Pandemic home values in Illinois rose at 3rd-slowest rate nationally

Pandemic home values in Illinois rose at 3rd-slowest rate nationally

Illinois’ history of poor policy decisions left homeowners behind the pandemic era housing boom. Continuing the trend leaves homeowners more susceptible to future downturns.

Since the onset of the COVID-19 pandemic, home values have surged nationwide. This was already expected to be a big home-buying period as more millennials reached peak home-buying age. Federal stimulus and government responses to virus outbreaks amplified that. Surging demand coupled with pre-existing housing shortages sent prices soaring.

Nationally, homes appreciated more than 25% from the fourth quarter of 2019 through the fourth quarter of 2021, according to recent Federal Housing Finance Authority data. However, Illinois homeowners missed a large chunk of the price growth seen in other states. Homes here appreciated by less than 16%, the third worst in the nation.

Not only have Illinois homeowners missed out on equity growth, but Illinois’ housing market could also be among the most susceptible to a downturn in the housing market.

Mortgage rates are ticking up now that the Federal Reserve has begun raising interest rates to combat inflation, and more rate hikes are expected through the end of the year. More expensive monthly mortgage payments likely will slow home price appreciation. Even worse, experts believe it is likely that home prices will fall in the next year or so, with Moody’s chief economist expecting a 5% to 15% decline.

Illinois’ housing market is likely more prone to a potential downturn in prices than other markets throughout the rest of the nation. While there is a nationwide shortage of 4 million homes, which likely will prevent national home prices from experiencing a major crash, Illinois is not facing the same market dynamics.

The supply of new homes nationwide has failed to keep up with population growth and demand for housing. By contrast, Illinois’ population has been declining at an accelerating rate for eight consecutive years, and homeownership rates have dropped. New residential construction has continued, albeit at a relatively slow pace, meaning the supply of homes is increasing more than demand. This is likely one reason for slower home price appreciation, and it also increases the risk of more severe home price declines in Illinois. Historically speaking, Illinois home prices were among the last in the nation to recover after the housing market collapse of the Great Recession.

Public officials have tools at their disposal to improve the situation for Illinois’ housing market.

On the demand side, Illinois needs pro-growth reforms to make the state an attractive place to live and conduct business. The major reasons Illinoisans are choosing to leave the state are for more affordable, higher quality housing and for better employment opportunities, both of which have been made worse by poor public policy decisions.  Illinois’ second-highest property taxes in the nation are now equivalent to nearly seven additional mortgage payments annually for new homeowners. Nearly half of Illinoisans have thought about moving away, and they said taxes were their No. 1 reason.

These high taxes aren’t all going to improved services or quality of life for homeowners. In the past two decades, less than 50 cents of every additional dollar paid in property taxes went to pay for services. Statewide, only 20% of the increases in property taxes collected for municipal police and fire departments went toward protective services. The bulk of new tax collections went to pensions. Without structural reform to Illinois’ pension system and to spending priorities, expect these trends to continue.

On the supply side, easing regulatory requirements can make the new homes more affordable, making homeownership more accessible to current and future Illinoisans. The National Association of Home Builders estimates regulations imposed by all levels of government account for about 24% of the current average sales price of a new single-family home. The burden of regulation is up 44% when compared with a decade ago.

Without reforms that make Illinois a more attractive place for businesses and families, the state’s housing market will continue to produce lackluster results and residents will continue to leave the state. If lawmakers choose to continue their current approach to state finances and public policy, Illinois housing market will remain among the most fragile in the nation.

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