By: Mark Glennon*
A tipping point is at hand in Illinois. It’s the point when potential homebuyers conclude they’ll never cash out whole because of increasing taxes and declining values: Buyers can get in but can’t get out — a Roach Motel. A buyers’ strike can follow, speeding the spiral downward.
Excessive property taxes are driving the potential disaster. A property tax freeze is essential, immediately, to head it off.
The evidence starts with effective property tax rates for towns and cities around Chicago, where the problem is most acute. Effective rates are the simple percentage of annual property taxes compared to home value.
Many of those rates are stupefying. In over 150 municipalities they exceed 3%, which is double the national average. In the south suburbs – the four townships directly south of the city – rates average over 5%. Many others have rates over 4%. But it’s not just the Chicago metro area. Statewide, Illinois has the highest property taxes in the country, averaging 2.67% according to a study by CoreLogic. That’s 78% higher than the national average.
The consequence has been entirely predictable – lagging or declining home values and underwater mortgages trapping owners in properties worth less than the mortgage they owe. Home values the Chicago region have trailed other major metro areas by about 25% since 2002 according to the Case-Shiller Index, and values are still 18% below their former peak.
Sales and and prices have picked up a bit in the last couple months, but that’s thanks mostly to a pocket of strength in Chicago’s most prosperous neighborhoods. Going forward, the picture is bleak. The Chicago metro area ranks dead last among 100 cities in the recent Realtor.com National Housing Forecast for 2017. Another study found that found that of the 50 largest metropolitan areas’ in and out-migrations, a bigger percentage of Chicago’s residents left the area than any other big city.
The ultimate result is that buyers see no potential appreciation in homes, or worse: the risk of being trapped in an underwater mortgage. Nearly 20% of Illinois homes, 500,000 of them, are severely underwater — valued at least 25 percent under their outstanding mortgage debt according to a recent RealtyTrac study. Hundreds of thousands more are underwater less severely or could only break even if they sold. Only Nevada has a worse percentage of underwater homes.
Property taxes are a major cause of those lagging prices and underwater mortgages. They directly determine affordability and mortgage qualification. And tax rates are rising with no end in sight thanks primarily to ever increasing strains on government budgets and increasing pension costs. Other factors are contributing to the loss of faith in the value of Illinois homes as an investment, but high taxes are the biggest reason Illinoisans cite for leaving. Those other factors require longer term solutions, but a property tax freeze can be done now.
There’s another reason why buyers may soon sour entirely: Rates as high as they’ve become in much of Illinois are immoral. Homeowners who have seen their taxes spike to 4%, 5% and higher have essentially had their homes taken. Their “ownership” interest is junior to a perpetuity in favor of the government secured by a lien that’s senior to their mortgage lenders and their own interests. It’s grossly unfair to single out homeowners for such a punitive burden.
Depressed prices from higher taxes are particularly harsh on working class families. For them, a down payment often represents their life savings. Underwater borrowers have had their home equity seized. This is a moral disgrace for Illinois.
The tipping point Illinois now faces is a matter of consumer attitude and prevailing opinion. It will spread once it starts, like any other consumer sentiment, feeding on itself by driving values still lower – a death spiral. That tipping point already passed in some places. The south suburbs, where property taxes average over 5%, are in that death spiral.
There’s only one means available now to help head off a statewide calamity: Stop “debating” a property tax freeze and pass it immediately. It’s already too late for many places where a large rollback is long overdue.
Freeze property taxes now.
*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.