(Above) Unit 14/15 at 1500 North Lake Shore Drive, for sale for $7.5 million (cash only).
11-Feb-18 Stock market turmoil in 2018 could cause a shift in the luxury home and condominium market after a banner year in 2017.
The markets recent rocky two weeks, which saw the Dow Jones Industrial Average drop 2,271 points from a record high of 26,616 is not an economic confidence builder for wealthy home buyers with substantial stock investments.
Some $3 trillion in stock investments evaporated during the downturn, which Wall Street analysts labeled a ten percent correction. Although these were only paper losses for investors who did not panic and sell, even the most entrenched, conservative stock owners felt the psychological pinch in their wallets.
(Above) Seven-bedroom property at 1500 North Lake Shore Drive. The 1927 building, overlooking Lake Michigan, was designed by McNally & Quinn with New York architect Rosario Candela and this unit features Louis XV designs from the 18th century.
When hundreds of millions of dollars exited the market during a broad selloff in late January, tens of millions moved to the haven of government bonds. Over the past two weeks the yield on 10-year Treasury notes rose sharply to 2.86 percent.
The upward movement of 10-year bond prices sparked a corresponding spike in 30-year fixed mortgage rates, which track Treasury notes.
Freddie Macs Primary Mortgage Market Survey reported that benchmark 30-year fixed rate loans averaged 4.32 percent on February 8, up from 4.22 percent a week earlier and the highest mark since December 2016. On February 9, Chicago lenders were quoting a range of 4.126 to 4.36 percent on 30-year fixed mortgages, reports rateSeeker.com. A year ago at this time, the 30-year fixed loan average was 4.17 percent.
||The 10-year Treasury yield resumed its upward march and mortgage rates followed, noted Len Kiefer (left), Freddie Macs deputy chief economist. The 30-year fixed mortgage rate is up 33 basis points since the start of the year.
Expect three, four Fed rate hikes in 2018
Despite all the volatility in the stock market and economy, experts say the Federal Reserve Board still is on course to raise interest rates three or four times in 2018, possibly pushing the federal funds rate as high as the 2-to-2.5 percent range.
That scenario could mean sharply higher 10-year Treasury rates, which will translate into lenders charging an interest rate of 5.25 percent on 30-year fixed mortgages by the end of 2018.
Recently, RE/MAX Northern Illinois reported that luxury home sales in Chicago were up sharply in 2017, gaining 18 percent to 1,332 units. However, a growing inventory of $1 million-plus home listings caused median sales prices to slip 1.7 percent to just under $1.35 million. Average market time was 136 days, three days longer than in 2016.
Will higher mortgage rates break the luxury housing markets momentum?
Its too early to tell for sure, but initial readings indicate housing markets are sustaining their momentum so far, said Kiefer. The Mortgage Bankers Association reported that purchase applications are up eight percent from a year ago in its latest Weekly Mortgage Applications Survey.
(Above) Kitchen and small dining area of Unit 14/15. Proof that you have $7.5 million to spend on a seven-bedroom home is required before any showing can be scheduled. If you want to buy the unit, youll need letters of reference and will have to pass an interview with the buildings co-op association.
Outlook gloomy for million-plus homes
Meanwhile, other analysts say it is likely that fewer wealthy home buyers, faced with a diminished stock portfolio and higher mortgage rates, will be shopping for $1 million-plus homes in 2018.
When smart purchasers compute the financial losses caused by tax reform legislation, the outlook for luxury home buying gets even gloomier.
Tax reform limits the tax deduction for property taxes on a primary residence to $10,000. Nearly two million Illinois residents used the property tax deduction in 2015 to claim an average deduction of $12,500 on their taxable income.
Million-dollar home and condominium buyers in Chicagos upscale lakefront neighborhoods with property tax bills that exceed $10,000 will see their annual property tax write-offs reduced under tax reform.
The new tax law also reduces the mortgage interest deduction cap to $750,000 from $1 million. So, if a buyer borrows $1 million to buy a luxury home in 2018, he or she can only write off the loan interest on $750,000 of the debt.