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Property Tax Rates After the Housing Downturn

Special Studies, April 4, 2011
By Natalia Siniavskaia, PhD.
National Association of Home Builders
Report available to the public as a courtesy of HousingEconomics.com

Previously NAHB analyzed real estate taxes and tax rates for all states and metropolitan areas in 2007.[1]The estimates were based on the 2005 American Community Survey (ACS) data gathered at the time when many housing markets were approaching the peak of the housing boom. At that time, home prices were rising so fast it was difficult for tax assessments to keep pace with housing appreciation. The current housing market is poles apart and real estate tax rates are likely to differ considerably from what they were in 2005. This article presents new estimates of property taxes and tax rates for US states and metropolitan areas based on the 2009 ACS data.

Measuring Real Estate Taxes and Effective Rates

The amount homeowners have to pay in property taxes every year is largely a combination of three factors: the value of their homes, the assessment ratio (the percentage of the property value that is taxed), and the nominal tax rate. The product of the last two factors is the effective real estate tax rate, the percentage of the property value that is paid in taxes every year. In practice, the effective rates can be calculated by simply dividing the overall annual property tax payment by the property value.

The American Community Survey (ACS), a replacement of the decennial Census long form, asks homeowners to report both their home value and overall annual real estate taxes and releases their median values for different levels of geographies publicly. Consequently, the ACS provides sufficient data to estimate residential real estate tax rates as a ratio of the median annual property tax payment to the median property value for different levels of geography.[2]At the request of NAHB, the Census Bureau first expanded the coverage of property taxes to include more detailed levels of geography for the 2000 Census and then restored that detailed coverage again in the 2005 ACS. This made it possible to study property taxes across counties and metropolitan areas.

Property Taxes and Tax Rates across States

According to the 2009 ACS, the median annual real estate tax payment in the US is $1,917 per home with half of all homeowners paying less and the other half making annual payments exceeding the median. The property tax payments vary considerably across states. Homeowners in the southern states, with the exception of Texas, and the Mountain Census Division tend to pay lower taxes per home, while homeowners in the Northeast and Pacific states, with the exception of Hawaii, are likely to pay property taxes exceeding the US median (see Table 1).

 Table 1. Property Values, Real Estate Taxes and Rates, 2009

As in 2005, New Jersey has the highest median real estate taxes with more than fifty percent of all homeowners paying in excess of $6,579 in annual property taxes per home. Connecticut comes in a distant second with a median property tax bill of $4,738. At the other end of the spectrum are southern states. Louisiana and Alabama have the lowest median real estate taxes in the nation with half of all homeowners paying less than $243 and $398 in taxes per home respectively.

To provide additional insights into large cross-country differences in annual property taxes, Table 1 presents and ranks both median home values and median effective real estate tax rates. The colored-coded map (Figure 1) highlights the geographic distribution of median effective real estate tax rates. New Jersey, New Hampshire and Texas have the highest property tax rates in the nation, exceeding $18 per $1,000 of home value. The next three positions are taken by the Midwestern states: Wisconsin, Nebraska and Illinois. Southern states, with the exception of Texas, where State and Local (S&L) governments traditionally rely less on property taxes as a source of their revenue are at the bottom of the list. Louisiana, where homeowners enjoy a generous homestead exemption, has by far the lowest effective real estate tax rates in the nation - $1.79 per $1,000 of property value.

Figure 1. Median Effective Real Estate Tax Rates per $1,000 of Value

Two states with the most expensive homes, Hawaii and District of Columbia, have median real estate tax bills that rank only 35th and 20th in the nation thanks to low effective property tax rates. Low property taxes in Louisiana and Alabama can partially be attributed to home values that are well below the nation’s median of $185,200 and partially to some of the lowest property tax rates in the nation. Homeowners in New Jersey end up paying the highest property taxes in the nation as a result of having both expensive homes (their home values rank fourth) and the highest property tax rates in the nation.

Comparing the 2005 with the most recent 2009 data reveals a wide range of double-digit changes in property tax rates that seem to have been driven by large fluctuations in housing prices during the last decade. Nevada and California, two states with the largest price declines according to the ACS, experienced major jumps in their effective property tax rates of more than 50 percent. States where the 2009 ACS home values are still above their 2005 levels, such as Utah, Montana, Idaho, registered a decline in their effective real estate tax rates.

