A Comparison Study of Real Estate Tax Closing Costs in Maryland, Northern Virginia, and Washington, D.C.

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1 A Comparison Study of Real Estate Tax Closing Costs in Maryland, Northern Virginia, and Washington, D.C. For the by Frederick E. Flick, Ph.D. Kristine Weilbacker Hanson, M.U.R.P. April 2007

2 EXECUTIVE SUMMARY High closing costs increase a buyer s cash requirements at settlement, already a significant barrier to homeownership. In Maryland, and particularly the Northern Virginia suburbs, and the Baltimore-Washington D.C. metropolitan area, taxes imposed upon the transfer of real property are particularly high. These costs can have an adverse affect upon affordability for buyers, who may be limited in their choices because of the cash requirements imposed by taxes. Sellers can also be affected, as a smaller pool of eligible buyers can make it more difficult to market a property quickly and efficiently. This study compares the real estate related tax burden at closing in each county in Maryland, (including the City of Baltimore) with that of nearby Virginia counties/cities and the District of Columbia for the years 2000 to The housing market in all these areas during this period remained consistently strong, with increasing sales and prices each year, making cost comparisons more consistent. Real estate market data were used to generate estimates for the major definable components of recordation taxes and fees, transfer taxes, and customary escrows for property taxes. These costs are compared across the counties/cities and relevant state areas. There are three main kinds of taxes imposed on real property at closing: recordation fees; transfer taxes; and property taxes, which are collected for escrows against future annual tax bills. Although some jurisdictions have variations, these encompass the greatest part of the tax bill buyers must pay. Washington, D.C. levies three real estate taxes transfer tax, recordation tax and property tax. In Virginia, except for nominal county fees, there are four significant taxes state and local recordation taxes, the state grantor tax, and local property taxes. Maryland has five significant taxes, because in addition to local recordation, property and transfer taxes, the state imposes a transfer tax and a property tax. This layering of taxes significantly increases the closing cost burden for Maryland buyers. For example, Maryland buyers (and sellers) may pay from an average of almost 0.4 percent to as much as 1.2 percent to 1.8 percent in transfer taxes; the latter figures are higher than Washington, D.C. s transfer tax rate, and are 10 times the Virginia grantor tax rate. Because almost all taxes are assessed based on the value of a property, the tax rate and the property value must be considered in determining the relative burden of taxes paid at closing. During the study period, the highest property values tended to be in Virginia. Additionally, although a six-month property tax escrow is generally charged in Washington, D.C. and Northern Virginia, an eight-month escrow is more typical in Maryland. The total estimated tax-related closing cost amounts for Maryland, Washington, D.C. and the Maryland and Virginia metropolitan areas include all recordation, transfer, and property tax escrows for local and state levels. taxes paid in Maryland at closing were also 2

3 calculated for both six and eight-month tax escrows. The amounts computed for Washington, D.C. and Virginia were based on six-month escrows. In 2005, the total taxrelated closing costs for an average priced home in Washington, D.C. was $16,219, compared to $6,562 in 2000 an increase of over 145 percent. In Virginia, while the total closing cost for an average priced home was only $5,960, this was a significant 147 percent increase from 2000, when the tax bill at closing for the average priced home was $2,410. In 2005, the average priced Maryland home generated tax related closing costs of $8,900 for six-month escrow and $9,500 for an eightmonth escrow. This was an increase of 112 and 133 percent respectively since For the average priced home in the Maryland metropolitan area, total closing costs in 2005 were $9,001 for a six-month escrow and $9,645 for an eight-month escrow. The increase in the taxes due at closing during the 2000 to 2005 period for the Maryland metropolitan area is greater than that statewide, totaling 127 percent for a six-month escrow and 112 percent for an eight-month escrow. Calculating the effective closing cost tax rate the ratio of total taxes paid at closing to the price of the home, is a more effective way to compare the relative burdens in each jurisdiction. In Washington, D.C., the effective closing cost tax rate is over 3 percent. In Maryland, the overall burden ranges from just under 2.6 percent to slightly over 2.8 percent. The metropolitan area Virginia counties and independent cities have the lowest rates, averaging only 1.23 percent less than half the rates of the other jurisdictions. Although Washington, D.C. clearly has the highest burden, Maryland has a much higher closing cost structure than Virginia, with more individual taxes and multiple layers of taxation. This additional cash required at the settlement table can adversely affect a homebuyer s ability to purchase property. Over the past decade there has been significant growth in the county and city economies of all these areas. Real estate sales and prices have risen substantially over this period across all local areas. However, over the period studied, the counties of Virginia have seen the most rapid rates of growth in their economies, jobs, incomes and real estate markets. Although growth in the economies of Maryland has been somewhat more stable and predictable, the real estate markets have not seen quite as much sales and price growth as in Virginia over the study period. This growth likely accounts for the more robust unit sales and prices in Virginia and the ability of local cities and counties to maintain lower local property tax rates. Maryland clearly has a much higher closing cost structure than Virginia, with more individual taxes and multiple layers of taxation. These undoubtedly can affect a homebuyer s ability to purchase property. Please visit for the full Closing Cost Study. 3

4 Table of Contents I. Introduction... 5 Analysis Methodology... 5 II. A Look at the Demographic, Economic and Housing Data... 5 Population Growth... 6 Jobs, Unemployment Rates and Incomes... 6 Per Capita Personal Income... 7 Housing Market Indicators... 8 III. Area State and Local Tax Rates... 8 Deed Recordation Taxes and Fees... 9 Transfer Tax Rates... 9 IV. Recordation and Transfer Tax Estimates Recordation Taxes Virginia State Recordation Local Transfer Taxes Maryland State Transfer Tax The Virginia Grantor Tax Estimates of Recordation and Transfer Taxes V. Property Taxes Local Property Tax Estimates Maryland State Property Tax VI. Tax-Related Closing Costs Closing Cost Tax Amount Estimates Effective Cost Tax Rates VII. Estimating Lender Fee Components of Closing Costs VIII. Study Conclusions References Appendix List of Charts Chart 1: Population by States and Areas... 6 Chart 2: Jobs by States and Areas... 7 Chart 3: Unemployment Rate by States and Areas... 7 Chart 4: Average Wage Per Job by States and Areas... 7 Chart 5: Per Capita Personal Income by States and Areas... 7 Chart 6: Personal Income Average Annual Growth: List of Tables Table 1(a): Area Housing Unit Sales... 8 Table 1(b): Area Housing Average and Median s... 8 Table 2: Real Estate Tax Types and Taxing Authority Table 3: Local Average and Median Recordation Taxes Table 4: Virginia Recordation Taxes Table 5: Average and Median Local Transfer Taxes Table 6: Maryland State Transfer Taxes Table 7: Virginia Grantor s Tax Table 8: Recordation and Transfer Taxes Table 9: Local Property Tax Escrows Table 10: Maryland State Property Taxes Table 11: Tax-Related Closing Costs Table 12: Effective Closing Cost Tax Rates

