Special offer

Will the AVI derail the housing market recovery in Philadelphia ?

By
Real Estate Agent with The Somers Team at KW Philadelphia

 Will the AVI derail the housing market recovery in Philadelphia ?

Similar to across the country, the Philadelphia real estate market has already started to rebound, showing many signs of strength.   Total housing inventory has decreased from 8,888 units to 7,862 units (from 12.4 months to 10.4 months of supply).   From June 2011 to June 2012, total homes sold ticked up to 4,533 from 4,450 with median prices being up 4.8 percent during that same period.   In many parts of Philadelphia, the inventory for some neighborhoods is extremely low where many properties sell quickly with multiple offers.   In 2012, the homebuilders have been one of the top performing sectors in the stock market.  Who would have thought?  Well, we did in our 2012 Predictions   (see numbers 4 and 12).   In some neighborhoods such as Northern Liberties, Fishtown and Graduate Hospital, new construction continues to happen at a brisk pace with a very healthy demand.

With the perfect storm in place to deliver a strong rebound which includes historically low mortgage rates, a shrinking inventory, increased consumer confidence and the election being out of the way in a few months, what could possibly derail this recovery?

Unfortunately, that would be the Actual Value Initiative (AVI).  What is the AVI?  It is some sort of system that no AVI - real estate tax rapeone really understands that at the end of the day, real estate taxes will go up substantially for many of Philadelphia's neighborhoods.  The main purpose is to raise funds for the ailing Philadelphia School District.   Since City Council refuses to make responsible fiscal choices, raising real estate taxes is their easy solution year after year.   Unfortunately, for property owners, real estate taxes have already been increased 3 years in a row and will be facing the largest potential real estate tax in Philadelphia's history once the AVI is implemented.  The plan is for every property to be reassessed by a City employee (not associated with the Greater Philadelphia Association of Realtors nor an appraiser) and then to have the real estate taxes be assessed on that value.    Due to the complications and complexity, the AVI was delayed a year. 

Councilman Bill Green was quoted in a Philebrity article  "Council delayed this with open eyes. We did the right thing that you argue may be against our interest. We will do the right thing next year and get AVI done but we will use the data and the tools available to blunt unintended effects and impacts. Next year council, with full information, will responsibly provide AVI relief that helps people who can’t afford it and has the least impact (increase) on millage for everyone else.”

So in 2013 every homeowner will get a reassessment on their property and an update on their real estate taxes will be for 2014 as part of the AVI.  The way real estate taxes are computed now is already hard to understand but the way the AVI will work, it is even more complex.  In speaking to Matt Ruben, president of the NLNA, a simple formula might be 1.5 percent of the value of the property.    If that is accurate, then a $300,000 property will have taxes of $4,500 and a $500,000 property will have taxes of $7,500.   If this is true, some homeowners may face an increase of 300 percent or more.  It is hard to find a property in Northern Liberties or Graduate Hospital for example where the real estate taxes are more than $2,500 a year so homeowners are bracing for this tax increase rape.

This tax increase rape on hardworking homeowners can really hurt the housing market in a number of ways.  First, just when the affordability index is close to an all time low, that will change quickly.  For example, a new buyer takes into account their real estate taxes as part of their monthly mortgage payment.  With those increases, a mortgage payment goes up dramatically which will prevent buyers from buying in a neighborhood they want to live in, or buying at all.   Second, the increase in real estate taxes may cause many homeowners to put their homes on the market (increasing the inventory) simply because they cannot afford it or out of principal since they may ask where is the money going or how is it used in the black hole of Philadelphia ?   Others will simply fall behind which will cause more sheriff sales, tax sales and foreclosures and thus more squatters stealing copper and benefiting from Squatters Rights (who do not pay real estate taxes at all).   Third, as less properties are sold, the City and State will collect far less in transfer taxes.  When a property is sold in Philadelphia, 4 percent is collected (3 percent by the City and 1 percent by the State) at settlement.  For every $300K property sold, the transfer tax is $12,000.   By the way, the 4 percent transfer tax is already one of the highest in the Country!

The conversation can get deeper when folks ask where is this money going?  How is it being spent?   How come there is not an overhaul with City contracts, pensions, the DROP program, cuts across the board since Philadelphia is on a fiscal brink?   It seems like there are many other options besides going after the homeowners (taxpayers) again to fund the black hole, specifically being the ailing Philadelphia School District.   Instead of Mothers Fleeing Philadelphia, could this be homeowners fleeing Philadelphia once the AVI is implemented ?  In such a fragile time in our local economy and our local housing market, why derail it?  And if you are a renter, be prepared for higher rental prices as landlords (who are used to the money grabs such as the brilliant Lead Base Paint bill passed by Blondell Reynolds Brown) will simply pass those expenses along to their tenants who have already seen a large percentage increase on rental prices.   Or just sell their properties...

The good news is that until this is law, perhaps Mayor Nutter and City Council will get their heads screwed on straight and reconsider one of the largest real estate tax hikes (rape) to date and if there is any common sense, they would start to understand the numerous unintended consequences of this tax hike.   Let's only pray...

What are your thoughts ?

 

 

 

Comments (2)

Daniel J. Brudnok, REALTOR
Berkshire Hathaway Home Services Fox & Roach, REALTORS - Exton - PA License #RS-225179-L / Delaware License #RS-0025038 - Downingtown, PA
SRES, e-PRO,ABR,GREEN,CSP

Hi Christopher and Stephannie,

I know how hard major increases hit and at times there is some good to it, needs have to be met.....but when you hear of all the wasteful spending....misappropriations and the like you have to wonder if there is enough already.

Aug 11, 2012 11:59 PM
The Somers Team
The Somers Team at KW Philadelphia - Philadelphia, PA
Delivering Real Estate Happiness

Great point Dan.  In this case with Philadelphia's AVI, perhaps a better solution would be some sort of "phase in".  Time will tell...

Aug 12, 2012 12:09 AM