Major Changes in Taxes to Impact Local Property Values

The National Association of Realtors (NAR) has prepared an interactive map that predicts the impact of the new Federal Tax bill on your home’s value.  When I queried it for Congressional District 8, which includes Downtown Jersey City, it predicts that the average home value will decrease by $32,260.  NAR also issued a bill Summary, which indicates that the reason for this decrease in value, among other things, is that the final bill will limit the itemized deductions for property taxes and state income taxes to $10,000.

At the same time, Jersey City is completing its property tax revaluation and issued a report regarding the results of the property tax revaluation.  The news is not good for Downtown property owners who will face steep increases in average tax rates:

Neighborhood Average % $ Increase Average 2018 Property Tax
Harsimus Cove 59% $6,832 $18,415
Hamilton Park 55% $6,179 $17,497
Paulus Hook 75% $12,435 $29,026
Van Vorst 67% $9,368 $23,252

 

How this will affect home prices in these neighborhoods is any one’s guess; however, my guess would be that prices will need to go down.  Residential real estate values are based on what it will cost an average consumer per month to own a home. This number is called P.I.T.I, which stands for Principle, Interest, Taxes and Insurance.  When the taxes go up, the amount of home a buyer can afford goes down.  It is pretty simple math.  A tax increase will decrease the value of real estate by decreasing what a buyer can pay for that real estate because of the total PITI that homeowner is qualified to pay, which is set by mortgage companies.

Let’s take Hamilton Park and Paulus Hook as two examples.  According to the report Hamilton Park had an average home value of approximately $1,500,000 with an average tax of approximately $11,000 in 2017.  Using the US Mortgage Calculator, we know that the average buyer would need to qualify for a monthly payment, including taxes, of $6,670 per month.  However, when we plug the new 2018 tax rate ($17,500) into the formula, the same buyer would only be able buy a home worth $1,350,000, a $150,000 decrease from 2017.

Photo of Paulus Hook Townhouses

In Paulus Hook, which appears to have the highest % increase, the average home value in 2017 was approximately $1,800,000 with an average tax of approximately $16,500.  This means that the average buyer in this neighborhood would need to qualify for a monthly payment, including taxes, of $8,290 per month.  However, when we plug the new 2018 tax rate into the formula, the same buyer would only be able to purchase a home worth $1,500,000, which is $300,000 less than what they could have afforded in 2017.

So, did this tax increase just take a big chunk out of my home equity?  Maybe, but not necessarily, it may just mean you have to wait longer to find a buyer with the cash or the income to support the higher tax rate.  However, a tax increase typically decreases the value of real estate over time by decreasing what the average buyer can pay for that real estate.

This report was prepared by Thomas Gibbons, a licensed Realtor® at Warren G Curtin Realty.  If you are interested in selling your home or just learning more about what your home may be worth please feel free to contact us for a free market evaluation or just visit our free home valuation page.

Disclaimer: This blog article is not intended to provide any conclusions regarding the value of a specific property or its projected 2018 taxes.   Homeowners should consult with their professional tax advisers regarding how this revaluation may impact their 2018 taxes and an appraiser regarding appraised value.