Home Prices: Who wins?

So I am jumping ahead a bit. There is much more to discuss as far as the implications of home price increases. I just read a fantastic article that correlates home price changes with changes in local fertility rates and so will look at Grand Forks in those terms too. However, the question was asked, by a friend of this website, why are we seeing all this about home prices?

I think the question to be asked first, is who gains from these price movements. The fiscal position of the city clearly improves with this type of situation. This is not an attack on whether or not the services provided equal the value. That is a topic for a separate day.

The market value, or house price, is a key part of the generation of local property taxes. The market value process is an imperfect science, more of an art really, and has a significant degree of imprecision to it. Unlike other transactions, say buying cereal at a store, we do not have the number of transactions to give us confidence in the level of the market price. You do not necessarily get more than one bid on a home if that bid meets the asking price. That does not tell us what the true market value is, just the price at which a sale made sense to both parties. Sale prices going up means valuations for all increase too.

Higher property values actually allow us to drop the mill levy, in theory, to keep the same amount of revenue. Now if levies stay at the same rate there will be more tax revenue to spend. In fact, if the percentage increase in the home values is higher than the percentage decrease in the tax rate there will still be revenue gains. So local government is one of the major beneficiaries of the price increases.

Homeowners gain too though, and often this goes overlooked. The increased price of a home increases the potential sales price if someone moves. It increases homeowner’s equity that can be tapped for home improvements, college expenses for children, or other uses. Looking far enough into the future there is the chance to leave a better inheritance to children or other heirs. Increased market values does bring more of a tax burden right now, but would people rather the prices stay lower and stable?

Clearly there are some benefits to higher prices, for local citizens and government. The real question is whether the negatives outweigh the positives, and for that people need to make their own decisions.

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