Chicago Olympics And Home Values

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I run into a fair amount of discussion about how the olympics being held in Chicago in 2016 would be such a boon to real estate values on the south side. Interestingly, everyone believes that hosting the olympics would benefit home values but I haven’t really heard any discussion of exactly how this works. Presumably, the construction, the activity, the redevelopment of a few key areas, the attention, and the proximity to a high visibility event would raise all boats.

The following map from Crain’s shows the plan.

As you can see, the affected areas on the south side would be Douglas, Kenwood, and Hyde Park.

As I have often said, people shouldn’t think of a home purchase as an investment but rather as a place to live. For one, you wouldn’t want to live in a community in which you were not happy just for the promise of a future investment return. Secondly, there is clearly no way to know ahead of time what purchase is going to provide a great return, if any. In the case of the Chicago olympics I can imagine a scenario whereby, after the olympics are over and they dump 5,000 former olympic village units on the market as condos, home prices plummet on the south side.

Nevertheless, everyone would like to know what the odds are that the olympics will be held in Chicago. As of the time of this writing there is a 65% chance. And how do I know this? Well, there is a prediction market called Intrade where people trade contracts on events like who the International Olympic Committe will announce as the host of the 2016 olympics on October 2, 2009. Much like a futures market, a prediction market trades contracts which will settle at some date in the future at a price determined by some future event. In this case, the 2016 Olympics in North America (Chicago) contract will settle at either 100 if Chicago is selected as the olympic host or 0 if some other city is selected. In the meantime the contract trades at a price that theoretically represents the probability that Chicago will be the 2016 host because the contract price represents the collective wisdom of everyone trading this contract. If someone believed the probability was significantly different than the contract price then it would make sense for them to either buy or sell the contract because of the favorable odds. This would then drive the price towards their perceived probability. The graph below tracks the current Chicago olympics contract in real time so that you can get a sense of what “the market” believes the current odds are. 

Looking closely at the graph above you can see that the contract price recently rose about 20 points right after the election. The reason for that was that there was a belief that Barack Obama would participate in the Chicago presentation to the International Olympic Committee and that that would help seal the deal.

Well, 65% odds is clearly not a sure thing and as you can see above the odds fluctuate quite rapidly. So this should convince you of one thing: gambling on the olympics coming to Chicago when buying a house would not be a smart move.

Gary Lucido

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