Issues & Insights
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Chicago’s Hemorrhaging Housing Market

High taxes and government debt have soured buyers on Illinois and the nation’s third-largest city. 

By Steven Malanga

In early 2012, Chicago Mayor Rahm Emanuel warned residents and local politicians that, unless the city, along with the state of Illinois, started tackling its deep pension problems, “You won’t recruit a business, you won’t recruit a family to live here.” Seven years later, as Emanuel exits office, it’s becoming clearer what he meant.

A few months ago, predicted that Chicago would have the weakest housing activity this year among the nation’s top 100 markets. Average housing prices in the Windy City still haven’t completely recovered from the real-estate downturn that began in 2009, though property taxes continue to climb. No wonder, then, that Illinois ranks among states losing the most people to other areas of the country, or that some Chicago-area homeowners are taking big losses when they sell their houses.

The future doesn’t look brighter. “Taxes are high, the services (that taxes) pay for are terrible, and the debt load is so high, so palpably unsustainable that people have no belief that the resources can be found to turn it all around,” Ball State economist Michael Hicks told the local press last year.

Pension Problems

Government-employee unions have pushed legislation that gradually forces local municipalities to ramp up pension contributions, even as efforts to control retirement-system costs have sputtered. The result: higher taxes.

Chicago’s annual pension payments have doubled over the last few years, to nearly $1.2 billion, and are set to rise to $2 billion within three years. In 2015, the city passed $543 million in property-tax increases, phased in over three years, to pay for the burden. Every penny that the city collects in property taxes goes into the pension system. The financially troubled Chicago school system has also been raising its share of local homeowner taxes, including a $224 million hike in the 2017 school year. The combined bite now gives Chicago among the highest residential property-tax rates of any American city.

As taxes soar, residents are leaving Illinois and its largest city. From 2011 through 2017, Illinois ranked second among the states in net domestic outmigration, losing 640,000 more residents than it gained from other states, according to a study by demographer Wendell Cox.

Chicago is a big reason. A recent Bloomberg study of metropolitan-area migration data found that the city had a net migration loss of 105,000 in 2014; it got worse in 2017, with the net loss totaling 155,000. Governors of some high-tax states, like New York’s Andrew Cuomo, have acknowledged the role that tax increases play in driving residents out, but in Illinois, 
new governor Jay Pritzker has proposed changing the state’s constitution so that he can institute a progressive income tax on the wealthy—giving them extra incentives to go somewhere else.

Losing Millennials

It isn’t just the wealthy, who tend to be older, who are leaving. A new study by demographer William Frey of the migration patterns of millennials (those aged 22 to 38) found that Chicago ranks as the third-least attractive among the nation’s 53 largest metro areas, losing an average of nearly 19,000 more young adults than it gains every year.

Those losses account for the bulk of millennial flight from Illinois, which similarly ranks below all but two states in trying to attract young adults. One problem is the flagging local economy. Despite big real-estate deals that have pushed up commercial rents in the Loop, the greater Chicago metro region has averaged less than 1 percent growth in private-sector jobs in each of the last two years.

Every homeowner leaving Illinois puts a house on the market without buying another one locally. That’s one reason the Chicago marketplace is struggling.

Slumping Housing Prices

The average price of a single-family home in Chicago is lower than it was before prices began plunging back in 2009. Nationwide, by contrast, home prices are 30 percent higher than before the crash. One consequence of the lagging recovery is that Chicago has more homes with underwater mortgages—that is, the mortgage is greater than the value of the home—than any other major market. As many as 135,000 of these homeowners may risk default when the next recession hits and prices plummet again.

Homeowners are feeling the pinch in other ways, too; local papers are filled with stories of people regretting their investment in a house. Last year, Crain’s Chicago Businesstold the story of a Chicago-area executive who lost more than half a million on the sale of his home when he retired to move elsewhere. If he had invested the money in the stock market instead, he said, “I’d probably have $6 million now.”

For years, voters in some states have acted as if government financial problems, including massive pension debt, weren’t real. Everything would work out somehow, they seemed to believe. Take a look at Illinois and the nation’s third-largest city to see how that bet is playing out.

Reprinted, with permission, from the City Journal.

Steven Malangais the George M. Yeager Fellow at the Manhattan Institute and the senior editor of City Journal.

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1 comment

  • “Every penny that the city collects in property taxes goes into the pension system?” This seems like an exaggeration? Perhaps the author meant to say that the recent increase goes to the pension system?

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