A town I'm fond of in Lower Slower Delaware is at last considering updating its property assessments, which currently date from 1968.
Continuing to use 1968 assessments means that the land values are listed at their 1968 values; that if the building on the lot hasn't had a building permit or renovation project since 1968, the value of the building is whatever the assessor said it was in 1968; and, that if a building has been built or renovated in the intervening years, it assessed value is the value which the assessor put on it shortly after the completion of the work, based on his/her best guess of what that would have been worth in 1968! Recall that, for example, at that time, vinyll siding was new, untested and disrespected. Houses were generally worth more than the land on which they sat.
In the intervening 44 years, land values have risen significantly, and even many new homes sit on land which is more valuable than the house itself. Many of the commercial properties are modest buildings -- cinderblock of 1 or 2 stories -- on million-dollar sites.
What else has happened since 1968? Well, the state, with a lot of federal funding, built a 6-lane highway to help increase trade and traffic in the area. Three campuses of a huge outlet mall were built nearby (outside 'city' limits, but still within the postal address. Beaches get nourished every few years, with the city bearing little of the expense.
As the Baby Boom generation aged into the age groups where second-home ownership and investment in real estate tends to be highest, new homes have been built, for family use and for rental. Lots which were worth $5,000 in 1968 may be worth $500,000 now.
The contempleted reassessment is only for one town, measuring about 1 square mile. City taxes pay for some public services, but trash, water and sewer are separate charges [for many homeowners, those fees are higher than their city taxes!]; the fire department is staffed by volunteers; tradespeople must pay for annual licenses to work within the city; the city receives 1.5% of every real estate sale (as does the county); those who rent their homes pay a small license fee and 3% of the rental to the city. City taxes do not fund public education; that's part of the county tax bill. Because so many homes are rentals, or second homes, and many of the year-round ones are owned by retirees, there are relatively few children to educate, so even county taxes are remarkably low. (County assessments date back to 1974, and the contrast between low land values inland and high ones close to the ocean and bays and their tributaries is striking.)
The effect of the current tax structure is to tax land very lightly and tax buildings much more heavily -- and also to tax different owners very differently. In some ways, it isn't so different from California's Proposition 13, which penalizes newbies and forces them to subsidize the well-established. Penalize those who build! Penalize those who want to do the building or maintenance.
A look at the city and county taxes compared to asking prices on houses that are for sale suggests that one's taxes correlate far less to the asking price than they do to the year in which the house was built. A new home far from the beach pays more in taxes than an older home close to it, even if the older home's asking price is twice that of the further-from-the-beach home.
I'll make comments on a few specific passages in the article:
1. "Hickey said the assessment will start by analyzing current sales information to come up with a value model for city properties.
"After testing their model, PTA/DelVal would then examine all city properties with an emphasis on location and current sales information. The process would ask basic questions of the homeowner such as how many rooms are in the house, what kind of heat is used and when was the house built."
I hope that they will start with land value. There are sufficient empty lots and teardowns to make this rather straightforward. Value the land first. That need not be expensive to do. (See this story from an earlier post, in the assessment collection at left.) Local realtors can provide a pretty good analysis of what land in each block of each neighborhood is worth, and how much it varies within certain blocks.
How the assessors should treat the buildings is a different story. I would make the case that valuing the buildings should be done by valuing the total property, and subtracting the land value. For some older homes, this might result in a building valuation pretty close to $0, and even, possibly, a negative figure. It costs something to remove an old house from the lot before one can begin to build a new one. (Please note that this valuation is unrelated to what it would cost to construct a new home of similar dimensions, which is a criterion on which one would decide how much to insure an existing home for.)
Houses depreciate. A May, 2006, Federal Reserve Board Study pegged annual depreciation at 1.5%. Most homeowners understand this somewhere in their gut; they spend either a lot of money or a lot of time, or both, maintaining their homes. When land values were rising hugely in the last decade, it was easy to imagine that one's home was appreciating, but this is not the reality. Even with excellent maintenance, systems depreciate. They also become obsolete, as new technologies and new fashions -- granite counters, family rooms, high ceilings -- become popular. Split levels, raised ranches and A-frames are likely to be razed, while other homes of the same age may fare better. Even a major renovation may not bring an older home up to the same value as a very new one. (See the final page of the assessor's table for Westport, Connecticut at http://www.westportnow.com/Revalmodel022704.pdf. This is now 8 years old; I'd be curious to see what they currently use.)
One possible exception to the rule that houses depreciate might relate to changes in our building regulations. It may be that some homes that could not be built under current regulations may have a higher value than would otherwise be predicted for a house of that age and condition.
2. "He added that another benefit of property reassessment is that the value of new construction can be determined using current values."
But at the same time, depreciation must be considered; interestingly, even a 2 year old house has some depreciation in the Westport model.
I'll conclude by saying that one of the ways at one measures the accuracy of an particular revaluation is by how well it predicts the prices of houses in the months following the revaluation date. Every valuation is as of a specific date, and incorporates transactions which have occurred in the preceding months. In the absence of a major change in the market (say, a major increase or drop in interest rates, or change in lending practices, or a loosening or tightening of building regulations relative to neighboring communities), the transactions which occur in the following months should be fairly close to the assessed valuations on those properties.
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