5 Introduction The past few years have set records for residential sales in the Baltimore Washington D.C. metropolitan area. Although the principal factors typically cited as stimulants to this robust market are strong demand and low interest rates, there is another factor that can affect an area s home sales and prices: the amount of cash buyers must have at the settlement table. High closing costs increase the buyer s cash requirements at settlement, already a significant barrier to homeownership. This is turn may limit homeowners choice to certain low cost areas or possibly to remaining renters. Closing costs may also affect sellers. When buyers face substantial closing costs, sellers can find it more difficult to market a property quickly and efficiently. This study measures the amounts and effective rates for state and local residential real estate taxes, fees, and escrow included in closing costs. We compare Maryland state and county (including the City of Baltimore) taxes paid at closing with those in nearby Virginia counties and cities and Washington, D.C. for the years 2000 to This period was chosen because the housing market in all these areas remained consistently strong, with increasing sales and prices each year in all jurisdictions, making cost comparisons more consistent. Real estate market data are used to generate estimates for the major definable components of recordation taxes and fees, transfer taxes, and customary escrows for property taxes. These costs are compared across the counties/cities and relevant state areas. In a final section of the study we also present some recent figures for financial closing costs. Analysis Methodology Our analysis uses historical data, primarily focusing on counties in Maryland and Virginia. The counties in the analysis encompass all those in the U.S. Office of Management and Budget definition of the Baltimore Washington, D.C. Consolidated Metropolitan Statistical Area (CMSA) ( the metropolitan area ). These include the District of Columbia; in Maryland, the counties of Anne Arundel, the City of Baltimore, Baltimore County, Calvert, Caroline, Carroll, Cecil, Charles, Dorchester, Frederick, Harford, Howard, Kent, Montgomery, Prince George s, Queen Anne s, St. Mary s, Talbot, and Washington ( metropolitan Maryland ). Virginia counties and cities include Alexandria City, Arlington, Caroline, Clarke, Culpeper, Fairfax City, Fairfax County, Falls Church City, Fauquier, Fredericksburg City, King George, Loudoun, Manassas City, Manassas Park City, Prince William, Spotsylvania, Stafford, and Warren ( Northern Virginia or metropolitan Virginia ). Additionally, to provide complete information for all of Maryland, we included data for the far western counties of Maryland, and those on the southern most part of the eastern shore/delmarva peninsula. These are Garrett, Allegany, Wicomico, Somerset and Worcester counties. Because the period under study involves record growth in housing demand and prices, we have included a brief examination of the underlying factors in the robust housing market. These factors, which are discussed in Section II, include population and job growth, unemployment rates and income, as well as various housing market indicators. Detailed calendar year data from 2000 to 2005 for these county markets are provided in the Appendix tables to the report. Tables 1(a) to (d) provide housing market information by county; Tables 2, 3 and 4 provide information on the recordation and transfer tax rates; Table 5 provides annual local property tax rates; Tables 6, 7, 8, 9 and 10 present annual estimates for the recordation and transfer taxes; Tables 10 and 11 show the estimates for the total recordation and transfer taxes; Tables 12 and 13 present estimates of state and local annual property taxes; and, Table 14(a), (b) and (c) contain estimates of the total closing costs along with the customary escrows for the annual property taxes. In the text, references are noted in brackets, [ ]. A Look at the Demographic, Economic and Housing Data The Baltimore - Washington, D.C. CMSA area is a national and international magnet for employment. As a result, those seeking work in the area may find employment not just in the urban centers of Washington, D.C. and Baltimore, but also in many of the surrounding counties. Indeed, households with more than one family member in the work force may commute to their places of employment in different directions around the metropolitan area. 5

6 Despite significant differences across metropolitan area counties, Maryland, Washington, D.C. and Virginia communities tend to offer similar packages of amenities such as parks, recreation, schools and other social services. Thus, a typical home buying individual, family, or group of individuals may be able to find properties that offer similar housing characteristics and amenities within various price ranges and locations. The Baltimore-Washington, D.C. CMSA area is the fourth largest market area (by population and labor force measures) in the nation. Per capita income and education level of residents are among the highest in the nation. The area is the seat of the federal government and related service spending, which provide a stable and secure economic environment for many families. This has allowed the development of vibrant, growing real estate markets and, for the most part, the transportation infrastructure to create a consolidated economic area. This section presents some basic data for Maryland, Virginia and the Baltimore-Washington, D.C. metropolitan region and selected states and regional area concerning population, the labor market, and incomes. Below, three sets of data are shown: 1. Annual population and population growth rates; 2. Local unemployment and job statistics; and 3. Personal income and per capita personal income. Population Growth Demographics such as population growth, household formation rates and age of the head of the household are proven factors in determining the demand for housing. Graph 1 presents data compiled by the U.S. Department of Commerce s Bureau of Economic Analysis (BEA) for 2000 through 2004, the most recent year available [1]. The regional information encompasses the Baltimore-Washington, D.C. CMSA ( metropolitan area ). Both Maryland and Virginia recorded gains in population from 2000 to 2004, 4.7 percent and 5.3 percent respectively. The data for the metropolitan area, which also includes West Virginia and therefore has a larger population than either of the states of Maryland or Virginia alone, posted a 5.9 percent increase in population. This information is based on the most recent data from the BEA and U.S. Census Bureau. Populations in Millions Graph 1: Population by States and Areas Maryland Virginia DC Metro Area Such population growth rates are likely to contribute positively to the demand for Maryland and Virginia housing units and possibly their prices. Overall, the metropolitan region has grown most rapidly, 5.9 percent, followed by 5.3 percent growth in Virginia s population. A large portion of the population growth in the state of Virginia overall is due to the rapid expansion of the Northern Virginia suburbs as popular residential, employment and commercial centers. Jobs, Unemployment Rates and Incomes While population growth is a good indicator of an area s demographic demand for housing, economic demand the ability to buy is critically important. A key indicator of the strength of economic demand is the rate of unemployment in the labor market, because most consumers must be employed to qualify for financing to purchase a home. Another important indicator is the number of and increases in jobs on employer payrolls. Unemployment data compiled by the U.S. Department of Labor s Bureau of Labor Statistics (BLS), and payroll job counts provided by the U.S. Bureau of Economic Analysis (BEA) demonstrate the economic strength of the region. Graphs 2 and 3 present both BEA and BLS annual state and regional jobs data for the period of 2000 to This data is compiled from monthly surveys in conjunction with local area labor departments as part of the Local Area Unemployment Statistics (LAUS) program [2], and are the primary source of local labor market information for federal, state, and local governments. Since 2000, the metropolitan area has experienced a 3.2 percent increase in the number of jobs. The District of Columbia had a 2.5 percent increase followed by Maryland at 2.3 percent and Virginia at 2.1 percent. Despite this job growth, the District of Columbia s 2004 unemployment rate was 7.5 6

