The stratospheric property taxes in Illinois are holding back what is otherwise a red-hot real estate market. Potential buyers are discouraged because real estate taxes make owning a home more expensive than it already is. This keeps the Illinois real estate market in check when it is bustling almost everywhere else in the country.
Illinois Real Estate Taxes Are Prohibitive
Illinois has the second-highest property tax rate in the entire country, behind only New Jersey. Many homeowners in the state pay nearly $5,000 each year in property taxes, but this is based on the average home price. Homes in the Arlington Heights area will have taxes far higher because homes are more expensive. Owners can count on paying over 2% of the home’s value each year in taxes.
Homebuyers are calculating the total cost of ownership each month. When they write their monthly mortgage check, it generally includes payment for the loan, insurance, and real estate taxes. What makes the bite even harder is that real estate taxes may not be deductible on federal taxes because there are limits on state tax write-offs. This makes Illinois comparatively a more expensive real estate market. Add to that the already high home prices, and it discourages some buyers.
For existing homeowners, the problem gets worse each year. Homeowners who have no intention of selling must pay higher taxes as their home values increase.
Taxes Help Suppress Home Sale Prices
The effect is borne out in what were stagnant prices in the state. In 2019, Illinois had the second-lowest rate of home price increase in the entire country. The only state that fared worse than Illinois was Connecticut, which saw the steepest rise in property taxes nationally in the last decade. Since 2007, Illinois has been one of the worst-performing real estate markets in the country.
For now, low mortgage rates may help put a floor under the Illinois housing market. 2020 saw brisk home sales, but that was more a function of high demand and near-zero rates of supply. However, as rates rise, the high property taxes could help magnify a possible decline in home prices.
