Ups & Downs of Assessing

(from Maine Townsman, February 2009)
By Douglas Rooks, Freelance Writer

The nationwide tumble of real estate prices, and the rise of foreclosures, might be expected to put the heat on Maine’s municipal assessors – the officials charged with keeping the values current on which the property tax system relies.

To date, assessors report only minor impacts on how they do their jobs, and how the public relates to them. Maine has so far been spared the dramatic loss of value that has struck some of the previously fast-growing regions of the country. While the slump has so far cut about 7 percent off the peak value of residential property here – and another 5 to 10 percent drop is predicted for 2009 – that’s a far cry from the turmoil evident elsewhere.

A recent New York Times story profiled the town of Lehigh Acres, Florida, an exurb of Fort Myers, where residential sales prices have dropped as much as 80 percent. During the boom years, from 2000-06, developers built more than 13,000 units in Lehigh Acres, nearly doubling the housing stock. Having peaked in 2005 at $342,300, the median home price dropped to $215,200 by December 2007, and was just $106,900 by the end of 2008. Whole subdivisions are now vacant.

A slower curve

It’s easy to see why Maine’s experience is a whole lot more appealing. In Machias, assessor Doug Guy says his area of Maine “is very slow on the curve” of rising or falling values. He estimates that, so far, there has been only a two or three percent decrease in home values, which will require some adjustments in the revaluation the town is currently undergoing, but nothing major.

In Belfast, Bob Whiteley said that values are still rising, though the 1-2 percent increase is slower than the 7-10 percent appreciation seen in the two previous years. The whole midcoast area, in fact, is an area of relative strength in real estate prices. The state’s 2009 valuation figures for Lincoln County, for instance, show a total of $8.27 billion, up from $7.98 billion the previous year, a 3.6 percent increase.

It is in southern Maine, where prices rose the most, that the turnaround is most evident. Some municipalities that recently conducted reassessments have seen values go back to 100 percent, and in a few cases go over 100 – a situation not seen in Maine since the early 1990s.

The changes were significant enough so that the Cumberland County assessor’s group, which hadn’t met in a couple of years, got together in January, with more than 30 attending.

“What we discovered was that, for the most part, values were holding against each other,” said Anne Gregory, Falmouth’s assessor. That point is particularly important to maintaining accurate appraisals, because it is shifts in different categories of property that create the need to reassess just as much as the overall percentage against full value.

In Falmouth, for instance, values have declined relatively evenly, although there have been greater reductions for multi-family housing, older commercial buildings, and condominiums, Gregory said.

For Cumberland County as a whole, the median home price peaked at $250,000 in 2005, and has dropped to $226,000. In Falmouth, one of Maine’s most prosperous communities, the decline is smaller, from $476,000 to $461,000, or 6 percent

‘Everything stinks’

Liz Sawyer, assessor for South Portland and Westbrook, attended the annual MEREDA conference (Maine Real Estate and Development Association), one of the state’s major trend-spotting gatherings. The consensus, Sawyer said, was that “everything stinks,” but that the major classes of residential, rental, commercial and industrial properties are experiencing similar declines.

This doesn’t mean there isn’t heightened public awareness and concern. For a long time, homeowners could be confident about selling their property, in most cases, for more than its assessed value. So the reverse phenomenon – assessments higher than sales – is unsettling.

For now, this hasn’t led to an increase in requests for abatements, according to Sawyer, but there have been a lot more inquiries.

“When property values are not what you thought they were, it has an impact. It’s a little harder to explain to taxpayers, given their expectations,” she said. “We’re hearing about it,” she said, but she described the number of calls as “not overwhelming.”

Sawyer said that South Portland, which reassessed in 2006 at the top of the market, is one municipality where values may be exceeding 100 percent. Westbrook is near 100 percent.

Doug Guy, who does assessing for 11 Downeast communities, has included a feature in several contracts that allows taxpayers to ask questions about their assessments by e-mail. Of those messages, at least two-thirds involve expectations that valuations will decline, or should have by now.

“Almost all of those comments are from out-of-state property owners,” he said, “not from local residents.” Because the real estate crisis has had a much bigger impact elsewhere, he said, some non-resident property owners don’t realize that, in Washington County, both land values and home prices have been relatively stable.

That relatively modest drop is having an effect on the Machias revaluation now in progress. When the survey began, Guy said, assessments were about 59 percent of full value but have since risen to 61 percent.

Higher than 100

While it’s well known that state law requires municipalities to reassess whenever values fall below 70 percent, there’s also a limit to values on the high side. Reassessments are also supposed to occur if values go over 110 percent, a feature of the law that was added during the recession of 1991-92, when a handful of Maine municipalities exceeded that rate.

It’s probably too early to tell, the assessors say, whether that will happen again.

Even if it does, Anne Gregory said, it doesn’t necessarily mean an entire reassessment of the town. If values remain in line, the town could simply adjust assessments downward. “You’d have lower assessments and a higher tax rate,” she said. “The amount of tax each property owner would pay would remain the same.”

What does seem to be causing some concern is the drop in sales volume, which in turn affects assessors’ ability to determine market prices.

Bill Healey, assessor in Cumberland and Yarmouth, said that volume in 2008 was only 60 percent of the previous year, and may be dropping further. Speaking of Cumberland, he said, “There were very few transactions in December, and only a half a dozen sales. We normally see about 35 transfers a month, of which about 15 are sales.”

