When are Rising Property Values Bad for Municipalities?

(June 2012) Property values have fallen dramatically across the country in the last several years something which is often cited as a pain point for the municipal bond market.  One example I was looking at recently is Collingswood, New Jersey. According to online real-estate portal Zillow, housing prices in Collingswood have fallen 7.3% over the last year compared with  an average of 1.8% for the entire United States as a whole.

Conventional wisdom would suggest falling home values would be bad for a municipality and rising home prices would be good.  As values rise, assessed home values on which property taxes are based should also increase. Rising property taxes, with one or two year time lags, should lead to more property tax revenue for the municipality.

 

The problem with this logic is  that a weak real estate market  in many cases makes people less likely to move.

This is true because:

  1. Most people want to find a job before they move. The will have to move and establish a new residence to start a job. However, they may not be able to sell their old home for many  months in a weak market, requiring them to support two residences. For many people, this not financially possible.
  2. A family may be underwater on their mortgage (they owe more than on the mortgage than the home is worth) and not have the financial resources to cover the difference.Thus, a family may be able to find better jobs in different locations, but not be able to make the move in a weak real-estate market.

When the real-estate market gets better, families are no longer chained to their homes and population flight may occur. With people leaving, the tax base of a municipality (basically, the income of the citizens of the municipality generate) will decrease. This makes it harder for a community to raise funds by taxing residents.

 

When could a weak real-estate market be good for a municipality?

  • Weak Local Job Market For Skilled Jobs
  • High Per-Capita Income

In these cases, emigration is a risk to municipal finances.

Interested in learning more about the municipal bond market?  Visit the municipal bonds section of Learn Bonds.

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