Depressed home prices hurt municipal budgets

"The nation’s housing crisis is five years old, but for local governments across the country, the worst of the reckoning might only now be at hand," The Washington Post reports.

Property taxes collected in Baltimore—$815 million in the most recent fiscal year—are expected to shrink to $803.5 million this year, $773 million in 2013, and $735.7 million in 2014. By 2015, Baltimore will be collecting roughly $85 million less than it did in the last fiscal year, The Post said. That's a drop of a little more than 10 percent. Not until 2016 is the situation there expected to improve.

Because most municipalities reassess properties much less than annually, the effects of the drop in housing values is just starting to affect municipal revenue—a process that will take a few years to run its course.

Though The Post didn't say so, Baltimore may not be the most representative example of what's happening. In recent years, Baltimore, with its thousands of abandoned rowhouses, has been one of the nation's more troubled cities. New York, Washington, and some other cities have fared considerably better. Washington has seen housing values rise in neighborhoods that are in much demand.

But there are quite a few cities—from Cleveland, Ohio, to Fort Myers, Florida, and Las Vegas, Nevada—where abandoned housing has become a problem. And analysts such as Christopher Leinberger at Brookings Institution have argued that some of the worst situations are in outlying suburbs—places where the price of gasoline has further strained household budgets.

The Post didn't sort out the differences between various places carefully, so it's hard to know how the impact on central cities nationally compares with the impact on close-in suburbs and distant suburbs.

It does seem clear, however, that many local governments will have to make large cuts in spending, which will have an impact on livability.

The view from Cleveland

At the Federal Reserve Bank of Cleveland, economist Thomas J. Fitzpatrick IV and research analyst Mary Zenker last month produced a report called "Municipal Finance in the Face of Falling Property Values." In it, they warned that government finances in Cuyahoga County, where Cleveland is located, may be hurt by a property reappraisal scheduled for this year, because many properties have lost value since the previous appraisal.

"The impact has been felt most strongly in Cuyahoga’s central city (Cleveland) and its inner-ring suburbs (those that border Cleveland)," Fitzpatrick and Zenker write. "The outer-ring suburbs have not been hit as hard." 

Fitzpatrick and Zenker, using figures from the county auditor, estimate that since 2008, property values have declined by 18 percent in the county. They have dropped by 8 percent in outer-ring suburbs, 31 percent in inner-ring suburbs, and a whopping 48 percent in Cleveland itself.  

The authors conclude:

If creative ways to make up for this lack of revenue are not found, local governments may face the undesirable choice of either raising property taxes or reducing funding for essential services. Both actions may make the municipality a less desirable place for new home owners to locate. Weakening housing demand may lead to further declines in property values. In any case, it appears that the dramatic fall in property values across the country will accelerate the financial distress of municipalities in the wake of the Great Recession.