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Property taxes a key to affordability

ANALYSIS
Three factors beyond Evanston’s control, and two the city can influence, will have far more impact on housing affordability than the 20 percent real estate transfer tax increase that voters will pass judgment on Tuesday.

ANALYSIS
Three factors beyond Evanston’s control, and two the city can influence, will have far more impact on housing affordability than the 20 percent real estate transfer tax increase that voters will pass judgment on Tuesday.

How much house an average Evanstonian can afford is driven by property taxes, interest rates, housing prices, wages and new construction.

Property taxes
Evanston owners of mortgaged homes surveyed by the Census Bureau said they paid median of $5,511 in property taxes last year. Homeowners without a mortgage said they paid a little less, a median of $4,977.

Based on the Census Bureau figures, if property taxes go up 3 percent next year, Evanston’s homeowners will pay almost $2.8 million more — about three times as much as the real estate transfer tax referendum is expected to raise for affordable housing.

Only about 20 percent of the property tax goes to the city, 65 percent is split by Evanston’s two school district and the rest goes to an array of regional agencies — so many decisionmakers affect how big the tax bite ultimately will be.

Interest rates
Consider what real estate industry data says is a median priced home in Evanston — worth $338,000.

If the interest rate on a 30-year fixed-rate loan with a 20 percent downpayment is 6.5 percent, a household would need an income of $89,700 to afford that house. If the interest rate drops to 5.5 percent, a family earning just $82,724 can afford it.

(These calculations assume that the cost of principal, interest, property taxes and insurance must be no more than 29.9 percent of income. They use the Census Bureau’s median property tax mount for a mortgaged Evanston home and estimate that home insurance costs $800 per year. You can experiment with other numbers yourself at BankRate.com and other mortgage calculator sites.)

A one percent interest rate drop would dramatically reduce the housing cost strain for Evanstonians across the income spectrum. A similar one-point rate boost would greatly add to the strain.

And rates have been changing. The average rate for a 30-year fixed loan was as high as 6.5 percent earlier this year, but Bankrate.com says it dropped to 5.78 percent today from 5.89 percent a week ago.

Housing prices

The Case-Shiller home price index shows metro-Chicago home price increases slowing this year, and the New York Times reports that a new futures contract on housing prices currently predicts that Chicago-area housing prices will fall 5.4 percent by next August.

After the big run-up in housing prices in recent years, a sustained slowdown in price appreciation would make houses much more affordable — though it would also disappoint folks who’ve seen housing as one of the best performing investments of recent years.

Wages
The decision by the City Council to raise property taxes this year by 2.92 percent, and suggestions an increase at least that size may be in the works for next year, are driven in part by assumptions that wage increases for local residents will keep pace.

There’s optimism on that score in a story in tomorrow’s Crain’s Chicago Business which cites a Hewitt Associates Inc. survey forecasting pay increases averaging 3.7 percent for Chicago area workers next year.

But looking back, Census Bureau data is much less rosey, showing the average Evanston household made $58,940 in 2005, up less than 1 percent per year from the $56,335 reported in 2000.

New construction
Under most scenarios, new construction will form only a modest part of the total housing mix in Evanston going forward. But decisions about new construction that the City Council makes will have an impact on how affordable the city becomes. Build more $1.5 million single family homes, like those approved this year for the Kendall College site, and Evanston becomes less affordable. Build more middle-income townhomes, like those approved for Church Street Village, and relatively speaking the whole town becomes more affordable.

The conversion of more vintage apartments to affordable condos would have a similar favorable impact on affordability for homeowners, though it may tighten up the market for rental housing.

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