The Role of Real Estate in Maryland s Economy

Transcription

1 The Role of Real Estate in Maryland s Economy Prepared by: Sage Policy Group, Inc. March 2011

2 Table of Contents List of Exhibits... 3 Executive Summary Introduction... 6 Real Estate A Critical Economic Component... 6 The Industry Defined... 6 Maryland s Real Estate Industry in Statistical Brief... 6 The Real Estate Industry s Economic and Impacts...11 Economic Impacts...11 Impacts...12 Real Estate Taxes as a Source of Local Government Finance...13 The Maryland Real Estate Tax Burden...19 Unrealized Revenues from Lost Employment...20 Impact of First-Time Homebuyer Tax Credits...21 Impact of Foreclosures...22 Impact of Homeowner s Tax Credit...24 Conclusion...26 Appendix - IMPLAN...27

3 List of Exhibits Exhibit E1: 2009 Real Estate Industry Impacts... 4 Exhibit E2: Property Values and Real Estate Taxes (RET) in Exhibit E3: Reduced State and Local Revenues Associated with Job Loss in Maryland s Real Estate Industry... 5 Exhibit E4: FTBC Claims April 2008 through April Exhibit 1: 2009 Summary of Direct Real Estate Employment Totals... 7 Exhibit 2: Employment Related to the Real Estate Industry (in thousands) Exhibit 3: Employment Related to the Real Estate Industry (share of total) Exhibit 4: Total Wages (millions of current dollars) Exhibit 5: Total Wages (share of total) Exhibit 6: Gross State Product (millions of current dollars) Exhibit 7: Gross State Product (share of total) Exhibit 8: Multipliers Used to Derive Economic Impacts...11 Exhibit 9: 2009 Real Estate Industry Economic Impacts...12 Exhibit 10: Maryland Assessable Base Exhibit 11: Sales and Prices of Maryland Homes Exhibit 12: Real Property Taxes in Maryland, FY2004-FY Exhibit 13: Property Transfer Tax Rates in Maryland, FY2004-FY Exhibit 14: Recordation Tax Rates in Maryland, FY2004-FY Exhibit 15: Sources of Local Government Finance ($ in millions) Exhibit 16: Residential Full Cash Value Change for Reassessment Group 2, Exhibit 17: Average Assessment Increase, Properties Assessed Ever Three Years, Exhibit 18: Property Values and Real Estate Taxes (RET) in Exhibit 19: State Reliance on Major Tax Sources, Ranked by Reliance on Property Taxes Exhibit 20: Reduced State and Local Revenues Associated with Job Loss in Maryland s Real Estate Industry...20 Exhibit 21: FTBC Claims April 2008 through April Exhibit 22: Property Foreclosure Events in Maryland Jurisdictions, Third Quarter Exhibit 23: Foreclosure Activity in Maryland, 2007Q1-2010Q Exhibit 24: Median Property Taxes Paid on Homes in Maryland Exhibit 25: Spillover Impact of Foreclosures in Maryland 2009 and Exhibit 26: FY2009 Homeowners Tax Credits by Maryland Jurisdiction

4 Executive Summary Economic Impacts Maryland s real estate industry, which encompasses an array of real estate, finance and insurance services as well as construction activities, supported 370,000 jobs in 2009, approximately 15 percent of the state s job total. These real estate related jobs were associated with almost $19 billion in related wage/salary income or more than $50,000 per job. The industry s operations supported nearly $55 billion in business sales activity, more than onefifth (21.0%) of the state s total sales of goods and services. The real estate industry generated 49 percent of total local government revenues in FY2010, more than $6.7 billion. Maryland ranked 11th nationally in terms of total real estate tax burden for property owners. In 2005, Maryland ranked 13th. Maryland s median real estate tax burden is $2,774; and the national median is $1,917. Maryland is the most real estate tax dependent state in the nation. The real estate sector has shed 13,000 jobs since our previous report. This tally does not include job loss in related financial services and construction. Economic impacts are summarized in Exhibit E1. Maryland s real estate tax rank is reflected in Exhibit E2. Table E1: 2009 Real Estate Industry Impact Type of Impact by Sector Jobs Income (millions) Sales (millions) Direct Impacts Construction 153,091 8,734 22,007 Real estate 1 41,508 1,197 7,460 Finance and 16,000 1,250 3,003 insurance Total industry 210,599 11,181 32,470 Indirect & Induced Impacts Construction 125,305 5,938 16,961 Real estate 1 20, ,971 Finance and 16, ,454 insurance Total industry 162,213 7,756 22,386 Total Impacts Construction 278,396 $14,672 $38,967 Real estate 1 61,846 $2,156 $10,432 Finance and 32,570 $2,109 $5,456 insurance Total industry 372,812 $18,937 $54,855 Note. (1) Real estate includes workers and income captured by BLS and Sage s estimates of self-employed workers and their earnings. Sources: BLS, IMPLAN, Sage Policy Group, Inc. Exhibit E2: Property Values and Real Estate Taxes (RET) in 2009 State Median Value of Homes Median RET RET Rank New Jersey 348,300 $6,579 1 Connecticut 291,200 4,738 2 New Hampshire 249,700 4,636 3 New York 306,000 3,755 4 Rhode Island 267,100 3,618 5 Massachusetts 338,500 3,511 6 Illinois 202,200 3,507 7 Vermont 216,300 3,444 8 Wisconsin 170,800 3,007 9 California 384,200 2, Maryland 318,600 2, Washington 287,200 2, Alaska 232,900 2, Texas 125,800 2, Oregon 257,400 2, Pennsylvania 164,700 2, Nebraska 123,300 2, Michigan 132,200 2, Minnesota 200,400 2, District of 443,700 2, Columbia United States 185,200 1,917 Source: housingeconomics.com 4

