Examining the correlation between high R.E. taxes and short/long term property value diminishment

Recently, a commission in New York State recommended a cap on real estate taxes. Of course, the majority of taxpayers are in favor of such a cap. In March I wrote a similar article regarding the detrimental effects on value caused by real estate taxes using some general examples. In late May, I presented the topic at an Appraisal Institute seminar, "Case Studies In The Valuation Of Upstate N.Y. Real Estate." In preparing for the seminar, I was able to obtain more precise statistics. I used median single family sale prices in Rochester, N.Y. which represented Upstate N.Y. I then chose three metropolitan areas in other states to compare appreciation, equity buildup and real estate tax rates. These areas were chosen because they currently or were similarly sized metropolitan areas and have relatively low real estate taxes. The goal was to measure the approximate effect real estate taxes have on real estate values. The areas chosen were Birmingham, Ala.; Charlotte, N.C. and Richmond, Va.for the time period between 1991 and 2007. The median price for a single family home for Rochester, N.Y. in 1991 was $90,938. For Birmingham, Ala.; Charlotte, N.C. and Richmond, Va. the median prices were $86,000; $101,400 and $92,500 respectively. In 1991, Rochester's median single family price was squarely within the range of the non-New York state regions. In 2007 the median price in metropolitan Rochester was $117,500. For the metropolitan areas of Birmingham, Ala. Charlotte, N.C. and Richmond, Va. the median prices were $162,200; $204,300; and $233,700 respectively. Metropolitan Rochester's median sales price appreciation was 29.21%.or 1.83% annually. In 2007, the median sales price in metropolitan Rochester had dropped dramatically below the range of the other markets. Metropolitan Richmond, Va.; Charlotte, N.C. and Birmingham Ala. median sales price appreciation was 88.60% or 5.54 % annually, 101.48% or 6.34 % annually and 152.65% or 9.54 % annually respectively. If you translate appreciation into equity, the equity increase in the Birmingham, Ala.; Charlotte, N.C. and Richmond, Va. was 86.88%, 187.40% and 331.59% greater than Rochester respectively. The current tax rates/$1,000 of assessed valuation for the Rochester area are approximately 300% higher than Birmingham, Ala. Charlotte, N.C. and Richmond, Va. This shows there's a high correlation between depressed values and taxes. The good news is that Albany and the Hudson Valley appeared to have outperformed Rochester, Buffalo, Syracuse, Utica/Rome, Binghamton substantially due to the nearness to New York City and the state government employment multiplier effect. Some politicians argue that is the price taxpayers pay for "quality" services such as education, infrastructure, etc. There are indicators which have shown that the superiority of New York State services are overstated relative to other states. As an example, average SAT scores in areas such as Birmingham, Ala.; Richmond, Virginia; Clearwater, Fla.; and Charlotte, N.C. are on par with much of New York State. The other argument, politicians use in this debate is affordability. That is, although real estate taxes depress value, this makes the properties more affordable. On the surface, lower prices do benefit purchasers of real estate. As an example, if real estate taxes are $5,000 higher than an equal property, the mortgage affordability may be as much as $65,921 lower based upon a 6.5% 30-year mortgage. So instead of paying $5,000 more in debt service the buyer could be paying approximately $5,000 more in real estate taxes. Thus, no harm; no foul? Wrong! The average Upstate N.Y. resident has been "robbed" of equity buildup because of high real estate taxes. In summary, the correlation between high real estate taxes and short/long term property value diminishment will apply to most areas of the New York and New England region with the exception of Downstate New York, Albany, the mid-Hudson, and the Boston Metropolitan area. John Rynne, MAI, SRA is the president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y.