The Role of Real Estate in Maryland s Economy

Transcription

1 The Role of Real Estate in Maryland s Economy Submitted by: Sage Policy Group, Inc. Submitted to: Maryland Association of REALTORS November 2013

2 Exhibit of Contents List of Exhibits... 3 Executive Summary Introduction... 6 A Critical Economic Impact... 6 The Industry Defined... 6 Maryland s Real Estate Industry in Brief... 7 The Real Estate Industry s Impacts...11 Economic Impact...11 Impact...12 Real Estate Taxes as a Source of Local Government Revenue...12 The Maryland Real Estate Tax Burden...18 Impact of Foreclosures...21 Conclusion...22 Appendix IMPLAN

3 List of Exhibits Exhibit E1: 2012 Real Estate Industry Impacts...4 Exhibit E2: Property Values and Real Estate Taxes (RET) in Exhibit 1: 2012 Summary of Direct Real Estate Industry Employment...8 Exhibit 2: Maryland Employment for Real Estate and Other Categories (in thousands) Exhibit 3: Maryland Employment Related to the Real Estate Industry (share of total) Exhibit 4: Total Wages (millions of current dollars) Exhibit 5: Gross State Product (millions of current dollars) Exhibit 6: Gross State Product (share of total) Exhibit 7: Multipliers Used to Derive Economic Impacts Exhibit 8: 2012 Real Estate Industry Economic Impacts Exhibit 9: Maryland Assessable Base Exhibit 10: Sales and Prices of Maryland Homes, Exhibit 11: Real Property Tax Rates in Maryland, FY2004-FY Exhibit 12: Property Transfer Tax Rates in Maryland, FY2007-FY Exhibit 13: Recordation Tax Rates in Maryland per $500 of Transaction Value, FY2007-FY Exhibit 14: Sources of Local Government General Fund Tax Revenues ($ in millions) Exhibit 15: Residential Full Cash Value Change for Reassessment Group 2, Exhibit 16: Average Assessment Increase, Properties Assessed Every Three Years, FY1991-FY Exhibit 17: Property Values and Real Estate Taxes (RET) in Exhibit 18: State Reliance on Major Tax Sources, Ranked by Reliance on Property Taxes Exhibit 19: Property Foreclosure Events in Maryland Jurisdictions, Third Quarter Exhibit 20: Foreclosure Activity in Maryland, 2009Q2-2012Q

4 The Role of Real Estate in Maryland s Economy Executive Summary Economic Impacts Maryland s real estate industry, which encompasses the activities of real estate professionals, associated financial service and insurance professionals, legal service providers and many forms of construction, directly supported approximately 234,500 jobs in Maryland in 2012, more than 9 percent of the state s job total. Including direct and secondary employment, real estate supported nearly 464,000 jobs. Direct real estate industry employment is associated with $15.5 billion in total wages and salaries, an average of $66,000 per worker. Real estate industry operations directly supported more than $40.5 billion of gross output in 2012, and $71 billion once multipliers are factored in. The real estate industry generated 60 percent of total local government revenues in FY2013, which translated into more than $7.3 billion. This is significantly higher than the 49 percent figure we calculated in FY2010, primarily because of increased levies on real estate transactions and slow income tax revenue growth. The industry supports significant amounts of economic activity despite one of the nation s highest real estate-related tax burdens. Exhibit E1: 2012 Real Estate Industry Impacts Type of impact by sector Jobs Employee Compensation ($mill) Output ($mill) Direct Impacts Construction 128,800 $8,741.7 $21,796.3 Real Estate 46,403 $3,453.3 $8,244.5 Architectural 40,623 $4,249.3 $5,610.2 and Engineering Services Financial 18,710 $2,074.9 $4,870.8 Activities and Legal Services Total industry 234,536 $18,519.2 $40,521.8 Indirect & Induced Impacts Construction 121,909 $5,455.9 $16,272.0 Real Estate 31,184 $1,283.7 $4,161.5 Architectural 47,507 $2,048.9 $6,153.7 and Engineering Services Financial 28,642 $1,361.8 $3,920.2 Activities and Legal Services Total industry 229,242 $10,150.3 $30,507.4 Total Impacts Construction 250,709 $14,197.6 $38,068.3 Real Estate 77,587 $4,737.1 $12,406.0 Architectural 88,130 $6,298.2 $11,763.9 and Engineering Services Financial 47,352 $3,436.7 $8,791.0 Activities and Legal Services Total industry 463,778 $28,669.5 $71,029.3 Source: Implan, Sage Policy Group, Inc. Maryland ranked 11th nationally in terms of total real estate-related tax burden. The State is the 10th most real estate tax dependent state in the nation (measured as share of tax revenues supported by real estate industry operations). Maryland s median real estate tax burden is $3,152. The national median is $2,331. 4

