The Unforeseen Secondary Effects of Falling House Prices

I’m beginning to see more and more posts and news articles complaining about falling house prices or houses being a drug on the market. Looks like it’s time for me to caution, as I’ve been doing for some time, about a possibly unforeseen secondary effect of falling house prices.

The concern I have is one I’ve been airing for the last four or five years. How dependent have states and municipalities become on predictably rising real estate values? If they’re dependent and don’t have California Proposition 13-style laws, rising assessed valuations are a stealth tax increase (that’s the way it is here). If municipalities have made their plans based on rising revenues, what will they do when those expectations aren’t met?

My guess is that they’ll raise marginal property tax rates before they try to cut wages or personnel. That will accelerate foreclosures (that’s what happened in the Depression of the 1930’s).

9 comments… add one
  • being a drug on the market.

    Drug?

    More seriously, here in Florida this secondary effect is definitely having a negative impact. Local governments are scrambling for funds because of the softening housing market. Of course, the local governments aren’t cutting back on expensive new projects (like new arenas or performing arts centers), but they’re not really too clear on how additional revenue will be generated. (We do have some Prop 13-type laws in Florida.)

  • “A drug on the market” is an old-fashioned colloquialism cf. here.

  • PD Shaw Link

    It still looks to me like real estate prices are declining primarily in a few states like California and Florida. Prices are still increasing in the Chicago area. http://www.suntimes.com/news/metro/530775,CST-NWS-homes28.article

    My pet economic theory is that high property tax states like Illinois discourage home prices from getting too high and thus are less likely to be hurt in a downturn. While Prop 13 type states encourage people putting as much money into housing as they can as quickly as they can to lock in their tax rates.

  • Here in my neighborhood on the northwest side of Chicago prices are holding fairly steady and velocity is slowing. Selling prices equalling asking prices have been traditional here for generations and that’s still the norm.

  • Well, I’ll be. I think “drug on the market” counts as the new thing I was looking to learn today. So now I can continue forward in blessed ignorance until the sun rises again.

  • I’ve always wondered about this: median home prices increased 162% from 2000-2006, inflation was always under 4%, yet so many municipalities (and other using property tax revenue) cried poor.

    Even if prices don’t rise at the same rate for a year or two local governments should be just fine.

  • Fallacy of composition. The increases weren’t spread evenly across the country, rising fastest in the areas that had Prop. 13-type provisions. Additionally, I think the real problem in the revenue shortfall that many states and municipalities have complained about is that they increased expenses during the late 90’s. Rising incomes (at least on the part of highest income earners) gave them a free ride. When the stock market stopped rising, income tax-based revenues did, too.

    It’s counter-intuitive but the time to cut expenses is when revenues are rising.

    Note, too, that states have been doing pretty well revenue-wise for the last year or so.

  • Drug, something which moves slowly, from the past tense of drag.

    See also “couchlock”.

  • They’re not dropping around here, that’s for sure. And the county keeps upping my “assessed property value” by large leaps. Realtors/sellers around here keep homes on the market for months rather than lower the price. My mom thinks that they are in collusion to keep prices high. When I’m feeling really paranoid, I do think that *something* must be going on, because there’s no way my crappy house on a postage stamp is worth what they say it is.

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