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By: Mark Glennon*

Wouldn’t home prices bottom out at some point when they drop because of high taxes? That is, wouldn’t rock bottom prices eventually tempt back in buyers who decide the taxes are secondary?

That’s the experiment reaching a new stage in Chicago’s south suburbs.

Two years ago we wrote in detail about badly depressed prices in south suburban home prices and the role of property taxes. They exceed, on average, 5% per year. Crain’s later did a thorough report on the same thing, including the work of “a set of pioneers” working to turn things around.

For a while, it looked like things indeed might be bottoming out. We noted some signs of stability in our initial article and Crain’s wrote again about clearer evidence earlier this year.

But did that hold up? Can it? Was temporary stability and even a bounce off the bottom predictable, to be followed by further declines?

Well, a new piece this week by Dennis Rodkin at Crain’s details further price drops in many of those suburbs.

The major cause, I suspect, is that after the bottoming out there’s a strong deterrent to make improvements and a strong incentive to let properties decline in order to reduce assessed value. Why would you make an addition to your home if the added value would be subject to a 5% lien in perpetuity in favor of the government? Why not let the assessed value drop to reduce your huge tax bill?

For commercial properties, those perverted incentives are still more severe. In the south suburbs, commercial effective rates are a mind-boggling 12.7% per year — almost six times the national average! Who would develop the countless, empty commercial sites in those areas when their investment would have to bear those taxes year after year? Nobody.

There’s no doubt variance among particular towns, but those perverse incentives ultimately must drive a further downturn.

It’s sad enough that tens of thousands of south suburban families lost their home equity. More frightening, however, is whether those suburbs are the precedent for more Illinois communities. Dozens of other towns and cities have rates exceeding 3% and even 4%, especially in Chicago suburbs (listed here).

We’ll continue to watch how this plays out, but so far, Mr. Market’s mercy appears to have been temporary.

*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

 

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