7 6 Graph 2: Jobs by States and Areas $70,000 Graph 4: Average Wage Per Job by States and Areas Jobs in Millions ,000 50,000 40,000 30,000 20,000 10,000 0 Maryland Virginia D.C. Metro Area 0 Maryland Virginia D.C. Metro Area percent, up from 5.7 percent in Virginia and the metropolitan area as a whole posted unemployment rates in 2004 at 3.7 percent and 3.6 percent respectively, while Maryland reported an annual 2004 unemployment rate of 4.3 percent. Unemployment rates in Maryland, Virginia and the metropolitan area as a whole have remained fairly constant since 2000 rising on average by 1.5 percent. Millions Graph 3: Unemployment Rate by States and Areas Maryland Virginia D.C. Metro Area Despite the relatively modest gains in the number of jobs, the average wage per job has risen substantially in the period between 2000 and In Washington, D.C., the average wage per job has risen by more than 20 percent since 2000, while Maryland and Virginia posted growth in the average wage per job of 17.1 and 16 percent respectively. In the metropolitan area, the average wage per job grew from $41,008 in 2000 to $47,867 in 2004 a 16.7 percent change. These wage gains have no doubt contributed to the strength of real estate markets in the metropolitan area. Graph 4 compares these results. there is income, while the type of job determines the level of income. Additionally, income is the first qualifying factor for mortgage financing, although marketable assets, debt, and debt history are also evaluated. Graphs 5 and 6 present per capita income and its growth rate over the period 2000 to Maryland per capita personal income increased from $34,257 in 2000 to $39,631 in 2004, 15.7 percent increase, or an average annual rate of 3.9 percent. In Virginia, the increase over that period was 16.3 percent, from $31,087 to $36,160, an annual rate of 4.1 percent. The metropolitan area income rose to $42,287, an average rate equal to that for all of Maryland. Washington, D.C. had the highest 2004 per capita personal income of $51,155 up by over 26 percent since 2000, and averaging 6.6 percent annually. Looking at these indicators as a group, the entire metropolitan area, as well as individual states have consistently done well, especially in job growth. Indeed, job and population growth help explain the strong housing markets in the overall metropolitan area during the study period. High per capita incomes in Maryland have especially helped that state s housing market as well as the overall metropolitan area. Graph 5: Per Capita Personal Income by States and Areas $55,000 50,000 45,000 40,000 35,000 Per Capita Personal Income Income, along with interest rates, is yet another critical factor affecting home sales and prices. For most homebuyers, employment determines whether 30, Maryland Virginia DC Metro Area 7

8 5.8% 5.7% 5.6% 5.5% 5.4% 5.3% 5.2% 5.1% 5.0% Graph 6: Personal Income Average Annual Growth: Maryland Virginia D.C. Metro Area Housing Market Indicators Detailed local market data are presented in Appendix Tables 1(a) to 1(d) at the end of this report. They provide annual housing market statistics for D.C.; all of the Maryland counties and the City of Baltimore; and, the counties and independent cities in Northern Virginia. These were obtained from the Metropolitan Regional Information Service, Inc. (MRIS), which serves all of the areas except the lower part of the Delaware-Maryland-Virginia peninsula, and the Automated Regional Information Systems (ARIS) multiple listing service that covers the three southern most counties on the Delmarva Peninsula. The tables include average and median price and total units for the period 2000 to 2005, the basis for the recordation, transfer, and property tax calculations in our closing cost estimates. Tables 1(a) and 1(b), below, provide comparative unit sales and average price statistics for all of Maryland, D.C., metropolitan Maryland, and metropolitan Virginia. Maryland Over the six years ending in 2005, the highest rate of increase in sales, 44 percent, was in the metropolitan Virginia area (metropolitan Maryland had the largest volume of unit sales). Sales in Washington, D.C. increased at about a 20 percent rate over this period, although the city accounts for only about 8,000 to 9,000 units annually. 8 In 2005, the weighted average price in the Maryland metropolitan area counties was just over $343,700, compared to almost $485,000 in Virginia and $532,522 in Washington, D.C. Analyzing changes in prices and sales over the full period 2000 to 2005, Virginia had the highest rate of price change over this period at 115 percent, while D.C. ranked a close second with an increase of 113 percent. Maryland, (both the metropolitan area and the state as a whole), experienced an overall rise in prices of about 93 percent over the period. In the following sections, we estimate the impact of state and local recordation, transfer, and local property taxes on closing costs on properties in our study areas using data on county/city average and median prices and unit sales data. We also calculate the relative burdens of various taxes as related to average prices. Area State and Local Tax Rates All jurisdictions in this study assess multiple taxes on the purchase and holding of real property, although the rates for recordation, transfer, and property taxes can show considerable variation. In Maryland and Table 1(a): Area Housing Unit Sales Pct Chg Maryland 98,858 97,893 89,371 84,866 80,071 71, % Metro MD 93,998 92,987 84,881 80,109 75,976 67, % Metro VA 63,797 66,628 59,576 53,973 50,043 44, % D.C. 9,179 9,139 8,708 8,250 7,683 7, % Source: MRIS, Metropolitan Regional Information Service, Inc. Consultant estimates. Table 1(b): Area Housing Average and Median s Pct Chg Avg. $340,977 $287,735 $241,029 $209,942 $185,000 $176, % Med. $277,466 $242,087 $200,344 $173,917 $153,108 $143, % Metro MD Avg. $343,704 $288,135 $242,081 $211,459 $186,692 $178, % Med. $279,631 $242,311 $201,176 $174,786 $154,203 $145, % Metro VA Avg. $484,911 $394,420 $326,030 $286,151 $252,335 $225, % Med. $433,419 $349,348 $285,860 $246,667 $212,369 $188, % D.C. Avg. $532,522 $450,430 $381,864 $348,334 $304,872 $250, % Med. $422,000 $350,000 $290,000 $250,950 $199,500 $159, % Source: MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates.

9 Virginia, taxes are levied by both state and local governments, although the types and rates vary. Of the several types of taxes charged against real estate, either at the time of purchase or annually, the largest single portion is the local property tax bill. (Maryland also assesses an annual state property tax, but the rate is significantly lower than the rates charged by local governments.) Nevertheless, it is the total of taxes paid at real estate closings that requires significant amounts of cash, as property tax escrows (as much as 6 to 8 months or more, depending upon state and local law, custom and lender practice) as well as taxes assessed only upon the transfer of ownership for example, recordation and transfer taxes must be paid at the settlement table. This section provides an overview of the typical rates for the states and localities for the three major forms of taxes at closing: recordation taxes/fees, transfer taxes and local property taxes. Table 2 shows the number and types of taxes collected by the jurisdictions in the study area. Table 2: Real Estate Tax Types and Taxing Authority State/Area Deed Recordation Deed Transfer Annual Property Maryland County/City State/City State/City County County Virginia State State(Grantor) County/City County County Fees Deed Recordation Taxes and Fees In the jurisdictions covered in this study, the local government most frequently levies deed recordation taxes. Appendix Table 2 contains information on the rates for the study areas. The recordation rates in Washington, D.C. are the highest in the study area, with an estimated average of 1.3 percent of the sales price for The rate is an average, as the 2005 rates were 1.5 percent for homes over $250,000 and 1.1 percent for those at or below $250,000. In 2006, D.C. adopted a single rate of 1.1 percent, regardless of price. In Maryland, recordation rates are quoted in dollars per $500 of the sales price. For 2005, Maryland locality rates varied from $2.20 to $5.00; areas with higher unit sales generally had lower rates. Appendix Table 2 demonstrates that many of the local recordation rates have remained stable over the past few years. Virginia mandates state and local recordation tax rates on deed amounts, as well as basic document/ instrument recording fees across all municipalities (counties and independent cities). Since early in FY 2005, the recordation or tax on deed conveyance allows the state to collect up to $2.50 per $1,000 of sales price and $2.50 per $1,000 of mortgage amount. Localities may collect a tax of up to $0.833 per $1,000 of the sales price and $0.833 per $1,000 of mortgage principal (one-third of the state rate). While the counties and independent cities do not have to adopt a recordation tax, all of the localities in this study charge the $0.833 rate. There are also recording fee tax stamps in Virginia that usually total $79 for a residential real estate transaction $46 for each Deed of Trust for the mortgage(s) and $33 for a property deed (additional mortgages require a $46 fee for each). In recent years, low first mortgage rates have permitted most sales to be financed with one loan, so most buyers pay a total tax of $79. On a sale with a 20 percent down payment, the total state and local recordation taxes work out to an average rate of about 0.57 percent of the sales price. While the additional $79 fee is a very small amount, it actually makes the tax impact mildly regressive. That is, with the fee add-on, buyers of higher priced properties actually pay a slightly lower relative percentage rate of the sales price in tax closing costs than do buyers of lower priced homes. Transfer Tax Rates Transfer taxes are usually assessed by the state as well as the local jurisdiction, as they are a major source of revenue for state treasuries. Maryland and D.C. each have named transfer taxes, while Virginia does not refer to any real estate closing tax as a transfer tax (although state publications do generally refer to real estate transfer taxes ). However, Virginia levies a grantor tax on the seller for transfer of the property deed; this is essentially a transfer tax. Appendix Table 3 lists the detailed local transfer tax rates for D.C. and Maryland; Appendix Table 4 provides Maryland and Virginia state components of recordation and transfer rates, and includes the Maryland state property tax which is discussed below. 9

