Property Values are Rising Again! Hooray for Higher Taxes??

Several sources have reported that home sales prices appear to have turned the corner and are now rising.  DataQuick shows increases in sales prices over the past five months, and year-over-year increases. While foreclosures remain high, the increase in sale prices is seen as a positive sign that the market is recovering.

 

ClearCapital also reports that the market may have turned toward a recovery, saying “The recovery has generally started in lower priced segments for most markets seeing gains, however demand in the West is now outpacing supply and driving prices up in the low, mid, and even high priced homes.”

This is good news for many home owners, home buyers and the real estate industry as a whole.  And it is doubly good news for cities, counties and local districts who rely on the property tax for part of their revenues supporting public services.

As property values rise, property taxes will rise as well, helping to pay for schools, parks, libraries, public safety and other services provided to residents and local businesses by public agencies.  And those taxes will rise relatively rapidly, despite the limits imposed by Proposition 13.

“How can that be?” you ask, “Didn’t Prop. 13 limit increases in property taxes to no more than 2% per year?”

Yes, it did, for the “base year value”–but many properties have had their assessed value reduced because of the drop in prices that occurred after the real estate bubble popped.  This adjustment to account for “decline in value” was authorized under Proposition 8, which was approved by the voters in 1978. But once the market turns, and values rise again, Prop. 8 allows those adjustments to be reversed immediately.

Prop. 8 requires the County Assessor to reduce the assessed value of property to reflect market declines, but it also requires increases in assessed value when the market recovers.  These increases match the change in the actual market value until the Prop. 13 base year value is reached, at which point the annual 2% per year limit is again imposed. The chart below, from an article in the Mercury News, shows how it works.

So, the market may have turned up again.  That means that mortgages may not stay underwater much longer, providing relief to owners who feel stuck because they will lose a lot of money if they sell their homes now.  Rising prices will also encourage people thinking of buying to feel more secure about making that down payment because the home they buy won’t drop in value, and lenders will feel better about making loans to those home buyers.  And it means that cities, counties and special districts may be able to stop laying off critical workers and shrinking services, and start refunding those “rainy day” accounts they have been draining to keep providing services to their constituents.

But it may be a shock to some long-term owners to see their property taxes rise right along with the market value of their properties.  However, if you consider the Prop. 8 reductions as a sort of “tax holiday” when times were bad, then the rising taxes can be seen in perspective.  If the bad times are coming to an end, then the “holiday” is over.

For more information about Propositions 13, 8 and other laws related to the property tax, visit the California State Board of Equalization website.