ANNAPOLIS – When Raj Agarwal and his wife decided to start shopping for a house in Silver Spring last summer, the high prices shocked and deterred them.
“It seemed as if the prices were ridiculous,” Agarwal, an accountant, said. “After scoping a lot of places in June, July and August, we sort of decided that buying a home is not within our reach, at least in the area.”
But when Agarwal checked back in December, the prices had dropped substantially. Now, he says, they’ve fallen another 5 to 6 percent, and he and his wife are waiting for prices to go down a bit more before making an offer.
Agarwal has reason to be optimistic. Though the assessed values of residential property across the state have risen by an average of 56.6 percent since 2004, sale prices have decreased by an average of 6.1 percent over the last year.
That?s bad news for homeowners, who are paying higher taxes on their newly-appreciated homes but can?t put them on the market at the same prices as a year ago. But it can also be bad news for house hunters like Agarwal, who may be able to afford a home?s sticker price, but may be wary of the higher property taxes.
The housing market in general has suffered setbacks in recent months, with the collapse of the sub-prime mortgage industry and record numbers of bank foreclosures on homes. This, coupled with increased property values and an economic downturn that is also affecting food, gas prices and job security, has created a less-than-ideal climate for real estate sales in Maryland.
“There are a number of things affecting the market right now,” said Joe Petruccelli, a real estate agent with Weichert Realtors in Montgomery County. “So you can’t just point at assessment values and say, ‘this is what it is.'”
But assessment values, in which the Department of Assessments and Taxation determines a property’s worth, do affect the real estate market in some cases by creating a gap between a house’s sale price and the amount on which prospective buyers would have to pay property taxes.
?If property taxes go up, it does affect affordability,? said Mike McDermitt, a real estate agent with Llewellyn Realtors in Montgomery County.
In this situation, a buyer who can afford a house priced at $500,000 may not be able to afford the taxes on the same house’s assessed price of $600,000, said Petruccelli.
McDermitt and Petruccelli’s sales region is among the central Maryland locations feeling the crunch of this gap. In Montgomery County, where they sell most of their properties, values have increased by 60.8 percent but sales prices have dipped 1.8 percent, which Petruccelli called unexpected.
“Assessed values have always gone up incrementally,” he said. “But they’ve really jumped a lot in the last five years. Everyone was fine with that because they thought the market values were going to increase as well, but [facing a] recession, market values are coming down. The trend is actually going backwards – people are saying, ‘why should I be paying taxes on a house that’s assessed at $600,000 that’s really only worth $450,000?'”
Homeowners can appeal their assessments, which are performed on a third of the state’s properties each year, but Petruccelli said he expects the overall trend to stay the same, because the state needs the tax revenue.
“Everything goes up – road cost, supporting libraries, everything those tax dollars go to – they’re not going to go backwards,” he said. “I just think that eventually the taxes will stay the same.”
A representative from the Department of Assessments and Taxation acknowledged that the recent spike in property values is unusual, but said the most recent assessments, which will take effect in July, increased by a factor that was 26.9 percent lower than the increased assessments that took effect last year.
“Our assessments are done on values that are three years old, so of course you’re going to see an increase,” said Bill Stansbury, the department’s deputy director. “But this year, it’s not as much of an increase. The market has definitely flattened out.”
Stansbury also added that residents struggling to pay the taxes on their homes’ new values may be eligible for a homestead credit, which caps the amount of the increase they actually have to pay taxes on.
The caps vary by county, Stansbury said. Anne Arundel, for example, has a cap of 2 percent, so someone whose prior property value was $200,000 would only have to pay taxes on a 2 percent increase of that total, or $204,000.
The assessment values are phased in by thirds, so an additional 2 percent increase would be added each year. By the time the property would be reassessed, it would undergo three 2-percent increases, for a top taxable value of $212,241.
The credit is available to eligible homeowners statewide, but residents outside of central Maryland, especially in the western counties and on the Eastern Shore, haven’t been as affected by dropping sales prices and may not be feeling the crunch the same way. Though residential sales prices dipped by an average of 6.1 percent statewide from March 2007 to March 2008, counties in these regions saw their sales prices mostly increase.
Petruccelli said that, given real estate’s mantra of “location, location, location,” this isn’t surprising.
“It can vary from neighborhood to neighborhood,” he said. “You can have the exact same house in a different ZIP code, and there will be tremendous interest in that home because of location, because it’s in a better school district, or because it’s closer to [Interstate] 270.”
Real estate agents in these regions agreed, but said the minimal effects seen there could also be due to the nature of the properties available.
“We’re kind of isolated from the rest of the mishaps,” said Jon Bell, a real estate agent who sells property in Garrett County. “It’s predominantly second homes. Nobody has to be here, but everybody wants to. There are very few full-time residential properties that I sell.”
The situation is largely the same on the Eastern Shore, where, in addition to being mostly second homes, a large portion of the properties are luxury housing catering to a wealthier clientele.
“The housing isn’t affordable for the income here on the shore ? so a lot of the real estate is summer homes,” said Janet Freeh, a real estate agent who sells in several counties, including Caroline, where sales prices increased by 20.9 percent from 2007 to 2008. “We just don’t have the industry to keep young people here. You don’t hit higher industry until you get to the Salisbury area. Basically, our industry is the hospital, lawyers – there are small companies and small businesses, but mostly they’re in service to the wealthy.”
Though the outlook in central Maryland is different, Petruccelli said he’s not worried about the future of the real estate market there.
“I’m not nervous. People still have to buy houses,” he said. “People sell, people die, people get married, people get divorced, families grow, families shrink. That never changes.”
-30- CNS 04-25-08