Wednesday, December 12, 2007

Revaluations, Falling Home Prices, and the Equalization Factor

There’s some confusion regarding revaluations during a bearish housing market. People fear that their homes will be over-assessed because prior sales are not necessarily indicative of current values in a falling market. However, the focus should be on property taxes, not assessments. Will the current housing market affect individual property taxes? Yes but in ways that are impossible to measure, predict, or control.

Let’s assume that property taxes consist of local property taxes and county property taxes. Your property taxes are based upon your “fair share” and total appropriations at both the local and county levels. Your fair share is based on your property’s assessment compared to the total assessment for your municipality and your county.

In theory, a rising and falling market shouldn’t affect your fair share because all the properties are rising and falling at about the same rate. But in reality, that’s often not the case.

To illustrate this problem, let’s assume you own a “custom colonial” in the Strathmore section of Aberdeen. The appraisal company will assess your home using a comparable sales approach. Basically, they look at recent sales of similar homes in the same neighborhood. In a stable market, they would look at sales over the past year, maybe longer. In the current market, they’re more likely to use a 6-month horizon.

The problem for you is that there haven’t been sufficient sales of custom colonials in your area in the past six months to use in a sales comparison. So, instead, they will use the next best thing, country clubbers. But there haven’t been many recent sales of country clubbers either so they’ll use 4-bedroom Strathmore colonials.

The appraisal company will use the 4-bedroom Strathmore colonials as a base and then make adjustments to account for your basement, 2-car garage, square footage of living space, and the fact that you have a more modern home.

Here’s where the problem arises. The moment the appraisal company uses a different model house as the base, they’re assuming that your house is rising and falling at the same rate as the base model. That may or may not be true. If prices for custom colonials are falling at a faster rate, then you will be over-assessed.

Will the owner of a Strathmore colonial be affected? Only in that the total assessment roll may be off because some properties were assessed too much or too little.

The other issue is the equalization factor. Aside from revaluations, properties are generally not assessed at 100% of market value and the percentage varies for each municipality. To account for this, the county uses an equalization factor to “equalize” all assessments.

If you look at Monmouth County’s Equalization Table for 2005, you’ll see some interesting facts. Matawan has the pole position of highest taxes in the county. (Aberdeen is ranked 5th highest but moved to 3rd place in 2006.) Our school property tax rates are higher than the total tax rates of 16 municipalities in Monmouth County.

After the revaluations, the county will assume our assessments are at 100% of market value. Because the market is falling, our assessments at the county level may be too high.

Neither of these problems concerns me for a few reasons. 1) Markets are usually going up or down. 2) Assessments are an inexact science. 3) Appraisal companies try to account for market changes. 4) The errors are well within an acceptable range.

Another point to remember is that there is no remedy. Those who advise we wait for the market to stabilize are implicitly suggesting that we can predict when the market will stabilize since revaluations are always planned over a year in advance.

As my readers know, I have concerns regarding the revaluations and property assessments in general but the timing of this revaluation isn’t one of them.
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2 comments:

In Aberdeen said...

Hello and thank you for this blog. I am in Aberdeen and find your blog helpful.

I would like to learn more about the assessment process. Can you provide any information sources?

Thanks, IA

Aberdeener said...

There are two components to a revaluation - the assessment and the tax rate. An assessment is slightly different from an appraisal in that certain items are excluded from an assessment (i.e. landscaping or a new roof).

For a brief summary of the tax rate and appraisal process, I'd recommend Essentials of New Jersey Real Estate (pages 45, 181) . You can look it up at books.google.com. This is the book that New Jersey Realtors use to pass their salesperson license exam.

To read about a worst-case scenario of a revaluation (which doesn't apply to Aberdeen, thankfully) you can read this New York Times article.

Thank you for your kind words. I'm glad to hear you enjoy the blog.