Do Undervalued Property Tax Assessments Affect Home Price?

The market value of your house is influenced by the economy and by housing demand in your area.
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Once a year in most counties, the county tax assessor either confirms or revises the assessed value of all residential housing. Some state laws require the assessment to reflect actual market values, but laws in other states prohibit it. For this and many other reasons, assessed values often differ from market values. With a single exception, assessed values have little influence on home prices.

Assessed Value Isn't Appraised Value

Writing in "The South Carolina Policy Forum Magazine," Charlie B. Tyler notes that the assessed value "may or may not be market value, a fact frequently not understood. While some states try to use market value for tax purposes, many do not. One reason is that it is difficult to maintain accurate market values when property has no recent sale record to draw upon." This being so, it's not likely that a realtor would advise a buyer to lower an offer, or a seller to lower an asking price, on the basis of an assessed value that is lower than the asking price.

Appraiser's Role

Assessments are often lower than appraisals ibecause the two processes are conducted by different parties for different reasons. The county assessor, for example, often works from plans supplied by owners of new houses, rather than from a physical inspection. When assessing older houses, the county assessor usually works from earlier reports. In both situations, while most homeowners are honest, they have no motivation to point out features in new houses or improvements in older houses that may raise the assessed value. Also, as in California, the property tax in a state may be suppressed by laws restricting annual price increases, which can only be reset to an approximation of market value upon sale.

Assessor's Role

The appraiser, often selected by the prospective buyer's mortgage company, seldom consults the county assessor's records when conducting the appraisal. He bases the appraised value on a physical inspection of the house and on a search of recent selling prices of comparable real estate in the same neighborhood. Both seller and buyer usually look to this appraisal as an indication of the house's probable market value. If a prospective buyer points to a low assessment as a reason for a reduced bid, in most cases the seller's realtor can point to similar disparities in other recent sales.

Market Value and Demand

When the real estate market heats up, as it did from the late 1990s through 2007, and again in 2012 and 2013, the demand for housing drives prices up. When this happens, assessment values fall behind because market prices move almost constantly upward, while assessed values changes once yearly. When a housing recession occurs, as happened in 2008 through 2010, the opposite happens: prices fall almost continuously, but assessment values change once a year. In both rising and falling markets, there's an inevitable disconnect between the assessed value and the market price. That this is widely understood further confirms the weak or non-existent influence of low property tax assessments on the market price of residential housing, with a single possible exception. In a state that does not reassess residential real estate upon transfer of ownership, a low assessment that carries forward to the new owner could prompt the seller to set the asking price higher. In many cases, however, the assessor would note the sale, and sales price, when reviewing the property in the next annual audit.

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