The past year’s vigor in the Chicago-area residential real estate market might carry it over the new hurdles that have recently been thrown in the path, but it could take some serious lift to get over them.

Three hurdles in particular are ahead.

• The Federal Reserve’s Dec. 18 statement that it will slow the pace of interest rate cuts in 2025 means people who’ve been waiting for mortgage rates to come down significantly will have to keep waiting.
• Some analysts say that President-elect Donald Trump’s promised tariffs and immigration crackdowns, if he follows through on them, will drive up inflation and in consequence push interest rates even higher.
• If the persistent lack of inventory of homes for sale since interest rates started rising in mid-2022 doesn’t loosen up, those buyers who need to make a move will have to pay ever-higher prices for the short supply.

In the city, a worrisome housing market hurdle was dropped into the path suddenly, but then swiftly removed. Mayor Brandon Johnson’s proposal of a $300 million property tax hike to help fill the city’s budget gap was trounced by the City Council and soon withdrawn. The city budget ultimately passed with no property tax increase.

Although the proposed tax increase would have meant just $240 a year for the owner of a $250,000 house, the tax would have added fuel to the widespread feeling that Chicago homeowners are overtaxed, and potentially nudged more buyers to pick the suburbs over the city.

What will happen in the housing market in 2025 is hard to say, both nationally and locally, where Chicago has defied national trends for years. Prior to the COVID-era housing boom, home price growth in the Chicago area was running at about half the nation’s, but in recent years the equation has switched and Chicago prices have risen about twice as fast as the nation’s.

It was true again in November, according to data released Dec. 19 by Illinois Realtors and the National Association of Realtors. The median price of homes sold in the Chicago metro area in November was up 7.8% from the same time a year earlier, and in the city 13%, while nationwide the median price was up 4.7%.

The surge in homes going under contract to buyers was also considerably bigger in the Chicago metro area than nationwide, although that surge fizzled in December as mortgage rates rose.

And there’s the issue: Interest rates have remained a burr under the housing market’s saddle. After the Fed reduced long-term rates in December, mortgage rates went in the other direction.

“Despite the cuts to the short-term interest rates by the Federal Reserve, mortgage rates have largely refused to budge,” Lawrence Yun, NAR’s chief economist, said in a statement after the Fed meeting. “One reason is that consumer price inflation has not been fully contained and slightly accelerated in the past two months. Lending money over the longer term needs to compensate for future returned money's loss of purchasing power.”

Housing Wire’s Mike Simonsen, a spelunker in real estate analytics, pointed out the wild hare that interest rates have become in recent years. In a Dec. 19 article, Simonsen noted that a year ago, when mortgage rates were above 7.5% for the first time in the 21st century, “most mortgage market observers expected that rates would generally decline in 2024, stabilizing at perhaps 6% or lower by now.”

Instead, the yearlong average was at about 6.72%, Simonsen wrote. The difference between expectations and reality, three-fourths of a percentage point, makes a difference of roughly $158 a month in what a homebuyer in the $400,000 range can afford, or $1,890 a year.

It's not a huge amount, but certainly enough to make buyers scale back when they’re already squeezing to maximize their homebuying dollar amid the inflated post-pandemic cost of living and fast-rising home prices.

This is particularly true in the Chicago area, because our home prices are rising so much more than they are in other metros. A key reason they’re doing so is that Chicago’s long-term affordability edge compared with other major U.S. cities means even with higher interest rates it’s more possible for people to buy a home here.

But the double-whammy of interest rates and prices both rising in 2025 could erode that advantage somewhat.

Just three days before the Fed’s announcement, the online real estate marketplace Zillow put out a forecast headlined: “Home sales poised to increase next year if rates cooperate.”

Within days it was clear rates won’t cooperate.

In the Chicago area, home sales have been increasing in the past few months — up 3.7% in the city in November from November 2023, and 2.9% metro-wide — but they’re coming up from a deep trough. The year is likely to end with fewer homes sold than any year since at least 2012.

Homebuyers generally follow the purchase with more purchases — of rugs, curtains and other home goods. Growing home sales should help boost those industries.

If the recent vigor in the Chicago-area holds — that is, if inflation and interest rates don’t weaken it — Realtor.com forecasts the metro area will see the number of home sales 12.4% higher in 2025 than in 2024, a solid increase.

Even so, the figure would still be below the average of the four years prior to pandemic-riddled 2020, the last four normal years in memory.

That is, normalcy is still only a memory.