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 A report released Nov. 27 by realtor.com forecasts the
Chicago-Naperville-Elgin Metropolitan Area will experience the worst housing
market slowdown among 100 of the nation’s metropolitan areas in 2019.
As mortgage rates are slowly creeping up to 5.5 percent, home sales are expected
to slow nationwide. However, the slowdown is anticipated to be nearly four times
worse in Chicago than in the rest of the nation.
Illinois homeowners are subject to the highest overall tax burden in the
country, including the second highest property taxes in the nation. They’re also
weathering the largest permanent income tax hike in state history. As these
costs rise, the value of homeownership in the Land of Lincoln falls relative to
other areas, reducing demand for housing.
Furthermore, as median home prices are expected to appreciate by 2.2 percent
throughout the nation, the typical Chicago area home will likely lose nearly 2
percent of its total value in 2019, according to the realtor.com forecast.
The combination of steeply declining home sales and values lands the Chicagoland
housing market at the bottom for 2019.
Why is housing demand declining faster in Chicago?
Chicago’s disturbing housing market performance comes as no surprise. Illinois
is one of only three states where single family homes became a worse investment
relative to before the housing bubble.
The poor health of the state’s – and Chicago’s – real estate market is due to a
variety of factors.
Outmigration
For starters, the Illinois population has been declining for four consecutive
years, second only to West Virginia. The Chicago metro area was the only one of
the 10 largest metro areas to experience population decline last year. While
births still outpace deaths in Illinois and Chicago, the population has been
declining due to persistent outmigration.
The shrinking population isn’t due to snowbirds retiring to warm-weather states
such as Florida. The primary driver of the state’s population decline is from
prime working-age Illinoisans (25-54 years old) moving away. Not only is
Illinois hemorrhaging its current workforce, hindering the growth in home prices
and sales, but population losses are also compromising its future workforce as
these working-age adults move away with their children. As the decline in
Illinois’ youngest population cohorts – those most likely to be buying homes –
are more severe than in the rest of the nation, the weak Illinois housing market
can be expected to continue.
Property taxes
For decades, Illinois property taxes have skyrocketed compared to home values,
growing 43 percent faster than home values statewide and 76 percent faster than
home values in Cook County. The dramatic rise in property taxes
has resulted in Illinoisans now paying the second-highest rates in the nation.
In some cases residents accept increased property taxes where they anticipate
the funds will finance local services that will improve the quality of their
neighborhoods and result in home price appreciation. However, this has not been
the case in Illinois: For the past 20 years, fewer than 50 cents of every
additional dollar paid in property taxes has gone to delivery of current
services.
When additional government spending is wasted, and does not go toward the
delivery of current services or improved services — all else being equal —
higher property taxes do not increase the desirability of a neighborhood. This
lack of improvement for additional tax dollars can cause housing prices to fall.
Income taxes
In 2017, Illinoisans were hit with the largest permanent income tax hike in
state history, raising the income tax to 4.95 percent from 3.75 percent. While
this 32 percent increase in the state’s individual income tax burden would be
damaging enough on its own, the fact that neighboring states have been reducing
income taxes since the end of the recession makes Illinois an even less inviting
place to buy a house.
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The most recent tax hike, just like the 2011 tax
hike, can be expected to have severely negative consequences for
investment within the state, resulting in fewer jobs and a smaller
economy. In fact, some of these effects are already being felt as
Illinois’ private-sector job creation ranks among the worst in the
nation in the year since the income tax hike.
Employment growth and housing price growth are
strongly correlated. Recent economic research highlights links
between regional labor and housing markets. In their article, “The
Recent Evolution of Local U.S. Labor Markets,” authors Maximiliano
Dvorkin and Hannah Shell examined the recession and recovery by
reviewing the correlation between county-level unemployment rates
and changes in housing prices. U.S. counties with larger decreases
in housing prices experienced larger increases in the unemployment
rate.
This means declining home price appreciation could have negative
spillover effects on the rest of Illinois’ economy. Illinois’ weaker
housing market recovery is consistent with the state’s much weaker
employment growth and weaker economic growth when compared to the
rest of the country.
2019 could be worse than projected
While recent public policy has certainly hindered the health of the
state’s housing market, the situation could be worse than projected
in 2019.
Gov.-elect J.B. Pritzker made passage of a progressive income tax a
key pillar of his campaign. While promoted as a tax break for the
middle-class, the states Pritzker suggested as models for this tax
change would all impose higher income taxes on the typical Illinois
family. Moreover, the most recent progressive tax proposal filed in
the Illinois General Assembly would have raised taxes on those
earning more than $17,300.
Even if Pritzker’s progressive tax proposal were not about
generating new revenue to fund campaign promises of higher spending,
a progressive income tax would be worse for the state’s economy than
Illinois’ constitutionally protected flat income tax.
Changing the forecast
If Pritzker wants to improve the forecast for Chicagoland – and
Illinois as a whole – the state needs lasting, meaningful reforms to
government cost drivers.
First, Illinois homeowners need real, sustained property tax relief.
Currently, homeowners face the second-highest property tax burden in
the nation, largely because of an unsustainable public pension
system that is at least $130 billion in debt.
If Illinois and its local governments were able to reform their
unaffordable pension systems, the state could contribute more money
toward classroom spending and reduce its overall spending.
Communities could provide property tax relief to make their housing
more attractive.
Second, Illinoisans need a state government that spends within its
means and doesn’t raise income taxes while other states cut theirs.
The Illinois Policy Institute proposed a path to balancing the
budget that requires no tax increases. One key policy solution the
Institute offered for fiscal year 2019 is a spending cap, which
would limit the growth in government spending to the 10-year average
growth rate of the state economy. Tying government spending to
economic growth protects taxpayers from future tax hikes. Democratic
and Republican lawmakers proposed spending caps as constitutional
amendments in the Illinois Senate and House of Representatives this
year.
Without property and income tax relief, housing in Illinois will
continue to be less attractive, Illinois’ population will likely
continue its decline, and the Chicago-area housing market will
continue to be among the worst in the nation.
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