Property Taxes Rise as Home Values Fall

property taxes rise, home values declineWith home values nosediving in many areas of the country, why are so many markets facing huge surges in property taxes? Charles Hughes Smith at our sister site, DailyFinance, takes an in-depth look at this seemingly backward phenomenon and explains why this paradox is unsustainable in today's housing market.

Common sense suggests that as home prices decline, the property taxes based on their valuations ought to as well. But even as house prices continue to slip, property taxes nationally are clicking higher.

Why is this occurring? There are several factors at work.

The first is that many local governments are responding to sharp declines in real estate values by raising property tax rates. In one southern Washington county this year, the rate jumped from $10.06 to $11.60 per $1,000 of assessed value -- a more than 15% increase. Throughout Washington, even as assessed values slumped by more than 13%, property tax revenues rose 2.1% to $8.8 billion -- a $181 million increase. Though Washington state has limits on property tax hikes, local governments' property tax rates don't rise or fall based on assessed values -- they're set by budget requirements. So falling prices don't necessarily translate into lower property taxes.

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Next door in Oregon, state law has combined with the law of unintended consequences to produce an unusual twist on the property tax problem: A voter-mandated statute limits increases in assessed values to 3% a year. As a result, those assessed values are still lagging market prices, which soared during the housing bubble. In Multnomah County, the average assessment of $174,000 is $100,000 lower than current average market values. Thus, assessed values -- as opposed to actual values -- will keep rising, and property taxes will rise with them, by 3% a year even as real home prices slip. Property taxes in those markets won't fall unless real values drop below assessed values, which would require massive additional price declines.

In northern New Jersey, property taxes are rising by as much as 12% in some municipalities, after skyrocketing 80% over the past decade, far outstripping growth in the consumer price index (31%) and household incomes (24%). The state government in Trenton has cut its contributions to local governments by $200 million over two years, and other revenue sources are falling. Localities now say raising property taxes is their only option.

Read the full article at DailyFinance.

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