5 Impact Remains Significant, Somewhat Diminished by the Downturn During the period 2006 to 2009, the real estate industry lost over 13,000 jobs, not including the loss in real estate finance and construction jobs over the period. When accounting for multiplier effects, the loss of more than 13,000 direct real estate jobs translates into nearly 20,000 total lost jobs in Maryland, with a loss of approximately $1 billion in associated labor income and a $2.5 billion decline in business sales. 1 The fiscal effects associated with downsized real estate activities are substantial: $279 million in unrealized government revenue, including more than $82 million in sales taxes, $88 million in property taxes and more than $37 million in income tax revenues. In other words, were the real estate industry as large today as it was three years ago, annual State and local government tax revenues would be $279 million. Exhibit E3. Reduced State and Local Revenues Associated with Job Loss in Maryland s Real Estate Industry Type of Impact Value ($mil) State sales tax $82.3 Local/state property tax $88.0 State/local income tax $37.1 Other taxes/fees including $71.4 corporate taxes Total $278.8 Source: Sage Policy Group, Inc. Federal Tax Credits Help Stem the Losses in Real Estate Activity Between April 1, 2008 and April 30, 2010, approximately 105,000 homes were sold in Maryland, according to the Maryland Association of REALTORS (MAR). More than half of those homebuyers took advantage of the federal tax credit. An estimated 20 percent of sales would not have taken place but for the tax credit. Exhibit E4. FTBC Claims April 2008 through April 2010 FTBC Claims Conclusion Number of Claims Dollar Amount Claimed April 2008 through 18,593 $126,578,147 December January 1, ,317 $203,252,189 through November 30, 2009 December 1, ,072 $80,575,592 through April 30, 2010 Total 56,982 $410,405,928 Source: U.S. Government Accountability Office Despite the ongoing and historic downturn in real estate activity, the industry continues to add substantially to State output and tax collections. In 2009, real estate related industries supported approximately 370,000 jobs in Maryland, $19 billion in associated incomes and $55 billion in local business sales. To put this into perspective, Maryland s gross state product in 2009 is estimated at $287 billion. While the industry accounts for just over one fifth of the State economy s business sales, it contributes nearly twice that amount in local government tax collections, a reflection of the already high tax burden borne by real estate at the local level. The latest available data indicate that Maryland real estate now has the 11th highest tax burden nationally, up from 13th in While federal tax credits partially countervailed the general decline in industry activity in recent years, foreclosure levels remain elevated, price stability remains elusive and many real estate-related jobs have been lost. Real estate conditions generally remain far too weak to withstand further increases in the tax burden, which would dampen not only a housing recovery but the state s broader economic recovery. 1 Business sales represent company revenues. However, the term is not to be confused with value-added, which tends to be much smaller. 5

6 Introduction Real Estate A Critical Economic Component The impact of real estate-related activity on Maryland s economy is substantial, through the jobs it creates and the multi-sourced tax revenues it generates. In June 2008, Sage Policy Group, Inc. (Sage) produced an initial assessment of the direct and secondary impacts produced by Maryland s real estate industry. Although that study analyzed economic activity during the worst downturn in housing in eight decades, we concluded that the industry nevertheless produced a significant positive effect on Maryland s overall economy. This study updates our previous work. In the intervening two years, residential and commercial real estate markets are still challenged, with low or declining transaction volumes and prices in many areas. Nevertheless, the industry continues to contribute significantly to State and local coffers, and supports thousands of jobs. Indeed, real estate related revenue remains the largest income source for virtually all Maryland counties. The industry also produces revenues directly and indirectly for the State and for Maryland s municipalities. The Industry Defined In defining each of the segments of the real estate industry, we looked at all stages of the transfer and professional maintenance of real property. The most visible professionals are the licensed real estate persons, most of whom are REALTORS, who represent buyers, sellers and landlords in residential and commercial property transactions. While probably best known, these professionals represent only the tip of an employment iceberg that includes a complex array of professionals and firms providing real estate related services. Appraisers, title companies, real estate attorneys, home inspectors, pest control companies and other ancillary service providers, as well as industry regulators and other professionals, play critical roles in linking buyers and sellers and facilitating their transactions. Property insurers, mortgage bankers and brokers and secondary market professionals also provide services essential to real estate transfers. Existing homes account for the majority of home sales. Residential properties typically dominate building construction activities, accounting for well over half the output of the construction industry. As is the case with real estate services, construction includes many types of companies and workers. These range from land developers, who assemble and prepare land for construction, to architects and engineers, who design housing and other structures, to builders, who manage the construction process. Builders in turn rely on subcontractors, including various construction trades such as electricians, HVAC technicians and roofers, as well as suppliers of materials and equipment to convert plans to homes. After properties are developed and sold, the real estate industry continues to provide critical services, including property management and maintenance. These services are crucial to the quality of life of residents and to their anticipated financial returns. Accordingly, for purposes of this study, the real estate sector is defined to include real estate, finance and insurance services and construction activities, all of which are interconnected in delivering real estate related services. Maryland s Real Estate Industry in Statistical Brief Because real estate necessarily involves so many players, it is difficult to provide a satisfyingly comprehensive statistical picture of the industry. As a general rule, we have categorized the industry to include those providing real estate, financial and insurance services, and those engaged in construction activities. The following data focus upon these as the most prominent segments of the overall real estate industry. Employment. The United States Department of Labor, Bureau of Labor Statistics (BLS) 2009 data indicate that approximately 31,000 Marylanders directly provide real estate services. This number includes REALTORS and other agents and brokers as well as property managers, landlords, appraisers, and other service providers. Of those 6

