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Does An Increase In The Real Estate Tax Rate Directly and Significantly Affect Housing Affordability? |
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The City of Harrisonburg recently increased the real estate tax rate from $0.86 per $100 of assessed value to $0.90 per $100 of assessed value. Does this affect housing affordability for home buyers and homeowners? I tried to say "yes and no" for this question -- but it's somewhat difficult to say that the increase in the real estate tax rate (alone) has a meaningful increase on housing affordability. Technically, yes, the increased tax rate does increase the cost of owning a home -- but not by much... For a property assessed at $250,000...
So, for the house assessed for $250,000 -- the monthly payment would increase by $9 per month based on this change in tax rates. So, certainly an increase in monthly housing costs, but not much of one. To put this change in monthly housing cost in context... If a homeowner had financed 90% of their purchase price of $250K at 3.5%, their mortgage payment would likely be right around $1,243 before the change in tax rate -- and right around $1,251 after the increase in real estate taxes. So, this change in tax rates increases their monthly payment by less than 1%. Am I saying that the City of Harrisonburg can just keep on raising the real estate tax rate forever without any impact on housing affordability? No. But it's hard to argue that this increase in the real estate tax rate, on its own, dramatically changes the financial picture for many or most homeowners. Now, I'll pivot a bit to a few other common talking points related to real estate taxes... Increased Tax Rates + Increased Assessed Values If we look at both at the increase in property values AND the increase in the real estate tax rate, then yes, the change in one's real estate tax bill is more significant. That said, the assessed values of real estate do not (at least right now) seem to be increasing as quickly as sales prices are in the current real estate market. While the median sales price has increased by about 10% over the past year, this year's property value assessments increased a net of 2.9%. As such, we shouldn't hastily calculate the increase in a tax bill using the increase in our local median sales price to show a large increase in real estate taxes, because market values are currently escalating much more quickly than tax assessed values. Tax Rate Increases + Income Changes A somewhat common refrain is to say "real estate tax rates increased by __% over such and such timeframe -- but my income didn't increase by that much during that timeframe!" This argument doesn't make a lot of sense to me. Let's make it as extreme of a point to point comparison as possible. The real estate tax rate was $0.59 ten years ago and is now $0.90. That is a 53% increase over a ten year period. So, per the argument above, I'd need a 53% increase in my income during the same time period in order to afford those higher real estate taxes, right? Well, probably not. :-) I'm going to use very rough, inaccurate numbers here, but let's pretend Fred owned a home assessed for $150K ten years ago and today it is assessed at $250K. His annual tax bill would have been $885 a decade ago at that $0.59 tax rate and that would have increased to an annual tax bill of $2,250. That's quite an increase! In fact, it's a $1,400 increase in annual real estate taxes over ten years. So, per the prior argument, he probably needs to have seen a 53% increase in his income because the real estate tax rate increased 53% over a decade, right? Well, maybe not. If Fred was earning $35,000 a decade ago, a 53% increase over the past ten years would mean that he would be earning $53,000 today. If you made it through all of my ramblings, thanks for reading and engaging on this topic. Do I think higher taxes are OK or good or great? No. I would love for everybody to pay the same or lower taxes forever and ever. Do increases in the local real estate tax rate directly and significantly affect housing affordability? In the short term it's very hard to say "yes" to this ($9/year) based on the information above. Over the mid to long term, certainly, this does have a cumulative impact - but I believe we should be precise with our language. Do you agree or disagree or have another counterpoint? Email me at scott@hhtdy.com. Recent Articles:
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Scott Rogers
Funkhouser Real
Estate Group
540-578-0102
scott@funkhousergroup.com
Licensed in the
Commonwealth of Virginia
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