foreclosure effects on neighborhood property assessments

Gauging the Impact of Home Foreclosure on Neighborhood Property

ValuesImproving Assessments to Help Struggling

Homeowners

Community & Economic Development CommitteeCity of Milwaukee

October 26, 2009Robert Weissbourd, RW Ventures, LLC

Why Should We Care?

Why Should We Care?

Why Should We Care?

Why Should We Care?

Why Should We Care?

Why Should We Care?

The Tax System Mediates the Role of Housing in Neighborhoods, Markets, and

Local Government

Real Estate Matters

Housing Defines Our Communities

Breakdown of Net Worth by Asset, 2002(Top Asset Classes; Outliers Excluded)

41.7%

53.8%

11.4%7.9%8.2%

2.6%7.4% 6.3%

0%

10%

20%

30%

40%

50%

60%

70%

All Households Lower Income Households

Home EquityStocks401KBank Savings

Source: Net worth and the assets of households, US Census Bureau 2002.

Real Estate Matters

Housing Builds Individual Wealth

Source: US Census Bureau

Real Estate Matters

Housing Supports Government

When Real Estate Markets don’t Work...

Housing Bubble Aftermath: One in Four Homes Are Now “Underwater”

Photo: Doug Benz, The New York Times

Bad Things Happen to Our Cities

Source: Center for Responsible Lending Press Release, May 2009

The Devastating Impact of Foreclosures

Data: HUD, Neighborhood Stabilization Program

Greatest Impact in Low Income Neighborhoods

A Good Property Assessment System is Key to Households, Communities, and Government.

Property Assessments influence

• Investment in housing stockhousing stock• Which communities communities residents choose• HouseholdsHouseholds wealth• GovernmentGovernment receipts

Source: Property Taxes on Owner-Occupied Housing by State (2007 Tax Foundation report)

Property Taxes: A Significant Household Expenditure

In 2007, the typical U.S. homeowner spent 2.91% of annual income ($1,838) on property taxes.

In Illinois, this figure was 4.76% of annual income, or $3,203..For Struggling Homeowners, Property Taxes

are a Substantial Additional Burden

The Assessor’s Role in the Tax System

Assessments Are Intended to be Accurate, Uniform, and Equitable

The Assessor’s Role in the Tax System

Accuracy Ensures Uniformity and Equity in the Tax System

The Assessor’s Role in the Tax System

Non-Uniformity: Similar Houses Assessed Differently

The Assessor’s Role in the Tax System

Inequity: Different Assessment Ratios for Different Values

But Current Market Conditions Present Serious Challenges...

68,24168,241

24,44524,445

Source: Cook County Assessor's Office, Single Family Only

Dramatic Decrease in Sales Volume

Volume Has Dropped by 64% Between the Peak in 2005 and 2009

Total Sales of Residential Properties

Source: Cook County Assessor's Office, Single Family Only

Compounded by Skyrocketing Foreclosure Rates

Result in Legal Challenges, a “Flood” of Appeals...“...Officials across the country say there is no question that the number of [assessment] appeals has risen from the usual trickle to a flood.” (NYT, July 4, 2009)

Lou Dobbs Tonight reports on assessments and property tax protests (CNN, April 1, 2009)

City of Philadelphia sued over assessment practices

And Serious Community Development Implications

Greatest challenges in neighborhoods that are most affected by foreclosure crisis

Risk of over-assessments for homeowners who can least afford them

The Cook County Assessor’s Office (CCAO) Took Action

Project Goal: Enhancing the Assessment Process to Better Estimate Property Values in the Current Environment

• How to account for the recent downturn in the market after years of steady growth?

• How to account for the increased influence of foreclosures?

