Conversations about the current housing market often have good news/bad news scenarios.
Case in point, a recent report from Zillow, the real estate website, shows the share of homeowners across the country who are underwater on their mortgage is 9.1%, falling below 10% for the first time since the housing market collapsed more than a decade ago. Good news, since the average U.S. home lost more than a quarter of its value when the market crashed, Zillow says, sending millions of homeowners spiraling into negative equity — in other words, their homes’ values were lower than their mortgage balances.
Now the bad news: While most of the nation appears to be rebounding when it comes to the housing crisis, Chicago is not faring so well. According to Zillow’s 2017 Q4 Negative Equity report, the city has the most homes with negative equity of all the metro areas in the country. The real estate website looked at estimated home values in relation to mortgage debt and lines of credit associated with homes in over 870 metro areas, 2,400 counties and 23,000 ZIP codes across the nation to arrive at data that reveal Chicago has 253,725 homes where the owners owe more on their mortgages than their houses are worth.
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That number equates to 15.5% of homeowners in the Chicago metro area having negative equity, making the city the second-highest metropolitan area in the country for percentage of homes in negative equity, just behind Virginia Beach, Va. Worse news: 20% of Chicago’s underwater homeowners owe at least twice as much as their homes are worth.
"Places like Chicago — where I don’t think the negative equity is primarily the result of the boom and bust years — is the result of much deeper, long-standing structural issues," said Aaron Terrazas, Zillow senior economist. "You look at where negative equity is in Chicago and it is on the South Side, heavily concentrated in neighborhoods where there is very deep poverty and larger issues around employment and wage growth that in many respects are more challenging than just waiting out a recovery or for home values to rise."
An aerial view of Chicago's Hyde Park neighborhood.
Issues around job growth add to Chicago’s negative equity problem, which Terrazas said also affects potential homeowners. As homeowners with underwater residences hold on to their homes longer (instead of selling for a loss), their inability to sell holds down the inventory of homes on the market. People who are underwater but not at risk of foreclosure can’t afford to list their house for sale, because they’d have to bring money to the table to make up the difference between the sale price and what they owe on their mortgage.
"Even after homeowners recover positive equity, they may still not be able to move because they have to wait until they recover their down payment too," Terrazas said. "As home values rise, homeowners will gradually recover their equity, it’s just a slow process; if you look at home values in Chicago, they’re up 5.5% from the past year."
Rebecca Thomson, president of the Chicago Association of Realtors and principal of Thomson Real Estate Group said inventory is a big challenge, especially this time of year when it is low.
"Chicago is comprised of 77 very different neighborhoods, each of which have been recovering (from the housing crash) at their own pace, but commercial growth is what spurs economic growth," she said. "If we look at the Whole Foods in Englewood, at The 606 trail, at what the Obama library is doing for these neighborhoods and some of the property values in those surrounding areas, we’re seeing that kind of growth come in. That kind of commercial development and investment always spurs that economic growth that we want to see, so while our neighborhoods are all recovering at different paces, there are definitely some that are well and above what they were prior to the recession."
Terrazas agrees, saying the share of homeowners with negative equity has been inching down very gradually over the past year and a half.
He suggests homeowners with negative equity work toward positive equity by paying down their mortgages faster than one would otherwise. In that way, even without home values rising, they can recover equity. Thomson recommends homeowners refinance, if they haven’t already, while interest rates are low. And while homeowners wait for home values to rise, Thomson proposes homeowners spend time getting their homes in great condition to sell quickly — changing up the aesthetics with high-end finishes and proper staging, if possible.
"When a buyer looks at a property and it needs a lot of work, especially in an area that may not have recovered as quickly, the way to stand out and maximize potential property value is to put in the work" so the home appeals to "those new buyer tastes," she said.
In many big cities, Terrazas said, you see transformation that seems to be outpacing Chicago, "but obviously there are pockets of change in Chicago, it’s not uniform."
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