The 22.3% average increase in the residential tax rate that we all received in the mail last month is the crowning blow in a trend that began in 2002. It is not a trend of unbridled spending, waste or corruption in municipal government. It is instead a natural process of a shifting of tax revenue from the commercial industrial sector to the residential sector. The shift has resulted in the extraordinary increase that has occurred in not only Burlington residential values but across the state and nation.
This shift can be seen vividly, both graphically and numerically in illustrations provided by Russ Washburn, Burlington Town Assessor, in the January town meeting warrant package. I read an article in the Globe Thursday that said that residential values in Massachusetts had jumped 50% over the past four years and then consulted our own information to determine if that was true in Burlington. In fiscal year 2002 our total residential value was $1,953,995,084. At the completion of this year's revaluation our total value had jumped to $3,006,687,085. Some of this can be attributed to new growth in housing. There has been new units added to the town's inventory during this period but certainly not 1 billion dollars worth. In fact the largest addition is not even fully on the tax rolls as of yet.
The illustration of the average single family home bears out a similar result. In 2002 the average home in Burlington was valued at $266,450 and this year came in at $406,990. Now some have argued that these values are incorrect since their home cannot be sold in the market at these values. One factor to keep in mind is that valuation is done a year behind so the value is a reflection of last years market. Even with this in mind however the values still stand up today based on comparable sales that have been recorded.
Every single family home sale that is recorded at the registry of deeds is kept in running order by date at the assessor's office. Those numbers show two very important things. Out of the 70 homes from the 2005 home sales list at random only 15 were below the 2006 average valuation of 406 thousand. More importantly, the average assessed value was 85% of what the selling price was.
What has exacerbated this shift in value to the residential market has been the decline in the commercial industrial property sector. In the same reference period in 2002, the CIP sector had a total valuation of $1,473,890,731 and in 2006 it has dropped to $1,273,069,910. What has resulted is that in 2002 the CIP sector (with a 1.504 classification factor) was responsible for 64.69% of the overall tax burden. In fiscal 2006 even with a classification factor move to the full limits of 1.893 (max allowable by law), the CIP sector is paying 56.31% of the tax burden.
The reasons for this are numerous. Certainly the hotel market is an example of over building resulting in a point of diminishing returns. I have used the Four Points sale previously to illustrate this. In 2000 Four Points sold for 14 Million dollars. Last year that property sold for 6.4 million dollars. When a comparable sale is available in a market place this inevitably must be applied to other properties. A similar comparable was available when the first class Hewlett Packard building was sold at a significant reduced value and then donated to a non profit institution.
Other factors at play are a shift in the work at home market and the number of companies that have moved South as well as corporate mergers. Another has been commercial properties coming off of the tax rolls.
None of this would matter if the properties in both classes were moving in lockstep up or down. That has not happened over the past four years for one very important reason. That reason is interest rates. Interest rates and home mortgage rates fell to historic lows after two events that happened in 2000 and 2001. In the 2000, the Federal reserve was tightening interest rates to slow the economy. The financial markets had reached all time highs and the fed was concerned about a "bubble" in financial instrument values contributing to inflation.
The Fed continued to hike short term rates to slow the money supply and subsequently inverted the yield curve against long term interest rates. The Fed tightening peaked at 6.50%. This resulted in a rather quick slowing of the economy. Instead of the "soft landing" predicted, we instead fell into recession. The Fed switched policies and began aggressively reducing rates through 2001. Then came the events of 9/11/01 and the American economy came to a virtual standstill for a two week period following the attacks.
What followed was an even faster pace of reduction in rates culminating in a 60 year low in both short and long term rates which resulted in an unprecedented availability of capital for the residential home market. Many buyers in lower economic strata who had been shut out of the home market because of income to mortgage ratios now found themselves able to make that leap.
In a market like Burlington and other similar Massachusetts communities that have a desirable location and a long list of services but a short supply of homes, the favorable rate climate resulted in skyrocketing prices.
Both the good and bad news is that like any trend or bubble, we are likely to soon see a reversal of the trend. We can go back in history and examine a similar situation in home values in town. In fiscal year 1988, the average assessment in Burlington went from $86,700 to $178,600. Yet ten years later that same house in 1998 was valued at $176,180. We did not suffer a similar rise in tax rates because the CIP values doubled as well.
My over all point is that the current situation although severe is likely to be transitory. What goes up comes down, bubbles burst and trends reverse. I will use my own home as an example. I bought my house in 1977 for $53,000 and paid approximately $2200 in taxes the next year. My value this year is $413,000 and my taxes are $3600.
To put that in the proper context my taxes are up roughly 60% over a nearly 30 year period however my value is up over 800%. During this time I paid approximately $60,000 in property taxes and the town educated my two children. I wish I had a bank account or stock portfolio that performed as well.