10 D.C. currently (calendar 2006) has a deed transfer tax of 1.1 percent. However, through 2005 the rate was set according to the price of the property at 1.5 percent for properties exceeding $250,000 and 1.1 percent for those at $250,000 or below. In fact, D.C. s transfer tax rate is less than that of several Maryland county jurisdictions. Maryland levies a state transfer tax of 0.5 percent of the purchase price for repeat homeowners. If the buyer is a first-time Maryland homebuyer, the tax is reduced to.025 percent, which the seller pays at settlement. Currently, there are no statistics on the percentage of Maryland transactions that involve first-time buyers, but an estimate may be derived from national surveys [3]. These reports suggest that historically, about 38 to 40 percent of home purchasers tend to be first-time buyers. Applying these estimates, we calculated a percent average effective rate for the Maryland state transfer tax. In 2005, all but seven Maryland localities levied transfer taxes of up to 1.5 percent of the sales price. Among the municipalities surveyed, Baltimore City, Baltimore County, and Prince George s County have the highest rates, followed by Anne Arundel, Harford, Howard, Montgomery, St. Mary s and Talbot counties. Calvert, Carroll, Cecil, Charles, Frederick, Somerset, and Wicomico do not levy a transfer tax. In Virginia, although recordation taxes were raised in late 2004, the grantor s tax rate has not changed for at least a decade. Virginia assesses sellers a grantor tax of $1.00 per $1,000 of purchase price, or 0.1 percent. This rate is fixed across localities; there is no local option add-on. Thus, because Maryland has two levels of transfer taxes, Maryland buyers and sellers, on average, pay a range of rates from as little as 0.4 percent to as much as 1.2 percent to 1.9 percent in transfer taxes. The latter rates are higher than D.C. s rate and are about 15 times the Virginia grantor rate. In other words, a $300,000 property that generates about $300 in transfer taxes in Virginia could require as much as $5,700 in taxes in Maryland, depending on the county rate. In 2005, the same property bought n Washington, D.C. would generate about $4,500 in transfer taxes. Maryland Recordation and Transfer Tax Estimates In this part of the study we present estimates of the amounts of the recordation and transfer taxes paid using the rates presented above. The rates are applied to average and median price figures, and the detailed county/city estimates are provided in tables in the data appendix. The tables presented in this text show the overall tax amounts for Maryland, D.C. and the metropolitan areas. The state and metropolitan area calculations are derived from weighted averages using the unit sales figures as the weights. Recordation Taxes Table 3 shows that the highest overall recordation tax costs are in Washington, D.C., with counties and cities in Maryland a distant second. The figures for the Virginia counties are substantially lower than Maryland s, even though Virginia levies a state recordation tax and Maryland does not. While Virginia state recordation taxes are about three times the county amounts (Table 4), the sum of the county and state figures is usually much less than for the District of Columbia or Maryland counties. Comparing the data over time indicates that county recordation tax revenue has risen most rapidly in Virginia roughly twice the rate of increase in Maryland counties though the absolute level of revenue is still substantially below that of Maryland and Washington, D.C. While some of the increase is Table 3: Local Average and Median Recordation Taxes Pct Chg Avg. $2,336 $1,931 $1,584 $1,290 $1,068 $ % Med. $1,888 $1,620 $1,317 $1,070 $888 $ % Metro MD Avg. $2,357 $1,934 $1,597 $1,299 $1,075 $1, % Med. $1,904 $1,622 $1,327 $1,075 $893 $ % Metro VA Avg. $693 $450 $280 $248 $220 $ % Med. $619 $399 $245 $214 $185 $ % D.C. Avg. $6,923 $5,856 $4,964 $3,832 $3,354 $2, % Med. $5,486 $4,550 $3,770 $2,760 $2,195 $1, % Source: MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates. 10

