Virginia Home Price Volatility and Property Taxes

by James C. Sherlock

House prices have more than doubled since 2012, reflecting supply shortages and resulting speculation. The increasing slope of these curves above is not comforting.

Prices have risen more than 20% in one year. Mortgage rates are on the rise. What could happen next? Most can understand that.

But this article is about the effects on local government property taxes of what most predict will be extreme housing market volatility in the future.

How are Virginia’s property taxes being adjusted to mitigate the effects on both property owners’ tax bills and government revenues in this boom and most likely bust cycle?

We will look at the law.

The S&P CoreLogic Case-Shiller Home Price Index reported home prices were 20.6% higher than they were in March 2021 nationwide.

Virginia’s basic property tax law is Virginia Code § 58.1-3201. Which properties to tax; assessment amount; owned by utility company.

This law in part:

All lands, except those exempted by law, are subject to such annual taxation as may be prescribed by law.

All general reappraisals or annual appraisals in localities that have annual real estate appraisals, except as otherwise provided in § 58.1-2604, shall be made at 100% fair market value and, except as provided in § 58.1-2608, the State Corporations Commission and the Department of Taxation certify ownership of the utility company to such county or city, except for ownership not operational (non-carrying) railroad, based on the tax rate as most recently determined and published by the Department of Revenue. (emphasis added).

But the last decade has certainly been good for the tax revenues of many Virginia local governments. Not so good for landlords and those who pay rent to them. But the owners were comforted by the paper gains on their investments. Until they had to sell and pay inflated prices for replacement properties.

Commercial real estate has been suffering since COVID. It’s unclear whether real estate valuations have caught up.

But if the markets turn out to be rational, the housing bubble will burst. Rising mortgage rates and prices portend a collapse in demand from buyers for residential real estate, particularly at the entry-level of the housing ladder, and an inability of tenants to pay higher rents.

One result is that local government tax revenues are vulnerable.

To see median property taxes by county, click here. Loudoun, of course, leads this year to a median annual tax bill of nearly $5,000. The median bill in Buchanan County is $284. So it’s normal to call it a big gap. Valuations and tax revenues have soared in Loudoun. Not so much in Buchanan County.

Most of the total is determined by the assessed value of the property, the rest by the rate at which that value is taxed.

Local governments collect “needs” for the taxes they collect. Many of them are real, but some have been generated by the increase in tax revenue itself. Local governments are after all run by politicians.

A analysis suggests that Virginia property taxes are only assessed at 74% of actual value statewide. This gives local assessors the ability to increase the property assessment without increasing the rate.

They can also raise prices.

It is therefore unwise for property owners to predict that their property tax bills will decline in a recession as rapidly as they have increased over the past decade.

What to do? The next General Assembly may have to deal with this situation if the real estate recession develops as much as expected. It will be a circus, but which may prove necessary and which everyone will watch.

More immediately, citizens and their local governments might want to work together to shape policy for the way forward.

Related