These findings suggest that tax assessments did not keep pace and followed behind home price changes during both the recent housing boom and bust years. Homeowners in states with rapidly declining house prices faced property tax bills based on the dated higher-value tax assessments thus effectively paying higher property tax rates (even if nominal rates remained the same). At the same time, homeowners in states with housing appreciation paid property tax bills based on the lagging behind lower-value assessments, thus registering declining effective tax rates. A simple correlation analysis confirms this finding. The correlation between percent changes in home values and property taxes is only 0.12, while the correlation between home price changes and effective tax rate changes is strong and negative, -0.83 .[3] In other words, the larger the home price decline the greater the tax rate increase.

Property Taxes in Metropolitan Areas

The real estate taxes show even more variation when compared across metropolitan areas.[4]The 2009 median annual property taxes are highest in Nassau-Suffolk, NY Metro Division where half of all homeowners pay more than $8,177 per home and lowest in Alexandria, LA Metro Area where the median is $151 per home. Similarly, the median effective property tax rates range from a high of almost $28 per $1,000 of value in Rochester, NY to a low of $1.36 in Alexandria, LA.

As Figure 2 shows, median effective property tax rates in metropolitan areas mirror the geographic pattern for entire states: lower effective tax rates in the South, with the exception of Texas, and higher tax rates in the Northeast and Midwest regions.

Figure 2. Median Effective Property Tax Rates per $1,000 of Value

Out of the top twenty metro areas with the highest property rates, seven metros are located in the state of New York (they all make the top ten list as well), five are in Texas, four are in Illinois, three are in New Jersey (Table 2). The bottom ten positions are taken by metropolitan areas in Louisiana, Alabama, and Honolulu, HI.

Table 2. Top Twenty Metropolitan Areas Ranked by Median Effective Real Estate Tax

Comparing the 2005 and 2009 effective property tax rates across metropolitan areas reveals the same significant effects of widely fluctuating home prices as across states. Three California metropolitan areas: Stockton, Merced, and Modesto, CA saw their effective real estate tax rates more than double as a result of sharp declines in home values from 2005 to 2009. An additional dozen of Californian metropolitan areas, as well as Las Vegas-Paradise, NV, Reno-Sparks, NV and three metros in Florida registered property tax rate jumps of more than fifty percent due to significant house price declines not captured by lagging tax assessments. In the Detroit metro area, probably due to home value declines that were not captured in a timely fashion by tax assessments, the median property tax rate catapulted to the sixth highest among all metros, almost $24 per $1,000 of value compared to less than $16 per $1,000 of value in 2005. The correlation analysis for metropolitan areas confirms the same strong negative relationship between the percent changes in metro home prices and effective tax rates, -0.79, while the correlation between the home price changes and the annual property tax changes are much weaker, 0.19. In other words, the larger the house price decline, the larger the property tax rate increase.

A complete table showing median real estate taxes, median home value, and the resulting effective property tax rate for every metro area/metro division in the country is provided in an Excel file that can be downloaded or opened from the “Additional Resources” box that appears at the top of this article.

[1] Residential Real Estate Tax Rates in the American Community Survey, Natalia Siniavskaia, Housing Economics Online , 2007
[2]  From a mathematical point of view, estimating the median property tax rate as a ratio of two medians is not ideal, but it is the only possible way given the data publicly available in the ACS summary files.
[3] Correlation indicates the strength and direction of a linear relationship between two variables and ranges from -1 to 1. Larger absolute values mean that variables tend to move closer together in the same direction (positive correlation) or opposite direction (negative correlation). Zero correlation means that changes in two variables are completely independent or unrelated to each other.
[4]  The definition of a metropolitan area used in the article is a Metropolitan Statistical Areas (MSA) as defined by the U.S. Office of Management and Budget (OMB). The OMB breaks several of the larger MSAs into Metropolitan Divisions, and where these are available this article uses the divisions rather than entire MSAs.

For more information about this item, please contact Natalia Siniavskaia at 800-368-5242 x8441 or via email at nsiniavskaia@nahb.org.

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