Why Rising Real Estate Prices Won’t Help South Florida Credit RatingsJune 25th, 2012 by David Waring
(June 2012) When the real-estate market cratered in 2008, South Florida was one of the most affected areas in the country. According to real-estate website Zillow, home values in the Miami-Fort Lauderdale Metro area have seen average home values fall from a peak of $310k to a current level of a little under $150K. Along with the fall in home values, many jobs related to real-estate development were also lost.
If you are like me, you are probably thinking that this would have caused financial problems for cities in south Florida to the point where many of the area cities credit ratings would be below investment grade. When researching this article however, I was surprised to learn that Broward and Palm Beach Counties had the highest possible rating from Moody’s, Aaa. Miami-Dade County is rated Aa2, only two notches below the highest rating.
How could this be?
I thought that falling real-estate values would have a detrimental impact on county revenues. With real-estate prices falling, I assumed the county’s property tax collections would also plumet. That was a wrong assumption. The counties were able to offset declining property values by raising property tax rates. Counties in South Florida can raise property taxes without state approval, with a couple caveats. The dollar amount cannot exceed the previous years and the total tax rates has to be 1.0% or less. As a result of increasing the tax rate, the revenues of the counties remained stable.
However, the counties cannot keep raising the property tax rates. So an uptick in property values, is a positive. This is noted Moody’s Weekly Credit Outlook (June 11, 2012) under the headline, “Taxable Property Values Rise In Some South Florida Counties, A Credit Positive”. As Palm Beach and Broward counties already have the highest credit rating, this good news cannot lead to them having a higher credit rating.
What I learned from this report?
When I originally started studying municipal bonds, I wrote an article that suggested that investors should look for municipalities with rising property values. The basic idea that rising property values should lead to higher property tax collection and improved credit ratings. Since then I have learned that analyzing the impact of changing property values is far more complicated. Understanding local laws with regards to property value taxation is just as important as changes in property values. In the case above, state laws cushioned municipalities from suffering reduced revenues from falling values protect credit ratings. However, rising property values is still important to the municipalities financial health in the long-run in South Florida.
However, this is not universally true. I have also written an article about when rising property values can have the opposite effect. In some cases, when property value rise, there can be population emigration lowering a municipality’s tax base.
Bottom Line: I no longer feel comfortable making broad sweeping statement about the impact of real-estate prices on municipal finances. Analysis must be done on a case by case basis.
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