The housing market in some areas of the state may be improving, but a new study by the N.C. Department of Revenue suggests that real estate values remain generally sluggish across the state.
The Department of Revenue’s annual sales assessment ratio study compares property tax assessments with actual sales prices for real property throughout a given county. If a ratio is greater than 100%, then that county’s tax assessments are on average higher than actual market values. During “normal” economic times a county’s ratio will gradually decrease in between county-wide reappraisals, because the tax assessments remain constant while real estate prices gradually increase.
We haven’t seen “normal” economic times since the Great Recession arrived, of course. Prior to 2009, each year we’d see only a handful of counties with sales assessment ratios at or above 100%. But in recent years, more and more counties are learning that their real property is on average overvalued for property tax purposes.
Last year, nearly half of the counties hit or exceeded 100%, which was astounding. The trend accelerates this year. In the soon-to-be-released 2012 sales assessment ratio study, more than two-thirds of our counties broke the 100% threshold. Equally surprising is the fact that the average sales assessment ratio statewide is now over 100% (it’s 104%, to be exact). Clay County leads the pack with a ratio of 142%, while Union County makes history as the first county to trigger the mandatory reappraisal provision added to the Machinery Act in 2008.
What does this all mean?
First, counties with reappraisals scheduled for 2013 can expect to see their real property tax bases suffer just as did tax bases in the counties that reappraised their property this year.
Before the Great Recession, counties could generally count on 20 – 40% increases in their tax bases after reappraisals. That’s no longer the case, and a quick look at North Carolina housing statistics shows why. The average sales price of existing homes as of January 2012 was down 12% from its peak in January 2008 across North Carolina, with some areas of the state experiencing much steeper declines. Counties that reappraised in or around 2008 caught the housing market near its zenith, meaning their next reappraisals will reflect the pricing retreat we’ve witnessed over the past few years.
We saw some dramatic drops in county tax bases after 2011 reappraisals and we’re seeing them again this year. New Hanover County, for example, suffered a 16% decrease in its residential tax base as a result of its 2012 reappraisal. Several beach towns in that county lost up to a third of their residential tax bases. Cabarrus and Rutherford counties witnessed more than 10% of their tax bases disappear.
In the current economic climate, it seems the best a county can hope is for its tax base to remain relatively stable after a reappraisal. Rowan County likely feels lucky having lost only 2% of its tax base last year. Guilford and Bertie counties managed to avoid losing value, but their residential tax bases rose by a mere 1% following their 2012 reappraisals. Those 20 – 40% increases counties used to anticipate are long gone.
This sad state of affairs is nearly certain to continue into 2013. Sales volume is up but sales prices are not. According to the N.C. Association of Realtors, through April 2012 average home sales prices statewide showed no increase from last year’s prices. It seems unlikely that prices will recover enough in the next ten months of the year to provide a major boost to 2013 tax bases.
Counties and towns that experience shrinking tax bases will need to dramatically reduce their expenses or raise tax rates to account for the lost revenue. Case in point: Carteret County raised its property tax rate by 30% last year in recognition of its new, smaller tax base.
Second, we may see more counties forced to conduct reappraisals more quickly than they had planned. In 2008, the General Assembly responded to complaints of taxpayers being hit with huge tax increases after years of housing appreciation by adding a provision to GS 105-286 that requires a county to hold a reappraisal if its tax values differ from actual market values by more than 15%.
The provision sounds tougher than it really is. It applies only to counties with populations over 75,000, a restriction that excludes roughly 1/3 of N.C. counties. And any county that would trigger the mandatory reappraisal has 3 years to satisfy the requirement, meaning the many counties on 4-year reappraisal cycles would conduct voluntary reappraisals before the requirement took effect. Thanks to these qualifications, the provision sat dormant for its first four years of existence.
But it is dormant no longer. Union County, population 202,000, triggered the mandatory revaluation requirement with its 2012 ratio of 119%. Instead of conducting its next revaluation in 2016 as planned, the county will need to conduct one by 2015 at the latest.
It’s a bit ironic that the mandatory reappraisal provision was triggered by a county whose tax values were too high relative to market values. Fears about the exact opposite situation originally motivated the legislature to adopt the provision. In 2008, taxpayers were clamoring for more frequent reappraisals in the hope that their tax assessments would not rise too much at once. In 2012, taxpayers are clamoring for more frequent reappraisals in the hope that their tax assessments will fall.
But counties must still balance their budgets regardless of what happens to their tax bases. Smaller tax bases will likely lead to higher tax rates, meaning most taxpayers will wind up paying roughly the same size property tax bill no matter when their county chooses to conduct a reappraisal.