Property Taxes Big Chunk of Home Mortgage
News Release No. 6, December 2006
By Bryan Pope

COLLEGE STATION, Texas - Most homeowners have groaned about property taxes at one time or another, and it is easy to understand why. Local property taxes constitute a hefty chunk of the total monthly cost of a home, second only to the actual mortgage payment.

Over time, numerous theories have tried to explain the relationship between local taxes, home values and homeownership.

Dr. James Gaines, research economist with the Real Estate Center at Texas A&M University, said local property taxes affect home affordability by increasing the monthly cost of ownership, but that the value relationship is not as obvious or consistent.

"Property owners expect to pay property taxes," Gaines said. "A value impact typically arises if actual taxes differ substantially from perceived 'fair' taxes relative to the services provided. Research indicates that the value-depressing effect of property taxes can be offset if the market places sufficient value on the services provided by the tax."

Take the local school tax rate. Gaines said studies consistently show that the value of homes in "desirable" school districts exceeds that of similar properties located in "less desirable" school districts, even if the desirable local school property tax rate is higher.

"Families bid up the prices of homes to live in desirable school districts despite higher property taxes," he said.

Gaines said buyers may also play a higher value on other local services (such as fire and police protection, planning and code enforcement, road maintenance or other government services) or on lower total state and local taxes than they do on the "cost" of higher property taxes.

"If the market does not value the benefits of local services more than the cost of providing the services, the value-depressing effects of higher taxes may be substantial," Gaines said. "This is especially true if actual taxes significantly exceed perceived 'fair' taxes for the area."

The value impact of local property taxes may depend on how the market views the property tax relative to the total tax burden. The total tax burden includes all other state and local taxes, collectively, on a per capita or percentage-of-income basis. If relatively high property taxes are offset by lower other taxes, any negative property tax value impact may again be reversed.

The 2004 per capita property tax collections show Texas ranked 14th nationally in property tax burden. However, with no state income tax and with other state and local taxes somewhat lower, Texas' relative total local tax burden is substantially less than most other states. Projected 2006 data indicate Texas has the 36th lowest total state and local tax burden per capita and 45th lowest total state and local tax burden as a percentage of income.

All 13 states with per capita property tax burdens greater than Texas' experienced higher rates of home price appreciation during first quarter 2006, according to Office of Federal Housing Enterprise Oversight (OFHEO) data. Despite the relatively low total state and local tax burden, Texas ranked 43rd in home price appreciation in the first quarter OFHEO report with a 5.9 percent increase compared with a 12.5 percent national rate.

For more information about factors that impact the cost of owning a home, read "Housing Affordability" in the October issue of Tierra Grande magazine, the Real Estate Center's quarterly journal. The article is available online.

The Real Estate Center has been providing solutions through research for 35 years. Funded primarily by Texas real estate licensee fees, the Center was created by the state legislature to meet the needs of many audiences, including the real estate industry, instructors, researchers and the general public.

Source: Real Estate Center at Texas A&M