Housing Slump Will Hurt Cities Well Into Future

Property tax lags create a vicious circle that slows recovery.

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Everyone knows that housing is dragging the national economy down. Now comes evidence of how the housing sector could hurt local economies for years to come.

According to the National League of Cities' City Fiscal Conditions Survey, sent to all cities with populations greater than 50,000, as well as some with populations between 10,000 and 50,000, U.S. cities' fiscal situations are by some measures marginally better than in 2010, which is to say that their incomes and outflows are shrinking more slowly than before. The survey shows that municipal general fund revenues for 2011 are down 2.3 percent from 2010, compared with a 3.8 percent drop from 2009 to 2010. But the report indicates that declines in property tax receipts continue to accelerate and, furthermore, projects likely property tax revenue declines in 2012 and 2013. City finance officers from municipalities that rely more on property taxes for revenue, as opposed to income or sales taxes, also report that they are significantly less able to meet financial needs than those from other cities.

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The National League of Cities estimates that the lag between a change in economic conditions and a city's reported revenue collections can be anywhere from 18 months to several years. "A downturn in real estate prices may not be noticed for one to several years after the downturn began, because property tax assessment cycles vary across jurisdictions," notes the report.

Taken together with the most recent data about the national housing situation, this indicates a grim future for U.S. cities. The latest Case-Shiller Home Price Index report, out today, showed that as of July, the national 20-city home price index was down by 4.1 percent from one year prior. David M. Blitzer, chairman of the Index Committee at S&P Indices, acknowledged in a statement that existing home sales are up and mortgage default rates are down, but added that there could still be plenty of pain to come in the housing market: "However, if you look at the state of the overall economy and, in particular, the recent large decline in consumer confidence, these combined statistics continue to indicate that the housing market is still bottoming and has not turned around."

Indeed, the housing market has a long way to go before it achieves anything close to a full recovery. Patrick Newport, U.S. economist at IHS Global Insight, estimates that roughly 6 million homes that are either delinquent or in foreclosure are clogging the system. Clearing out all of those homes, he says, could be a lengthy undertaking. "It's got to go through the courts in some cases, and the processors can't do it overnight," he says. "It's going to take two to three years to get that number down to a manageable number, and until that happens, we're going to see weakness in housing."

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And though lawmakers are struggling to come up with ways to help jump-start a stagnant housing market, it may simply be that time is going to be a more effective salve than policymaking. "I think it's mainly something we're going to have to ride out," says Newport.

Of course, property taxes are not the only contributing factor to municipal financial woes. Income tax collections also reflect individuals' earnings from previous years, making for yet another lag, albeit shorter than that from property taxes. Declines in aid from states, facing their own budget troubles, also can hurt cities. All of this makes for a harmful cycle: Cities already crippled by the Great Recession are now being hit by this drop in property tax revenue. Cities facing financial troubles have been forced to lay off employees, freeze hiring and salaries, and cut health benefits. Workers who are uncertain about their future employment or salaries will almost certainly be less willing to purchase a new home.

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