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Winter 2013
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Local Small Rental Property Market Improves, Housing Study Shows

The small rental property market has shown improvement as investors target low-value properties, according to a third-quarter update by DePaul’s Institute for Housing Studies (IHS) in November. Prices for high-value properties in strong neighborhoods also increased, according to the institute’s Cook County House Price Index.

Small rental properties, defined by the IHS Index as those with two to four units, have experienced two consecutive quarters of price increases after experiencing dramatic price declines following price peaks in 2006 and no sustained price recovery after hitting bottom at pre-2000 price levels, says Geoff Smith, executive director of the IHS.

Between the second and third quarters of 2012, small rental properties experienced a 10.5 percent price increase. Year over year, small rental properties also saw price increases of greater than 10 percent. Prices for these two-to-four unit buildings are at their highest point since the third quarter of 2009.

“Prices for the lowest-value small rental properties are likely benefiting from increased competition among investors for low-cost distressed sales as well as increased demand for rental housing,” Smith says.

Price trends for small rental properties are largely the product of price increases in the lowest-value price tier. The lowest-value small rental properties saw prices increase by nearly 19 percent year over year. The highest-value small rental properties also saw positive price trends, with year-over-year increases of more than 7 percent.

Small rental properties are a major part of the Cook County rental housing stock and are particularly important to the county’s supply of affordable rental housing. Two-to-four unit buildings account for more than 26 percent of the total housing units in the city of Chicago. In Cook County’s low- and moderate-income communities, two-to-four unit buildings account for more than 53 percent of all multifamily rental units.

“Although these trends are a positive sign for the small rental property market, there is a long way to go for recovery,” Smith says. “This segment of the market was devastated by the foreclosure crisis, and prices remain at below-2000 levels.”

The IHS Index shows that in the third quarter of 2012, prices of small rental properties were more than 54 percent lower than their 2006 peak.

The IHS Cook County House Price Index reflects price changes on properties with repeat sales from the first quarter of 1997 through the third quarter of 2012. The index tracks quarterly price changes for the four primarily residential property types found in the county: single-family homes, condominium units, small rental buildings with two to four units, and larger rental buildings with five or more units.

Additional data from the third quarter show that prices for single-family homes and condominium units continue to struggle despite recent optimism for these segments’ recovery. Prices for single-family homes were down nearly 3 percent year over year from the third quarter of 2011, and condominium prices were down nearly 12 percent year over year.

Prices for larger multifamily rental buildings experienced a slight decline from the second quarter to the third quarter of 2012, but still saw year-over-year price increases of more than 14 percent.

Visit housingstudies.org for the most recent summary of quarterly IHS Cook County House Price Index data.