Why is Chicago so affordable?

[urbanlife78]

Originally Posted by The Urban Politician

^ My point is that, with Chicago having more households than it has ever had, the "oversupply of housing" theory that you proposed may not really explain Chicago's cheaper prices.

The households may be smaller, but they're still households.

On a side note, I would argue that much of what Chicago lost in population from 1950-2010 was non tax-paying, tax-consuming children. Add to that the fact that far more women are in the tax-producing workforce in 2010 compared to 1950, and Chicago's time-adjusted tax base may actually have stayed even or perhaps grown.

Does anybody have any hard facts to support/disprove that assumption? I'd be curious..

That is actually an interesting theory worth looking into. I am mostly just shocked that I could be living for the same cost in rent in Chicago as to what I pay for now in Portland...and in Chicago I wouldnt even have a car...though in Portland I really dont need a car either, I just keep it around because it is paid off and easy access for me when I want to use it for casual things.


There could also be something else at play with Chicago, it is one if the big 4 cities Chicago, Houston, LA, and NYC, and at one point it was the number 2 city, being a city that is technically falling in the ranks as other cities grow could have a mental effect on Chicago and seen as not having the same amount of demand as other faster growing cities have, in other words that sense of needing to over inflate the cost of housing for people moving there. If Chicago was forecasting an influx of 2 million people within the city over a short period of time, then we might see rates in housing rising.

But then again, that theory could easily be wrong. It is an interesting fact, but if I ever move to Chicago, it is a fact you will NEVER hear me complaining about, especially if I am raising a family in a great building that is a fraction of the cost it would be in NYC.

[simulcra]

There could also be something else at play with Chicago, it is one if the big 4 cities Chicago, Houston, LA, and NYC, and at one point it was the number 2 city, being a city that is technically falling in the ranks as other cities grow could have a mental effect on Chicago and seen as not having the same amount of demand as other faster growing cities have, in other words that sense of needing to over inflate the cost of housing for people moving there. If Chicago was forecasting an influx of 2 million people within the city over a short period of time, then we might see rates in housing rising.

But then again, that theory could easily be wrong. It is an interesting fact, but if I ever move to Chicago, it is a fact you will NEVER hear me complaining about, especially if I am raising a family in a great building that is a fraction of the cost it would be in NYC.

I wouldn't put Houston among those other cities. While Houston itself is a big city and growing fast, looking at the MSA populations shows a clearer picture of each city's relative status: NYC ~ 20 million, LA ~ 12 million, CHI ~ 10 million, Houston at only almost half Chicago at ~5.7 million (by comparison, Atlanta with only a 530k actual city population, has an MSA that's almost as large as Houston's at 5.5 million). Houston also has an immensely low cost of living compared to those other cities, and is probably due to a combination of: lack of zoning laws (which helps support the supply-side argument to affordability) and a huge, poor immigrant population (which helps support the demand-side argument to affordability). So, to run counter to your theory - Houston is projected to have huge population increases, but that ain't increasing its cost of living anytime soon, simply because the nature of the growth and who's fueling the growth (primarily poorer Latino especially Mexican immigration).

I still maintain my more demand-based argument - which you actually allude to. Chicago is 3rd and probably within the next 4 or 5 decades will be bumped to 4th by either Houston or Dallas, but that in and of itself doesn't really mean anything. It's more important to consider why Chicago is dropping slowly compared to LA and NYC's relative persistence, and for me that's due to the fact that alot of top talent just isn't attracted to Chicago for whatever reason (lack of venture capital, lack of significant industry) and instead flock to the coasts, while more middle-income americans get squeezed out of higher cost cities like Chicago and go to dirt-cheap-but-still-solid-economic-engines of Dallas and Houston. As a result, Chicago's home prices tend to be lower than its peers because the rich top professionals aren't bidding up the real estate as high, and more upper-middle class and middle class professionals would rather save a couple hundred thousand on a home to get a similar job and more discretionary money for cars and stuff down in Texas (and other parts in the South), which also helps depress prices.

