Is it time to start worrying about Chicago?

Personally, it’s one of my favorite cities to visit, but on an objective level, the trend lines aren’t good and the state government isn’t helping.

Earlier this year, to ease a budget crisis, the state passed a tax bill that increased state income tax from 3 percent to 5 percent and the corporate tax rate from 4.8 percent to 7 percent. Immediately, other states such as Indiana and New Jersey cranked up efforts to lure away Illinois businesses. But, even before the tax increases, there were concerns about job growth in the state.

"I don’t think there has been very good job creation in the state of Illinois nor in the city of Chicago," said Mabel Guzman, president of the Chicago Association of Realtors. "And now the tax base has become an issue."

Unlike other Midwestern cities, Chicago has done a good job of recreating itself as a vibrant metropolitan area, thus maintaining its position as one of America’s largest cities. Yet, total population has still been melting away. In 1950, the city’s population peaked at 3.6 million and except for a period in the 1990s when the city stabilized, the slow drip of emigration continues. In 2006, Chicago’s population stood at 2.83 million, but in 2010 it had fallen to 2.67 million.

As of March, the 20-city S&P/Case-Schiller Composite home-price index showed metro Chicago area housing prices hitting the lowest point since sales started dropping more than four years ago. To be fair to the Windy City, the Chicago area was one of 12 metros marking the same ignominious benchmark.

"Chicago is struggling and lagging the nation," said Diane Swonk, chief economist with Mesirow Financial in Chicago. "The decline in population, however, was mostly due to the displaced low- and no-income households who have moved further out to more affordable suburbs."

That’s not the only attraction of the suburbs. A blogger who called Chicago "the city that doesn’t work" wrote, "Chicago’s high-tax lifestyle has driven business and jobs to the suburbs. Chicago is one of the only towns in America with a head tax on employment." (Chicago’s Employer’s Expense Tax, at $4 per employee per month, applies to businesses that employ 50 or more full-time workers that perform 50 percent of more of their work service in the city.)

The blogger pointed out that most of Chicagoland’s major corporations are now housed in the suburbs — i.e., Motorola, Allstate, Walgreen’s McDonald’s, Abbott Labs, and Kraft.

What has all that meant for Chicago’s housing prices? According to Guzman, pricing has been stable and "bouncing along the bottom."

She added, "We have seen downward pressure on the medium price, but that comes from distressed properties in the marketplace."

Connie Atterbury, a Realtor with Dream Town Realty in Chicago, agreed. "There was a significant drop in housing prices; however, if you eliminate the foreclosures and short sales, it was only (a) 0.04 percent decline. The standard market is doing better."

The trouble is, the foreclosure market is very much a problem, although it was more in the under-$300,000 housing range than the high end, Atterbury said.

Illinois, of course, tends to make things harder rather than easier.

"We are a judicial foreclosure state," Guzman said. "In a nonjudicial state, foreclosures go quickly to the market. In judicial states it takes longer for that property to be embargoed and then for sale. In Illinois, it’s better to do modifications; it’s better to do short sales."

Guzman worries there will be more foreclosures on the back end because the state holds up the processing on the front end.

"The distressed asset is where the rubber meets the road, and what I’m seeing is an increased amount of short sales, which are outpacing foreclosures," she said. "We need to monitor short sales because there are some Chicago communities where 44 percent of everything on the market is a short sale. What we don’t know is, where are they in the short-sale process or if they are going to be failed short sales that will end up as foreclosures. Are we going to have a third wave of foreclosures hitting the market?"

As Atterbury said, the high-end neighborhoods managed to avoid most of the foreclosure problems. But that doesn’t mean everything’s peachy in those markets.

Dream Town Realty data in three high-end Chicago ZIP codes (60614, 60610 and 60611) shows from March 2009 to March 2011, the number of units for sale dropped 20.9 percent, while units under contract and sold, increased 20.4 and 42.3 percent, respectively.

One can argue that the increased selling is partially due to lower prices. Again, according to Dream Town data, from March 2009 to March 2011, in these three ZIP codes, the median price declined by 5.6 percent.

In the high-end Chicago market, there are both single-family homes and condominiums. "I checked in two of those major ZIP codes," said Atterbury, and the average price for a condominium was $1.8 million for the first three months of 2011; in 2010 it was $2.4 million for the same period. On the other hand, she said, the average price for single-family homes was up slightly this year as compared to the year before.

I asked Atterbury how sales were going for her, personally, and she told me she had a $2 million-plus transaction and a $1 million-plus transaction that were pending.

"This year is already a strong year," she said. "I checked with my company and for the first quarter we are a little ahead of last year."

"While the political decisions are not helping, you don’t want to discount Chicago," she said. "We have a tremendously broad-based economy; the biggest commodities/options market is here; and we have fabulous universities. Chicago is a very dynamic city."

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