The outbreak of the Covid-19 pandemic two years ago sent the country into a recession, leaving millions of Americans unemployed. At the same time, perhaps surprisingly, it marked the beginning of a significant boom in the housing market. The median sales price of houses sold in the US went up from $330,000 in 1Q2020 to $408,000 in 4Q2021, a 24% increase, according to data from the Census Bureau and the Department of Housing and Urban Development. The S&P/Case-Shiller Index also indicates an increase of close to 29% in home prices over the same period.

According to Zillow’s ZTRAX data, the boom was even more pronounced in the Sunshine State, with median sales prices of single-family homes going up by almost 32% from pre-pandemic levels to 4Q2021. However, this data also suggests that assessors have been unable to keep up with soaring prices, causing the gap between transaction and assessed values to increase substantially.

Assessing Tax Value

Assessors generally use property and neighborhood characteristics to determine market and assessed values, based on the selling price of similar and/or nearby homes. These assessed values are then used to determine local property taxes. In a market with accelerating prices, there will be a natural mismatch between transaction prices and the previously assessed values of properties, due to the lag between assessment and sale. This developing gap is revealed in Figure 1. However, assessments should quickly catch up, once the market discontinues its rapid acceleration.

Figure 1 — Source: Zillow ZTRAX as of March 2022

In fact, after a period of stability before March 2020, the average difference between sales prices and assessed values went up from about $100,000 to about $250,000. There have yet been no signs of the trend slowing down as can be seen in Figure 2. What is perhaps more surprising is that beginning in 2021, while market prices continued to rise, assessment values began to fall.

Figure 2 — Source: Zillow ZTRAX as of March 2022

Fiscal Impact

Some degree of mismatch between market price and assessed value of properties arises naturally from fluctuations in the housing market. The larger the disparity and the longer for which it lasts, the larger the fiscal implications. According to the most recent Census — American Community Survey (ACS) estimates, there are 5.23 million single-family homes in the state of Florida. If every home is under assessed by the average gap, the statewide effective tax rate of 0.86%^[1] leads to approximately $6.3 billion a year in lost fiscal revenue due to the lag in property assessment. Florida’s combined state and local revenues were $172.8 billion in the fiscal year 2019, according to the Urban Institute — Florida. Therefore, the relative fiscal impact amounts to over 3.6% of the state’s revenues. Although it is tempting to interpret this outcome as a tax break for families, property taxes are most often used to fund schools and local government services which directly benefit the taxpayers.

To investigate whether this was a general or localized pattern, we looked separately at the price and assessment trends for the four largest metro areas in Florida. All metros displayed a very consistent pattern as shown in Figure 3: there was an acceleration in prices, particularly in 2021, accompanied by a decrease in assessed values in the second half of that year. Consequently, the average difference between sales prices and assessments showed a consistent upward trend, having reached twice the pre-pandemic level by the end of 2021 in all four metro areas. The resulting spread created by subtracting the assessed value from the sales price by metro is shown in Figure 4.

Figure 4 — Source: Zillow ZTRAX as of March 2022

At some point, house prices will stabilize and assessment values will eventually close the gap. This is precisely what happened following the bursting of the 2000s housing bubble. Using data from the Florida Department of Revenue for Duval and Miami-Dade counties, we analyzed the trends between sales prices and assessed values between 2002 and 2011. As prices soared until 2006, assessment values lagged and the gap between them more than doubled, exactly as it happened in the current boom. Beginning in 2007, the trend in prices reversed while assessed values started accelerating, which resulted in the gap completely closing by late 2009. See Figure 5.

Figure 5 — Source: Zillow ZTRAX as of March 2022

Looking ahead, with mortgage rates on the rise, we should expect a slowdown in the housing market and the scenario described above to unfold. This will not be such good news to the owners of over 1.35 million single-family homes in Florida that are not owner-occupied. These properties are not protected by a homestead exemption or the Save our Homes tax increase limitations. In case the gap completely closes as it did during 2009, these properties could see their tax bill more than double.

Figure 6 — Source: Zillow ZTRAX as of March 2022

Figure 6 presents the spread of sales prices minus assessed values around the time of the financial crisis in 2009. If the recent acceleration of home prices is following a similar pattern, then today would be equivalent to 2006 in this figure. As assessments track the recent rise in prices, we will expect the gap between price and assessment to fall. Only if house prices fall, as they did following the 2006 housing peak, will we expect assessments to fully match or exceed prices. The magnitude of change is yet to be determined. In any event, yesterday’s housing price appreciation is tomorrow’s assessment increase.

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Footnotes:

1. Tax Foundation: Facts & Figures 2021 edition: Tax-Foundations-Factsand-Figures-2021-state-tax-data-resource1.pdf (taxfoundation.org) Back to content