(June 2012) Property values have fallen dramatically across the country in the last several years something which is often cited as a pain point for the municipal bond market. One example I was looking at recently is Collingswood, New Jersey. According to online real-estate portal Zillow, housing prices in Collingswood have fallen 7.3% over the last year compared with an average of 1.8% for the entire United States as a whole.
Conventional wisdom would suggest falling home values would be bad for a municipality and rising home prices would be good. As values rise, assessed home values on which property taxes are based should also increase. Rising property taxes, with one or two year time lags, should lead to more property tax revenue for the municipality.
This is true because:
When the real-estate market gets better, families are no longer chained to their homes and population flight may occur. With people leaving, the tax base of a municipality (basically, the income of the citizens of the municipality generate) will decrease. This makes it harder for a community to raise funds by taxing residents.
In these cases, emigration is a risk to municipal finances.
Interested in learning more about the municipal bond market? Visit the municipal bonds section of Learn Bonds.