He agrees that what’s now unfolding is unusual, if not unprecedented. The wide scale decline in values isn’t something Mainers have experienced. “I’ve been in the appraisal business since the early 1990s, and this is the first time I’ve seen it,” he said.

One factor affected by the sales dearth is how to spot “outlier” sales that don’t necessarily change the overall municipal assessment. One of the first things an assessor asks if a buyer finds the assessed value dramatically different from what they paid is whether it was a foreclosure, or a “distressed sale,” where for one reason or another a seller simply had to act.

Usually, those sales are easy to spot, but a rash of foreclosures in an area could change that. Healey said that he anticipates perhaps 15 foreclosure sales this year in Cumberland, but there will still likely be 150 sales overall. Assessors are allowed to disqualify such forced sales from valuations of similar properties because they don’t reflect overall conditions. “If they become the market,” Healey said, “that’s something else entirely.”

Healey confirms that, while values are down, there isn’t a major shift from one part of the real estate market to another. Cumberland, for instance, has only three percent of its valuation in commercial property, while the other town where he’s assessor, Yarmouth, has 20 percent commercial. Yet the “quality ratio,” the divergences from a mean that, according to state standards, should remain within 10 to 15 percent, is equally close in both towns.

Not Time to Reassess

Kennebunk is a town where reappraisals are done far less frequently. When the current valuation, completed in 2003, was done, it had been nearly 20 years since the last complete reassessment of this southern coastal community.

Barry Tibbetts, the town manager and a former assessor, said that “there are definitely areas that need to be adjusted,” given changes over the last five years, and the town is pointing toward a “statistical update” though not another revaluation.

In fact, given market instability at the moment, he said he can’t in good conscience recommend to the town selectmen spending a lot of money to hire an outside firm. “Even if we were to start soon, the new values wouldn’t be ready until 2010.”

He emphasized that delaying a revaluation “doesn’t mean we don’t want to do it,” because of the town’s obligation to keep assessments consistent and fair. But given understandable taxpayer resistance to any new spending requests this year, it’s unlikely that Kennebunk will be reassessing any time soon. “It makes a lot of sense to wait,” Tibbetts said. “We don’t want to end up at 110 percent.” In preparing a budget, he said each municipality is looking “to preserve what you need to deliver in services at the minimum amount of money.”

Tibbetts said that coastal property, as in past downturns, seems to be holding its value for now. While assessors upstate tend to look at the Portland area for wider swings in value, in southern Maine, Tibbetts finds the comparison to other parts of the country more telling. “Maine reacts more slowly than other areas,” he said. “For us, right now, that’s a good thing.”

Behind the Meltdown

In the midcoast, Bob Whiteley thinks that real estate prices have been buffered from declines because they didn’t get overvalued in the first place. He’s outspoken about what he sees as the causes of the subprime mortgage meltdown, saying, “The whole thing was contrived, the same way the electricity market in California was manipulated by Enron.” With former Federal Reserve Chairman Alan Greenspan lowering interest rates in 2003-04 “for no reason at all,” the chase for cheap loans was on. “People paid more for property than it was worth,” is his blunt assessment.

In the midcoast, a conservative approach by the financial community helped keep things stable. “We haven’t suffered as much because banks didn’t make the loans that got other areas in trouble,” he said.

Ups and downs

Both sides of the home-buying boom and bust are recorded in Falmouth, where all the reappraisals are done in-house, something that Anne Gregory says provides a lot more options in times of changing values. “If you’ve spent a lot of money hiring an outside firm, you’re not going to want to throw out those values,” even though they may not be the same as when the reassessment started, she said.

In Falmouth, there were revaluations in 2000 and 2003, and another in 2006-07 when values had already fallen to 76 percent. Because the revaluation was taking place as the market peaked, and then started falling, Gregory decided to shift the period where values were being averaged. “We disregarded the first six months and added another eight months at the end,” better reflecting current conditions. “With a contract appraisal, you’d have a harder time doing that,” she said.

There’s so little activity on some types of property that assessors occasionally have to make some unorthodox adjustments. In some smaller Washington County towns where Doug Guy has the assessing contract, coastal lots have been changing hands very slowly. To get accurate values for some undeveloped parcels in Perry, for instance, Guy has had to look at properties with buildings and then subtract them to get a fix on land values in the area.

“We can be consistent and accurate that way, where otherwise we wouldn’t have enough sales,” he said. When the process is explained to taxpayers, “they understand and accept it.”

An Unsettled Outlook

There was little eagerness among assessors to do crystal ball-gazing in uncertain times, but a few were willing to take a crack at it.

Bill Healey said that he expects values “to slide a bit” over the coming year, influenced primarily by the “glut of properties” on the market now. Spring is usually a time when real estate sales begin to perk up, and he said that numbers for April and May should give a good indication where the market is going.

Anne Gregory, who also attended the MEREDA conference, said that while the immediate outlook wasn’t positive, she found that people were “hopefully optimistic,” and that a lot of potential buyers “want to be in Maine.”

With experience in both the public and private sector, she said that she’s been through big real estate busts before, particularly in the mid-1970s and the early 1990s. “Each time it’s a different component” that drives the downturn. It was the second home market that was hardest hit in New England the first time, and commercial real estate more recently. The fallout from the subprime mortgage debacle is still unfolding, and, she said, it’s impossible to know how this downturn will compare to its predecessors: “You can’t really tell when you’ve hit bottom until you’ve been there.”