The Forgotten Impact of the Booming Housing Market

Always remember: the government will gets its share of the economic pie any way it can.

Over the past several months, there has been article after article (links) either praising or deriding the skyrocketing cost of housing.

• Buying is “beyond crazy and frustrating.”
• First-time buyers are “squeezed out of the market.”
• Home prices are “detached from reality.”

But the one thing that you haven’t read about all that much is the increase in the housing appraisals, which also increases a homeowner’s tax liability.

How Property Tax Works

There are two different values of a house.

• Appraised value
• Assessed value

The appraised value is an educated guess as to the fair market value (i.e. the price a home will sell for), given the current market, comparable nearby houses, condition of the house, etc.

Additionally, when taking out a mortgage, the appraised value needs to meet or exceed the value of the loan. Otherwise, the bank would be making a loan that was worth more than the underlying asset, and it would probably be cancelled.

The assessed value is used solely for calculating the amount of property tax owed on a house. This value is usually significantly below the appraised value, as it a) reflects the day-to-day status of the house, not the tip-top shape when trying to sell and b) the long term value of the home, regardless of the current market.

Most municipalities have a county Assessor’s Office that is responsible for the maintenance of and annual update to every home’s assessed value. The amount of money owed on your bi-annual tax bill is the assessed value x the property tax rate.

Same Tax Rate, Higher Taxed Value

Both the appraised value and assessed value use comparable values of similar homes in the nearby area (comps) to help ascertain the most accurate value of a home.

With the housing boom, not that many houses are being sold due to historically low supply, but every single house is being affected by rising sale prices due to increased taxed prices.

This has been particularly insidious in my county.

The State of Indiana passed a law years ago that capped property tax at 1% of a home’s assessed value. Instead of ripping the band-aid and adopting the lower tax rates at the time of passage, my county appealed for and received a multi-year extension of the old tax caps, which just went into effect in 2020.

What happened, as I’m sure you guessed, is that the county didn’t take the time to plan for the lower tax receipts. Instead, they just went on as usual, and the tax cap effect was just as harsh now as it would have been then.

Go figure.

Now, since they didn’t plan ahead, the county has been raising the assessed value of homes for the past couple of years, trying to make up for a shortfall.

• In 2020, 58% of homes received higher assessments.
• In 2021, 62% of homes received higher assessments.

That means many homes have received multiple double-digit increases, with some absolute values reaching into five figures.

All you need to do is look at the assessed value of the home I’m about to purchase. The sale price was $305,000, but here are the assessed values for the past five years.

• 2017: $102, 900
• 2018: $175, 400 (after 2017 remodel)
• 2019: $190,700 (+8.7% annually)
• 2020: $207,800 (+9.0% annually / +18.5% since 2018)
• 2021: $223,000 (+7.3% annually / +27.1% since 2018)

As if we didn’t already have enough inflation at this point, now taxes are going up without even taking a vote.

The Takeaway

It’s no secret that owning a home comes with several “hidden” costs that aren’t widely advertised.

• Lawn care (equipment, gas, time)
• Maintenance on everything
• Appliances

Property taxes are just another one to add to the list.

It also illustrates that the government will find a way to get revenue, regardless of what the politicians say.

• On the federal level, it’s very easy to find funding, as they can always print more money by way of selling more Treasury bonds.
• On the municipal level, it’s a bit more difficult, but let that lull you to sleep thinking that your current tax bill is on solid ground.

All that being said, I’m happy to pay my taxes, as it funds public schools, helps keep the roads smooth, and makes sure the fire station two blocks away doesn’t go dormant.

My only complaint is that the ones in charge of taxes try to shroud these expenses by quietly changing the game, rather than stating out loud, “Your cost of living here is $XX,XXX.”

It’s the classic dissonance between honesty and bullshit in politics that makes everyone throw up their hands in exasperation.

My only advice? Be prepared, then tack on 20%.

Most Recent Stories

• Biden’s Next “Big F***ing Deal”
• April’s Jobs Report Was a Disaster
• Student Loan Borrowers Just Got a Friend in the White House
• Will Robots Really Take Your Job?
• The Vital Home Inspection That You Can’t Ignore (But Always Do)

Don’t miss my next article! Click here to get notified when I publish new material.

If you love the articles published in Money. Daily., then become a member of the Medium community and get full access to our full archives.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.