7 31,388, only 6,302 work in offices of real estate agents and brokers. According to 2010 MAR membership data, the Association had 23,011 agents and broker members. The implication is that the BLS data capture just over 6,300 workers. The other MAR members are presumed to be self-employed, and therefore not embodied in the BLS establishment survey data. This means that more than 48,000 workers in Maryland are involved in providing real estate services 31,388 in the BLS establishment data and 16,709 self-employed. Relevant statistical detail is provided in the exhibit below. Exhibit 1: 2009 Summary of Direct Real Estate Employment Totals Employment Data Categories Employment BLS-measured real estate 31,388 employment MAR membership not captured by 16,709 BLS data Total 48,097 Source: BLS, MAR, Sage BLS provides detailed annual data regarding both employment and wages. These data focus more specifically on those finance and insurance activities directly connected to the real estate industry. In 2009, the most recent data available, there were approximately 6,000 workers in real estate credit, a category that largely includes mortgage brokers/ bankers. While this includes mortgage banking businesses, it excludes other banks, savings and loans, and other sources of mortgage credit. Property insurance companies employed about 9,000 workers, while title insurance companies reported an additional 1,000 workers. Maryland construction activities employed 153,000 workers in Ninety percent were involved in building construction directly or as workers in specialty trade companies such as masonry, roofing, electrical, and plumbing contractors. The remaining 10 percent of all construction workers were involved in heavy construction such as roads and bridges. Exhibit 2 provides employment data for the real estate industry, all private-sector workers, and all workers in Maryland. Exhibit 2: Employment Related to the Real Estate Industry (in thousands) Sector Total: all sectors 2,404 2,422 2,427 2,434 2,459 2,497 2,530 2,547 2,538 2,461 Government sector: total Private sector: total 1,973 1,980 1,977 1,984 2,015 2,049 2,074 2,086 2,067 1,984 Real estate services Rental and leasing N.A services Self-employed N.A. N.A. N.A. N.A. N.A. N.A. N.A. 27 N.A. 17 agents and brokers 1 Finance & insurance N.A Real estate credit N.A Property insurance N.A Title insurance N.A Construction Construction of buildings Heavy and civil engineering construction Specialty trade contractors Note. (1) The estimates of self-employed agents and brokers are based on current MAR membership. Data for earlier periods are not available. Source: U.S. Department of Labor, Bureau of Labor Statistics 7

8 As a share of overall state employment, real estate services as reported by BLS have remained remarkably stable since According to the most recent data, 1.3 percent of all Maryland workers counted by BLS provide real estate services as a form of employment. Finance and insurance employment was 0.7 percent of the total. Construction employment s share of total employment dropped to 6.2 percent in 2009 from 7.4 percent in Exhibit 3 provides year-by-year data for the share of total employment attributable to the most significant sectors of the real estate industry. Collectively, the real estate/construction industry directly supports almost precisely 200,000 jobs, or more than 9 percent of total Maryland employment. Exhibit 3: Employment Related to the Real Estate Industry (share of total) Sector Government sector: 17.9% 18.2% 18.5% 18.5% 18.1% 18.0% 18.0% 18.1% 18.6% 19.4% total Private sector: total 82.1% 81.8% 81.5% 81.5% 81.9% 82.1% 82.0% 81.9% 81.4% 80.6% Real estate services 1.5% 1.3% 1.3% 1.4% 1.3% 1.4% 1.3% 1.3% 1.3% 1.3% Rental and leasing N.A. 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% services Self-employed agents N.A. N.A. N.A. N.A. N.A. N.A. N.A. 1.1% N.A. 1.0% and brokers Finance & insurance N.A. 0.7% 0.7% 0.8% 0.8% 0.8% 0.8% 0.8% 0.6% 0.7% Real estate credit N.A. 0.2% 0.2% 0.3% 0.4% 0.4% 0.4% 0.4% 0.2% 0.2% Property insurance N.A. 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Title insurance N.A. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Construction 6.5% 6.8% 6.8% 6.9% 7.2% 7.3% 7.4% 7.4% 7.0% 6.2% Construction of 1.5% 1.6% 1.6% 1.6% 1.7% 1.8% 1.8% 1.7% 1.6% 1.3% buildings Heavy and civil 0.6% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% engineering construction Specialty trade 4.4% 4.5% 4.5% 4.5% 4.7% 4.9% 5.0% 5.0% 4.8% 4.2% contractors Source: Sage Policy Group, Inc. Income. In 2009, real estate, finance, insurance and construction employees received more than $11.1 billion in income (see Exhibit 4 for relevant statistical detail). This figure does not include the income of self-employed agents and brokers, for whom reliable data are not available. As Exhibit 5 indicates, these employees accounted for approximately 9 percent of total state wage income, commensurate with their proportion of the workforce. Were the incomes of self-employed agents and brokers included, it is likely that the data would reveal that real estate-related professionals and technicians earn more on average than their counterparts in the balance of the economy. 8

