I’m a big fan of the new breed of Web based real estate tracking sites like Zillow.com, Redfin.com and the like. They’re incredibly powerful tools for studying home values, researching towns and so on. The amount of information they consolidate — maps, demographics, public data on home sales and appraisals is amazing. That’s why I was intrigued when I got an email from Zillow noting that home values in Belmont have decreased 5.6% in the first quarter of 2008, compared with the same quarter in 2007. That’s hardly good news — but it could be worse. Single family home values nationally were down 7.5% in the same period. Condo values were down 9 percent, Zillow claims. There’s a link to their report (which isn’t just on Belmont) here.
Now Zillow.com trying to get people to visit their Web page is one thing, but the Zillow news jives with a recent conversation my wife had with one of the town’s assessors. He had come to our house to check out a bathroom renovation we’re doing. Despite the improvement, he said the assessed value of our house was likely going down in 2008, not up. It had dipped last year (unbeknownst to me) but he said the drop would be even bigger this year, given the state of the housing market.
On the one hand, this is good — I get to enjoy a renovated bathroom without worrying about the tax hit. On the other hand, it makes me worry that the town’s estimated $4.5m budget shortfall in FY 10 could end up being wishful thinking, especially if there are widespread reductions in property tax assessments — the town’s single biggest source of revenue.
Paul,
That is a common misperception people have. You will not be paying less because your assessment went down. The Tax rate is directly tied to assessed values on property so as property values drop the tax rate increases. An example.
You have a 500,000 home at a 10% tax rate and you pay $5,000 in taxes.
The following year your home is assessed at $475,000 but the tax rate is increased to 11% to compensate for the drop in assessed values and you pay $5,225.
You could ask for an abatement but you would need justification that your new assessment is higher than comparable properties.
Sorry for the clarification but I frequently here how dropping values is somehow positive to anyone but new home buyers…
PJ
Point taken PJ — and you’re right – the tax rate/assessment levels see saw to keep us at the 2.5% level. I guess my question was on the effect town-wide should property values decline precipitously, but i guess the answer is that we’ll just end up paying a higher tax rate to keep the “in” at the end of the year stable. I’m interested in the 6% figure too, as it’s been noted elsewhere that the towns within 128 like Belmont and Arlington are among the few areas of the state that have seen home prices stay the same or even increase somewhat.
Minor dips in overall assessments should not be a problem — the product of overall assessment and tax rate can rise as fast as 2.5% per year. If the assessments go up faster than that (as they have in recent years) then the rate falls. If the assessments stay flat, then the rate rises by 2.5% per year (for example, a 1% rate increases to 1.025%). If the assessments fall, then the rate rises more than that.
There is also a cap on the highest possible tax rate of 2.5%, but because our current rate is about 1%, assessments (property values) would need to fall by about 60% before town revenues were affected.
Things get more complicated if people add on to their houses, or if fashions in housing change. If you add on to your house, that increases the amount of property in the town, and the new taxes on that new property are added to what the town can tax. If, on the other hand, fashions make one sort of property (say, two family, or brick, or with a media room) houses much more desirable and thus more valuable, then taxes on the fashionable houses go up faster than 2.5%, but taxes on the other houses go up less than 2.5%.
For example, suppose you have a town of two houses, one red, one blue, each initially worth $100,000, and a tax rate limit of 1.5%. This year, the town can collect $3000 in taxes ($1500 each). If nobody adds on to their house, then next year the town can collect $3075 in taxes. As long as the assessed values of the houses change at the same rate, they each pay $1537.50 in taxes. If the values both double, then the rate is 1.5% x .5 x 1.025 = 0.76875%. If the values both fall by 10%, then the rate is 1.5% x 1.11111 x 1.025 = 1.708333%. Either way, same tax is paid (as long as the the rate also does not exceed 2.5% — that number appears twice, both as the rate limit, and as the tax revenue increase limit).
Suppose, on the other hand, that the houses change value at different rates. If the amount of property is increased (if an addition is built) then the town’s tax revenues can increase faster than 2.5% per year, in proportion to the amount of property added. So, in an otherwise flat market, if the red house gets a large addition that doubles its value, the amount of taxable property in town increases by 50% (from $200,000 to $300,000) and the town’s tax revenues can go up by a factor of 1.5 x 1.025 to 4612.50. Blue house still pays $1537.50, but red house pays $3075 (double the property, double the tax).
