Cooler market, leaner times

Budgets curbed as home sales dip

August 27, 2006|By Larry Carson | Larry Carson,sun reporter

Maryland's local governments have enjoyed several years of surging revenues because of a real estate boom that propelled home sales and values to record levels. But the onset of a real estate slowdown has them preparing for leaner times.

Local officials expect a sharp drop in transfer and recordation tax revenues that are generated when a property changes hands or is refinanced.

"I've been predicting a slowdown of this revenue for five years. Finally, I'm right," said John Hammond, Anne Arundel County's budget director, who budgeted for a 25 percent drop in real estate tax revenues - $105 million for the fiscal year that started July 1, down from $130 million in the last fiscal year.

Real estate taxes represent 9 percent of the county budget, Hammond said, while the property tax provides 42 percent of all revenues.

The number of homes sold in the Baltimore region in July declined by 23.6 percent, although the average price of sold homes still increased by 6 percent, according to the Metropolitan Regional Information Systems Inc., which compiles the statistics.

"Over the long term, prospects are still good," said John Hopkins, associate director for applied economics at RESI, Towson University's research and consulting arm. He said Maryland's economy will outpace the national growth rate in part because of a military base realignment expected to bring thousands of new jobs.

In Baltimore County, budget director Fred Homan said he budgeted for 25 percent less revenue from transfer and recordation taxes, from $90 million to $68 million this fiscal year. Baltimore City has budgeted for 13 percent less revenue from real estate taxes, said budget director Raymond S. Wacks.

"We've seen a slowing in July, but it's too soon to say how much it will be," he said.

In Harford County, treasurer John R. Scotten said he has budgeted for 25 percent less in transfer taxes and 15 percent less in recordation revenues. But July showed no downturn, he said - in fact, revenues increased in July over the previous year.

He said Harford County is in good shape with recordation and transfer taxes, which were higher than predicted for fiscal 2006.

If problems do crop up, he said, some of the surplus can be used to compensate.

And at the state level, real estate revenues dropped by more than half in the last six months of fiscal 2006, which ended June 30, said David F. Roose, director of the bureau of revenue estimates for the state comptroller's office.

"In many respects, this is almost the same sort of thing as in the late '90s with the stock market [decline]," Roose said.

The state dedicates all of its real estate tax revenue to land conservation programs, mainly Program Open Space, which gets 85 percent of state transfer tax revenues. That program lost more than $400 million diverted by the Ehrlich administration to help the state weather the last recession.

The sharp rise in home values over the past half-decade has insulated local governments from any drop in much the larger pot of property tax revenues, which are based on assessments and often make up more than 40 percent of local budgets.

Hopkins said home sales are correcting after years of an overheated market, but there are other factors. "People read about this and see it on the news and think that if things are bad, maybe we need to scale back."

The resulting drop in consumer spending then produces the predicted slowdown.

The real estate sales decline "is going to have very minimal effect on local government finances because of the [assessment] caps." Hopkins said.

That's because if a home's value has doubled since 2000, a 4 percent or 5 percent annual assessment cap increase will take nearly two decades to catch up. Even if assessments decline slightly, the property tax increases to local governments would continue.

"July's revenue was down 24 percent, but one month does not a year make," Arundel's Hammond said, noting that the county got more money than expected in each of the past few years.

Howard County home sales dropped 23 percent in July, compared with the corresponding period last year, finance director Sharon Greisz said, and the county budgeted for a 14 percent real estate revenue decline. But Howard's recordation tax revenues increased during June and July last year, and transfer tax revenues were steady. Greisz speculated that the early returns might reflect spring home sales, before the slowdown took effect.

Carroll County also saw higher-than-expected recordation tax revenues in the last fiscal year. Carroll has no transfer tax.

"We budgeted $18 million in fiscal 2006, and we expect to end the year with $22.8 million," said Ted Zaleski, Carroll's budget director. He said budget officials know that real estate revenues can be volatile, and they plan for that.

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