[The Urban Politician]

Originally Posted by simulcra

I still maintain my more demand-based argument - which you actually allude to. Chicago is 3rd and probably within the next 4 or 5 decades will be bumped to 4th by either Houston or Dallas, but that in and of itself doesn't really mean anything. It's more important to consider why Chicago is dropping slowly compared to LA and NYC's relative persistence, and for me that's due to the fact that alot of top talent just isn't attracted to Chicago for whatever reason (lack of venture capital, lack of significant industry) and instead flock to the coasts, while more middle-income americans get squeezed out of higher cost cities like Chicago and go to dirt-cheap-but-still-solid-economic-engines of Dallas and Houston. As a result, Chicago's home prices tend to be lower than its peers because the rich top professionals aren't bidding up the real estate as high, and more upper-middle class and middle class professionals would rather save a couple hundred thousand on a home to get a similar job and more discretionary money for cars and stuff down in Texas (and other parts in the South), which also helps depress prices.

^ You're inducing a conclusion based on an incorrect premise. On one hand you're talking about Chicago's population growth, on another hand you're talking about housing prices and industry talent.

Truth is, demographic trends don't agree with what you've said here. Both LA and NYC have seen huge amounts of net domestic outmigration (ie established Americans with good jobs), more so than Chicago. What is fueling those regions' (and Chicagoland's) growth is a) births, and b) international immigration. I'm sorry, but last I checked 99% of international immigrants don't come in with a net worth of $2 million and drive up the cost of Manhattan's or Beverly Hills' housing markets.

The second point you made (top notch talent, etc) is certainly a point that can be debated, but it has nothing to do with the actual sources of population growth in these metros.

Having said that, I stand by my assertion that "being at the top" of industry has little to do with the phenomenon you describe. Chicagoland has more major corporate HQ than S. Cal. Given that HQ offices tend to have the highest paid individuals in the company, one would deduce that Chicagoland would have higher housing prices.

Instead, I think the difference in prices has to do with something far more intangible--perception. Southern Cali is perceived to be a very desirable and hip place to live, as is New York City, hence much higher housing prices. I really do think that when it comes down to real estate, perception is more important than anything else.

[simulcra]

Truth is, demographic trends don't agree with what you've said here. Both LA and NYC have seen huge amounts of net domestic outmigration (ie established Americans with good jobs), more so than Chicago. What is fueling those regions' (and Chicagoland's) growth is a) births, and b) international immigration. I'm sorry, but last I checked 99% of international immigrants don't come in with a net worth of $2 million and drive up the cost of Manhattan's or Beverly Hills' housing markets.

The second point you made (top notch talent, etc) is certainly a point that can be debated, but it has nothing to do with the actual sources of population growth in these metros.

Sorry, I kind of glossed over the connective tissue that links the two. There's some literature out there about globalization that dictates that with the major new industries (IT, biotech, finance), you end up with an extremely pyramidal social structure. So, you get a wealthy-ass Bank in Manhattan that employs maybe 1000 highpaid professionals. The spillover effect into the service industry is much more that in terms of low-paid low-skilled workers. I didn't mean to say Chicago doesn't also have similar sources of growth (immigration, domestic outmigration) I meant more to say that with regards to top talent, Chicago is not doing as well as NYC and LA, which has spillover effects to immigrant labor and the such.

Having said that, I stand by my assertion that "being at the top" of industry has little to do with the phenomenon you describe. Chicagoland has more major corporate HQ than S. Cal. Given that HQ offices tend to have the highest paid individuals in the company, one would deduce that Chicagoland would have higher housing prices.

Well, if we're talking about chicagoland... A lot of the major companies in Chicagoland that are a part of the new economy (especially IT) have residents or roots in DuPage County, which also so happens to be one of the most obscenely wealthy counties in Chicagoland and in the nation. From wikipedia: "Today, DuPage County boasts a personal per capita income which is the highest in the state. DuPage County's per capita income is also the highest in the midwest; nineteen of the county's towns have average household incomes of over $100,000." and also "DuPage County is the primary location of the Illinois Technology and Research Corridor. It is home to many large corporations, including [many fortune 500/1000 companies]." Naperville, which sits in DuPage County, also happens to have a lot of expensive houses (especially for a city as low dense as it is).

It just so happens that, as opposed to Silicon Valley or NYC, finance or IT doesn't make up such a huge proportion of the overall Chicago/land economy.

[The Urban Politician]

Originally Posted by simulcra

Sorry, I kind of glossed over the connective tissue that links the two. There's some literature out there about globalization that dictates that with the major new industries (IT, biotech, finance), you end up with an extremely pyramidal social structure. So, you get a wealthy-ass Bank in Manhattan that employs maybe 1000 highpaid professionals. The spillover effect into the service industry is much more that in terms of low-paid low-skilled workers. I didn't mean to say Chicago doesn't also have similar sources of growth (immigration, domestic outmigration) I meant more to say that with regards to top talent, Chicago is not doing as well as NYC and LA, which has spillover effects to immigrant labor and the such.

