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 Most people view their decision to buy a home at least in part
as an investment. For most households, the net equity in their home represents
the bulk of their net worth. But it’s more than just a financial decision – it’s
a sign of trust and certainty in the future of a given community.
Unfortunately, government data suggest home prices in Illinois are still down 10
percent compared with 2006. And over the same time, property tax bills have gone
up more than 51 percent.
That doesn’t inspire confidence or certainty for prospective homeowners.
Although home prices in Illinois have started to increase again
since 2013, home prices are still down 10 percent compared with 2006, according
to research by the Federal Housing Finance Agency. This weak recovery is
prevalent across the state.
Despite the decrease in home prices over the decade, the average household
property tax bill in Illinois rose 51.4 percent, according to the U.S. Census
Bureau’s American Community Survey, or ACS.
Meanwhile, Illinois’ nonfarm personal income (adjusted for inflation) grew by
just 10.2 percent over that time, according to the Bureau of Economic Analysis.
Compared with the nation, Illinois has been a laggard in terms of housing
appreciation.
ARE GROWING PROPERTY TAX BURDENS BEHIND THE DECLINE IN ILLINOIS
HOME VALUES?
Illinoisans have seen their property tax bills grow six times faster than
household incomes. Are those bills driving down home values?
The dependence of local governments on property taxes has been justified
traditionally with the claim that an increase in the tax rate has little to no
effect on the tax base. One explanation offered for why property taxes may not
lead to changes in property values is that taxes are used to finance public
services that may benefit homeowners and businesses.
When property ownership is related to individuals’ use of goods provided by
local governments, such as schools or parks, then property taxes can be
justified as user fees, implying that it is the provision of amenities – not
property taxes – that lead to changes in property values.
However, research shows that an increase in the property tax rate has a negative
effect on property values, even after accounting for local public services.
WHAT TO EXPECT IF THE STATE'S ECONOMIC TROUBLES CONTINUE IN 2018
From 2006 to 2016, nearly 276,000 households left the state on net, according to
IRS tax data.
 A reduction in the number of households in Illinois could have serious negative
consequences for the housing market. A decrease in housing demand is expected to
cause housing prices to decrease.
But the relationship between population and housing is complex.
On the one hand, population change leads to a changing demand for housing.
Population growth – and the growth in the number of households – leads to growth
in housing demand.
Population decline might lead to a decrease in housing demand. This will,
however, only happen in the long run, after not only the number of people but
also the number of households has started to decline. The danger of population
decline is greatest in rural areas and in areas with lower-quality housing.
On the other hand, an increase in the supply of housing that puts downward
pressure on home prices stimulates population growth through migration. Adequate
housing supply might attract migrants or influence where they choose to live.
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Economists Dragana Cvijanovic, Jack Favilukis and
Christopher Polk found empirical evidence that predictable
demographic changes related to fertility and mortality rates have no
effect on housing values. However, it’s the non-natural component of
population growth – growth due to new migrant households – that
causes home prices to rise.
Economist Albert Saiz found that a migrant household inflow equal to
1 percent of a city’s population is associated with a 1 percent
increase in average rents and housing values. New migrant households
push up rents and housing values in cities.
And recent economic research highlights links
between regional labor and housing markets. Researchers found a
strong negative correlation between an area’s housing prices and the
area’s unemployment rate.
The authors found that after a negative economic shock – the last
recession, for example – areas where housing prices declined the
most also experienced the highest decline in employment.
This means that if Illinois’ economy continues on its current path,
areas with large decreases in housing prices would also experience
large decreases in employment. This is because a large decline in
housing prices leads to a large decline in local spending that
further depresses the economy.
TURNING THE SHIP AROUND
Fewer people are looking to plant roots in Illinois because of tax
hikes that have reduced investment flows, causing the quantity and
quality of jobs to decrease.
Employment growth in Illinois is lagging the rest of the nation and
could actually get worse. If home prices begin to decline, the labor
market could take another hit.
In order to move Illinois back from the edge of disaster, the right
policy prescriptions would be to reduce property taxes across the
state in order to make buying a home in Illinois a worthwhile
investment again. To make that realistic, lawmakers must address the
main cost-drivers of government. A good place to start is
consolidating the state’s nearly 7,000 units of local government,
which fuel high property tax bills.
Enacting long-term property tax relief would gift greater certainty
to homeowners residing in the Land of Lincoln, not to mention
homeowners-to-be.
APPENDIX: MEASURING HOME VALUES
Researchers have relied on two main types of data sources to
investigate housing price movements. Both have serious issues that
limit their usefulness in a variety of applications.
The first category consists of value measures such the American
Community Survey, the decennial census or Zillow’s home value index,
which all confound price and quantity changes.
Unfortunately, median or average sales prices are not a good measure
of appreciation. Movements in sales prices should not be interpreted
as measuring changes in the value of a home. Prices are influenced
by changes in costs and also by changes in the characteristics and
size of homes actually sold. For example, if for some reason in a
given year a disproportionately high number of high priced homes
were sold, the median price would rise even if no single property
appreciated at all.
The second category consists of proprietary price index data such as
Black Knight, CoreLogic or Case-Shiller, which are produced using
limited transactions data prior to the late 1980s or early 1990s,
forcing reliance on geographic pooling of transactions, smoothing of
series over space or time, or limiting coverage.
To address this gap in the availability of constant-quality house
price measures, economists at the Federal Housing Finance Agency
used data from nearly 100 million transactions to construct a
comprehensive set of annual house price indices over four decades
for cities, counties, 3-digit ZIP codes (ZIP3s) and 5-digit ZIP
codes (ZIP5s).
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