Chicago is… Whose Kind of Town??

“And each time I roam, Chicago is calling me home… Chicago is one town that won’t let you down… it’s my kind of town.â€

Those nostalgic lyrics, first sung by Frank Sinatra in 1964, are a reminder of the good ol’ days in The Windy City. Today, Illinois has no budget, and other state and city government dysfunction–much of it rooted in major public pension crises–has created a huge black cloud over the Chicago economy. The city’s credit rating has already sunk to junk. The cloud is creating headwinds that threaten to crush renters’ homeownership aspirations and reverse a recent surge in their confidence. Unfortunately, for residents across The Land of Lincoln, the forecast calls for the cloud to loom and unleash a steady rain of higher property taxes. Chicago homeowners are already getting soaked.

Chicago Renters’ Leap of Faith

Despite the foreboding forecast and shaky homeowner sentiment, renter confidence in Chicago has been rising steadily over the past two years. The latest Zillow Housing Confidence Index (ZHCI) revealed that of the renters who reside in one of the 20 large metro areas it tracks, those in Chicago have the strongest homeownership aspirations. After flat-lining for two years, the ZHCI sub-index that measures this dimension of housing confidence (the gray line within the chart below) jumped to the 66.5 level for Chicago renters in January (the scale is 0-100; an index level above 50 is a positive reading). Another sub-index–one that gauges expectations concerning future home prices, perceived affordability of homeownership in the coming years, and the expected value of owning versus renting a home in the long-run–also spiked-up.

Sources of Renter Optimism

After emerging from negative territory in 2014, Chicago renters’ assessments of local housing market conditions have leveled-off since early 2015. The flattening of this sub-index was in-synch with signals from other gauges of real estate market conditions in The Windy City:

• Average monthly for-sale home inventory was seven percent higher in 2015 than it was in 2014, according to Zillow data. This is a sharp contrast to last year’s mostly tighter inventory levels in other metro areas (Chicago’s home inventory has tightened since the start of 2016).
• After growing nearly 10 percent in 2013, Chicago home value appreciation began to shift to a lower gear after that (just 2.4 percent in 2015).

These relatively calm, buyer-friendly housing market conditions and other encouraging economic developments  likely stoked the expectations and homeownership aspirations of Windy City renters in the second half of last year, e.g.:

• Relatively low rent inflation (less than 0.4 percent in 2015, according to the Chicago Zillow Rent Index).
• Pockets of robust wage growth have accompanied a growing presence of high-profile, high-tech employers like Amazon (which announced in November a plan to lease 30,000 square feet of downtown office space on the heels of opening a large fulfillment center in Chicago’s Will County).
• The passage of a transit-oriented development ordinance that includes incentives for more affordable housing and walkable streets.

Here is a sample of attitudinal data collected in January from Chicago renters concerning their housing market expectations and homeownership aspirations (from The U.S. Housing Confidence Survey):

• Six in ten Chicago renters said that “buying a home is the best long-term investment a person can make,†up from five in ten in July.
• Sixty-three percent said they expect Chicago home values will be higher in ten years, up from 47 percent in July.
• More than one-half (51 percent) said that Chicago homeowners would be better off financially in ten years compared those who rent, up from 44 percent in July.
• Seventy percent of Chicago renters said that owning a home someday is “a specific goal I am determined to reach” or “something I think about a lot,” up from fewer than six in ten renters (57 percent) who said so last July.
• Two-thirds of them said that owning a home “is necessary to live The Good Life and The American Dream†(up from just one-half in July).
• The number of Chicago renters who said that owning a home “is necessary to become a respected member of society†increased by 39 percent from July.

Chicago Renters: Behind the Curve?

The upward trend and recent spike in housing confidence among Chicago renters suggest that for most of them, an impending property tax storm is, at least for now, out-of-sight and out-of-mind. Rising renter sentiment–coupled with the latest slump in homeowner moods–leaves Chicago with the narrowest housing confidence gap of all cities tracked by ZHCI (see chart below).

The gap for San Francisco residents provides an interesting contrast. Homeowner confidence in The Bay Area remains elevated even as renter confidence has fallen. Renters’ expectations concerning future home purchase activity are fading as home values continue to appreciate rapidly. For example, in January, less than one-quarter of San Francisco renters agreed that “now is a good time to buy a home” there–down from more than one-third at the start of 2015–and, fewer than a quarter of them said they were confident in their ability to afford a home someday.

Interestingly, the most significant shifts in Chicago homeowner confidence have coincided with news about city property taxes:

• March 2014: Mayor Rahm Emanuel announced his initial proposal to address the public pension mess– one that included an explicit plan to hike Chicago property taxes.
• October 2014: In his budget address to the Chicago City Council, Emanuel pledged to “hold the line†on property taxes.
• October 2015: The Chicago City Council passed a measure to increase property taxes by almost $600 million.

The hit to homeowners’ housing confidence at the start of this year could be the beginning of an extended downtrend. The January dip was broad-based: all three sub-indexes of Chicago ZHCI–current market conditions, expectations, and homeownership aspirations–fell. And with property taxes already crushing Illinois homeowners and high negative equity rates impairing geographic mobility and in-market trade-ups (more than one in five Chicago homeowners with a mortgage are upside-down, according to Zillow data), the environment is not conducive to sustained confidence-rebuilding among the most heavily-invested housing market stakeholders. One can also infer from the latest U.S. Housing Confidence Survey data that more Windy City homeowners are sensing that local economic headwinds will persist well into the future: their long-term home value appreciation expectations have dropped, and:

• Fewer of them are confident that they will be able to afford to live in their current home as long as they would like.
• Fewer of them expect Chicago area home values will be higher in 10 years than they are now.
• More of them believe that, in ten years, they will be worse off financially than renters.
• More of them believe that renting a home provides a person more freedom than owning a home.

Cognitive Dissonance

Residents and business owners are fleeing the Windy City’s hostile tax environment, violent crime, and a deepening public education crisis: Chicago lost an estimated 6,263 residents last year–the most significant loss of any metro area in the country (the loss would be higher were it not for the nearly 337,000 homeowners trapped in Chicagoland by their negative home equity status). A separate report indicates that among U.S. cities, Chicago also lost the largest number of millionaires in 2015 (no doubt, many of them job-creating entrepreneurs and business owners).

Renter households in The Windy City–that is to say, those not planning to move out of town–should be careful about what they’ve wished for.