Ep. 31: The hot housing market
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This edition of The Policy Shop is brought to you by Chief Economist Orphe Divounguy.
It’s spring, the most popular time of the year for buying a house. Homeownership is in demand and across the United States housing markets are on fire.
The Chicago metropolitan area enjoyed 14% growth in home prices last year, but it’s still underperforming the nation. Housing prices increased 20% in the past year nationally.
Supply and demand: Sluggish home building during the past decade has culminated in a housing shortage that is pushing prices and rents higher. Illinois saw new residential building permits in 2021 issued at one of the slowest rates in the nation.
While the rest of the U.S. saw residential construction permits grow per capita by 17.5%, Illinois was far slower: 10.6%.
This sluggish construction should have pushed home prices higher in Illinois than in other states, all else equal. Yet, Illinois’ housing shortage isn’t as severe because housing demand is also more subdued in Illinois. Fewer people want to work, live, play – and own – in Illinois.
Why? Because Illinoisans’ true cost of home ownership includes the nation’s second-highest property taxes. Plus, Illinois has among the highest total tax burdens in the nation. Relatively higher taxes made Illinois among the least-attractive destinations. Residents increasingly moved out of the state during the pandemic.
No wonder even Illinois politicians who claim they want to “tax the rich” are also supporters of repealing the $10,000 cap on state and local tax deductions. The cap on state and local tax deductions makes high tax states like Illinois relatively less attractive.
Realtor real talk: Chris Stephens, managing broker with Jameson Sotheby’s International Realty, explains: “The problem is, probably since ’08 we haven’t seen a lot of new construction. It’s not cost effective to build condos or single-family homes right now – not in the Chicagoland or Chicago-proper areas – unless they’re luxury. Because the cost to build is too much. The taxes are so high and nobody’s gonna afford that.”
Broken ladder: The bottom rungs of the property ladder are broken. Government policy shares some of the blame.
First, the cost of building has increased during the past decade because of government regulations. 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. And most of the cost is passed on to homebuyers.
Then, the pandemic only exacerbated the supply problem by causing material and labor shortages.
This, coupled with sluggish construction, has resulted in higher housing prices and higher rents.
It’s not too late: Making housing affordable again begins by reducing the number of regulatory hurdles that raise the cost of building new homes. If builders could still make a profit by building starter homes, they would build them to meet the soaring demand for starter homes and rental units. Many Americans simply can’t keep up with the combination of rising mortgage rates, soaring housing prices and rising rents.
In addition, Illinoisans need real, sustained property tax relief. Currently, homeowners face the second-highest property tax burden in the nation, largely because of an unsustainable public employee retirement system. Landlords pass on their costs to renters.
If Illinois and its local governments were able to reform their unaffordable pension systems, the state could contribute more money toward classroom spending, and localities could provide property tax relief.
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