^ We've been over this before. Your model is just far too broad and lacks in nuance to explain so many differences in housing prices around the world, let alone the country. I'm not convinced that LA's industries, outside of entertainment & media, are the talent magnet to such a high degree that would explain its high housing prices; to the contrary, I think SoCal itself is the actual magnet for a lot of people due to perceptions, and thus the high housing prices.

Despite the rough ride of late and the bum perception Chicago's media tends to give itself, it continues (and will continue) to have enormous amounts of industry and a very large number of high paying corporate jobs (more, say, than Boston or Seattle, and certainly Portland), yet still its housing prices are so ridiculously cheap in a relative sense. Your model just plain does not account for this.

My thoughts: Chicago's lack of visibility, lousy weather, and constant overbuilding are the major reasons why it's cheap; not due to deficiencies in its workforce/industry. For example, right now Chicago's industrial & distribution market is perhaps the worst in the nation due to rampant, speculative overbuilding in the past decade.

But perhaps we should move on since we've been through this before. I'm simply not going to be convinced of the validity of your theory.

[Mr Downtown]

Originally Posted by simulcra

Perhaps I misspoke. I didn't mean "the" michigan avenue bridge, I meant the first primary bridge crossing the river (before then ferries were used).

The first Dearborn Street bridge was built in 1834. A third of the original townsite was on the North Side.

[urbanlife78]

Of course if someone is wealthy enough to want to spend 3 million on a place in Chicago, there will be something available for them under that price tag. My interest lies more in the point of my personal window of spending for housing because as of now, that is really all I can relate to.

So needless to say, the fascination with housing being the same as Portland, which is a city that is easily only a 4th of the size of Chicago is really impressive and confusing to me.

[wrabbit]

Originally Posted by urbanlife78

.....So needless to say, the fascination with housing being the same as Portland, which is a city that is easily only a 4th of the size of Chicago is really impressive and confusing to me.

Portland? Again?

[Northsider]

Originally Posted by wrabbit

Portland? Again?

Uhh ohh...better lock the thread, QUICK!

[simulcra]

Despite the rough ride of late and the bum perception Chicago's media tends to give itself, it continues (and will continue) to have enormous amounts of industry and a very large number of high paying corporate jobs (more, say, than Boston or Seattle, and certainly Portland), yet still its housing prices are so ridiculously cheap in a relative sense. Your model just plain does not account for this.

Yes it does. As a % of employment, high paying professional/managerial jobs make up a far smaller proportion of Chicago's economy than Seattle, Boston, or Portland. That's kind of the whole point of my model - it doesn't matter whether or not a given municipal/metro region has wealthy people or top-of-the-industry companies, it matters more the degree to which those industries or people constitute the economy.

While i otherwise loathe city-data.com (terrible design, mostly horrible forums), I can at least use it to contrast Chicago and Seattle. Note that the data isn't *too* accurate because it isn't granular enough, but it's still illuminating.

Chicago - #1 industry for males is a three way tie between Construction, Professionals, and Food services (9% each), #1 occupation for males is building/grounds maintenance and cleaning (5%)

Seattle - #1 industry for males is Professionals/science industry (16%), #1 occupation is computer specialists (8%).

That also hides the fact that Seattle has a lot of top-of-industry companies (Microsoft, Amazon, Boeing). While I'm not saying this data is the sole proof of my model, it's meant to be illustrative. Chicago has the far more balanced economy. Seattle, however, has an economy heavily based around an industry that's doing particularly well right now - as such it'll tend to overwhelmingly attract top talent within that industry far greater than one would expect just by proportionality (I could swap out Seattle with San Francisco and get even starker numbers, especially since San Francisco/Silicon Valley is so dominant in patents and venture capital as well). Seattle, however, will also be far more vulnerable to crashes than Chicago (various Boeing problems in the past, the dotcom bust of the early 00's) - but that's just a part of the model. Cities with a dominant industry will ride highs and lows with greater swings, and it's just so right now that the industries currently going through some of most prolonged growth periods (biotech, it, finance, media) that cities whose industries are dominated by them will do particularly well. Just like how similarly, cities like Chicago and Detroit did very well in the late 19th to mid 20th century, riding on the back of Fordist manufacturing, while cities like Portland and Seattle were timber-industry backwaters and Los Angeles was just a desert city in the shadow of San Francisco. Chicago has chosen to broadly diversify its economy, which has served it well in escaping the crash of manufacturing (see Detroit, Buffalo, Baltimore, etc) but necessarily means it can't ride the current boom of it/biotech/finance as well as Seattle, Silicon Valley in terms of attracting wealth and capitol investment. With a commensurate lack of dominating wealth from a dominant industry, the demand-side to housing is weaker which results in lower housing costs.