9 Exhibit 4: Total Wages (millions of current dollars) Sector Total: all 87,640 92,645 95,590 99, , , , , , ,480 sectors Government 17,540 19,290 20,704 21,362 22,108 23,162 24,419 26,055 27,420 28,646 sector: total Private sector: 70,100 73,354 74,886 77,678 82,609 87,646 92,372 96,831 98,286 95,834 total Real estate 1,278 1,198 1,280 1,377 1,562 1,690 1,794 1,855 1,803 1,658 services Rental and N.A leasing services Self-employed N.A. N.A. N.A. N.A. N.A. N.A. 1,344 N.A. N.A. N.A. agents and brokers Finance & N.A ,150 1,431 1,469 1,624 1,607 1,546 1,333 1,333 insurance Real estate N.A credit Property N.A insurance Title N.A insurance Construction 6,006 6,655 6,825 7,080 7,750 8,398 9,076 9,509 9,352 8,198 Construction 1,468 1,630 1,770 1,898 2,118 2,307 2,482 2,484 2,345 1,926 of buildings Heavy and civil engineering construction Specialty 4,017 4,348 4,394 4,475 4,885 5,288 5,743 6,108 6,081 5,419 trade contractors Source: U.S. Department of Labor, Bureau of Labor Statistics 9

10 Exhibit 5: Total Wages (share of total) Sector Government sector: 20.0% 20.8% 21.7% 21.6% 21.1% 20.9% 20.9% 21.2% 21.8% 23.0% total Private sector: total 80.0% 79.2% 78.3% 78.4% 78.9% 79.1% 79.1% 78.8% 78.2% 77.0% Real estate services 1.5% 1.3% 1.3% 1.4% 1.5% 1.5% 1.5% 1.5% 1.4% 1.3% Rental and leasing N.A. 36.1% 35.5% 34.5% 36.0% 32.1% 30.8% 32.8% 33.1% 33.1% services Self-employed agents N.A. N.A. N.A. N.A. N.A. N.A. 1.2% N.A. N.A. N.A. and brokers Finance & insurance N.A. 1.0% 1.2% 1.4% 1.4% 1.5% 1.4% 1.3% 1.1% 1.1% Real estate credit N.A. 0.4% 0.6% 0.8% 0.8% 0.8% 0.7% 0.6% 0.4% 0.5% Property insurance N.A. 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% Title insurance N.A. 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% Construction 6.9% 7.2% 7.1% 7.1% 7.4% 7.6% 7.8% 7.7% 7.4% 6.6% Construction of 1.7% 1.8% 1.9% 1.9% 2.0% 2.1% 2.1% 2.0% 1.9% 1.5% buildings Heavy and civil 0.6% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% engineering construction Specialty trade 4.6% 4.7% 4.6% 4.5% 4.7% 4.8% 4.9% 5.0% 4.8% 4.4% contractors Source: Sage Policy Group, Inc. Gross State Product. As defined by the U.S. Department of Commerce, gross state product (GSP) is a measure of the value added by economic activity. For example, when a builder purchases lumber and other materials to build a house, the builder uses skilled labor and expertise to convert those materials into a finished home. The difference between the cost of lumber and other construction materials/inputs to the construction process and the price of a finished home is considered the builder s value added. Real estate services contributed $43.9 billion in value added to Maryland s gross state product in 2008, the most recent actual data available. This is an increase of 12.5 percent (not adjusted for inflation) from the $39.0 billion that real estate services contributed to gross state product in 2006, which we noted in our last report. Construction contributed $14.8 billion, a slight increase from GSP contributions for financial activities, a significantly related sector to real estate, were not available. (Exhibit 6 provides related statistical detail for gross state product data.) As a result, to the extent that real estate activities are embedded within those sectors, the gross state product figures cited above do not fully reflect the totality of real estate activities in Maryland. Exhibit 6: Gross State Product (millions of current dollars) Sector Total: 182, , , , , , , , , ,797 all sectors Private sector: 151, , , , , , , , , ,364 total Real estate 24,946 27,060 28,780 30,792 33,602 36,812 39,016 41,937 43,891 N.A. Construction 10,474 11,605 11,963 12,572 13,550 14,609 14,990 15,077 14,817 14,143 Source: U.S. Department of Commerce, Bureau of Economic Analysis 10

