This document summarizes the state of the housing market and economy in Illinois. It finds that while housing sales increased in 2012, prices remained low due to a large inventory of foreclosed homes. Job growth is improving but remains below pre-recession levels. Continued recovery of the housing market and broader economy are dependent on addressing issues like high foreclosure rates, fiscal problems at the state level, and lack of leadership. The regional economy also remains tied to national and Midwest trends. Price and sales forecasts for 2013 anticipate only modest growth.

1. Housing and the Economy:
Impacts and Forecasts
Geoffrey J.D. Hewings, Ph.D.
Director
Regional Economics Applications Laboratory (REAL)
University of Illinois
Institute of Government and Public Affairs
217.333.4740 217.244.9339 (fax)
hewings@illinois.edu
www.real.illinois.edu
Illinois Association of REALTORS® January 2013
Public Policy Meetings

2. Regional Economics Applications
Laboratory - University of Illinois
 Founded in 1989 initially as collaborative venture with
the Federal Reserve Bank of Chicago
 Objective: enhance analytical capability for public
policy decision-making at the urban and regional scale
with an initial focus on Chicago and the Midwest
 Employs doctoral students from economics,
agricultural economics, urban and regional planning
and geography

3. 2012-2013 Highlights
 Last half of 2012 revealed positive changes in prices
 Significant increase in sales volume
 Resolution of foreclosure issues saw significant
increase in foreclosed properties
 Consumer optimism dampened by “fiscal cliff issues in
Washington and the failure of Illinois state government
to address deficit and unfunded pension obligations
 Combination of enhanced inventory, historically low
interest rates and accelerating costs of renting should
fuel the housing market in 2013

4. State of Illinois Economies
• State is 330,000 below prior peak (November
2000) “translates” into loss state income tax
revenue of $0.4 billion+ in lost sales and income
tax
But…need to add considerations of:
• population growth since 2000
• decrease in labor force participation rates
• Large number in part-time who would like full-time
employment THEN…

5. State of Illinois Economies
State probably needs to add close to:
• 647,000 jobs to achieve equivalent level to
November 2000
• Chicago would need to add 285,000 jobs to
return to 2000 level and another 100-140,000
to account for additional factors noted

6. RECOVERY
SCENARIOS
Jobs recovered
Since December 2009
Note:
Best year since 1980 – Illinois added 60,000
jobs
Last 12 months added 53,000 jobs

7. RECOVERY:
How long will it take?
• Before this recession, longest recovery was 8 years
(now > 12 years – since 2000)
• Current employment in Illinois matches that late 1990s
• Illinois has 5 of 10 sectors with employment levels
below those of 1990: Manufacturing, Information,
Construction, Trade, Transportation & Utilities, and
Financial activities
But in 2012, Illinois’ employment growth rate was
65% of U.S. but below that for the Rest of the
Midwest (IA, WI, IN, OH, MI, MO). Usually it is 35% US

8. Sources of Growth – Illinois
and Chicago
Both economies heavily tied to
U.S. domestic market
 85% exports go to other states
 15% international with strong dependence
(35%) on Canada and Mexico
40% of domestic exports and imports are with
Midwest neighbors – WI, IN, OH, MI, MO, IA

9. Sources of Growth – Illinois
and Chicago
Recovery of Chicago and Illinois tied in
with U.S. recovery but especially Midwest
recovery
 Political leaders in Midwest fail to appreciate
the negative effects of “job poaching” (e.g.
the Indiana ad “Are you Illinoyed?”)
 Illinois is in a sense the economic locomotive
for Midwest economy

10. Where is the growth/decline
taking place? US
Growing:
• Professional & Business, Education & Health
(Chicago flat)
Declining:
• Information and Financial (much greater losses
than Chicago)

11. Where is the growth/decline taking place?
Illinois Metros
TTU Trade, Transportation Utilities; PRO: Professional Services; CON:
Construction; EDU: Education; MAN: Manufacturing: GOV: Government

12. Illinois & National Economy
130.00
US
125.00 US
120.00
115.00
110.00
105.00
100.00
Illinois
National RMW IL
95.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Since early 1990s, Illinois’ growth rate has fallen
behind the U.S. and Rest of the Midwest, but
paralleling with the latter in the last two years

13. Illinois and National Economy
• Illinois’ performance is surprising in view of
the fact that, unlike the Rest of the Midwest, it
has a similar structure to the US
• Then, why have we underperformed US?
• Lower population growth?
• Loss of human capital?
• Less competitive industries?
• Governance issues?