Grossly simplified, but you get the idea.

[urbanlife78]

Originally Posted by wrabbit

Portland? Again?

I hate to break it to you, but I live in Portland and I am thinking of going to grad school in Portland, Seattle, Chicago, or a long shot NYC...so seeing that Portland is currently my frame of reference, I will probably be referring to it from time to time.

Plus my fascination with the fact that I could be living in Chicago, which is an amazing city that I visit each year, for the same cost that I am paying here is just amazing to me and something I am curious to know why that is the case.

[simulcra]

Originally Posted by Mr Downtown

The first Dearborn Street bridge was built in 1834. A third of the original townsite was on the North Side.

Hmm, I'll have to compare notes with Chicago: A Biography, as that's where I got my development information from.

[Mr Downtown]

I don't think you'll find much conflict, as I drew the maps for that book.

[simulcra]

Originally Posted by Mr Downtown

I don't think you'll find much conflict, as I drew the maps for that book.

WAT? really? awesome.

[The Urban Politician]

Originally Posted by simulcra

Chicago has chosen to broadly diversify its economy, which has served it well in escaping the crash of manufacturing (see Detroit, Buffalo, Baltimore, etc) but necessarily means it can't ride the current boom of it/biotech/finance as well as Seattle, Silicon Valley in terms of attracting wealth and capitol investment.

^ I can see your point about IT and biotech, but in what way is Chicago not "riding a boom" in finance to the degree of Seattle and SF? Chicago is regarded as the second most important financial center in the western hemisphere.

Regarding the rest of your post, I see your point but I just don't think you've connected with me. There are a lot more forces at play that affect real estate prices, and your model fails to account for them.

Lets move on. You're not going to convince me of anything, and I guess I haven't convinced you of anything either.

[paytonc]

TUP, I'm pretty sure that what simulcra is saying is that there is *a* demand-side factor. It's not the only factor -- we readily acknowledged the supply-side factor of easier construction right at the start of the thread -- but it's there. Chicago's income distribution just isn't as skewed as it is in less affordable places.

Take a look at this paper from Ed Glaeser:
http://www.economics.harvard.edu/fac...Inequality.pdf
(The scatterplots in particular are really hard to read, but they're text so do a PDF text search for "Chicago.")

Some notable findings:
p.2: Exurban Kendall County has an incredibly balanced income distribution, whereas Manhattan's is incredibly imbalanced.
p.10: "Housing consumption inequality is particularly below income inequality in places with large amounts of income inequality." Even in highly unequal places, people live in surprisingly similar houses. In a more unequal place, this would result in rich people bidding up the price of average housing (particularly in the presence of supply constraints).
p.47: Chicago has a middling "Gini coefficient," the basic measure of income inequality. The cities with the highest coefficients are either places which attract the really wealthy (NY, SF, LA) or places which attract the really poor (Mexican immigrants in McAllen, college students in Gainesville). Cities with low coefficients tend to be very working-class.
p.60: Chicago has a lower share of finance workers than Atlanta, Dallas, Denver, Minneapolis, or Washington.
p.63: Lower inequality not only makes us more affordable, it makes us happier! Chicagoans are just as happy as people in San Francisco or New Orleans, although nowhere near as ebullient as Grand Rapids.

[simulcra]

Originally Posted by The Urban Politician

^ I can see your point about IT and biotech, but in what way is Chicago not "riding a boom" in finance to the degree of Seattle and SF? Chicago is regarded as the second most important financial center in the western hemisphere.

Regarding the rest of your post, I see your point but I just don't think you've connected with me. There are a lot more forces at play that affect real estate prices, and your model fails to account for them.

Lets move on. You're not going to convince me of anything, and I guess I haven't convinced you of anything either.

