pace of 15.8 percent.

The catastrophic damage loosed upon Louisiana and Mississippi may have a ripple effect on national construction costs, according to Nothaft, but the housing market remains at a historic high.

“Home sales and housing starts are still expected to set a new record this year,” Nothaft noted. “The devastating effects of hurricane Katrina will likely drive up costs of construction materials once the rebuilding effort gets underway and may slow deliveries of new homes in other areas of the country as resources are reallocated to Louisiana, Mississippi and other areas affected by the storm,” he predicted.

The Freddie Mac economist said it is too soon to know the full impact on the economy from the storm.

“Home sales in areas not affected by hurricane Katrina should remain strong and support continued home price appreciation, especially since interest rates have fallen in recent weeks,” Nothaft said. “Prior experience in Florida shows that home prices in hurricane disaster areas fall temporarily and then recover. We hope that will be the case here.”

Real estate columnist and media consultant Don DeBat has written about Chicago-area housing and mortgage markets since 1968. He is chief executive officer of DeBat Media, Inc., www.dondebat.net.