14. Impacts of Migration &
Job Losses
• Probably see continued erosion of state’s
competitive position (dropped from 4th to 15th
in terms of per capita income in the last 15
years)
• Average income of in-migrants lower than out-
migrants leading to loss of income averaging
$1billion over the 2000-2010 decade
(translates into loss of 20,000 jobs)

15. Challenge
loss of jobs
loss of people
loss of expenditure
loss of business expansion

16. Housing Market
Sources of Demand for Housing
Market
• New time buyers – special credit programs
• Housing turnover – people upsizing or
downsizing
• Job relocation/migration
• Retirement
• Those currently “parked in rental properties”

17. Housing Market: Do
Incentive Programs Work?
 Federal Government program successfully
attracted buyers – but REAL estimated that
CBO estimates were way too high
(i.e., incremental sales associated with the program failed to
account for sales that could normally have been expected to
have been made)
 Secondly, after program ended, sales
plummeted for several months eroding much
of the benefit of the program
 In essence, all the program did was
accelerate the timing of purchases

18. Incentive program
Ended, 2010

19. Housing Market: Turnover
Turnover generating fewer sales as
consumers become more risk adverse
• In recent years, “time on the market” has
extended to 15+ months (in the early 2000s,
2-4 months was normal)
• In December 2012, it was between 4-5
months (pre-recession, 2+ months)

20. Housing Market: Turnover
• Market segmentation by price becoming
more pronounced
• Time on market increases with price
• However, note the significant decreases
across all prices ranges comparing
December 2012 with 2011

21. Unsold Inventory by Price
Range – Illinois
December 2012 on top, Dec 2011 on bottom

22. Housing Market: Job
Relocation/Migration
Job relocation still important source of
demand but fewer people changing jobs
• Migration rates have been declining since
early 2000s - demographers are puzzled
by this phenomenon
• In a buoyant housing market and
expectation of price appreciation,
relocation often accompanied by sale and
purchase of house

23. Housing Market: Job
Relocation/Migration
• Now with job mobility down, those
relocating often “parking” themselves in
apartments to shelter against prospect of
short-term negative equity in a home
• Rental rates have thus risen in the last
two years
• A Deutsche Bank A.G., the cost of renting
in Chicago was 31.3% higher than
average after-tax monthly mortgage
payments in the third quarter in 2012

24. Housing Market:
Retirement/Migration
• Are retirees beginning to reconsider
remaining in the Midwest?
• Relative housing price declines greater in
FL and AZ – suggesting that retirees could
sell in IL (even below their desired price)
and still afford the house they desire in FL
or AZ

25. Housing Market:
Retirement/Migration
Is net effect positive or negative
for state?
• Retiree incomes spent in Illinois
generating positive ripple effects
• Retirees remaining here are not selling
their homes so there is a loss of energy in
the housing market

26. Housing Market: Turnover
generates impacts
• Through 2007, typical Illinois county
experienced 11% turnover in households
each year (5% in and 6% out)
• Further 6-12% change houses within the
same county
• Rates tend to be higher in metro counties

27. Housing Market: Turnover
generates impacts
• Illinois Total Direct Expenditures on a home
sale is $28,581 (payments to REALTORS®,
bank loan origination fees, state and county
taxes, fix-up costs) source: recent IAR study
• In 2010 111,319 sales so direct impact
was $3.2 billion
• Generates about $7.9 billion annually
through ripple effect

28. Housing Market: Turnover
generates impacts
• Each $1 billion generates about 12,000 jobs
directly: total direct + indirect effect = 130,000
jobs
• 34% reduction in sales translates into loss
of 50,000 jobs
• Further negative effect on states income and
sales taxes
• This is in addition to the construction
impacts associated with new homes

29. Let’s Do the Math –
Cumulative Impacts on Jobs
• Decline in housing sales 50,000
• Net Out-migration 20,000
• Reduced spending for
road construction (down $1 b) 16,000
Total (86,000) greater than IL job growth in
2012!