NorthNorth2010 & 2013(450,679 parcels) CityCity

2009 & 2012(855,140 parcels)

SouthSouth2011 & 2014(526,799 parcels)

1.8 Million Total Parcels1.8 Million Total Parcels

About Cook County

Total Parcels: 1.8 MM Total Assessed Value: 72.5 BB

85%4.0

23.5

44.9

5%10%

OtherCommercial/IndustrialResidential

Total Parcels: 1.8 MM Total Assessed Value: 72.5 BB

85%4.0

23.5

44.9

5%10%

OtherCommercial/IndustrialResidential

About Cook County

The CCAO Is One of the Largest and Most Sophisticated Assessor’s Offices in the Country

Assessment Practices and Considerations Vary WidelySize of JurisdictionMethod and Technology

• Manual Re-calibration• Computer assisted mass appraisal• GIS Systems

Frequency of ReassessmentGovernmental Considerations

• Tax Base and Levy• Assessment Caps

Project Structure

Build from Existing ModelsOperate within current systems (data, software and staffing)

Deliver under tight timeline dictated by assessment process

Accuracy, Uniformity, Equity• How close are assessed values to actual

market values? • Are similar homes assessed at similar

values?• Are different value homes assessed at the

same rate?Practical Considerations

• Ease of implementation, transparency

Criteria for Success

Process and Diagnostics

Evaluation of current modelIntroduce modifications, from simple to complex

Evaluate each step using rigorous statistical techniques

Review outcomesDevelop recommendations

Evaluation via Out of Sample Testing

Enables readily determining quality of current systems and modifications

Detailed Reports Generated for Each Model Modification

To preserve confidentiality, the following graphs and figures were

constructed for illustrative purposes only, and do not reflect specific

project data or results.

DISCLAIMER

Defining the Problem: A Major Market Downturn

That Impacted Neighborhoods Differently

Model Improvements Goal:Accurately Capture Both Trends

Number of foreclosure filings in the neighborhood within the past year

Presence of foreclosure filings on the same block within the past year (dummy)

Also tested: Block-level number instead of dummy, REO instead of filing, different distances (1/32 mile, 1/16 mile, 1/8 mile)

Tested Multiple Foreclosure Measures

Accounting for the Impact of Foreclosures

Created new variables that capture and account for nearby foreclosures

New variables better assess the value of the foreclosed property as well as non-foreclosed properties on the same block

What Does This Mean for the Assessment of Individual Properties?

No Filing Nearby Filing Nearby

Accounting for the Downturn in Housing Trends

Created new variables that track the housing market on a more “real time” basis

New variables adjust to market trends – regardless of whether they are up, down or flat

Capturing Market Trends: Time Dummies vs Linear Model

Capturing Market Trends: Time Dummies vs Linear Model

Capturing Market Trends: Time Dummies vs Linear Model

Capturing Market Trends: Time Dummies vs Linear Model

Capturing Market Trends: Time Dummies vs Linear Model

Capturing Market Trends: Time Dummies vs Linear Model

Graphics are for illustrative purposes ONLY

Model Enhancements Make a Big Difference

Improvements Change Distribution, not Tax Collection Amount

Changes do not Affect Overall Tax Collection (a Function of Levy), Changes do not Affect Overall Tax Collection (a Function of Levy), but Preserve Accuracy and Equity in the Tax Systembut Preserve Accuracy and Equity in the Tax System

Project Impact

Savings for lower income homeowners (holding aggregate tax revenue constant) in the order of sixty million dollarssixty million dollars.

The changes have been incorporated into the current round of assessments and will be applied to all future assessments.

Additional assessment model improvements have been identified and are being explored together.

The “New Frontier” of Property Assessments

Opportunity to apply newest statistical and data mining techniques to assessment models

Potential to deliver assessments more accurately, equitably and efficiently, leading to a new generation of property assessment practices

In Sum...

Time to revisit “one of the most important, easily documented, and manipulable of all influences upon the social geography of cities, and also one of the most neglected.” (Harris and Lehman, 2001)

A modest investment generates a large financial impact for neighborhoods and homeowners who sorely need help.

The approach, techniques and solutions of the project are easily transferable to other counties.

Gauging the Impact of Home Foreclosure on Neighborhood Property

ValuesImproving Assessments to Help Struggling

Homeowners

Community and Economic Development CommitteeCity of Milwaukee

October 26, 2009Robert Weissbourd, RW Ventures, LLC