Nearly 17 percent of Illinois homes with mortgages were seriously underwater as of the end of 2016, according to a report by RealtyTrac. The total number of seriously underwater homes in Illinois ranked second-worst of all states, behind Nevada’s rate of almost 20 percent.
Nationwide, around 10 percent of mortgaged properties fell into that same category.
Seriously underwater properties can devastate homeowners, because a homeowner selling an underwater or seriously underwater property doesn’t profit from the sale. In fact, he still needs to write a check to pay off the mortgage. For many homeowners, that could mean the loss of an entire life’s savings.
Diminished property values are a main reason homeowners find themselves submerged. And Illinois’ epidemic of seriously underwater properties suggests true housing recovery continues to disproportionately elude the state.
It also signals crisis levels of residents stuck in homes that have become debt traps.
What does a seriously underwater property look like?
A homeowner who is “underwater” owes more on his mortgage than the actual value of his home; “seriously underwater” means he owes at least 25 percent more than his home is currently worth to pay off his mortgage.
It works like this. Imagine purchasing a home in Illinois for $168,000, and:
- You put down 20 percent of the purchase price ($33,600). This represents your immediate equity in the home.
- You take out a mortgage to finance the outstanding 80 percent ($134,400). You agree to pay this amount, with interest, regardless of market changes.
- The value drops to $107,520.
If you were to sell under those conditions, you’d make $107,520, but would still owe the bank $134,400, or 25 percent more than the home value. Your equity would be gone, and you’d have to shell out even more just to walk away.
Many Illinois homeowners grappling with seriously underwater mortgages are unable or unwilling to suffer losses on their homes. So, they have little choice but to stay put and hope the market recovers. Alternatively, they could walk away from their homes to get out from under the debt. But this would destroy their credit and ability to borrow in the future.
Neither option helps those who can’t find work in Illinois, but can’t afford to follow opportunities to other states, either.
Economic failures have exacerbated the housing crisis in Illinois
Illinois teeters on the edge of an economic death spiral, and the state’s ongoing housing crisis strikes further at the state’s economic foundations.
After the Great Recession, economic winners and losers began to emerge among U.S. states. States that recognized the heightened need to compete for jobs and population implemented pro-growth policies and became hotspots for business and residential investment. Meanwhile, Illinois policymakers rejected reforms and raised income taxesin an attempt to address perpetual budget deficits.
Policymakers still refuse to change the policies making Illinois uncompetitive, such as high workers’ compensation costs, forced unionization, a crushing tax burden and heaps of red tape – despite the state’s deepening financial hole replete with billions in debt, backlogged bills and unfunded pension liabilities.
Residents are reacting to hostile economic conditions by fleeing Illinois, further complicating the state’s ability to bounce back.
In the sink-or-swim of post-recession recoveries, Illinois is the Titanic of the Midwest – the largest ship, by far, but one that is taking on water.
These policy failures have left Illinois without the tools to dig itself out of recession era economic chaos, and Illinois’ flailing economy has had reverberating effects on the state’s housing market.
- Slow jobs and personal income growth undermine economic vitality. Illinois’ jobs and employment growth trail those of surrounding states. Similarly, Illinois’ post-recession personal income has grown at an unimpressive annualized rate of 0.9 percent, worse than that of every state except Nevada’s 0.6 percent, according to The Pew Charitable Trusts. A recent report by Trulia Inc. identified a close correlation between property value recovery and personal income growth. That’s significant, since Nevada and Illinois are worst and second-worst, respectively, on both seriously underwater mortgages and personal income growth.
- Unaffordable property taxes crush Illinoisans. Since 1990, Illinois’ property taxes have grown 3 times faster than the state’s median household income. Property taxes often amount to a second mortgage; yet local governments continue raising them with little regard for property values or the harm that higher rates inflict on homeowners. They’re taxing families out of their homes, while also scaring away potential buyers. In some parts of Illinois, property taxes are so high they’re driving down home values and wiping out home equity.
- Residents flee to friendlier states. Illinoisans increasingly leave for better opportunities in faster-growing, more affordable states, and those losses aren’t being offset by new residents settling in Illinois. So, housing demand plummets, and home values remain low.
The housing market can’t recover without economic recovery. But anti-growth policies exacerbate meager jobs and personal income growth, perpetuate soaring property taxes, and spur rampant out-migration – keeping property values depressed, deterring home sales, and financially squeezing homeowners.
Path to recovery
Businesses and residents consistently choose other states over Illinois in a clear rejection of the state’s uncompetitive policies. And the divide between Illinois and the rest is widening. State policymakers must institute pro-growth reforms that stimulate jobs and personal income growth, reduce debilitating property taxes, and stop mass out-migration to ripen the state for economic growth.
Policymakers should start by freezing property taxes. This would protect homeowners against growing liabilities while also reducing businesses’ overhead costs. Fixing cost drivers in Illinois’ workers’ compensation system – which is far more expensive than those in neighboring states – reducing restrictive licensing schemes, and enacting Right to Work would also foster growth in jobs and personal income.
These changes would stimulate economic and housing recoveries, which would in turn help homeowners lift their heads back above water.