Published: Thursday, 8 Oct 2009 | 9:25 AM ET

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The common perception of Middle America is that of a region insulated from the afflictions of the coasts, but a look at some of the larger Midwestern real estate markets shows that’s not always the case.

The once high-flying condo market in the Chicago area remains under pressure.

Indeed, some areas fell victim to the same woes that dragged down large markets in New York, Florida, and California, while others are currently experiencing boom-era price increases. Sales are rebounding in the harder-hit markets, but much of that activity has been in distressed properties—foreclosures and short sales.

One trend is clear: the $8,000 first-time home buyer tax credit has been a boon to markets throughout the Midwest. And with prices beginning to stabilize, Midwest realtors are cautiously optimistic about the near-term outlook. Here's a look at some big and small markets.

Chicago

High foreclosure rates, tumbling prices. That’s the Chicago-area real estate market in a nutshell. According to the National Association of Realtors, the media sales price of existing single-family homes in the second quarter fell to $204,300 from $257,600, or 20.7 percent, from the same period in 2008.

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The first-time home buyer tax credit has sparked six consecutive months of increased unit sales, according to David Hanna, president of the Chicago Association of Realtors.

But he points out that much of that activity is in distressed properties, which is putting downward pressure on sales prices overall. No surprise, given that the Chicago area’s foreclosure rate climbed 30 percent in the first half of 2009, according to foreclosure listing service RealtyTrac.

More disturbing, Hanna says, has been the pressure on Chicago’s condominium market, once the strength of the area’s real estate market.

The median condo price fell 17 percent in the second quarter. Unit sales dropped 19.1 percent in August, according to the Illinois Association of Realtors. Hanna attributes much of the weakness to regulations Fannie Mae implemented in January to limit risky lending, including raising the presale requirements in condo developments from 51 percent to 70 percent.

“[Condos are] entry-level housing in many areas of the city, but in Nevada or South Florida or parts of California, these are second homes, and people are much quicker to walk away from those properties than if they are their primary residence,” Hanna says. “Even though we had a healthy condo market, they made decisions based on national statistics and applied them onto our marketplace. Those were body blows.”

Chicago is also known for two-to-four-unit condos. Hanna says changes in Federal Housing Authority guidelines regarding approval of loans for such housing should help bolster the market. Effective Nov. 2, the Federal Housing Administration will allow one unit of two-to-four-unit condos to be eligible for financing.

“You’re going to have FHA willing to do loans in two-to-four-unit buildings, which they weren’t doing for most of this year,” Hanna says. “Our neighborhoods are full of these two- to four-unit buildings.”

Minneapolis

Minnesotans tend to be a more fiscally prudent bunch. That’s why it’s so surprising the Minneapolis market experienced the same boom and bust of more high profile markets.

“We’ve had a large degree of risky lending practices that were similar to what was going on in the coastal markets,” says Mark Allen, chief executive officer of the Minneapolis Area Association of Realtors. “It’s fairly perplexing to us, because Minnesotans historically have been very conservative in how they spend, invest, and borrow money. Nobody’s been able to come forward with a good explanation as to what created that cultural shift in our market. But it’s clear relative to the data.”

The end result: a 12.5-percent drop in second-quarter median sales price for existing single-family homes. On the bright side, inventory is steadily declining.

Minneapolis skyline.

“Last year, as of August 31, there were 31,600 homes for sale,” Allen says. “This year there were 25,500 homes currently on the market.” That’s a decline of 19 percent.

But, like Chicago, much of Minneapolis’ sales activity has been in distressed properties and lower-priced homes.

“We are confident that we’ve seen the price bottom, but it’s far more established in the lower-end price ranges than in the higher-end price ranges,” Allen says. “Our expectation is that the higher price ranges are going to continue to suffer for at least a year, and possibly two to three years.”

Quad Cities

Thanks to a steady agricultural market, and industrial industries that serve the agricultural market—along with a traditional approach to mortgage lending—the Quad Cities area (a group of four cities in Illinois and Iowa split by the Mississippi River) has been a pillar of strength in the Midwest. Second-quarter prices jumped 30.6 percent from a year ago to a median price of $113,200.

“Our marketplace has always been a little bit more conservative when it comes to financing,” says Jon Yocum, chairman of the Quad City Area Realtor Association. “It also has to do with the education we provide our member realtors and making sure our buyers are comfortable with the loan program they applied for.”

Although the 30-percent jump is exceptionally steep by Quad Cities standards, much of it can be attributed to an unexpected decline in prices at the end of 2008.

“Last fall with the election, you had talk about the economy on every candidate's agenda,” Yocum says. “They were saying how values had gone down across the nation and it was going to affect every market. It wasn’t uncommon to see offers come in 20 percent below list price. That was because of what people were hearing on the national news, but we didn’t have that effect here. Once the election was over, things started to turn around and get active again.”

Springfield

Illinois’ capital best exemplifies the steady-as-she-goes approach to growth typically associated with the Midwest.

“If we had 2- or 3-percent appreciation in a year, we always felt that we were doing good,” says Nancy Long, president of the Capital Area Association of Realtors. “A lot of our people do lending with the local lenders. That’s a big help because they’re a little more conservative than the other lenders, so they haven’t gotten into the financial quagmire that a lot of other people have gotten into.”

According to Long, year-to-date home sales through July were down 4.5 percent from a year ago. But activity has recently rebounded with ales for the month of July up 3.8 percent from a year ago.

Long also says homes are selling quickly—often after less than 10 days on the market. And foreclosure activity fell 29 percent in the first half of the year, according to RealtyTrac (it helps that Springfield has the second-lowest unemployment rate in the state).

And prices are holding up well. Second-quarter median prices climbed 3.5 percent. But for anyone thinking that they’ll get prime property on the cheap, Long says it’s best to look elsewhere.

“We’ve got people out there who think because of everything they hear nationally, people come from some of the bigger areas to our area and think they’re going to get a $400,000 or $500,000 for $100,000 or $200,000,” she says. “That’s not happening in our area. Our list-to-sales price ratio is still hovering around 95 percent.”

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