11 due to home price increases in Virginia, the major cause was the state legislated rate increase in September than $2,500. Arlington, Loudon and Fairfax Counties followed with an average state recordation tax of more than $2,300. Appendix Tables 6(a) to (b) contain estimates of the local recordation tax burden for average and median priced homes each year for 2000 to The detailed county estimates were derived by applying the recordation tax rates in Appendix Table 2 to the average and median price data in Appendix Table 1(a) to (d). As expected, the recordation tax amounts mirror the vast difference in rates across jurisdictions, as well as the variance in prices within a county. In 2005, Washington, D.C. had the highest recordation tax on properties, collecting from $5,846 to over $6,900. Maryland was the second most expensive region, with local recordation taxes exceeding all areas in Virginia. For average priced homes, Calvert County had the highest revenue at $3,811 collected; Talbot and Carroll Counties were next, with more than $3,500 in recordation tax revenue. Prince George s County was the least costly at $1,355, followed by Baltimore County at $1,401 and Baltimore City at $1,625. In general, Maryland cities and counties collected an average of over $2,300; and, expensive homes in the higher-rate areas could cost over $3,500 in local recordation taxes. Virginia local county/city recordation costs in Appendix Table 6(b) are significantly lower. For example, Virginia recordation fees on average priced homes ranged from as low as $379 to $844. For median priced homes, taxes ranged from $343 to $796. (Note: the $79 document stamp fee was not included with the figures above, but these additional fees would not significantly affect the magnitudes relative to those of the Maryland counties). Virginia State Recordation Although Maryland s local recordation taxes are significantly higher than those imposed by local Virginia municipalities, the picture changes significantly when state recordation taxes are included. Virginia imposes a state recordation tax; Maryland does not. Appendix Table 7 contains county estimates of the Virginia state recordation tax. In the last two years, Virginia state recordation tax amounts have been approaching the Maryland local recordation tax amounts, with an average close to $2,000. Falls Church City had the highest average amount of more Table 4, shows the trend of these values over time. Across the metropolitan area counties/cities in the study, the average Virginia state recordation tax was $2,077; the median was $1,856 in (Note: These amounts do not include the $79 fee for document tax stamps.) Compare those figures with 2000, when the average state recordation tax was $594, and the median was $497, with stamp fees at $64. Over the study period, the amount of the state recordation tax increased by approximately 250 percent, due to a combination increase in the rate and rising values of real estate in Virginia. Table 4: Virginia Recordation Taxes Pct Chg Metro VA Avg. $2,077 $1,351 $839 $743 $659 $ % Med. $1,856 $1,197 $736 $641 $555 $ % Source: Va. Reports, MRIS data. Consultant estimates. In 2005, the total average recordation tax paid in metropolitan Maryland counties was $2,357. The total average recordation tax for metropolitan Virginia counties, including the state recordation tax, was $2,770. The average recordation tax bill in the District of Columbia was $6,923 as shown in Table 3. Local Transfer Taxes Appendix Table 8 provides estimates of the local transfer tax bills for D.C. and Maryland counties. Note that not all local Maryland jurisdictions levy a transfer tax. Table 8 summarizes the transfer tax for the average and median priced homes for these areas during the study period. Estimates of the Virginia grantor tax, which may be considered a transfer tax as it is assessed upon the transfer of the property, is estimated in Table 10 below. Virginia has no local add on option and thus no local grantor or transfer tax. The average and median local transfer tax estimates in Appendix Table 8 indicate that District of Columbia is the most expensive jurisdiction, followed by the more affluent counties of Maryland. For example, Talbot County s higher-end properties can be assessed over $5,600 in local transfer taxes. The next most 11

12 expensive area in the state is Montgomery County, with an average over $5,000 in transfer tax revenues. Howard, Baltimore and Prince George s Counties follow in greatest transfer tax revenues. However, transfer taxes in Maryland can be a low as $1,200 to $1,300 in Washington and Caroline counties. As Table 5 shows, average transfer taxes in the District have increased by over 150 percent during the study period; in 2005, the average buyer could end up paying almost $7,000. For Maryland, the average amounts of local transfer taxes rose by approximately 112 percent to 115 percent during the same period. In 2005, the average amounted to almost $3,300 in the state, and nearly $3,400 in the Maryland part of the metropolitan area. Maryland Table 5: Average and Median Local Transfer Taxes Avg. $3,260 $2,725 $2,258 $1,969 $1,646 $1, % Med. $2,689 $2,274 $1,860 $1,613 $1,353 $1, % Metro MD Avg. $3,357 $2,799 $2,329 $2,034 $1,697 $1, % Med. $2,770 $2,336 $1,918 $1,665 $1,394 $1, % Metro VA Avg. n. a. n. a. n. a. n. a. n. a. n. a. n. a. Med. n. a. n. a. n. a. n. a. n. a. n. a. n. a. D.C. Avg. $6,923 $5,856 $4,964 $3,832 $3,354 $2, % Med. $5,486 $4,550 $3,770 $2,760 $2,195 $1, % Source: MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates. Maryland State Transfer Tax Appendix Table 9 provides local estimates of average and median Maryland state transfer taxes. For 2005, the Maryland state transfer typically averaged about $1,300 to $1,400, based on a percent rate, adjusted for first-time and repeat buyers. Table 6, provides estimates of the Maryland state transfer taxes for the period 2000 to 2005, based upon average and median prices for the state and the metropolitan area. Over the study period, transfer tax revenue has risen about 93 percent, due exclusively to the increase in Maryland Table 6: Maryland State Transfer Taxes Pct Chg Avg. $1,347 $1,137 $952 $829 $731 $ % Med. $1,096 $956 $791 $687 $605 $ % Metro MD Avg. $1,358 $1,138 $958 $835 $737 $ % Med. $1,105 $957 $797 $690 $609 $ % Source: smris, Metropolitan Regional Information Service, Inc.; Consultant estimates. average and median house prices. In 2005, for the state as a whole, the average priced home generated about $1,347 in state transfer tax; the metropolitan area figure was just slightly higher. The median priced home generated about $1,100 in state transfer taxes. (Note: As discussed Pct Chg. above, these estimates assume that 35 percent of home purchases are made by first-time homebuyers who pay a slightly lower rate.) The Virginia Grantor Tax Appendix Table 10 provides estimates of the Virginia grantor tax. In 2005, the tax on an average Falls Church City property was approximately $600; in Arlington County and Alexandria City, it was $554 and $489, respectively. Rapidly growing Loudoun County properties averaged $547 in grantor tax revenue, but lower cost properties in Warren County yielded about $300. Table 7, demonstrates that for the Virginia part of the metropolitan area, the tax on an average price home was about $225 and was $189 for a median priced home in By 2005, these figures had risen to an average of $485 and a median of $433, with no change in the tax rate. This amounted to a 115 percent increase in the seller s closing cost tax bill for the average priced home, and a 129 percent increase for the median priced home. Thus, the average local and state transfer tax bill for Maryland in 2005 was $4,715, compared to $485 in Virginia with no local transfer tax and $6,923 in the Washington, D.C. 12

13 Table 7: Virginia Grantor s Tax Pct Chg Metro VA Avg. $485 $394 $326 $286 $252 $ % Med. $433 $349 $286 $247 $212 $ % Source: MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates. Estimates of Recordation and Transfer Taxes Many real estate and finance professionals consider recordation taxes and transfer taxes to represent the total tax burden for transferring ownership in property. Annual real estate taxes are typically considered to be part of the continuing cost of owning real property and are treated separately in the next section. Appendix Tables 11(a) and (b) provide tax estimates for the counties and cities in the study. The table includes the recordation and transfer taxes, Maryland recordation and transfer taxes, and the Virginia recordation (state and local), grantor s (state) and stamp fees. Table 8 summarizes the total state and metropolitan area tax revenue. Washington, D.C. has the highest recordation and transfer tax burden, which ranged from about $11,000 to $14,000 in 2005 for average and median priced homes. Maryland and its metropolitan counties have the second highest burden, generating $5,800 to almost $7,000 in revenue. The Virginia metropolitan areas have the lowest burden, averaging about $3,000 to $3,300. Maryland Table 8: Recordation and Transfer Taxes Pct Chg Avg. $6,942 $5,792 $4,795 $4,088 $3,445 $3, % Med. $5,673 $4,851 $3,968 $3,370 $2,846 $2, % Metro MD Avg. $7,071 $5,872 $4,884 $4,168 $3,509 $3, % Med. $5,779 $4,915 $4,044 $3,430 $2,895 $2, % Metro VA Avg. $3,333 $2,268 $1,509 $1,341 $1,195 $1, % Med. $2,988 $2,017 $1,331 $1,165 $1,016 $ % D.C. Avg. $13,846 $11,711 $9,928 $7,663 $6,707 $5, % Med. $10,972 $9,100 $7,540 $5,521 $4,389 $3, % Source: Maryland SDAT Data, MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates. 13 The Maryland recordation and transfer tax burden is more than twice that of Virginia, while D.C. is about four times as high. Indeed, recordation and transfer taxes in the District are roughly double those in Maryland. Property Taxes The largest real estate tax homeowners pay is the annual property tax. The local property tax is essentially a payment for local government services including police and fire protection, schools, health and social services, and often sewer and water plant and maintenance. Builders often directly contribute to this through up-front costs like impact fees during construction. Typically, buyers who obtain mortgages pay monthly estimates of local property taxes (and state property taxes, if applicable) with their mortgage payments. Homeowners without mortgages usually pay the annual tax assessment in bi-annual payments in the jurisdictions in this study. Unlike transfer taxes and other taxes assessed only on the transfer of real property, property taxes are paid annually. For purposes of this study, we will focus on property tax payments made at the closing of a real estate transaction. Property taxes show the most variation of all real estate taxes by locality and over time. Many cities, towns, and specifically designated areas add special assessments to the rate. The rates used in this study are the base rates for the counties/cities. Appendix Table 5 contains annual rates for the municipalities in this study. The official rates quoted by some counties are in fiscal years starting July 1 of the previous year, through June 30 of the next year. Because our unit sales and price data are in calendar years, the fiscal year rates were converted to calendar years by simple averaging (Note: in consecutive years where rates did not change, the average is the same as for the two fiscal year rates). From 2000 to 2005, D.C. s property tax rate was stable at $0.96 per $100 of assessed value (at 100% of market). The District of Columbia also has a

