The Roundup

Issue No. 24-006 | July 10, 2024

Property Tax

Notable property tax developments:

• Georgia > The Fulton County Board of Commissioners is proposing to raise its property tax rate by 3.74%, setting the millage rate at 8.87 mills. Read more here.
• Idaho > The City of Boise is considering a hike in fees and property taxes to offset increases in the budget from inflation and personnel costs. Read more here.
• Property Tax > Ryan has agreed to purchase the property tax practice of Altus Group in a deal valued at $500m USD. Read more here.
• Massachusetts > Massachusetts communities are increasingly seeking voter approval to override the state’s property tax cap to avoid severe cuts to essential services. The surge in overrides, nearly 100 in the past 18 months, reflects the struggle of local communities to keep pace with inflation and provide services within the constraints of the 2.5% annual tax increase limit. However, this approach is not sustainable, adding to residents’ financial challenges and leading to calls for increased state aid and a potential review of the tax cap. Read more here.

Commentary

Review & Commentary on Property Taxes and Housing Allocation Under Financial Constraints

This week I shared a new paper by Josh Coven , Sebastian Golder, Arpit Gupta , and Abdoulaye NDIAYE titled Property Taxes and Housing Allocation Under Financial Constraints. In this section of the Roundup, I summarize the paper and provide commentary on the findings.

Summary

• Property taxes affect who owns homes. Where property taxes are low, older people who no longer have children living with them are more likely to own homes. This is because they can afford the property taxes and may want to hold onto their homes as an investment. This makes it harder for younger families to buy homes, because they may not have enough money for a down payment and the ongoing property taxes. In contrast, places with high property taxes, like Texas, may lead to more young families owning homes. This is because the high property taxes lower the price of the homes themselves, making them more affordable for young families.
• Raising property taxes could increase homeownership for young families. The authors modeled what would occur if property taxes in California were raised to the same as those in Texas. The authors found that this would increase overall homeownership in California by 4.6%. It would also lead to a much bigger increase (7.4%) in homeownership among young families.
• Why higher property taxes might lead to more young families owning homes. There are two main reasons why higher property taxes might lead to more young families owning homes. First, the higher property taxes would reduce the price of homes, making them more affordable for young families to buy. Second, even though property taxes are higher, young families may be better able to afford the ongoing costs of owning a home compared to older empty-nesters. This is because young families are typically just starting their careers and their incomes are likely to grow over time. In contrast, older empty-nesters are nearing retirement and their income may not grow much in the future.

Commentary

• Comparing California and Texas. It would be interesting to see the authors run the policy experiment between two states with similar property tax systems but differing levels of taxation, such as between Washington and Texas. California's property tax system, which is subject to a yearly assessment cap and a reassessment on sale or a qualifying change in control, is materially different than the Texas property tax system that seeks a level of assessment at market value, subject to the fair and equitable valuation constraint. Laws governing the setting of tax levies and rates are also different in material ways, e.g., Proposition 13 limits general property taxes to 1% of value vs. Texas where levy limitations differ depending on the taxing jurisdiction.
• Incentivize New Homeownership with a Property Tax Credit. The authors show that property tax can be used to allocate housing toward the young and away from the elderly by lowering the upfront cost of housing in exchange for higher property tax payments during the homeowner's ownership period. Assuming that this is the policy aim, an alternative mechanism could be property tax credits that decline in value each year and terminate after a certain ownership period, say eighteen years to capture the period of child rearing. This would lower the cost of home ownership for young families, assuming the credits are age dependent, but would likely not have the effect of lowering the cost of housing that the authors find is important in reallocating housing toward the young.
• Proposition 13 Creates Inequity. The authors observe that "policies such as California's Proposition 13, intended to protect homeowners from rising taxes, may have the unintended effect of making it harder for young families to enter the housing market." Practitioners know this all too well. Jurisdictions with reassessments on sale, either mandated by law or set by custom, are likely to create inequity (favoring owners with longer housing tenures) when all other properties are valued via another assessment method, usually a computer-assisted mass appraisal model. A step toward removing the influence of property tax on the allocation of housing would be utilizing a less volatile method of assessment, such as the cost approach in Nevada or an assessment cap regime with an equalization factor and without a reassessment on sale like in Arizona and Oregon.

Multifamily Housing

Notable multifamily developments:

• South Carolina > Rising housing costs in Myrtle Beach are hindering healthcare recruitment. With average home prices at $541,750 and rents at $2,000 per month, multifamily developers have a great opportunity to help meet the city’s goal of 5,670 new housing units by 2033. Read more here.
• Indiana > The housing affordability gap in Indiana is widening, with minimum wage workers needing to work 122 hours per week to afford a Fair Market Rate two-bedroom apartment. The average Hoosier wage falls short in 88 of 92 counties, and less than a third of Indiana’s largest occupations pay wages sufficient to meet the state’s Housing Wage. Read more here.
• Washington > The Seattle City Council Land Use Committee has advanced an amended proposal to facilitate the conversion of commercial buildings to residential uses across various zones. The amendment by Councilmember Cathy Moore reinstates Mandatory Housing Affordability (MHA) requirements for conversion projects in downtown high-rise or mid-rise multifamily zones. The legislation, part of Mayor Bruce Harrell’s Downtown Activation Plan, aims to activate empty buildings and includes provisions for early permit applications and tracking of projects. Read more here.
• Supply & Demand > Great commentary and chart from Jay Parsons on the supply-demand dynamics impacting the multifamily market in the U.S. As he observes, rents are growing in parts of the country that didn't see an increase in demand last cycle (e.g., Lincoln, NE, Cleveland, OH, etc.) and rents are falling in parts of the country that experienced and continue to experience high levels of demand, but that demand is being met with even higher supply (e.g., Austin, TX, Atlanta, GA). Read more here.

. . and Much More

• Stinson Dean appeared on The Odd Lots podcast to discuss the state of the lumber markets. Stinson's commentary is a good listen for multifamily market participants. Listen here.
• The Aspen Institute held its annual Aspen Ideas Festival in late June. Here are some of the talks that I found interesting: David Brooks on populism (watch here), The Dilemma of Modern Parenting moderated by Jenna Bush Hager (watch here), and Governor Moore of Maryland on infrastructure spending in the U.S. (watch here).