11 In terms of its relative contribution, the value added by real estate services to Maryland s GSP in 2008 was almost 21 percent of the total. Remarkably, this percentage has been expanding over time, despite the slowdown in the real estate industry. This may be due to the increasing emphasis on real estate transactions in recent years, as professionals have dealt with elevated levels of mortgage defaults and the need to transfer or dispose of property as efficiently as possible. The increasing reliance upon real estate professionals has more than offset the diminished role that the construction industry has played in overall economic activity in recent years due to reduced demand for construction services amid high inventories of unsold properties, high commercial vacancy rates and tight credit. Exhibit 7: Gross State Product (share of total) Sector Private sector: 82.92% 83.08% 82.73% 82.75% 82.74% 82.97% 82.85% 82.73% 82.38% 81.72% total RE services % 19.76% 19.71% 20.01% 20.31% 20.72% 20.68% 20.85% 20.86% N.A. construction Real estate 13.64% 13.83% 13.93% 14.21% 14.47% 14.84% 14.94% 15.34% 15.59% N.A. Construction 5.72% 5.93% 5.79% 5.80% 5.84% 5.89% 5.74% 5.51% 5.26% 4.93% Source: Sage Policy Group, Inc. The Real Estate Industry s Economic and Impacts Economic Impacts In addition to the jobs, income, and business sales and revenue supported directly by Maryland s real estate industry, there are other jobs that are supported through the industry s multiplier effects. These may be the generic type associated with any business operation the purchase of office supplies for a REALTOR or title company s office or those more specifically related to the real estate transaction, such as roof replacement or a termite inspection. These transactions in turn allow for the purchase of yet other goods and services, from utilities and accounting services to airline tickets and fleet repair services. This chain of suppliers to the real estate/construction industry is viewed by economic impact modelers as the indirect economic influence of real estate associated activities. Moreover, workers in the real estate industry and those in the broader supply chain spend a substantial proportion of their wages and income in Maryland on a host of consumer goods and services. The economic impacts associated with household expenditures attributable to these activities are known as the real estate industry s induced economic impacts. One important and predictable phenomenon that has occurred since our prior report is smaller multiplier impacts, as businesses are more likely to hold onto a fraction of their revenue rather than expend it. In common parlance, cash is king in an economic environment such as the one that has prevailed in recent years, which somewhat suppresses the multiplier effect relative to more normal times. The multipliers reflected in Exhibit 8 were used to derive total economic impacts for this updated report. Exhibit 8: Multipliers Used to Derive Economic Impacts Sector Jobs Income Sales Construction Real estate Finance and insurance Multiplier: (Direct Effect + Indirect Effect + Induced Effect) / Direct Effect Source: IMPLAN 11

12 According to IMPLAN, the modeling software that has become the industry standard economic impact assessment tool, the value of sales made by the real estate industry in Maryland in 2009 was $34 billion, well below the estimate for 2006, when industry activity was still near its all-time peak. 1 Exhibit 9 includes additional statistical detail regarding the real estate industry s economic contributions. Exhibit 9: Type of Impact by Sector Type of Impact by Sector Jobs Income (millions) Sales (millions) Direct Impacts Construction 153,091 8,734 22,007 Real estate 1 48,079 1,419 8,857 Finance and insurance 16,000 1,250 3,003 Total industry 217,170 11,403 33,867 Indirect & Induced Impacts Construction 125,305 5,938 16,961 Real estate 1 23,558 1,569 3,510 Finance and insurance 16, ,454 Total industry 165,433 8,366 22,925 Total Impacts Construction 278,396 $14,672 $38,967 Real estate 1 71,637 $2,988 $12,368 Finance and insurance 32,570 $2,109 $5,456 Total industry 382,603 $19,769 $56,791 Note. (1) Real estate includes workers and income captured by U.S. Department of Labor, Bureau of Labor Statistics and Sage s estimates of selfemployed workers and their earnings. Sources: U.S Department of Labor, Bureau of Labor Statistics, IMPLAN, Sage Policy Group, Inc. Impacts The Maryland Department of Assessment and Taxation estimates the value of all real property in Maryland and publishes annual summary statistics. The most current assessment, for the fiscal year that began July 1, 2010, estimates the total value of Maryland real estate at $731.4 billion. (Over the past five years, the total assessable base of real property in the state has risen over 60 percent, from $451.8 billion in the fiscal year beginning July As shown in Exhibit 10, the annual change has been decelerating since July 2008, with a slight decrease in assessable based registered during the year ending July Exhibit 10: Maryland Assessable Base Period Value Annual Change (billions of current dollars) July July % July % July % July % July % July % July % Average 10.9% Source: Maryland Department of Assessment and Taxation, Sage Policy Group, Inc. 1 IMPLAN is the industry standard software and data product for conducting economic impact assessments and can generate a statistical picture of Maryland s economy. IMPLAN is a product of the Minnesota IMPLAN Group, Inc. 12

13 The assessable base reflects both changes in the individual value of real estate properties and changes in the total number of properties (i.e., due to new construction). Exhibit 11, which presents data on average and median prices of housing sold in Maryland since 1999, indicates that most of the long term increase in the assessable base can be attributed to the increased value of individual properties. The last three years, however, are associated with difficult times for the real estate industry. While units sold bounced back in 2009, thanks largely to temporarily available federal tax credits for first-time homebuyers, average home sales and median sales prices in 2009 continued to drop. Exhibit 11: Sales and Prices of Maryland Homes Period Units Sold Average Price Median Price Number Change Number Change Number Change ,814 $162,018 $131, , % $182, % $144, % , % $184, % $152, % , % $210, % $173, % , % $241, % $200, % , % $286, % $241, % , % $341, % $292, % , % $357, % $307, % , % $362, % $307, % , % $341, % $285, % , % $301, % $256, % Average 74, % 7.4% Sources: Maryland Association of REALTORS, Sage Real Estate Taxes as a Source of Local Government Finance In Maryland, some form of real estate taxes including real property taxes, transfer taxes, and recordation taxes are levied by the State, all counties, Baltimore City, and many municipalities. The most significant real estate taxes in terms of cost to the consumer and value to government finance are those levied by the twenty three counties and Baltimore City. Indeed, taxes on real estate are the primary source of local revenue. Real Property Tax. In the previous report, we noted that counties had been decreasing their real property tax rates in earlier years, most likely because of increasing property values. Since that time, property values have been dropping or remaining flat. (Note that declining values have not necessarily resulted in lower tax bills, due to the Homestead Act, discussed below). Though real property tax rates have not risen substantially thus far, weak local government revenue growth in conjunction with potential reductions in grant aid to local governments from higher levels of government suggest that the real estate industry is susceptible to greater local taxation during the years ahead. This could further exacerbate the deflationary cycle that has gripped residential real estate in much of Maryland, destroying wealth, jobs and tax base in the process. 13