5 Exhibit E2: Property Values and Real Estate Taxes (RET) in 2011 State Median Value of Homes Median RET RET Rank New Jersey 332,100 $7,188 1 Connecticut 282,900 5,152 2 New Hampshire 243,100 5,050 3 New York 303,500 4,606 4 Illinois 190,100 4,206 5 Rhode Island 244,400 3,796 6 Massachusetts 330,500 3,735 7 Vermont 220,700 3,647 8 Wisconsin 172,100 3,302 9 California 363,600 3, Maryland 293,800 3, Alaska 255,000 3, Texas 144,100 3, Washington 263,100 2, Pennsylvania 178,800 2, District of 426,800 2, Columbia Nebraska 137,800 2, Oregon 238,600 2, Michigan 126,600 2, Minnesota 191,400 2, United States 190,200 2,331 Source: American Community Survey, U.S. Census Bureau Conclusion Through both upturns and downturns, Maryland s real estate industry continues to support high levels of economic and fiscal activity statewide. In 2012, the industry directly and secondarily supported almost 464,000 jobs in Maryland, approximately $28.7 billion in associated employee compensation (including value of benefits), and $71 billion in output. Average annual wages for these jobs exceeded $66,000. ly, real estate directly generated $887 million for the State in individual income taxes, and $7.3 billion in local government real estate-related tax revenues. The industry supports three-fifths of local government general fund revenues. The latest available data indicate that Maryland s real estate related tax burden is now the 11th highest tax in the country. Despite signs of an improving market, recent upticks in foreclosure activity and interest rates jeopardize the pace of a housing recovery. Moreover, proposed policies focused on key aspects of the real estate industry create additional uncertainties regarding the fate of real estate in Maryland and nationally. 5

6 The Role of Real Estate in Maryland s Economy Introduction A Critical Economic Component The performance of Maryland s real estate industry is important to policymakers and other stakeholders for many reasons, the most obvious of which relate to employment, income, business sales, and tax revenues. But there are other reasons as well. When real estate is prospering, homeowners become wealthier and more financially stable. While the most affluent Americans have much of their wealth tied up in financial assets, middle class Americans are more likely to have the bulk of their wealth in their homes. In June 2008, Sage Policy Group, Inc. (Sage) produced its initial assessment of the direct and secondary impacts produced by Maryland s real estate industry. The study was conducted in the midst of the worst housing downturn in eight decades. Despite the loss of real estate, financial, and construction-related activity, the Sage study team concluded that the industry continued to produce positive economic and fiscal impacts in Maryland, which included ongoing real property tax collections. Our second assessment, prepared in 2011, was conducted during a period of market recovery, though the industry had yet to recover to pre-recession thresholds across multiple dimensions, including average home prices. This study is our third assessment. Industry activity is a mixed record, and by numerous metrics, has failed to return to pre-recession levels. However, home sales nationally have been steadily rising since mid In certain instances, the inventory of unsold homes has fallen to unusually low levels, supporting both renewed construction and stable to rising prices. As of July 2013, median sales price for an existing home in the United States was $213,500, up 13.7 percent on a year-over-year basis, but down 7.3 percent from the peak achieved in July 2006, according to National Association of REALTORS. Recovery in Maryland is also apparent. In 2012, 56,530 existing homes were sold, an increase of 4.5 percent from Median sales price rose 7.2 percent, to $244,912. Yet despite recent gains in activity and in price, median sales price remains well below the apex of $307,744 reached in 2007, and the pace of sales in 2012 was only 57.2 percent of the total number of sales in 2005, the peak year. Rising home prices create greater incentives for homeowners to invest in their properties based on a rising rate of return. Investments in exterior improvements also enhance community aesthetics, which in turn induces further private investment in the community. This raises appraised real estate values yet further, creating additional resources for government to invest in the community and more broadly shared quality of life. The Industry Defined Among the primary roles of the real estate industry is the efficient and legal transfer of real property. The mainstays of the industry are REALTORS professionals who facilitate residential and commercial property purchases and sales. These highly visible professionals, however, represent only the tip of an iceberg comprised of a complex array of professionals and firms involved in providing real estate services. Property appraisers, title companies, real estate attorneys, website managers, newspaper advertisers, industry regulators, and other professionals each play critical roles in linking buyers and sellers and aiding them in successful transactions. Property insurance and mortgage banking sectors also provide services essential to real property sales and purchases. (Mortgage banking encompasses not only banks, savings, and loans, and credit unions, but also mortgage brokers and professionals operating in the secondary mortgage market.) Residential properties typically dominate building construction activities, accounting for well over half of construction industry output. As is the case with real estate services, construction involves many types of 6

