Chicago’s housing market has been recovering steadily in recent years. The rate of foreclosure filings has gone down across the city, and home prices have significantly increased compared to a year ago.

But some neighborhoods aren’t recovering nearly as fast as others. You might think you know all the reasons why, but there’s a new wrinkle in this post-bubble housing market.

It’s no surprise that a nicely finished four-bedroom, two-bathroom single family home in Chicago’s North Center neighborhood can be listed on the market for $669,000. A similar home in Austin on the city’s West Side could be listed at $179,000.

Map: See how housing numbers compare in Chicago communities

Geoff Smith with DePaul Housing Institute says in this recovery, hot neighborhoods like Lincoln Park are reaching sale prices beyond their original peak.

“Really, the price increase you’re seeing in these stronger markets are more a function of supply and demand dynamics and access to credit. To the extent that [credit] is available is going to be more abundant in those areas because borrowers have stronger financial conditions,” he said.

So a nearly half a million dollar price difference from one neighborhood to the next is likely based a lot on location.

But in some cases, it could actually be more difficult for a middle class family to get a bank loan to buy the cheaper house in the distressed neighborhood.

One family’s odyssey

This happened to my friend Leila Noelliste. Her middle class family wanted to put down roots in North Lawndale on the West Side of the city. Last year, 80 percent of its total residential property sales were cash transactions and nearly a quarter were considered extremely low value, like about the price of a car.

Noelliste wasn’t making a cash purchase. She offered $182,000 for a two- flat in the neighborhood.

“When we got it inspected, it was really sturdy. Good foundation, good roof, didn’t need a lot of repairs,” she said. “There were two sets of tenants living in it. It was just a good building on a good block.”

She had plans for her family to live in one unit while renting out the other. But those plans came to a halt because of the home’s value —its appraisal.

“It was appraised for like in the 140s. And we were shocked. I mean, I know this isn’t a great area, but that just seemed really, really low,” she said.

The bank would only finance a loan for the appraised amount. Noelliste and her husband Norman Baldwin didn’t have the out of pocket money to pay the extra $40,000 on top of a down payment, so they had to move on.

That block in North Lawndale is wedged between two main thoroughfares, Cermak and Ogden. The street is mostly rental units, nicely maintained buildings. But there were a number of boarded up houses and vacant lots.

A short drive east on Ogden Avenue takes you in front of small businesses, boarded up commercial properties and some vacant lots before you get to the vast manicured greenery of Douglas Park. The rising buildings of the Medical District can be seen in the distance, and new rehabs start to pop up along the residential streets.

“Baffling, frustrating”

A less than 10-minute drive brings you to the Near West Side, where Leila ended up buying a home.

“Upstairs we have a master bedroom with a walk-in closet, with a master bathroom. And then we have two smaller bedrooms. One of the bedrooms we use as my office-guest room. And the other room, my son is in. So it’s a beautiful home,” Noelliste said.

They offered $285,000 for the place, and it was accepted..

“My credit was good, Norm’s credit was good. We had a lot in our savings. All it was  [the lower appraisal on the two-flat] was the value of the house. That’s all it boiled down to.  Which is baffling, very, very frustrating,” she said.

Here’s a family now living in a $285,000 house, but couldn’t get the financing for a place  $100,000 cheaper in a less desirable neighborhood.

“Our friends who were looking in the area, they too were like middle class people who wanted to move back into Lawndale and to try to help build the community and they were just essentially being shut out,” she said.

To be clear, this applies to homebuyers looking to get a loan and not cash purchasers.

Geoff Smith with DePaul says cash investors aren’t bad. They can even help market recovery.

“You need those types of players to continue to have the market be active and for it to recover. If there’s weak demand in a market and no one’s buying anything, the properties will continue to deteriorate,” he said. “So the hope is the investors will stabilize the neighborhood to some extent.”

But for neighborhoods like Lawndale, that recovery is slow going with the cash activity.  The Noelliste family couldn’t get the loan they needed because values were low in this distressed neighborhood.  So they went to a nicer area, a neighborhood that includes the Medical District and the United Center,  and they had no problem getting a loan to buy a house for $285,000.

A number of housing people I talked to about Noelliste’s home buying story, including mortgage lenders, housing advocates, appraisers— none of them were surprised. They all said, “Yeah, that happens.”

Michael Hobbs, president of Pahroo Appraisal and Consultancy was one of those people.

“If distressed properties are the predominant occurrence in that market, then that is what’s typically going to drive pricing,” he said.

Comparing neighborhood properties

That means if you’ve got an area with lots of boarded up houses and lots of extremely low value sales, then it’s likely that even a newly rehabbed house would be appraised at a lower price. Hobbs says that’s because most residential appraisals are determined by comparing that property with ones that have recently sold in the neighborhood.

“In the desirable neighborhoods, there’s an insufficient amount of inventory or supply and therefore buyers are competing even more ferociously to be in place, to be the one individual or family that is successful in buying that property,” he said.

So in an area like Lincoln Park, that demand drives prices way up, even beyond peak prices. And appraisers and banks feel comfortable with that because they have the numbers to back it up. But when someone wants to make a traditional purchase in a marginal area like Lawndale, appraisers and lenders are more conservative, especially after what happened during the housing crisis.

“You’re not rewarded for taking risk,” said Rob Rose, chief operating officer of the Chicago Community Loan Fund.

He said it can be more punitive for banks to go against regulation or to make policy exceptions, like approving a mortgage loan for $182,000 when the house was appraised at $140,000.

According to the Federal Deposit Insurance Corporation, lending policy exceptions will be reviewed to determine whether the lending institution’s decisions are adequately documented and appropriate in light of all of the relevant credit considerations. According to FDIC, a lot of exceptions may signal a weakening of a bank’s underwriting practices.

Rose said for people in Noelliste’s situation, it’s just easier for banks to say no.        

“For those bankers involved, then that’s a bit of their own equity they have to put at risk for the regulators to explain why they made that exception,” he said.

Rose said in the post-bubble market, banks are putting more weight on the value of a property than they did before. He thinks using cash transactions and distressed sales as comparables doesn’t really give a true market sense for what a house should sell for.

“So if I’m telling you the market is such that I can now sell this house for a higher amount, that should mean something,” he said.

Rose says banks sometimes get in their own way in this post bubble market. He says banks need to start having the courage to make policy exceptions and be willing to explain their actions.

Rose says it’s unlikely that national institutions like Bank of America or Chase would do this because of the volume of loans they deal with. But he says community banks have the opportunity to step up and give loans at a higher value to people who are willing and have the ability to make the payments.

He says then we might eventually see values edge up in these marginal neighborhoods.

Map: Chicago housing statistics

Susie An is WBEZ’s business reporter. Follow her @soosieon.