14 Exhibit 12: Real Property Tax Rates in Maryland, FY2004-FY2010 Jurisdiction Change FY04 FY10 CAGR* FY04- FY10 Allegany % -0.3% Anne Arundel % -1.1% Baltimore City % -0.4% Baltimore County % -0.1% Calvert % 0.0% Caroline % -2.2% Carroll % 0.0% Cecil % -0.5% Charles % 0.3% Dorchester % -0.9% Frederick % -1.6% Garrett % -0.9% Harford % -0.2% Howard % -0.7% Kent % -1.0% Montgomery % -4.4% Prince George s % 0.0% Queen Anne s % -5.8% St. Mary s % -1.4% Somerset % -1.8% Talbot % -3.7% Washington % 0.0% Wicomico % -4.1% Worcester % -1.0% State of Maryland % -4.0% Average: state -6.6% -1.1% and counties Average counties -6.2% -1.2% only Note. *CAGR = compound annual growth rate or the average change per year. Source: Maryland Department of Assessment and Taxation, Sage Policy Group, Inc. Transfer tax. The sale of real property in Maryland is also subject to transfer taxes that are imposed by the State and most, though not all, counties. While real property taxes are assessed annually based upon the value of the property, transfer taxes are transaction based: one-time tax events levied when a property changes hands. Unlike real property tax rates, which have generally declined over time, transfer tax rates, with one exception, have held steady in recent years. The exception, Allegany County, increased its transfer tax rate sharply, by 150 percent in FY2006. Seven Maryland counties impose no transfer taxes. Exhibit 13 lists current and recent transfer tax rates for all counties, Baltimore City, and the State of Maryland. 14

15 Exhibit 13: Property Transfer Tax Rates in Maryland, FY2004-FY2010 Jurisdiction Change FY04- FY10 CAGR* FY04- FY10 Allegany 0.20% 0.20% 0.50% 0.50% 0.50% 0.50% 0.50% 150.0% 16.5% Anne Arundel 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.0% 0.0% Baltimore City 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 0.0% 0.0% Baltimore County 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 0.0% 0.0% Calvert 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N.A. N.A. Caroline 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.0% 0.0% Carroll 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N.A. N.A. Cecil 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N.A. N.A. Charles 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N.A. N.A. Dorchester 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.0% 0.0% Frederick 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N.A. N.A. Garrett 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.0% 0.0% Harford 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.0% 0.0% Howard 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.0% 0.0% Kent 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.0% 0.0% Montgomery 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.0% 0.0% Prince George s 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 0.0% 0.0% Queen Anne s 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.0% 0.0% St. Mary s 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.0% 0.0% Somerset 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N.A. N.A. Talbot 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.0% 0.0% Washington 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.0% 0.0% Wicomico 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N.A. N.A. Worcester 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.0% 0.0% State of Maryland 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.0% 0.0% Note. * CAGR = compound annual growth rate or the average change per year. Source: Maryland Department of Assessment and Taxation, Sage Policy Group, Inc. Recordation Tax. The recordation tax is imposed when a property is sold or a mortgage is refinanced. Given declining mortgage rates in recent years, the recordation tax (also sometimes referred to as documentary stamps) has been a source of significant local government revenue growth for much of the current decade, as many homeowners have refinanced, sometimes more than once, to take advantage of record low interest rates. All counties and Baltimore City levy a recordation tax (but not the State), traditionally listed as value per $500 of transaction. For example, the current rate of $3.25 for Allegany County equates to 0.65 percent of transaction value, a rate higher than the County s transfer tax rate of 0.50 percent. In most counties, recordation taxes have remained unchanged in recent years. Four jurisdictions, however, have raised recordation tax rates since FY2004 Allegany, Cecil, and Frederick counties and Baltimore City. Current and recent rates are shown in Exhibit

16 Exhibit 14: Recordation Tax Rates in Maryland per $500 of Transaction Value, FY2004-FY2010 Jurisdiction Change FY04- FY10 CAGR* FY04- FY10 Allegany % 1.3% Anne Arundel % 0.0% Baltimore City % 10.5% Baltimore County % 0.0% Calvert % 0.0% Caroline % 0.0% Carroll % 0.0% Cecil % 3.7% Charles % 0.0% Dorchester % 0.0% Frederick % 3.1% Garrett % 0.0% Harford % 0.0% Howard % 0.0% Kent % 0.0% Montgomery % 0.0% Prince George s % 2.2% Queen Anne s % 7.0% St. Mary s % 0.0% Somerset % 0.0% Talbot % 0.0% Washington % 0.0% Wicomico % 0.0% Worcester % 0.0% Note.* CAGR = compound annual growth rate or the average change per year. Source: Maryland Department of Assessment and Taxation, Sage Policy Group, Inc. Real Estate Tax Revenue. The share of property tax revenues as a portion of total county revenues in FY 2009 and FY 2010 rose compared to the previous two years. In FY 2007 and 2008, property tax revenues accounted for about 45 percent of total local revenues. In FY 2009 and FY 2010, property taxes accounted for 46 percent and 49 percent of local revenues, respectively. 16