7 companies and workers. Professions 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. Real estate developers use architects and engineers to design their developments, create blueprints, ensure public safety, and plan other aspects of the development. Even after properties have been developed and sold, however, the real estate industry continues to provide services, including critical ones such as property management and maintenance. These 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, financial and insurance services associated with the real estate industry (e.g., real estate credit, mortgage bankers, direct insurers and real estate investment trusts), title abstract and settlement offices, construction activities (with the exception of heavy and civil engineering construction, which is less directly tied to real estate transfer and development activities), and architectural and engineering services. Maryland s Real Estate Industry in Brief Because real estate necessarily involves so many participants (e.g., real estate lawyers, lenders, title insurers, etc.), it is difficult to provide a satisfyingly comprehensive statistical picture of the industry. In previous studies, we categorized the industry to include those providing real estate, financial and insurance services, and those engaged in construction activities. For purposes of this study we have slightly altered the definition to include those providing real estate services, financial and insurance services associated with the real estate industry (e.g., real estate credit, mortgage bankers, direct insurers and real estate investment trusts), title abstract and settlement offices, those engaged in construction activities (building and specialty trade contractors), and architects and engineers. Employment. U.S. Department of Labor, Bureau of Labor Statistics (BLS) 2012 data indicate that 31,585 Marylanders directly provided real estate services that year. This includes REALTORS, property managers, landlords, appraisers, and other service providers. Of those, 5,920 worked in the offices of real estate agents and brokers according to BLS. Not all of these workers are real estate professionals; some work in support capacities such as receptionists and other back office employees. But the BLS Establishment Survey data encompass only a small fraction of REALTORS. According to 2012 Maryland Association of REALTORS (MAR) membership data; the Association had 20,738 primary agents and broker members. The bulk of MAR members are self-employed, and so are not reflected in BLS Establishment Survey data. The addition of these 14,818 self-employed real estate professionals not captured in the BLS data means that more than 46,000 workers in Maryland are involved in providing real estate services: 31,585 in the BLS survey and 14,818 self-employed which is an estimate based on members not captured in the BLS data. Average wages and salaries for MAR members who are not captured in the BLS data are based on the average annual wages for workers employed in offices of real estate agents and brokers. The number of workers engaged in finance and insurance activities related to real estate (e.g., property insurance) totaled 16,854 in This includes approximately 6,000 workers in real estate credit, a category that largely includes mortgage brokers/bankers. Other bank and savings and loans functions are excluded from this total. Mortgage and nonmortgage loan broker employment exceed 1,600 employees for the year. Property insurance companies employed approximately 8,600 workers, while title insurance companies reported additional 550 staff members. Legal service providers employed in title abstract and settlement offices totaled 1,856 workers in Construction firms operating in Maryland employed 128,800 workers in This figure excludes heavy and civil engineering construction workers, as that segment is less directly tied to real estate industry activities (e.g., road construction). The number of workers engaged in architectural and civil engineering services in Maryland exceeded 40,000 in

