Negative Equity In The Chicago Area Real Estate Market

Last week I posted on how the real estate market in the Chicago area could not possibly be in a housing bubble since it hasn’t fully recovered from the last bubble. Many area homeowners are still underwater on their mortgages, which means they owe more than their home is worth- i.e. they have negative equity.
I wanted to take you on a deeper dive into this aspect of the Chicago area real estate market that just doesn’t get enough attention. In my last post I referenced the CoreLogic Equity Report but the Zillow Q2 2016 Negative Equity Report provides a lot more detail starting with this graph that shows the trend in the nation’s negative equity going back to the 2nd quarter 2011. Peaking (I assume that was the peak) at 31.4%, it is now down to only 12.1% of the homes.
Zillow negative equity over timeLike CoreLogic, Zillow shows the Chicago metro area as having more homes with negative equity than the nation as a whole but Zillow’s estimate is higher than CoreLogic’s. Whereas CoreLogic had us at 13.4% Zillow puts us at 19.0%. More on that later.
The other nice feature of Zillow’s negative equity analysis is that I can get the data by zip code, which I have heat mapped below. You’re going to want to click on the map to get a larger version. Dark green corresponds to zip codes with close to 5% homes with negative equity whereas the darkest orange zip codes have negative equity approaching 52%. Gray is where the data is missing.
As you can clearly see in the map the Chicago suburbs are doing much better than the city for the most part, with the exception of a slice of the southern suburbs. In one of the Zillow graphics they break out the difference between the suburbs and the urban centers of the major metro areas and it shows the Chicago suburbs at only 17.3% vs. 25.7% in the city.
Obviously the city is also highly variable with the north and northwest areas doing much better than the south. Lincoln Park is essentially at 20.4% (yeah, I know that seems high but I suspect there are plenty of underwater condos there) with Lake View at 22% and Forest Glenn at 10.5%. You can contrast that with Grand Boulevard which is estimated at 38%.

Chicago area negative equity by zip code

Another interesting observation contained in Zillow’s Negative Equity report is that the lower the value of a home the more likely it is to be underwater. They break up each market into thirds based upon home values and for Chicago 32.8% of the bottom tier is underwater and 16.9% of the middle tier is underwater but only 9.4% of the top tier is underwater. This same pattern holds true in all of the major metro markets and it just confirms what we already knew – that poorer neighborhoods got hit harder during the housing bust than the richer neighborhoods.

Caveat About Negative Equity Reports

Obviously some of these numbers look suspiciously high so the methodology should be explored. Both CoreLogic and Zillow use similar methodologies: they only look at homes that have mortgages, they estimate the market value of these homes, they estimate the outstanding mortgage balance, and then they look at the the mortgage balance relative to the home value.
So, right away, zip codes get no credit for having a lot of homes purchased with cash or that have their mortgages paid off. That throws off the results because none of those homes have negative equity and the area should get credit for that.
In addition, the analysis is totally dependent upon the accuracy of the respective home valuation estimates and that is a huge variable. As I’ve pointed out in the past these automated estimates have huge errors and they could certainly be large enough to add 10 percentage points to the negative equity percentages of any given zip code.
But I would expect that the impact of these inaccuracies would be fairly consistent across zip codes so these analyses are still useful for making relative comparisons and tracking the negative equity problem over time. I would just be skeptical of referencing the absolute percentages without context.
#ChicagoHomePrices #HousingBubble #UnderwaterMortgages #NegativeEquity
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

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