I don't have a very good answer because I'm not as knowledgable about finance as, say, someone like Saskia Sassen, but these are my general hypothesis:

- Chicago's investment banking is not nearly as strong or prevalent as New York's. I can only really think of Morningstar or Harris Bank when it comes to investment banks or financial institutions on a national-recognizable level, whereas JPMorgan Chase, Citigroup, and Bank of america (3 of the big 4) are based in NYC and are much larger than anything Chicago has natively. There's also the (now ill-fated) mega I-banks like Lehman Bros or Bear Stearns.
- Chicago really excels when it comes to futures and derivatives, which was not (as far as I know) directly linked to the growth in finance, which was driven more by traditional investment flows to other countries as well as securitization and high-frequency trading (which sort of necessitates being based in London or NYC). Nevertheless, as evidenced by CME's pretty good growth recently, derivatives (remember hearing about Credit Default Swaps?) are a good growth source and Chicago's finance is large enough that it lends itself to some high-frequency trading.

I would just venture to say that while Chicago really excels in finance, it's not as huge as a part of its overall eocnomy (6% according to city-data) then NYC. Even Seattle, which really only had WaMu (which is now just a Chase branch) had a huge swing based on WaMu's successes, simply because of how distortingly huge WaMu was to Seattle's local economy - when WaMu fell, a *lot* of downtown retailers were worried about going bankrupt simply because wamu execs and workers filled up so much of downtown. Whereas in Chicago, if Harris Bank inexplicably failed, while people would definitely notice, you wouldn't have everyone in the Loop also freaking out that their businesses might also fail.

[The Urban Politician]

Originally Posted by simulcra

I don't have a very good answer because I'm not as knowledgable about finance as, say, someone like Saskia Sassen, but these are my general hypothesis:

- Chicago's investment banking is not nearly as strong or prevalent as New York's. I can only really think of Morningstar or Harris Bank when it comes to investment banks or financial institutions on a national-recognizable level, whereas JPMorgan Chase, Citigroup, and Bank of america (3 of the big 4) are based in NYC and are much larger than anything Chicago has natively. There's also the (now ill-fated) mega I-banks like Lehman Bros or Bear Stearns.
- Chicago really excels when it comes to futures and derivatives, which was not (as far as I know) directly linked to the growth in finance, which was driven more by traditional investment flows to other countries as well as securitization and high-frequency trading (which sort of necessitates being based in London or NYC). Nevertheless, as evidenced by CME's pretty good growth recently, derivatives (remember hearing about Credit Default Swaps?) are a good growth source and Chicago's finance is large enough that it lends itself to some high-frequency trading.

I would just venture to say that while Chicago really excels in finance, it's not as huge as a part of its overall eocnomy (6% according to city-data) then NYC. Even Seattle, which really only had WaMu (which is now just a Chase branch) had a huge swing based on WaMu's successes, simply because of how distortingly huge WaMu was to Seattle's local economy - when WaMu fell, a *lot* of downtown retailers were worried about going bankrupt simply because wamu execs and workers filled up so much of downtown. Whereas in Chicago, if Harris Bank inexplicably failed, while people would definitely notice, you wouldn't have everyone in the Loop also freaking out that their businesses might also fail.

^ Ahh, I think I get what you're saying. You're talking about finance as a proportion of the overall economy. If that's what you're talking about, then yes, I certainly agree with you.

In other words, despite Chicago having more raw numbers of wealthy individuals than all of those smaller metros, its 'averages' skew downward due to the large numbers of lower payed workers living in the area. If that is what you're trying to say, I can halfway buy that argument.

[Coldwake]

Originally Posted by simulcra

That also hides the fact that Seattle has a lot of top-of-industry companies (Microsoft, Amazon, Boeing).

Not to get off topic... but I thought Boeing moved to the chicago area?

[simulcra]

Originally Posted by Coldwake

Not to get off topic... but I thought Boeing moved to the chicago area?

Only really in terms of management operations for their HQ (about 1000 administrative jobs; for reference sake, boeing employs a total of 155,000 people, according to wikipedia). All the engineers, industrial designers, manufacturers, etc. are all in Seattle still. If I go to a random networking event, probably 1 out of 3 people I meet are either from Microsoft or Boeing.

EDIT - what I meant to say was all the jobs for boeing's main manufacturing/research/engineering facilities. boeing has facilities in all sorts of crazy states and locations, but the bulk of them are in the seattle area.