8 Based on employment data characterizing these industry segments, Maryland s real estate industry employed approximately 234,000 people in Average annual pay for real estate industry workers stood at $66,217 per year, more than 27.5 percent higher than the average annual pay for all private employees in Maryland ($51,916 in 2012). Relevant statistical detail regarding employment and wages is provided in Exhibit 1 below. Exhibit 1: 2012 Summary of Direct Real Estate Industry Employment Industry Employment Total Wages Average Wage ($thousands) Real Estate Services 31,585 $1,876,845 $59,422 MAR Membership not captured by BLS data 14,818 $1,095,776 $73,949 Real Estate Credit 6,046 $686,640 $113,569 Mortgage and Nonmortgage Loan Brokers 1,638 $179,764 $109,746 Property Insurance 8,622 $701,262 $81,334 Title Insurance 548 $41,269 $75,308 Real Estate Investment Trusts N/A N/A N/A Title Abstract and Settlement Offices 1,856 $98,928 $53,302 Construction of Buildings 30,596 $1,869,918 $61,116 Specialty Trade Contractors 98,204 $5,324,087 $54,215 Architectural and Engineering Services 40,623 $3,655,866 $89,995 Total 234,536 $15,530,355 $66,217 Sources: U.S Department of Labor, Bureau of Labor Statistics, Maryland Association of REALTORS and Sage Policy Group, Inc. Exhibit 2 provides historical employment data for Maryland s real estate industry, total employment, total private employment and the public sector. It is clear that real estate industry employment has not fully recovered from the market s decline that began as early as 2006, but began to be more fully reflected in the data by Exhibit 2: Maryland Employment for Real Estate and Other Categories (in thousands) Sector Total: all sectors 2,497 2,530 2,547 2,538 2,461 2,454 2,479 2,512 Government sector: total (1) Private sector: total 2,089 2,117 2,128 2, ,970 1,991 2,024 Real Estate services Real Estate credit Mortgage and Nonmortgage loan brokers Property insurance Title insurance Real Estate Investment Trusts 0 0 N/A N/A N/A N/A N/A N/A Title abstract and settlement offices Construction of buildings Specialty trade contractors Architectural and Engineering Services Total BLS Real Estate Sectors Note: (1) Estimated due to partial lack of data; Totals may not add up due to rounding. Source: U.S. Department of Labor, Bureau of Labor Statistics Exhibit 3 provides statistical detail regarding employment. Real estate employment as a proportion of total statewide employment has declined. Real estate directly represents 8.7 percent of total employment and 11.5 percent of private employment, as compared to a peak of 11.0 percent of total employment and 13.1 percent of 8

9 Exhibit 3: Maryland Employment Related to the Real Estate Industry (share of total) Sector Government sector: total (1) 18.0% 18.0% 18.1% 18.6% 19.4% 19.7% 19.7% 19.4% Private sector: total 82.1% 82.0% 81.9% 81.4% 80.0% 80.3% 80.4% 80.6% Real Estate services 1.4% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Real Estate credit 0.4% 0.4% 0.4% 0.2% 0.2% 0.2% 0.2% 0.2% Mortgage and Nonmortgage 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.0% 0.0% loan brokers Property insurance 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Title insurance 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Real Estate Investment Trusts 0.0% 0.0% N/A N/A N/A N/A N/A N/A Title abstract and 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% settlement offices Construction of buildings 1.8% 1.8% 1.7% 1.6% 1.3% 1.3% 1.2% 1.2% Specialty trade contractors 4.9% 5.0% 5.0% 4.8% 4.2% 4.0% 4.0% 3.9% Architectural and Engineering 1.6% 1.7% 1.6% 1.6% 1.6% 1.6% 1.7% 1.6% Services Total Real Estate Sectors 10.9% 11.0% 10.7% 10.1% 9.2% 9.0% 8.9% 8.7% Source: Sage Policy Group, Inc. private employment in 2007 and 2006, respectively. The proportion of people working in real estate credit has declined from 0.4 percent to 0.2 percent, while that of those working in title abstract and settlement offices has fallen from 0.2 percent in 2006 to 0.1 percent more recently. Income. In 2012, real estate sector employees received approximately $14 billion in income (see Exhibit 4 for relevant statistical detail). This figure does not include the income of self-employed agents and brokers, because they are not included in the BLS Establishment Survey data. We estimate that the 14,818 self-employed agents and brokers earn an additional $1.1 billion. Exhibit 4: Total Wages (millions of current dollars) Sector Total: all sectors 110, , , , , , , ,379 Government sector: total 23,162 24,419 26,055 27,420 28,646 29,490 30,593 30,648 Private sector: total 87,646 92,372 96,831 98,286 95,834 97, , ,095 Real Estate services 1,690 1,794 1,855 1,803 1,658 1,762 1,783 1,877 Real Estate credit Mortgage and Nonmortgage loan brokers Property insurance Title insurance Real Estate Investment Trusts N/A N/A N/A N/A N/A N/A Title abstract and settlement offices Construction of buildings 2,307 2,482 2,484 2,345 1,926 1,814 1,835 1,870 Specialty trade contractors 5,288 5,743 6,108 6,081 5,419 5,116 5,223 5,324 Architectural and 2,723 3,004 3,188 3,203 3,342 3,310 3,554 3,655 Engineering Services Total Real Estate Sectors 14,251 15,239 15,581 15,017 13,925 13,473 13,884 14,433 Source: U.S. Department of Labor, Bureau of Labor Statistics 9

