Declining home values – the perfect storm

There’s a perfect storm brewing in El Paso County, and it’s got nothing to do with the weather.As required by the voter-approved 1982 Gallagher Amendment, county assessor Mark Lowderman is already analyzing residential and nonresidential property values in preparation for the 2011 real estate reappraisal cycle that happens every two years.”For the last 10 years, we’ve seen double-digit percent increases in property values, but the data for the 2011 reappraisal is showing that assessed values are down, so revenue to the county will be down,” Lowderman said.”I’ve warned the city and county that it’s coming. Be prepared,” he said.Last May, property owners received reappraisal notices based on sales data collected through June 2008, just before the foreclosure rate started to skyrocket.Five years ago, only 3 percent of sales were short sales and REOs (properties owned by the lender). Today, they make up 32 percent of sales, Lowderman said.Home sales from July 2008 through June 2010 show that home valuations are almost down to 2004 levels because of a huge decrease in the number of overall sales and a huge increase in short sales and REOs, he said.Although it’s too early to know the exact impact, Lowderman said the lower valuations “will affect almost every taxing authority, including Falcon fire district, the library district and water districts.””It’s going to hurt schools, too,” said Larry Schneller, county appraiser and statistician modeler.In Colorado, each county has a public trustee whose office processes foreclosures.A search of the El Paso County Public Trustee Web site shows that Falcon’s ZIP code, 80831, had 351 foreclosures in 2009 compared with 295 foreclosures in 2008 – an increase of 19 percent.Tom Mowle, the county’s public trustee, said for two years in a row, Falcon has had the highest density of foreclosures in the county, with 128 foreclosures in Woodmen Hills in 2009.On average, 60 percent of homes that enter foreclosure are sold at auction, with the remaining 40 percent withdrawn because the homeowner did a short sale or came up with the money to keep the house, he said.”We’re seeing people who don’t have risky mortgages go into foreclosure and foreclosures on properties ranging from $3,000 mobile homes to $3 million dollar houses,” Schneller said.Decreasing property values combined with the Gallagher Amendment and ratcheting down effect of the Taxpayer Bill of Rights are “a perfect storm,” Lowderman said.The Gallagher Amendment requires that 45 percent of property tax revenues in the state must come from residential property and 55 percent from nonresidential property.Gallagher also fixes the assessment rate for nonresidential property at 29 percent, which means that 29 percent of the total market value of a nonresidential property can be taxed.To fulfill the 45/55 ratio required by Gallagher, the assessment rate for residential property is adjusted every two years, when property values are reassessed.Since Gallagher was passed, the assessment rate for residential property has dropped from 21 percent to 7.96 percent today, Lowderman said.The end result is that nonresidential property owners pay almost four times more in taxes than residential property owners, he said.For example, a house valued at $100,000 has an annual property tax of $541, while, assuming a mill levy of 68 mills as in School District 11, an office building of the same value has a property tax of $1,974, Schneller said.The property tax on nonresidential property and the personal property tax that businesses have to pay make it hard to convince businesses to come here, Lowderman said. And that concerns him. “As a community, we need to do something to keep students here. Young professionals are growing up and going other places,” he said.Colorado has one of the lowest property taxes on residential real estate in the country, and El Paso County has the lowest property tax in the state, Lowderman said.Gallagher has flipped the county’s revenue sources, so that 35 percent comes from property tax (a stable source of revenue) and 60 percent comes from sales tax, which is unstable because of the ups and downs of the economy, he said.Lowderman said a housing recovery could be quicker than the housing downfall of the early 1990s because back then financing packages encouraged builders to keep building, which led to a bigger inventory of vacant houses than is currently available.He said he also expects property values to continue to decline until foreclosures stop.When foreclosures do end, it will take a year to clear the existing inventory, Mowle said.There are a few positives in the numbers.Properties sold at auction are getting bid up by $5,000, and people are making money again doing fix and flips, Schneller said.Investors are buying about 12 percent of the houses sold at auction, mostly in the Fountain and Briargate areas but, so far, not in Falcon, Mowle said.”(The foreclosure) numbers so far this year are a little bit lower than last year, but I don’t want to make predictions with mortgage resets coming later in the year, Mowle added.