Another possibility is that housing prices will change because of fashions. If there is no addition to either house, but the red house becomes twice as valuable because buyers suddenly and mysteriously prefer red, the town CANNOT increase its tax revenues faster than 2.5% per year, even though the resulting values are the same as in the previous example where the red house was added to ($100,000 and $200,000). Instead, the town must reduce the rate so that the tax on $300,000 still produces $3075 in taxes. The result is a tax rate of 1.025%, down from the previous year’s 1.5%. The blue house owner will pay $1025, and the red house owner will pay $2050, still totalling $3075.
Obviously this example is contrived to make the numbers a little simpler, but values go up and down, people add on to their houses, and the relative prices of condos/townhouses/single-family/multifamily homes do change over time. Towns also vote for both operating overrides (permanent increases in the revenue limit) and bond (capital) overrides (temporary increases in the revenue limit).
I have tried to make this as clear as I could, yet I fear that people will still think that I am trying to trick them with numbers. I’ve been trying to make sense of this for years, and I’m good with numbers, and I’m still only “pretty sure” that I explained this correctly. Remember that this was a citizen’s initiative; allegedly people voted for this because they understood how it would work, and thought that would be an improvement. You might keep this in mind the next time someone ask you for your signature to promote some cure-all citizen’s initiative.
PS.
And if you hear someone say “the property tax is a stable source of revenue”, the right and proper answer is “well duh, of course. It’s mathematically defined to be stable.”
We could, if we wanted, adjust the income tax in the same way — each year, let the state collect 5% (I’m totally guessing at the non-inflation-adjusted rate of economic growth) more income tax revenue than the previous year, and simply adjust the rate that we all pay to obtain that end. Presto, the income tax is now a “stable” source of revenue, albeit one that magnifies the peaks of booms and the valleys of busts. (I hope that nobody actually does this, it makes much more sense to accumulate a rainy day fund during booms and spend it down during recessions.)
Funny you should post this.
We’ve been working on a story for a couple of weeks now about the real estate crash and what effect is is having on Belmont. We should have it, barring a major incident, this week.
Long story short? Sales are up and prices are down. Compared to other towns? Belmont is not seeing the huge dips others towns are seeing. In fact, Belmont is one of the only towns not seeing dips on both sales and prices. I don’t think the Web sites will help us with our story but I will check them out.
On a side note, the above comments by all involved are why the “new growth” angle is so important with a system like Prop 2 1/2 in place. So long as there is only so much that can be taxed, a specific percentage, with a specific levy limit, the only way to lift the levy limit is new growth. While there is limited potential for growth in Belmont, there are areas which could be developed and that growth could be beneficial to the town.
New growth is hard, and we should not be surprised when it is inadequate. I have heard (from someone in the town, don’t recall name) that we actually manage almost a 1% boost in revenue increase from yearly new growth, meaning additions to houses mostly. That gets us all the way to the historical inflation rate, though not to the economic growth rate.
The two problems with significant new growth are (1) that in order to avoid overrides, one year’s growth is not enoigh; it has to occur year after year after year, and (2) for whatever reason, we seem to not like business. I don’t entirely understand this; other places I’ve lived, the business centers have been exciting, interesting, expensive places to live (expensive means people like it). I don’t know if this is just something peculiar to Belmont, or if it has something to do with different state laws the change how we can(not) control business.
P.S. (hindsight is 20-20)
I don’t think I quite made the continuous-new-business point well enough. Right now, we’ve got something like a 5% business tax base (might be 3, might be 7, but it’s small). To not lose ground on revenues (against economic growth, that is, salaries, not just inflation) we’d need to add 1 to the business percentage each year. So if we’re 5% business now, in 5 years, we’d be 10%, and in 15 we’d be 20%. That’s a big change, even for someone with my point of view who thinks that we need more business in town and is puzzled at the unfriendliness. If we ever stop adding business tax base, then we lose ground and need to start regularly voting operating overrides. This is what “structural imbalance” means — there is NO one-shot solution, other than adjusting the 2.5% in Prop 2.5 to a larger number, like 3.5% or 4%, or getting the state to commit to a level of local aid that increases as fast as economic growth.