The real estate housing market has been one of the unexpected beneficiaries of the Covid-19 pandemic. While existing homeowners have seen the benefits of increased home valuations, they are also experiencing the downside of higher property taxes and higher home maintenance costs.
Median home prices for an existing single-family home were up over 13% YoY in October 2021. For context, this is the highest increase in valuation of single-family homes on an inflation adjusted basis since the 2008 housing bubble. This is thanks, in-part, to increased demand from the 72 million millennials in the US, who now comprise the largest share of home buyers, at 37%. While millennials represent the largest share of new home buyers, still less than half of them currently own a home. Compared to preceding generations, millennials are lagging the rate of home ownership of both the baby boomers and the gen-Xers. Almost 80% of baby boomers are homeowners, and almost 70% of gen-Xers are homeowners. But, even if millennials do not make up this disparity entirely, there are still millions of them who will be entering the marketplace in the next few years – thus demand is not likely to let up.
Recently, the high demand has been compounded with a shrinking supply; through November 2021, the national inventory of active listings declined by 26.0% over last year, while the total inventory of unsold homes, including pending listings, declined by 16.2%. New construction is up, with home starts rising over 8% from this time last year. Home builders are dealing with labor shortages due to the pandemic, and rising material costs from inflation. Lumber prices are well above where they hovered prior to the pandemic, and these costs are typically passed through to the consumer. These factors have led to the dramatic acceleration in home price growth that we have not seen in decades.
Property taxes rose by 4% on average in 2020, and they are expected to have risen by even more than that by the end of 2021 with some experts estimating an increase of 6.5%. Property taxes are calculated as a percentage of a home’s taxable value, so when home prices go up, local governments have a larger tax base, and it may lead to higher bills for homeowners. Local governments usually reassess home values every few years, and then taxes increase or decrease accordingly. Tax rates may also change as pandemic-related expenses and budget shortfalls put pressure on some localities to increase their tax rates in the coming year. Local jurisdictions could potentially look to bolster revenues by increasing property tax rates, i.e. increasing the percentage of a home’s taxable value. Combining a higher rate with a higher assessed home value, could lead to dramatic property tax increases in some areas. All states and localities will not see equal effects of rising home valuations and inflation. In some states, like California, the increase in the tax rate is capped on annual basis while in others, like North Carolina, the properties can only be reassessed every four years. Other states, like Texas, have no restrictions. Property valuations occur on an annual basis and there are no caps on property tax rate increases.
Over the last 12 months the average cost to care for a single-family home has risen by 9.3%, driven partly by labor and material shortages, as well as the increase in demand for services. Given current wage pressure and continued supply chain problems, these costs are likely to continue to rise although hopefully at a decreasing rate. This financial burden will have the hardest impact on homeowners who lost their jobs during the pandemic, elderly residents living on a fixed income, and those struggling to get by in the face of rising inflation. Even tenants will pay the price, as at least a portion of those tax increases are expected to be passed down to them in the form of higher rents.
One helpful aspect of today’s economy is record low interest rates. New home buyers and existing homeowners looking to refinance are seeing average rates for a 30-year fixed mortgage at just north of 3%. Lower monthly payments for financing your home loan can lessen the burden of increased taxes and maintenance. This low-rate environment may not last for too long though, as this is the lowest rates have been since Freddie Mac began tracking them in 1971.
For those who remember the housing bubble and subsequent crash in 2008, the rapid growth of the last few years may be cause for concern. Most economists agree however, that this expansion is largely driven by the fundamentals of high demand and tight supply. The entry of a new generation of buyers will drive home sales and price appreciation to continued growth in 2022, but perhaps at a less extreme rate than we’ve seen in 2021.
Existing owners are in a good position, and rising rents are likely to entice investor buyers to continue to purchase homes even if mortgage rates rise and challenge potential returns. Homeowners, and prospective homeowners, just need to be more cognizant of increasing expenses for both maintenance and taxes.