14 homestead exemption, which reduces the assessed value to which the tax is applied; the exemption varied during the study period, from $30,000 to $38,000, and was raised to $60,000 for Maryland and Virginia counties also use 100 percent of market value as their tax basis. In 2005, Virginia rates ranged from as low as percent of value to as high as percent. Maryland rates started lower, ranging from percent in Talbot County to percent in the City of Baltimore. Typically, the higher property value municipalities can keep the rate low, or even reduce it, if property values increase sufficiently to provide enough revenue for budgetary considerations. Thus, affluent Talbot and Montgomery County can afford a low percent rate, given the value of the residential property base. However, this generalization does not always hold, and there is variation, depending upon the growth of local public service needs. Local Property Tax Estimates Because property taxes are the largest single real estate tax most homeowners pay, a large component of tax related closing costs required to purchase a home is the amount of annual property taxes paid into escrow at settlement. Typically, an escrow of 6 to 8 months of estimated property tax for the local area is part of the settlement costs, and thus becomes part of the cash required to settle. Thus property taxes can be a significant factor in overall housing affordability, and may affect the willingness of buyers to locate within a specific city or county. While local property taxes are not strictly a tax on the real estate transaction, like recordation fees or transfers taxes, they do raise the amount of up-front cash that homebuyers need to purchase a home. At closing, an escrow account for property taxes is established. This guards against default and sets up a non-interest bearing sinking fund for initial property tax payments with the mortgage principal and interest payments. This escrow fund is adjusted annually by the servicer, through changes in the mortgage payment amount. Completing a real estate transaction generally requires escrowing funds for a minimum of six months to pay local annual property taxes. In D.C. and Virginia, a sixmonth escrow is standard. In Maryland, six-months is a minimum, but often lenders require eight-month escrows. To maintain a consistent comparative base for the escrows, we present estimates for all four areas using a six-month escrow. However, for Maryland and its metropolitan areas we also provide both a sixmonth and eight-month escrow to measure how high the actual costs could go. Table 9 provides estimates of local property tax escrows for the major areas. It does not include the Maryland state property taxes, but these are added into the final estimates of total closing costs in a following section. Table 9: Local Property Tax Escrows Pct Chg Maryland (6 month) Avg. $1,679 $1,412 $1,180 $1,025 $904 $ % Med. $1,353 $1,177 $973 $846 $749 $ % Maryland (8 month) Avg. $2,239 $1,883 $1,573 $1,367 $1,206 $1, % Med. $1,805 $1,569 $1,298 $1,128 $999 $ % Metro MD (6 month) Avg. $1,703 $1,425 $1,195 $1,039 $918 $ % Med. $1,372 $1,187 $986 $856 $759 $ % Metro MD (8 month) Avg. $2,271 $1,900 $1,594 $1,385 $1,224 $1, % Med. $1,830 $1,582 $1,315 $1,142 $1,012 $ % Metro VA (6 month) Avg. $2,627 $2,213 $1,810 $1,644 $1,236 $1, % Med. $2,347 $1,959 $1,587 $1,415 $1,039 $1, % D.C. (6 month) Avg. $2,374 $1,897 $1,651 $1,528 $1,319 $1, % Med. $1,843 $1,435 $1,210 $1,061 $814 $ % Source: Maryland SDAT Data, MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates. Using a six-month escrow assumption, Virginia metropolitan area property taxes are about $1,000 more than local Maryland tax escrows, and $400 more than the Washington, D.C. The median priced home in the D.C. rose by 187 percent over the study period, with the prices for Maryland homes moving up at about 93 percent. Using an eight month escrow assumption, metropolitan Maryland escrows roughly equal those in Washington, but are still less than those for Virginia. 14

15 Appendix Tables 13(a) and (b) provide estimates of full annual local property tax revenues for the county/ city areas in the study. As has been true for other measures of housing cost, D.C. average property taxes are at the high-end at about $4,600. However, they are considerably less than several affluent areas in Virginia. In fact, with significant price appreciation in some parts of Virginia, annual property tax revenue can exceed $6,000, which is more than the amounts for comparable affluent counties in Maryland. Affluent Howard County generates the highest average tax at $4,534, which is significantly less than Virginia s most expensive Falls Church City at $6,303. The other high property tax amount areas include Garrett, Queen Anne s, Carroll, Anne Arundel, and the City of Baltimore. Montgomery County s 2005 average was only $3,587, considerably below Alexandria City at $4,478, Arlington County at $5,243, and Montgomery s cross-river competitor, Fairfax County at $6,285. High cost Talbot County, with some of the most expensive homes in the state, had an average annual property tax bill of only $3,000. Significant home price appreciation in Virginia, over the period of this study, is the likely explanation for its higher local property tax bills. As a cautionary note, these estimates of annual local property taxes are for sales of homes over this period. The actual local property tax collections in an area are likely to be less per property as many homes are not sold and valuation assessments may lag market prices. Older existing properties that do not trade very often may be valued lower than those that are actively trading in the market. Also, these figures include new home sales which tend to be more expensive than existing properties; areas with significant new home building and sales will tend to have higher prices and higher property tax amounts. Maryland State Property Tax Maryland also has an annual state property tax levied on 100 percent of the assessed value of the property. The rate was percent for half of July 1, 2003 to June 30, 2006 and percent prior to July 1, Our calculations use averages of the fiscal year rates when applied to the calendar year market prices. Appendix Table 12 provides estimates of the state property tax bill by counties and the City of Baltimore for the sales year. (Note: The Maryland state tax amounts vary annually with the annual assessment, as do local property taxes.) For 2005, the Maryland state property tax across the counties ranged from as low as $215 to almost $750 on the average priced county property. For homes in the center of the price distribution, the costs range from as little as $158 to over $550. Average priced homes in 2005 generated about $450 in taxes. Sales of homes in the middle of the distribution would produce revenue of about $240 to $558, with the median about $366. For the metropolitan area, the averages were only a few dollars higher. Table 10 shows the cost estimates for the Maryland state property tax for the entire state and the metropolitan areas. In 2005, the state areas averaged about $450, with the metropolitan areas just slightly higher. Homes in the middle price ranges were levied about $370 in state property tax. Table 10: Maryland State Property Taxes Pct Chg Maryland Avg. $450 $380 $260 $176 $155 $ % Med. $366 $320 $216 $146 $129 $ % Metro Md. Avg. $454 $380 $262 $178 $157 $ % Med. $369 $320 $218 $147 $130 $ % Source: MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates. Tax-Related Closing Costs Closing Cost Tax Amount Estimates Table 11 summarizes the total estimated tax-related closing cost amounts for Maryland, Washington, D.C. and the Maryland and Virginia metropolitan areas. These include all recordation, transfer, and property tax escrows for the local and state levels. Again, both six-month and eight-month property tax escrows are included for Maryland. In 2005, the average priced house sold in Maryland generated tax related closing costs of approximately $8,900 to $9,500, for six-month and eight-month escrows, respectively. The closing tax bill for a median priced home ranged from $7,200 to $7,700. By comparison, the typical 6-month escrow requirement 15

