Take Home:

• Real estate taxes have historically been decent indicators of home value growth, but that phenomenon has started to fade.

• Not all high-tax locations have been bad investments. In fact, high-tax locations with below-average home values have routinely beaten average price growth, most likely due to the value of the public investments (schools, parks, etc.) made with real estate taxes.

• Real estate taxes should not be a primary decision-maker in your investment decisions. However, if real estate taxes are part of your decision-making process, your best bets for good home value returns are high-priced neighborhoods with low taxes or low-priced neighborhoods with high taxes.

Real estate taxes vary wildly across the U.S. In some places, like much of Alabama, real estate taxes are virtually zero. In other places, like parts of New York and New Jersey, taxes are as much as 2% of home values. The map below show estimated tax burdens at the neighborhood scale.

The amount of real estate taxes has a clear impact to home prices - lower taxes mean you can afford a higher initial home price on the same monthly housing budget. But real estate taxes also seem to influence future home values in some interesting and important ways that you should know about.

1. Lower Real Estate Taxes Once Led to Higher Price Returns. But not anymore.

   Historically, locations with lower real estate taxes have seen larger home value increases over time. The chart below summarizes home value change since 2010. Neighborhoods with low tax rates - generally less than 0.75% of home value - had much higher returns from 2010-2015 and from 2010-2021.

This same pattern exists when starting from the middle of last decade.

But as of a few years ago, this pattern has faded.

It may be that whatever market inefficiency there was around real estate taxes has been absorbed, and home prices are accurately accounting for the increased buying power that low taxes provides.

2. Not All High-Tax Locations Have Done Poorly

Even when high-tax locations were underperforming as a whole, a particular subset has been fairly competitive. Lower priced neighborhoods in high-tax locations didn’t fare so badly - especially those neighborhoods where home prices were below the national median.

From 2015-2018, high-tax, low-priced neighborhoods increased in value by 20%. This was effectively equal to the national average of 21%. And these same neighborhoods were among the most successful over the past 3 years - their 32% average return exceeded all other neighborhood groups, as seen in the chart below.

Interestingly, over the past 3 years tax rates haven’t influenced price change in high-priced neighborhoods. Among high-priced neighborhoods, both low-tax and high-tax neighborhood home values increased by 24%.

3. So, What Are We to Make of This?

The main takeaway for me is that the era of low taxes leading to high returns has run its course. It could be that low-tax communities are finally being valued more appropriately. But I also think it makes logical sense for there to be more nuance in evaluating the importance - and thus the future value - of real estate taxes. To the extent that real estate taxes go to major public investments like schools, police forces, parks, or other local amenities, it stands to reason that these public amenities could create larger relative benefits for lower-priced neighborhoods. Conversely, lower-tax communities may be expected to use more of their own money to supplement public amenities, which is an easier ask in higher-priced neighborhoods.

It is of course not the case that high-tax areas always have better public amenities - often the reason for higher taxes is to address costly problems not in existence in lower-tax places. But to the extent that higher taxes are used to benefit local quality of life, these benefits should make lower-priced neighborhoods in high-tax areas better investments than lower-priced neighborhoods in low-tax areas. And to the extent that high-priced neighborhoods are less in need of public amenities, high-priced neighborhoods in low-tax areas should be better buys than high-priced neighborhoods in high-tax areas.

This is something that Homeworthi will continue to monitor over time, and we’ll update findings as they come in.