10 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 to the construction process and the price of a finished home is considered the builder s value added. Much of this value added translates into compensation for human capital employed in the project. Real estate services contributed $45.2 billion in value added to Maryland s GSP in 2011, the latest year for which such data are available. This represents an increase of 15.9 percent (not adjusted for inflation) from the $39.0 billion that real estate services contributed to gross state product in Construction contributed $14.1 billion to GSP, a slight decrease from Contributions for financial activities are not available. Thus, to the extent that real estate activities are embedded within those sectors, GSP figures cited above do not fully reflect the totality of real estate contributions to Maryland s GSP. Exhibits 5 and 6 below provide relevant statistical detail. Jointly, the exhibits indicate that real estate-related activities represented nearly a fifth of total economic activity in Maryland in 2011, the most recent year for which comprehensive data are available, and nearly a quarter of private activity that year. 1 Changes in previous year s data are a result of revisions made by the BEA. Exhibit 5: Gross State Product (millions of current dollars) Sector Total: all 216, , , , , , , , , ,678 sectors Private sector: 179, , , , , , , , , ,104 total Real Estate 30,822 33,632 36,858 39,021 41,990 44,458 44,390 44,860 45,240 N/A Construction 12,572 13,544 14,630 14,987 14,878 14,987 13,913 13,833 14,096 14,356 Source: U.S. Department of Commerce, Bureau of Economic Analysis Exhibit 6: Gross State Product (share of total) Sector Private sector: 82.75% 82.72% 82.90% 82.80% 82.67% 82.34% 81.79% 81.71% 81.47% 81.56% total RE services % 20.34% 20.83% 20.79% 20.91% 21.15% 20.48% 19.83% 19.44% N/A Construction Real Estate 14.23% 14.50% 14.91% 15.02% 15.44% 15.82% 15.59% 15.16% 14.82% N/A Construction 5.80% 5.84% 5.92% 5.77% 5.47% 5.33% 4.89% 4.67% 4.62% 4.52% Source: Sage Policy Group, Inc. 1 Historic gross state product data have been modestly revised by the Bureau of Economic Analysis since our 2011 report. 10

11 The Real Estate Industry s Impacts Economic Impact In addition to the jobs, income, and business sales and revenue supported directly by Maryland s real estate industry, there are additional jobs 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 real estate transactions, such as a termite inspection and treatment. These transactions in turn allow for the purchase of other goods and services, from utilities and accounting services to airline tickets and fleet repair services. This chain of suppliers to the real estate industry is viewed by economic impact modelers as the indirect economic impacts 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 effects associated with household expenditures attributable to these activities are known as the real estate industry s induced economic impacts. The multipliers reflected in Exhibit 7 were used to derive total economic impacts for this updated report. The multiplier effect is calculated using certain formulae for various sectors. For every direct job supported in the nonresidential construction industry, another jobs are supported elsewhere in the economy. Multipliers in other real estate segments are larger. For instance, in the category of insurance carriers, each job supported directly generates an additional jobs in the broader economy. Exhibit 7: Multipliers Used to Derive Economic Impacts Sector Jobs Employment Compensation Output Nonresidential Construction Residential Construction Credit and Related Activities Insurance Carriers Real Estate Establishments Legal Services Architectural and Engineering Services Multiplier: (Direct Effect + Indirect Effect + Induced Effect) / Direct Effect Source: IMPLAN According to IMPLAN, the modeling software that has become the industry standard economic impact assessment tool, the value of direct output generated by the real estate industry in Maryland in 2012 was $40.5 billion 2, which was associated with 234,000 jobs and $18.5 billion in employee compensation. The industry s indirect and induced impacts generated an additional $30.5 billion of value, and affected an additional 229,242 jobs for approximately $10.2 billion in employee compensation. All told, considering all multipliers, the real estate industry accounted for $71.0 billion in statewide output, nearly 463,800 jobs, and $28.7 billion in employee compensation. Exhibit 8 includes additional statistical detail regarding the real estate industry s economic contributions. 2 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 IMPLAN Group LLC, Inc. 11