17 Exhibit 15: Type of Revenue Type of Revenue Value Share of Total Value Share of Total Total property-related taxes 2 $5, % $5, % County property tax $4, % $5, % Transfer tax $ % $ % Recordation tax $ % $ % County income tax $4, % $4, % Other county revenue $3, % $3, % Total county revenue $12, % $13, % Type of Revenue Value Share of Total Value Share of Total Total property-related taxes $6, % $6, % County property tax $5, % $6, % Transfer tax $ % $ % Recordation tax $ % $ % County income tax $4, % $3, % Other county revenue $3, % $3, % Total county revenue $13, % $13, % Note: (1) Amounts represent the average for all Maryland jurisdictions excluding Worcester County. Comparative data from that jurisdiction were not readily available. Note: (2) Total property tax values include real property, transfer and recordation taxes. Note: Totals may not add up due to rounding. Sources: Maryland county government web sites, Sage Policy Group, Inc. FY2010 revenues are estimated by local jurisdictions. It should also be stressed that some municipalities in Maryland impose their own property taxes in addition to the county taxes listed in Exhibit 12. Additionally, Maryland is one of only a handful of states that taxes real property. Thus, Exhibit 15 reports only the local real estate tax burden for Baltimore County and City Residents. In the most recent series of real estate property tax assessments, 739,764 property owners received notices regarding the assessed values of their homes. Based on these most recent assessments, residential property assessments experienced a 22 percent decrease in value compared with three years prior. In fact, approximately 95 percent of assessed properties declined in value, based on the last round of real property tax assessments. The exhibit below reflects changes in values by Maryland jurisdiction. 17

18 Exhibit 16: Residential Full Cash Value Change for Reassessment Group 2, Jurisdiction Base (1/1/2008) Reassessment (1/1/2011) Difference % Change Garrett 2,550,124,590 2,484,566,100-65,558, % Allegany 1,044,766, ,233,900-52,532, % Kent 1,388,158,320 1,211,874, ,283, % Baltimore City 8,283,716,140 7,158,404,600-1,125,311, % Talbot 3,415,605,110 2,890,330, ,275, % St. Mary's 5,089,081,790 4,219,356, ,725, % Worcester 2,654,807,790 2,199,238, ,569, % Harford 9,909,894,420 8,196,118,600-1,713,775, % Montgomery 52,387,038,990 43,296,694,500-9,090,344, % Baltimore City 30,472,445,720 24,882,708,000-5,589,737, % Queen Anne's 1,589,393,800 1,274,835, ,558, % Carroll 6,557,484,200 5,235,393,700-1,322,090, % Somerset 473,079, ,539,400-95,539, % Caroline 1,177,157, ,538, ,619, % Calvert 4,430,607,700 3,462,777, ,829, % Howard 15,149,380,970 11,722,088,700-3,427,292, % Cecil 3,063,463,730 2,367,096, ,367, % Anne Arundel 22,577,347,220 17,373,987,600-5,203,359, % Washington 3,368,015,440 2,560,420, ,595, % Wicomico 2,222,906,070 1,656,702, ,203, % Frederick 9,794,711,990 7,237,765,600-2,556,946, % Dorchester 1,135,054, ,771, ,283, % Charles 4,936,500,260 3,561,297,100-1,375,203, % Prince George's 37,135,650,270 24,156,042,000-12,979,608, % Statewide 230,806,392, ,264,781,830-50,541,611, % Source: Maryland Department of Assessments and Taxation While decreases in assessed value of this magnitude would intuitively correspond to declining tax burdens, this has not necessarily been the case in Maryland. Under the Homestead Tax Credit, property taxes statewide cannot increase by more than 10 percent per year. Individual jurisdictions may choose even lower limits on jurisdictional tax increases, and many do. For example, Talbot County and Queen Anne s County have placed their assessment cap at 0 percent (no increases in property taxes as long as the property owner owns the home) while Baltimore City and Baltimore County have placed their property tax cap at 4 percent. Because tax increases were restrained in years past by these caps, declines in assessed values can still be accompanied by increased property tax burdens. This is of course damaging to household finances, since their cash flow burdens are still expanding even as a principal source of wealth declines. 18

19 Exhibit 17: Average Assessment Increase, Properties Assessed Every Three Years, % 56% 50 47% 40 34% 36% 33% % 2% 0% 2% 16% 10% 4% 4% 3% 4% 6% 26% 1%-16%-18% Source: Maryland Department of Assessments and Taxation The Maryland Real Estate Tax Burden Maryland is not the only state with substantial real estate taxes. It is, however, one of the states with the most aggressive real estate tax structures. As Exhibit 18 indicates, Maryland ranked 11th in the nation in terms of the median dollar value of real estate taxes in 2009, or approximately 44 percent higher than was typical for the nation at that time. In 2009, the median value of real estate taxes for Maryland was $2,774, while the median value for the country was $1,917. While Maryland is among the highest ranked states in terms of property taxes, when property transfer and recordation taxes are considered, the State ranks even higher in terms of overall tax burdens. The National Council of State Legislatures (NCSL) collects data on real estate transfer taxes imposed both by state and local governments. These taxes go by different names, but generally can be described as taxes imposed on the value of deeds (e.g., transfer taxes) and those imposed on mortgages. The latter include Maryland county recordation taxes and similar taxes in other states. Based on NCSL data and current Maryland tax rates, the State of Maryland ranks among the top ten state governments in terms of reliance upon propertyrelated tax revenues. In 2009, Maryland relied on gathering 4.6 percent of tax revenues from propertyrelated taxes. This is compared to an average of 1.8 percent nationwide, ranking Maryland tenth among Exhibit 18: Property Values and Real Estate Taxes (RET) in 2009 State Median Value of Homes Median RET RET Rank New Jersey 348,300 $6,579 1 Connecticut 291,200 4,738 2 New Hampshire 249,700 4,636 3 New York 306,000 3,755 4 Rhode Island 267,100 3,618 5 Massachusetts 338,500 3,511 6 Illinois 202,200 3,507 7 Vermont 216,300 3,444 8 Wisconsin 170,800 3,007 9 California 384,200 2, Maryland 318,600 2, Washington 287,200 2, Alaska 232,900 2, Texas 125,800 2, Oregon 257,400 2, Pennsylvania 164,700 2, Nebraska 123,300 2, Michigan 132,200 2, Minnesota 200,400 2, District of Columbia 443,700 2, United States 185,200 1,917 Source: housingeconomics.com 19

