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Mike Walden: New reality for property values

One of the casualties of the Great Recession has been property values, particularly residential property values. In the decade from 1997 to 2007, government statistics show the average value of a home in North Carolina jumped almost 60 percent. However, since 2007, that same average home value has dropped between 10 percent and 15 percent in most regions of the state ó and much more in some areas, like the coast.
This turnaround is creating some major upheavals. Clearly one is in the real estate market. Prior to the Great Recession ó and, indeed, for almost a century ó people could count on buying a home today and selling it for more later. Homes typically rose in value 3 percent to 4 percent per year. So a household could purchase a home now and sell it in five years for 15 percent to 20 percent more. The gain could be used to finance a bigger and better home. The process was virtually automatic.
Now things are different. People who bought homes three, five or even seven years ago canít count on selling them at a higher price. Actually, to sell they might have to accept less than they paid. For many, the residential real estate market has turned upside down.
Many homeowners arenít willing to accept this new reality, at least at first. They will only grudgingly lower their sales price, or they will pull their home off the market if the asking price isnít met. If the seller resists setting the homeís price in line with what buyers are willing to pay, the home will simply remain unsold, costing the seller both time and money.
Sellers sometimes refer to their countyís official assessed value as a guide to the market price. Every few years, between four and eight in North Carolina, county governments put a value on homes. This value is set by using sales prices of homes similar in size and location that have recently sold, so the value should represent what a buyer would pay. These values are used by local governments in billing owners for property taxes.
However, government assessed values donít change until the next assessment is completed ó again, generally between four and eight years. Therefore, the assessed value can quickly be out-of-date. The problem many home sellers now face is that unless the assessment was done recently the assessed value will likely be higher than the current market value of the home ó that is, the price at which the home could be sold.
Thereís a second issue with government-assessed home values that directly impacts North Carolina county and city governments. Public revenues from taxing homes (and other real property) are a major source of local government revenue. If those revenues drop, that can cause big problems for the ability of local governments to fund their public services.
When home values were rising, the problem was that property tax revenues werenít rising as fast as those values. This was because the assessed values ó set in some previous year ó were out-of-date. This situation led to proposals to shorten the number of years between assessments, and in fact, some counties did shorten those periods. But with home values increasing, at least cities and counties could count on the local property tax base rising when a new assessment was done.
But now the opposite problem exists, and it is potentially more damaging to local governments. With home values falling in most counties, local governments face the unpleasant prospect of seeing their property tax base shrink.
If a new assessment results in lower property values, then local governments face two options. They can accept the resulting reduced property tax revenues and make adjustments in their spending, a prospect that is never easy.
Or, local governments can increase the property tax rate and tax the smaller property tax base at a higher percentage to make up some or all of the revenue gap. Of course, this option could lead to significant push-back from property owners.
These choices will have to be faced as more counties conduct property reassessments in the period since the drop in real estate values.
Both home sellers and local governments face the stark new reality of property values in the post-crash era. Even if the home market stabilizes and values begin to rise, most economists think it will take between five and 10 years for the average home to recover the value lost during the Great Recession. Itís a new real estate world, and each of us will have to decide how to react.

Dr. Mike Walden is a William Neal Reynolds Professor and N.C. Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State Universityís College of Agriculture and Life Sciences.

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