12 Exhibit 8: 2012 Real Estate Industry Economic Impacts Type of impact by sector Jobs Employee Compensation (millions) Direct Impacts Impact Sage estimates that the $28.7 billion in total compensation impact (which includes the value of employee benefits such as health insurance) attributable to real estate directly and secondarily translates into $24.0 billion in wages and salaries, at least potentially subject to Maryland s 4.75 percent personal income tax. Because of the manner in which the tax code functions, it is not possible simply to multiply the value of wages and salaries by the nominal income tax rate to derive a personal tax revenue impact statistic. We calculated an effective tax rate for Maryland of 3.70 percent. 3 Using that rate yields an estimated $ million in annual State individual income tax collections related to real estate activities in Real Estate Taxes as a Source of Local Government Revenue Output (millions) Construction 128,800 $8,741.7 $21,796.3 Real Estate (1) 46,403 $3,453.3 $8,244.5 Architectural and Engineering Services 40,623 $4,249.3 $5,610.2 Financial Activities and Legal Services 18,710 $2,074.9 $4,870.8 Total industry 234,536 $18,519.2 $40,521.8 Indirect & Induced Impacts Construction 121,909 $5,455.9 $16,272.0 Real Estate 31,184 $1,283.7 $4,161.5 Architectural and Engineering Services 47,507 $2,048.9 $6,153.7 Financial Activities and Legal Services 28,642 $1,361.8 $3,920.2 Total industry 229,242 $10,150.3 $30,507.4 Total Impacts Construction 250,709 $14,197.6 $38,068.3 Real Estate 77,587 $4,737.1 $12,406.0 Architectural and Engineering Services 88,130 $6,298.2 $11,763.9 Financial Activities and Legal Services 47,352 $3,436.7 $8,791.0 Total industry 463,778 $28,669.5 $71,029.3 Note. (1) Real estate includes workers and income captured by U.S. Department of Labor, Bureau of Labor Statistics and Sage s estimates of self-employed workers and their earnings. Soures: Sage Policy Group, Inc., IMPLAN Property taxes have the most significant real estate-related fiscal impact. The Maryland State 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 ended July 1, 2012, estimates the total value of Maryland real estate at $657.2 billion. As shown in Exhibit 9, the annual change has been decelerating since July 2008; the 4.56 percent decrease for the fiscal year ending July 2012 was just slightly lower than the 5.85 percent decrease of the previous year. Since its peak in 2009, the value of the assessable base has declined over 12 percent. 3 The effective tax rate was estimated by dividing collected income tax given as stated by the Maryland s State Comptroller by total income household income as estimated by the U.S. Census Bureau. 12

13 Exhibit 9: Maryland Assessable Base Period Value (billions of current dollars) July Annual Change July % July % July % July % July % July % July % July % July % Source: Maryland State Department of Assessment and Taxation, Sage Policy Group, Inc. The assessable base reflects both changes in the individual value of real estate properties and changes in the total number of properties. Exhibit 10, 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. Last year (2012) marked the first time since 2005 when both sales price and number of units sold were up on a year-over-year basis. However, both remain considerably lower than 2005 levels. Exhibit 10: 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, % , % $291, % $245, % , % $277, % $228, % , % $292, % $244, % Average 70, % 273, % 229, % Sources: Maryland Association of REALTORS, Sage Policy Group, Inc. 13