20 all states. Other Mid-Atlantic states are far less real estate tax dependent, including Virginia (0.2% share of revenues), Pennsylvania (0.2%), and West Virginia (0.1%). Delaware does not assess state property taxes. Please see Exhibit 19 for relevant statistical detail. Exhibit 19: State Reliance on Major Tax Sources, Ranked by Reliance on Property Taxes 2009 State General Sales and Gross Receipts Individual Income Selective Sales Taxes Corporation Net Income Other Taxes Property Taxes 1. Vermont 12.8% 21.3% 20.0% 3.5% 6.1% 36.4% 2. New Hampshire X 4.6% 39.0% 23.2% 14.7% 18.5% 3. Washington 61.2% X 18.7% X 9.2% 10.9% 4. Wyoming 35.8% X 4.7% X 49.1% 10.4% 5. Michigan 40.2% 25.6% 15.0% 2.8% 6.5% 9.9% 6. Arkansas 37.0% 30.0% 13.2% 4.6% 5.3% 9.8% 7. Montana X 34.4% 22.0% 6.8% 27.1% 9.8% 8. Arizona 50.4% 17.4% 15.2% 5.3% 4.2% 7.4% 9. Kentucky 29.3% 34.0% 18.5% 4.0% 9.0% 5.3% 10. Maryland 25.5% 42.8% 15.1% 5.0% 7.1% 4.6% United States 31.9% 34.4% 16.0% 5.6% 10.3% 1.8% Source: National Conference of State Legislatures Unrealized Revenues from Lost Employment In Sage s previous study, which focused upon 2006 data, we indicated that the real estate industry accounted for 61,234 jobs statewide, which includes both Bureau of Labor Statistics-tracked employees and independent contractors with MAR membership (this figure does not includes jobs in finance or in construction). In 2009, direct real estate employment shrank to 48,079 jobs, translating into a loss of 13,155 over the course of 3 years. Based on current multipliers, the downturn in real estate employment translates into the loss of nearly 20,000 jobs in Maryland. The decline in industry performance has also resulted in the loss of approximately $279 million in lost State and local government tax revenue. In other words, were the real estate industry as large today as it was three years ago, State and local government tax collection would be $279 million higher per annum. Exhibit 20: Reduced State and Local Revenues Associated with Job Loss in Maryland s Real Estate Industry (not inclusive of lost construction and finance activity) Type of Impact Value ($mil) State sales tax $82.3 Local/state property tax $88.0 State/local Income tax $37.1 Other taxes/fees $71.4 Total $278.8 Source: Sage Policy Group, Inc. 20

21 Impact of First-Time Home Buyer Tax Credits Without the assistance of federal tax credits, real estate activity would have been even more suppressed. Since the tax credit s inception in 2008, Congress has passed three different versions to help stimulate the housing market: The Housing Act version created a refundable tax credit, paid even if there is no tax liability or if the credit exceeds any tax due, equal to 10 percent of the purchase price of a home, up to a maximum of $7,500. Taxpayers must repay the credit over 15 years beginning in the 2011 filing season. The Recovery Act version provided taxpayers a refundable tax credit equal to 10 percent of the purchase price of a home and increased the maximum credit to $8,000, adding a waiver of the repayment provision for purchases in However, taxpayers are still required to repay the credit if the home is resold or ceases to be the taxpayer s primary residence within 3 years. The Assistance Act version extended the time frame in which homebuyers could claim the Recovery Act version of the credit from November 30, 2009 to April 30, It included several modifications, such as allowing certain long-term homeowners purchasing homes to claim a tax credit up to $6,500. While the final version of the credit was extended through September 30, 2010, Sage is able to access data only through the April 30, 2010 deadline for the State of Maryland. As of that date, 56,982 tax credits had been claimed by Maryland homebuyers. Between April 1, 2008 and April 30, 2010, about 105,000 homes were sold in Maryland, according to MAR. More than half of those homebuyers took advantage of the federal tax credit. It is estimated that 20 percent of sales would not have taken place without the tax credit. Exhibit 21: First Time Homebuyer Tax Credit Claims April 2008 through April 2010 FTBC Claims Number of Claims Dollar Amount Claimed April 2008 through 18,593 $126,578,147 December January 1, 2009 through 27,317 $203,252,189 November 30, 2009 December 1, ,072 $80,575,592 through April 30, 2010 Total 56,982 $410,405,928 Source: United States General Accountability Office 21