16 Table 11: Tax-Related Closing Costs Pct Chg Maryland (6 month) Avg. $8,846 $7,394 $6,104 $5,201 $4,427 $4, % Med. $7,209 $6,187 $5,050 $4,289 $3,659 $3, % Maryland (8 month) Avg. $9,481 $7,928 $6,541 $5,572 $4,754 $4, % Med. $7,721 $6,633 $5,410 $4,595 $3,931 $3, % Metro MD (6 month) Avg. $9,001 $7,487 $6,211 $5,296 $4,505 $4, % Med. $7,335 $6,262 $5,136 $4,360 $3,719 $3, % Metro MD (8 month) Avg. $9,645 $8,025 $6,653 $5,672 $4,838 $4, % Med. $7,854 $6,710 $5,501 $4,670 $3,994 $3, % Metro VA (6 month) Avg. $5,960 $4,481 $3,319 $2,985 $2,432 $2, % Med. $5,335 $3,975 $2,918 $2,580 $2,056 $2, % D.C. (6 month) Avg. $16,219 $13,608 $11,579 $9,191 $8,027 $6, % Med. $12,815 $10,535 $8,750 $6,581 $5,203 $4, % Source: Maryland SDAT Data, MRIS, Metropolitan Regional Information for closing on the average priced home in the District of Columbia was over $16,000. Median priced homes produced a tax bill of about $13,000. In the Maryland metropolitan area, based on a sixmonth escrow, the average property incurred a tax bill at closing of $9,000 in 2005, while an average priced home in the Virginia suburbs carried a tax bill of slightly less than $6,000, or only two thirds of the Maryland tax bill. For the median priced metropolitan Maryland home, the closing tax bill was $7,300, compared to about $5,300 for the median priced Virginia home. For Maryland buyers faced with the more common eight-month escrow requirement, the picture was even bleaker they shouldered burdens of $7,900 to $9,600 in average closing tax costs. Detailed county area estimates are provided in Appendix Tables 14(a) to (c), which include estimates for Maryland with the eight-month escrow assumption. Here we compare using a six-month assumption for both Virginia and the D.C. The tables show that in 2005, Washington, D.C. buyers faced by far the highest total closing costs: $16,219 on an average priced house, $12,815 for the median priced home. In Virginia, total closing costs for averaged priced homes are highest in Falls Church City at almost $7,195, and as low as $2,907 in Caroline County. The middle of the range of costs across the counties is between Warren at $3,014 and Manassas Park City at $4,967. In Maryland, using the six-month escrow assumption, Cecil County has the lowest closing costs for the average priced home at $4,310. Talbot has the highest, at a staggering $13,520. This is a significant range for one state, and results from the wide variation in average real estate prices. The middle-range costs are in Frederick, Dorchester, Charles, the City of Baltimore, Prince George s, Queen Anne s and St. Mary s counties with total costs ranging around $6,700 to $8,600. Appendix Table 14(c) contains the Maryland areas costs assuming an eight month escrow. Effective Cost Tax Rates While absolute cost estimates provide one basis for comparison, it is more useful to compute the relative percentage burden of closing costs. Appendix Tables 15(a) to (c) provide estimates of the effective closing cost tax rate tax related closing costs as a percentage of prices for the cities and counties in the study and for six-month and eight-month escrows. These figures were calculated by taking total closing cost measures, including all state and local recordation, transfer, and property taxes as a percent of the sales price. Table 12 summarizes the results for D.C., Maryland and the Maryland and Virginia metropolitan areas, including six-month and eight-month escrow assumptions for Maryland. Maryland s effective closing cost rate ranges from 2.4 percent in 2000 to the 2.6 percent to 2.8 percent in For the Maryland metropolitan area, the effective cost rate rose from about 2.4 percent to the 2.7 percent to 2.8 percent range. In the Virginia suburbs, the rate increased from less than 1.1 percent to about 1.23 percent. Thus, the actual overall effective tax rate in Virginia is less than half the rate in Maryland. In Washington, the tax portion of closing costs in 2005 amounted to over 3 percent of the sales price, a 15 percent increase since 2000 and the highest rate in the area. While the increase in the homeowner s 16

17 Table 12: Effective Closing Cost Tax Rates ( Taxes as a Percentage of Average/Median ) Pct. Chg Maryland (6 month) Avg % Med % Maryland (8 month) Avg % Med % Metro MD. (6 month) Avg % Med % Metro MD. (8 month) Avg % Med % Metro VA. (6 month) Avg % Med % D.C. (6 month) Avg % Med % Source: Maryland SDAT Data, MRIS, Metropolitan Regional Information Service, Inc.; Consultant estimates. exemption reduced some of the property tax take, removing the transfer and recordation brackets still resulted in a substantial increase over the six year period. The effective closing cost taxes ratios in Table 12 summarize the overall effects of the various types of taxes. While the trend of rate increases over time in Virginia and Washington, D.C. are greater, Maryland has seen a substantial increase in tax rates on real estate transactions. Effectively, Maryland rates have increased by about 25 basis points or a quarter of a percent, while metropolitan Virginia s have risen only about 16 basis points. The District s rates have risen about 40 basis points. What immediately stands out in the tax structure is the number of individual taxes on property that are levied in Maryland. D.C. levies three real estate taxes transfer tax, recordation tax and property tax. In Virginia, except for nominal county fees, there are four significant taxes state and local recordation taxes, the state grantor tax, and local property taxes. But Maryland has five significant taxes, because in addition to local recordation, property and transfer taxes, the state imposes a transfer tax and a property tax. This layering of taxes significantly increases the closing cost burden for Maryland buyers. 17 Estimating Lender Fee Components of Closing Costs A recently published study by bankrate. com estimates that in 2005, average mortgage financial closing costs nationwide were $2,748. In Maryland, Washington, D.C. and Virginia the estimate totaled $3,010, $2,844, and $2,631 respectively. These estimates are based on a $200,000 mortgage amount and include points, application fees, commitment fees, document prep, origination or lender fees, processing, tax service, underwriting, and any wire transfer fees. They also include title and closing fees, appraisal fee, attorney/closing/settlement fees, credit report fee, flood certification, pest inspections, courier fees, land surveys, title insurance and the title search/plat drawing/name search and endorsements. The importance of these figures is that they provide some indication of the proportion of closing costs attributable to loan points and lender origination fees which would be in addition to the tax closing costs estimated above. For Maryland, these two costs total approximately $1,897 or 63 percent of the Maryland costs; for D.C. it is $1,794 or 63 percent; and for Virginia it is $1,559 or 59 percent of average costs. The other fees and services average about $1,100. There are some significant limitations to the survey. It omits altogether the costs of taxes and government fees and documentary stamps, as well as prepaid interest and local property tax escrow items. The survey was based on data from websites of online lenders and collected data on closing costs for a hypothetical 30-year fixed-rate loan for a buyer with good credit and a 20 percent down payment. Although flawed, the survey does illustrate that financial closing costs can add between $2,000 and $4,000 to closing costs, depending on the size of the mortgage loan and mortgage lending fees. For example, in Maryland, with an eight-month escrow, the total tax and financial closing costs in 2005 could have been as much as $13,000 assuming a $275,000 mortgage carrying about $4,000 in financing closing costs. The same mortgage in Northern Virginia would