14 In Maryland, some forms 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 coffers are those levied by the twenty-three counties and Baltimore City. Indeed, taxes on real estate represent the primary source of local government revenue in Maryland. Real Property Tax. The Property tax rates levied by the State and 16 of the 24 jurisdictions have declined from their peak levels in FY The State property tax rate has declined by more than 15 percent (a decrease of 0.2 percentage points) since FY 2004; it currently stands at percent. From a local government perspective, the greatest percentage decrease in Maryland since FY 2004 took place in Wicomico County, where the rate has declined percent (a decrease of 0.2 percentage points) to a rate of percent. The largest increase in property tax rates occurred in Charles County, where the rate rose percent to percent (an increase of percentage points). Exhibit 11 provides relevant statistical detail. Exhibit 11: Real Property Tax Rates in Maryland, FY2004-FY2013 Jurisdiction Change FY04-FY13 CAGR* Baltimore City % -0.29% Charles % 1.10% Baltimore County % -0.15% Harford % -0.52% Kent % 0.11% Carroll % -0.32% Howard % -0.32% Cecil % 0.12% Garrett % -0.51% Allegany % -0.21% Dorchester % 0.54% Prince George s % 0.00% Washington % 0.00% Anne Arundel % -0.16% Frederick % -0.74% Calvert % 0.00% Caroline % -0.75% Somerset % -0.30% St. Mary s % -1.81% Queen Anne s % -1.56% Wicomico % -2.35% Worcester % 0.59% Montgomery % -0.41% Talbot % -1.31% State of Maryland % -1.81% Average: State and -3.70% Counties Average Counties only -3.22% Note. *CAGR = compound annual growth rate or the average change per year Source: Maryland State Department of Assessment and Taxation 14

15 Transfer tax. The sale of real property in Maryland is also subject to transfer taxes that are imposed by the State and most 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. Seven Maryland counties impose no transfer taxes. In those localities imposing a transfer tax, the rate ranges from 0.40 percent to 1.50 percent. The State transfer tax is.50 percent. Exhibit 12 lists current and recent transfer tax rates for all counties, Baltimore City, and the State. Recordation Tax. A recordation tax is imposed when a property is sold or a mortgage is refinanced. Given declining mortgage rates in recent years (until very recently), 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 during the current cycle, to take advantage of record low or near record low interest rates. All counties and Baltimore City (but not the State) levy a recordation tax, traditionally listed as value per $500 of transactional volume. 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. Exhibit 12: Property Transfer Tax Rates in Maryland, FY2007-FY2013 Jurisdiction Change FY07- FY13 Allegany 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.00% Anne Arundel 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00% Baltimore City 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 0.00% Baltimore County 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 0.00% Calvert 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N/A Caroline 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.00% Carroll 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N/A Cecil 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N/A Charles 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N/A Dorchester 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.00% Frederick 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N/A Garrett 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00% Harford 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00% Howard 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00% Kent 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.00% Montgomery 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00% Prince George s 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 0.00% Queen Anne s 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.00% St. Mary s 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00% Somerset 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N/A Talbot 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00% Washington 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.00% Wicomico 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% N/A Worcester 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.00% State of Maryland 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.00% Source: Maryland Department of Assessment and Taxation, Sage Policy Group, Inc. 15 s

16 In most counties, recordation taxes have remained unchanged in recent years. Four jurisdictions, however, have raised recordation tax rates since FY2007 Allegany, Frederick, Prince George s, and Queen Anne s counties. Current and recent rates are reflected in Exhibit 13. Real Property Tax Revenues. As reflected in Exhibit 14 on page 17, property tax revenues have routinely accounted for about three-fifths of local government revenues in Maryland. The figure for FY 2013 was 59.6 percent, down less than 2 percent from FY However, this is not where the property tax story ends. In addition to the State (one of only a handful of states to impose a property tax) and all 23 counties and Baltimore City, some municipalities in Maryland impose their own property taxes. The impact of these municipal taxes is not reflected in the exhibit on page 17. Exhibit 15 also reveals that the share of local government revenues attributable to real property taxes have been slipping in recent years. This is due in large measure to shrinking property values. In its most recent round of real estate property tax assessments, 678,763 property owners received notices regarding the assessed values of their homes. Based on these most recent assessments, residential property assessments decreased 7 percent compared with three years prior. Approximately 77 percent of assessed properties declined in value based on the last round of real property tax assessments. The most dramatic declines have occurred in Prince George s County. The exhibit on page 17 categorizes the changes in assessed value by Maryland jurisdiction. Exhibit 13: Recordation Tax Rates in Maryland per $500 of Transaction Value, FY2007-FY2013 Jurisdiction Change FY07- FY13 Allegany % Anne Arundel % Baltimore City % Baltimore County % Calvert % Caroline % Carroll % Cecil % Charles % Dorchester % Frederick % Garrett % Harford % Howard % Kent % Montgomery % Prince George s % Queen Anne s % St. Mary s % Somerset % Talbot % Washington % Wicomico % Worcester % Source: Maryland State Department of Assessment and Taxation, Sage Policy Group, Inc. 16

