In this post we analyze how the two main components of housing costs-mortgage payments and property taxes vary in some of the nation’s most expensive housing markets. This approach has the advantage of capturing both the overall underlying costs of housing and the interaction between property taxes and home values.
By focusing on costs, rather than home prices, the data better reflects the fact that one of the main reasons for the sharp increase in home prices that has occurred over the past 20-30 years is the significant drop in interest rates that occurred over this time frame. As a result of the drop in mortgage rates from almost 10 percent in 1990 to 4 percent in 2015, the payment on a home that cost $200,000 in 1990 is equivalent to a payment on a home valued at over $400,000 today. Here’s what the data looks like for all homeowners:
Annual Homeowners Costs: All Homeowners
- San Francisco topped the list for all homeowners with annual housing costs exceeding $36,000. The hyper gentrification that has occurred in this market as a result of the tech boom has caused overall housing costs to exceed those in Manhattan.
- District property taxes were lower than in most of these other expensive housing markets with the exception of Brooklyn.
- The District’s lower property taxes were offset by somewhat higher mortgage payments that brought overall housing costs in line with the other expensive markets, excluding the top two markets of Manhattan and San Francisco, which are set apart from the rest of the nation.
- Housing costs in Brooklyn were lower compared to these other markets. Brooklyn comprises a vast housing market of more than 2 million residents and includes both very expensive and relatively moderate priced homes.
Differences in housing costs can arise because households have different median incomes. As a result, median home prices and property taxes would also vary. Manhattan and San Francisco topped the list for both median income and median home price, with median income exceeding $70,000 and median home prices north of $700,000 in both these markets. To better control for differences in income, we looked at the data in greater detail for only those filers with household income in excess of $200,000.
Annual Homeowners Costs: Homeowners with Income Greater than $200,000
- Manhattan topped the list with annual homeowner costs of $55,000 narrowly exceeding costs in San Francisco. Homeowners in San Francisco paid higher mortgage costs compared to Manhattan residents, but property taxes were significantly higher in Manhattan. This could be the result of Proposition 13, which imposes strict limits on increases in property taxes in California.
- Excluding these top two markets, homeowner costs in the District were second highest, after Los Angeles. As was the case for overall homeowners, lower property taxes in DC compared to most of the other markets were offset by higher mortgage costs.
What can we conclude from the data:
- The drop in mortgage rates to historic lows that occurred over the past 20-30 years that contributed to sharp increases in home prices is likely behind us. Going forward interest rates are likely to rise, and increases in home prices could be more moderate and reflective of increases in household income.
- The data also suggests that lower property taxes can lead to higher home prices and vice versa. How this relationship plays out among existing landowners, and property owners versus new homeowners is an interesting question for policymakers and residents alike who also have to weigh in how property taxes affect funding for public services like education and safety which in turn can affect property values.
What exactly is the data? Data in this report is from the 2012 IRS County Statistics of Income. Most homeowners in these expensive housing markets can itemize their mortgage payments and property taxes on their income taxes. The IRS data has the advantage of capturing most homeowners in these markets rather than relying on sample data from the American Community Survey. The data also better reflects actual property taxes paid compared to published statutory rates.
Economic literature on this topic can be found in “The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis” by Wallace E. Oates
Bob Zuraski contributed to this post