18 have included tax closing costs of about $6,000 and financing costs of $3,500, for a total of about $9,500. In Washington, D.C., the estimates would be in the $20,000 range. [Note: These estimates do not include the down payment on the property.] Study Conclusions Real estate settlement costs form a substantial upfront barrier to qualifying for a home purchase. As this study has demonstrated, there are substantial differences in the overall burden rates across Maryland, and the Baltimore - Washington,D.C. metropolitan area. The effective closing cost tax rate the ratio of taxes paid at closing to the price of the home is over 3 percent in Maryland, the overall burden ranges from just under 2.6 percent to slightly over 2.8 percent. The metropolitan area Virginia counties and independent cities have the lowest rates, averaging a remarkable 1.23% less than half the rates of the other jurisdictions. Over the past decade there has been substantial growth in the county and city economies of all these areas. Real estate sales and prices have risen substantially over this period across all local areas. However, over the period studied, the counties of Virginia have seen the most rapid rates of growth in their economies, jobs, incomes and real estate markets. Maryland clearly has a much higher closing cost structure than Virginia, with more individual taxes and multiple layers of taxation. These clearly can affect a home buyer s ability to purchase property. Accordingly, policy makers need to take into consideration the impacts of a high cost tax structure on the ability of home buyers to purchase homes in the state, as well as the state s ability to attract jobs and income-creating businesses. Some comparisons of the differences in unit sales suggest that Virginia may be seeing more sales due to the relatively higher closing costs in Maryland and the District of Columbia. References 1. U.S. Department of Commerce, Bureau of Economic Analysis, Regional Accounts Data, Regional Profiles; ( 2. U.S. Bureau of Labor Statistics, Employment and Unemployment data, ( bls.gov) 3. NATIONAL ASSOCIATION OF REALTORS, Research Department, The Homebuying and Selling Process, various years. 4. Maryland Association of REALTORS Web Site: 5. Maryland State Department of Assessments and Taxation Web Site (SDAT): md.us/sdatweb. The site contains tax data and tax rate history. Although growth in the economies of Maryland has been somewhat more stable and predictable, the real estate markets have not seen quite as much sales and price growth as in Virginia over the study period. This growth likely accounts for the more robust unit sales and prices in Virginia and the ability of Virginia areas to maintain lower local property tax rates. Indeed, in 2004 although Virginia more than doubled its recordation taxes, overall tax rates moved up only by a small percentage. 18

19 DATA APPENDIX The following pages contain Appendix Tables

20 Maryland Average Table 1(a): Maryland and Washington, D.C. Market Statistics: Average and Sold Average Average Allegany $100, $81, $75, $77, $75, Anne Arundel $399,827 9,347 $334,119 9,405 $282,640 8,734 $245,229 8,068 $211,495 7,961 $206,281 7,006 Baltimore City $162,502 11,539 $131,405 10,253 $108,522 8,685 $91,134 8,543 $80,518 7,855 $82,217 6,954 Baltimore Cnty. $280,225 11,741 $233,031 11,534 $194,575 10,588 $171,930 10,107 $156,459 9,793 $151,536 8,563 Calvert $381,051 1,675 $306,687 1,628 $262,736 1,671 $220,933 1,633 $198,384 1,620 $186,618 1,298 Caroline $230, $197, $158, $130, $110, $116, Carroll $358,545 2,377 $303,348 2,484 $251,509 2,561 $218,371 2,365 $193,905 2,335 $180,256 1,990 Cecil $267,512 1,446 $236,351 1,418 $199,588 1,241 $178,170 1,124 $152, $141, Charles $340,109 3,157 $268,888 2,916 $216,678 2,631 $183,127 2,486 $168,467 2,201 $158,295 1,677 Dorchester $251, $205, $165, $133, $120, $132, Frederick $346,299 4,672 $283,502 4,807 $235,687 4,466 $206,540 4,069 $182,576 3,807 $170,891 3,191 Garrett $378, $324, $297, $253, $218, $185, Harford $279,035 4,103 $231,626 4,065 $197,669 3,506 $167,781 3,360 $157,911 3,161 $155,736 2,720 Howard $434,339 4,866 $367,924 4,993 $296,274 4,760 $263,900 4,701 $234,501 4,492 $212,870 4,209 Kent $330, $289, $235, $200, $187, $164, Montgomery $507,340 17,011 $429,480 17,753 $362,997 16,534 $320,708 16,071 $275,079 15,543 $253,691 14,779 Prince George s $308,060 15,067 $238,285 15,237 $195,398 13,480 $166,109 12,141 $146,229 11,270 $139,875 9,609 Queen Anne s $429, $377, $311, $265, $218, $211, St. Mary s $315,237 1,731 $254,686 1,446 $216,313 1,446 $187,819 1,358 $166,974 1,228 $159,275 1,013 Somerset $153, $129, $99, $110, $87, $91, Talbot $566, $514, $432, $363, $284, $331, Washington $256,477 2,254 $205,138 1,940 $170,685 1,730 $144,221 1,524 $136,100 1,418 $124,582 1,252 Wicomico $191,467 1,076 $172,238 1,139 $160,723 1,071 $130,779 1,074 $124, $121, Worcester $398,407 2,163 $398,407 2,288 $264,823 2,286 $230,220 2,281 $175,692 2,100 $151,783 2,199 /Avg:* $340,977 98,858 $287,735 97,893 $241,029 89,371 $209,942 84,866 $185,000 80,071 $176,540 71,488 Average Average Average Washington, D.C. $532,522 9,179 $450,430 9,139 $381,864 8,708 $348,334 8,250 $304,872 7,683 $250,236 7,656 20

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