Gauging the Impact of Home Foreclosure on Neighborhood Property Values Improving Assessments to Help Struggling Homeowners

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Gauging the Impact of Home Foreclosure on
Neighborhood Property ValuesImproving
Assessments to Help Struggling Homeowners
Community Economic Development Committee City
of Milwaukee October 26, 2009
Robert Weissbourd, RW Ventures, LLC
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Why Should We Care?
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Real Estate Matters
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Real Estate Matters
Source Net worth and the assets of households,
US Census Bureau 2002.
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Real Estate Matters
Source US Census Bureau
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When Real Estate Markets dont Work...
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Bad Things Happen to Our Cities
Photo Doug Benz, The New York Times
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The Devastating Impact of Foreclosures
Source Center for Responsible Lending Press
Release, May 2009
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Greatest Impact in Low Income Neighborhoods
Data HUD, Neighborhood Stabilization Program
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A Good Property Assessment System is Key to
Households, Communities, and Government.

• Property Assessments influence
• Investment in housing stock
• Which communities residents choose
• Households wealth
• Government receipts

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Property Taxes A Significant Household
Expenditure

• In 2007, the typical U.S. homeowner spent 2.91
  of annual income (1,838) on property taxes.
• In Illinois, this figure was 4.76 of annual
  income, or 3,203.

Source Property Taxes on Owner-Occupied Housing
by State (2007 Tax Foundation report)
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The Assessors Role in the Tax System
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The Assessors Role in the Tax System
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The Assessors Role in the Tax System
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The Assessors Role in the Tax System
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But Current Market Conditions Present Serious
Challenges...
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Dramatic Decrease in Sales Volume
Total Sales of Residential Properties
68,241
24,445
Source Cook County Assessor's Office, Single
Family Only
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Compounded by Skyrocketing Foreclosure Rates
Source Cook County Assessor's Office, Single
Family Only
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Result in Legal Challenges, a Flood of
Appeals...

• ...Officials across the country say there is no
  question that the number of assessment appeals
  has risen from the usual trickle to a flood.
  (NYT, July 4, 2009)
• Lou Dobbs Tonight reports on assessments and
  property tax protests (CNN, April 1, 2009)
• City of Philadelphia sued over assessment
  practices

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And Serious Community Development Implications

• Greatest challenges in neighborhoods that are
  most affected by foreclosure crisis
• Risk of over-assessments for homeowners who can
  least afford them

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The Cook County Assessors Office (CCAO) Took
Action

• Project Goal Enhancing the Assessment Process to
  Better Estimate Property Values in the Current
  Environment
• How to account for the recent downturn in the
  market after years of steady growth?
• How to account for the increased influence of
  foreclosures?

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About Cook County
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About Cook County
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Assessment Practices and Considerations Vary
Widely

• Size of Jurisdiction
• Method and Technology
• Manual Re-calibration
• Computer assisted mass appraisal
• GIS Systems
• Frequency of Reassessment
• Governmental Considerations
• Tax Base and Levy
• Assessment Caps

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Project Structure

• Build from Existing Models
• Operate within current systems (data, software
  and staffing)
• Deliver under tight timeline dictated by
  assessment process

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Criteria for Success

• Accuracy, Uniformity, Equity
• How close are assessed values to actual market
  values?
• Are similar homes assessed at similar values?
• Are different value homes assessed at the same
  rate?
• Practical Considerations
• Ease of implementation, transparency

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Process and Diagnostics

• Evaluation of current model
• Introduce modifications, from simple to complex
• Evaluate each step using rigorous statistical
  techniques
• Review outcomes
• Develop recommendations

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Evaluation via Out of Sample Testing
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Detailed Reports Generated for Each Model
Modification
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DISCLAIMER
To preserve confidentiality, the following graphs
and figures were constructed for illustrative
purposes only, and do not reflect specific
project data or results.
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Defining the Problem A Major Market Downturn
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That Impacted Neighborhoods Differently
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Model Improvements Goal Accurately Capture Both
Trends
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Tested Multiple Foreclosure Measures

• Number of foreclosure filings in the neighborhood
  within the past year
• Presence of foreclosure filings on the same block
  within the past year (dummy)
• Also tested Block-level number instead of dummy,
  REO instead of filing, different distances (1/32
  mile, 1/16 mile, 1/8 mile)

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Accounting for the Impact of Foreclosures

• Created new variables that capture and account
  for nearby foreclosures
• New variables better assess the value of the
  foreclosed property as well as non-foreclosed
  properties on the same block

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What Does This Mean for the Assessment of
Individual Properties?
Filing Nearby
No Filing Nearby
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Accounting for the Downturn in Housing Trends

• Created new variables that track the housing
  market on a more real time basis
• New variables adjust to market trends
  regardless of whether they are up, down or flat

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Capturing Market Trends Time Dummies vs Linear
Model
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Capturing Market Trends Time Dummies vs Linear
Model
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Capturing Market Trends Time Dummies vs Linear
Model
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Capturing Market Trends Time Dummies vs Linear
Model
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Capturing Market Trends Time Dummies vs Linear
Model
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Capturing Market Trends Time Dummies vs Linear
Model
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Model Enhancements Make a Big Difference
Graphics are for illustrative purposes ONLY
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Improvements Change Distribution, not Tax
Collection Amount
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Project Impact

• Savings for lower income homeowners (holding
  aggregate tax revenue constant) in the order of
  sixty million dollars.
• The changes have been incorporated into the
  current round of assessments and will be applied
  to all future assessments.
• Additional assessment model improvements have
  been identified and are being explored together.

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The New Frontier of Property Assessments

• Opportunity to apply newest statistical and data
  mining techniques to assessment models
• Potential to deliver assessments more accurately,
  equitably and efficiently, leading to a new
  generation of property assessment practices

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In Sum...

• Time to revisit one of the most important,
  easily documented, and manipulable of all
  influences upon the social geography of cities,
  and also one of the most neglected. (Harris and
  Lehman, 2001)
• A modest investment generates a large financial
  impact for neighborhoods and homeowners who
  sorely need help.
• The approach, techniques and solutions of the
  project are easily transferable to other counties.

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Gauging the Impact of Home Foreclosure on
Neighborhood Property ValuesImproving
Assessments to Help Struggling Homeowners
Community and Economic Development
Committee City of Milwaukee October 26, 2009
Robert Weissbourd, RW Ventures, LLC