Will Chicago be the next big city to witness its housing market implode, virtually without warning?

Friday the Treasury Department set off alarms in the Windy City when it spotlighted Chicago’s housing market in its monthly Housing Scorecard, describing its condition as “continued fragility.”

“Fragile” is not a word Chicagoans like to hear others use to describe their homes.  Within hours of the release of the Treasury Scorecard the Chicago Tribune carried a report on it, noting that it “shines a national spotlight on Chicago and paints a somber picture of President Barack Obama’s hometown.”

In fact, Chicago has been encountering a rising tide foreclosures over the past year, and they’ve had their impact on prices.  The greater Chicago market’s foreclosure count is up 43 percent over a year ago; one in every 302 housing units is a foreclosure, ranking it fourth in the nation, according to RealtyTrac.  With an REO saturation level of 35.7 percent compared to 29 percent nationally and it ranks 13^th among Clear Capital’s lowest performing markets, with a median 4.4 percent year-over-year price decline. Moreover, foreclosure processing in Illinois, a judicial state, takes an average of 575 days which means distressed mortgages in Chicago remain unresolved in the foreclosure pipeline 50 percent longer on average than in other cities, the Treasury report said.

While much of the nation’s foreclosure concern has been focused on the Sand States, Chicago has fallen victim to a stuttering economy and a high degree of negative equity. Nearly one in four residential properties in the Chicago six county region is underwater, with just under $25 billion of negative equity. The average underwater property has 31.8 percent more outstanding mortgage debt than the property is worth, according to the Woodcock Institute. In fact, Chicago’s housing market faces a full plate of challenges including a high percentage of distressed mortgages, high vacancy rates, a surge in suburban poverty, as well as severely underwater mortgages.

Atlanta was in virtually the same boat a year ago.  Atlanta shocked many housing economists last year when suddenly the bottom fell out of prices in the wake of economic woes and a flood of foreclosures.

Beset by economic woes and a flood of foreclosures, the Atlanta housing market surprised residents and experts alike when the bottom fell out of prices last year.  In mid-January, the New York Times, citing November 2011 data, called Atlanta “one of the biggest laggards in the economic recovery.”  Atlanta topped all metros in the nation in foreclosures sales during the fourth quarter (6,458) and its foreclosure discount, a sign of instability, was fifth highest nationally, at 48.12 percent.

With a declining December unemployment rate of 9.4 percent, down from 10.2 percent twelve months earlier, Atlanta is moving in the right direction.   Not only is the job market improving, inventories are shrinking dramatically.  The combination of better demand and fewer properties suggests prices will continue in the black for the near future.  Nearly 4,600 of Atlanta’s foreclosures are owned by Fannie Mae and Freddie Mac, ranking it number one in the nation in terms of GSE-owned foreclosures, far outnumbering those in Phoenix, Las Vegas and other major metro areas hit hard by the housing bust, according to a report last month from the Federal Reserve.    Plans by the federal government to sell bulk quantities to investors to rent out may help reduce Atlanta’s foreclosure inventory.

Atlanta still has a ways to go though it’s moving in the right direction.  Its foreclosure rate of one in every 244 homes in February ranks second worse, ahead of Chicago, but foreclosures are down 4.5 percent from where they were a year ago while Chicago’s are up 43 percent.