30. Prices Inching up, still below 2010

31. Sales Gain: strong second half 2012
– eclipsed 2011 and 2010

32. Mix of Home Sales remained steady
-slight decline in properties < $100,000

33. If sales have increased, why haven’t
prices? The Foreclosure Overhang
 Three parts to consider:
– Filings
Occurwhen mortgagee cannot make
payments
– Sales
Sale of property returned to owner of the note
– Inventory
Accumulation of foreclosed properties not yet
sold

34. The Foreclosure Overhang…..
More on inventory
• Illinois uses the judicial foreclosure process.
• A typical foreclosure case in Illinois takes 210 to 270
days.
• However, if the borrower tries to fight against the
foreclosure process, then it will take much longer to
finish the foreclosure process – accumulating in the
inventory.

35. The Foreclosure Overhang…..
More on inventory
• According to RealtyTrac, Chicago MSA has the
highest foreclosure stock among the top 20 MSAs.
Sooner or later, part of the foreclosure inventory will
turn into foreclosure sales or short sales.
• For several months in 2012, Illinois led nation in
foreclosure sales
• This foreclosure inventory generates large impact for
the future housing market sales and prices.

36. The Foreclosure Overhang…..
More on inventory: Good news –
Bad news
• Bad news: foreclosed property sales drag down
median prices
• Good news: number of foreclosed sales greater
than new additions to the inventory
• Faster the foreclosed properties are moved,
greater the possibility for some sustained price
recovery (estimate 2 years)

37. The Foreclosure-Sales Relationship
Sales
New Filings

38. The Foreclosure-Sales Relationship
Start of the recession

39. Housing Market: Current
Situation: Sales
 In December, year-over-year increase in sales
slowed down: 10,264 houses were sold in
Illinois, 15.2% more than a year ago.
 In
Chicago, 7,372 houses were sold, 19.2%
more than last December.

40. Housing Market: Current
Situation: Prices
 Median prices were $132,000 in Illinois,
reaching the highest year-over-year change
rate of 5.6% since 2008.
 Similarly,
median price in Chicago PMSA
experienced a historic high yearly increase of
4.1% and stood at $151,000.

41. 2013 Illinois Forecast: Prices

42. 2013 Illinois Forecast: Price
Changes (year over year by month)

43. Housing Market:
Next 12 Months
Through mid Year:
• Year-over-year changes in monthly sales are
mixed in both Illinois and Chicago;
Mid Year through December
• Mixed changes tending to group around + or -
1-3%.

44. Housing Market:
Next 12 Months
By September 2013, the median price of a
house is forecast to be (September 2012 in
parentheses):
• $140,423 ($138,000) Illinois
(+1.75%)
• $166,045 ($160,000) Chicago PMSA
(+3.7%)

45. How well did we forecast
last year?
Last year, the forecasts for September
2012 (actual in parentheses) were:
• $127,527 ($138,000) Illinois
$141,603 ($160,000) Chicago PMSA
• Our model is a sprint/medium distance system
3-6 months ahead) and weights more recent
events higher
• Took a while to embrace the change in the last
6 months of 2012

46. Final Concerns
 Signals in the economy and in the housing
market continue to be “noisy”
 Congress’ inability to fully address Fiscal
Cliff (including deductibility of mortgage
interest) creates uncertainty
 State has not yet demonstrated that it is
prepared to tackle its fiscal problems
 Firms would like to locate/expand in the
state but have little faith in the state’s
fiscal management

47. Illinois’ Opportunities
 Re-shoring is beginning to gather momentum
 Boston Consulting Group estimated Chinese
wages will approach US levels in 3-5 years
 Developments in 3-D manufacturing have the
capacity to change the state’s locational
competitive advantage
 Do we have the leadership in place…?

48. REAL’s Current Initiatives
 Continue to work on development of a housing
index that reflects housing characteristics
 Examining the role of crime and gang activity in
affecting housing prices (in Chicago)
 Completed a Japanese case study of the
impact of a negative event (death or crime in a
house) on its price

49. Monthly index of
leading indicators
for Chicago
L
Monthly Employment analysis
for state and Metro areas
Illinois Economic Review
(monthly) with employment
forecasts for next 12 months

50. For More Information
www.real.illinois.edu
www.illinoisrealtor.org/marketstats