Since the housing market collapsed four years ago, county officials in the Triangle and across the state have been confronted with a dilemma that few saw coming.
After watching property values steadily rise for decades, officials in places such as Orange and Chatham counties suddenly faced the prospect of conducting revaluations that would significantly reduce their property tax base. If the revaluations were completed on schedule, these counties likely would be forced to raise the tax rate in a dismal economy just to bring in the same amount of revenue as before.
“How do you explain to the public we’re lowering your (property) value but raising your tax rates?” said Frank Clifton, Orange County’s manager, summing up the tricky political problem revaluations now pose.
The solution – for Orange, Chatham and 25 other North Carolina counties – has been to delay the revaluations by anywhere from one to four years. Such a decision, while understandable to many taxpayers, has its critics, particularly since Orange, Chatham and many other counties had reduced the time between revaluations to four years to capture appreciation in the marketplace.
“It’s all about equity and truth,” said Gary Phillips, owner of Weaver Street Realty in Carrboro and a former Chatham County commissioner. “Once you make that commitment to do them every four years, they ought to be done every four years because the entire community needs to know what that snapshot looks like.”
Counties are required to revalue property at least once every eight years, a process designed to make sure the tax burden is being equitably distributed among all property owners. The tax value is set roughly at market value, but that market value can fluctuate significantly in the years between revaluations.
For counties that experienced large amounts of speculative building and conducted revaluations at or near the peak of the market, the decline in real estate values posed a number of challenges.
During the boom years, new high-end homes experienced the greatest appreciation in value. But since the bubble burst, many of those same homes are depreciating much faster than other sectors of the market.
“The pendulum has sort of made a perfect swing,” said Marcus Kinrade, Wake County’s revenue director.
A revaluation in today’s market would shift some of the tax burden away from those once-hot properties to others that have experienced less dramatic changes in market value over the past five years. It also could shift more of the tax burden from real estate to personal property, with higher tax bills for registered motor vehicles, boats, mobile homes and business personal property.
When to revalue?
Wake conducts revaluations every eight years, and has no plans to move up the date of its next one even though the state estimates that the median sales price of homes is now about 10 percent below the assessed value. Durham, which also conducts revaluations every eight years, also has no plans to move up its timetable. Durham’s values were about 6 percent below assessed value this year.
Under a state law passed in 2008, any county with more than 75,000 residents whose median sales values differ more than 15 percent from tax values must perform a revaluation within three years. Only Union County, near Charlotte, has so far met the criteria; its median sales price was 20 percent below tax value this year.
Kinrade said if all sectors of the market are falling by equal amounts compared to their tax value, there isn’t really a problem in delaying a revaluation.
“But if the high-end homes are selling significantly less compared to the tax value than the low-end homes, than you’ve got an equalization problem,” he said. “The burden of the tax is unfair” to those high-end homeowners whose property is now worth much less than its current tax value.
Counties that have delayed their revaluations are hoping to avoid the sort of wild swings in assessed values experienced in places such as Carteret County on the coast. Carteret tax values jumped 130 percent after the county’s 2007 revaluation and then dropped 24 percent last year, causing the county to raise its tax rate by 7 cents.
“The whole purpose of revaluation is to assign proper values as directed by the market and then the tax burden falls in accordance to what the value is,” said Carl Tilghman, Carteret’s tax administrator. In Carteret and other counties along the coast, that has meant that the tax burden shifted from coastal property owners to inland owners whose values experienced less fluctuations in recent years.
Although the state puts out annual estimates showing the ratio of each county’s median sales price to its tax values, getting a clear picture on how much the two are diverging is tricky. One problem is that there have been far fewer property sales since the bust. When doing a revaluation, counties are supposed to use only sales in which there is a willing buyer and seller, meaning foreclosures and short sales are not to be included.
This has only added to the disconnect between market and tax values, as a homeowner in a neighborhood riddled with foreclosures is likely to wonder why his or her tax value does not reflect all those distressed sales. The lack of qualified sales also can play havoc with commercial property assessments.
“The biggest problem that we still had, even delaying it two years, was the lack of qualified sales,” said Shane Mitchell, chairman of the Franklin County Board of Commissioners.
Franklin conducted its revaluation this year because officials could not delay it any longer. The initial revaluation outraged commercial property owners, whose values increased 46 percent. The contractor hired to conduct the revaluation later went back and recalibrated those values down; Mitchell said they were based on just 11 qualified commercial sales countywide.
Many counties, including Orange, have cited the lack of qualified residential sales in explaining their decision to delay revaluation. The number of such sales in Orange, which delayed its revaluation two years to 2015, totaled less than 1,000 in 2011, down 60 percent from 2004.
The county estimated that, based on the sales that did occur, its 2013 revaluation would have left it with a $9.9 million shortfall. The towns of Chapel Hill, Carrboro and Hillsborough as well as the Chapel Hill-Carrboro Schools would also have faced shortfalls that would have required tax rate increases.
“It would have had everybody trying to raise taxes just to stay the same without any real significant explanation of why you did it,” said Clifton, the town manager. “The basis of doing that was a small number of sales countywide.”
Clifton noted that by the state’s estimate, Orange’s median market values are now 5 percent below tax values. “They were well within the category of the statutes,” he said.
Growth during recession
Counties and municipalities rely on property taxes to pay for the majority of services they provide, as well as to pay the debt service on all the money they’ve borrowed in recent years. Because of that, falling property values pose particularly thorny problems for local governments in the Triangle.
While property values have been falling here, the costs associated with the region’s growth are not abating. Triangle counties have continued to add new residents even in a bad economy, which only increases demand for all the services counties and municipalities provide.
“The growth in Harnett is astounding,” said Tony Wilder, Harnett County’s deputy county manager and tax administrator. “We’re getting hammered from Fort Bragg. ... it’s really tough on our tax rate right now.”
Harnett would seem to have less to lose from a revaluation, as according to the state’s annual estimates the county’s median sales price was actually 1 percent higher than tax values in 2012. But the county delayed its revaluation from 2013 to 2015 anyway, because of fears that values would drop and because conducting the revaluation would have cost $600,000.
In counties that assessed property at the peak of the market, the listed tax value has now come to mean different things to different people. Owners having trouble coming to grips with the market correction often cite it as proof that their property has not lost value. Savvy investors and other buyers, meanwhile, now use the figure as a signpost to gauge how much a property has been discounted since the peak of the market.
Kinrade, Wake’s tax administrator, has a basic spiel he gives to enraged property owners who inquire about why the county isn’t moving up the date of its next revaluation.
“If you are of the opinion that your property hasn’t lost a great deal of value, then you probably don’t want us to do a revaluation,” he said. “... Compared to properties that have lost a lot of value, your value is going to hold up compared to theirs and the burden is going to shift to you.”