17 Exhibit 14: Sources of Local Government General Fund Tax Revenues ($millions) Category/Date FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Real Property Tax $5,507 $6,057 $6,594 $6,723 $6,728 $6,743 Real Property Transfer Tax $375 $265 $292 $272 $274 $284 Recordation Tax $350 $266 $238 $239 $237 $247 Total Property Taxes $6,232 $6,588 $7,124 $7,234 $7,239 $7,275 Income Tax $4,248 $4,250 $3,721 $3,862 $4,148 $4,254 Other Revenue $599 $604 $853 $677 $679 $683 Total Revenues $11,079 $11,442 $11,698 $11,775 $12,067 $12,213 Income Tax as % of Total 38.3% 37.1% 31.8% 32.8% 34.4% 34.8% Property Taxes as % of Total 56.3% 57.6% 60.9% 61.4% 60.0% 59.6% County Tax Revenue Note: 2012 and 2013 data are estimates. Real Property tax revenues include special fire district taxes. Note: This data was retrieved from the MD Department of Legislative Services County Revenue Outlook. Data for the previous study was gathered from the individual county budgets, which accounts for the updated values for 2008 through Source: Maryland State Department of Assessment and Taxation, Sage Policy Group, Inc. Exhibit 15: Residential Full Cash Value Change for Reassessment Group 2, Jurisdiction Base (1/1/2010) Reassessment (1/1/2013) Difference % Change Montgomery 46,209,472,540 46,990,047, ,574, % Howard 11,783,121,200 11,757,979,300-25,141, % Garrett 531,986, ,788,500-19,197, % Anne Arundel 20,606,769,300 19,841,283, ,485, % Allegany 1,049,961,560 1,009,371,800-40,589, % Frederick 8,657,912,100 8,320,425, ,486, % Carroll 6,901,516,300 6,626,333, ,183, % Kent 738,800, ,022,500-44,777, % Baltimore City 10,019,626,800 9,236,083, ,543, % Harford 6,178,751,900 5,690,913, ,838, % St. Mary's 2,779,080,000 2,545,323, ,756, % Cecil 2,672,428,600 2,411,057, ,371, % Queen Anne's 2,919,095,950 2,612,320, ,775, % Washington 4,096,159,350 3,666,385, ,773, % Charles 4,501,687,800 4,008,362, ,325, % Somerset 354,208, ,842,400-41,366, % Dorchester 993,699, ,831, ,867, % Calvert 3,460,044,600 3,010,734, ,310, % Talbot 3,096,153,700 2,694,112, ,041, % Baltimore 17,798,379,850 14,986,265,600-2,812,114, % Worcester 3,679,576,400 3,077,886, ,689, % Caroline 910,398, ,623, ,774, % Wicomico 1,640,779,400 1,299,612, ,167, % Prince George's 16,760,458,800 13,156,601,100-3,603,857, % Statewide 178,340,068, ,092,208,100-12,247,860, % Source: Source: Maryland State Department of Assessments and Taxation 17

18 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 has placed its assessment cap at 0 percent, while Baltimore City and Baltimore County have placed their annual property tax cap at 4 percent. The cap only applies to primary residences. During the housing boom years, annual tax increases were constrained by these caps, at least in part. Even though values have been declining more recently, annual property tax bills have still been rising in many cases. While this can place strain on individual household finances, government property tax revenues are effectively stabilized. The impact of these caps is therefore to constrain real property tax revenues during boom years and to allow for stable revenue receipts even during periods of elevated housing market distress. Exhibit 16: Average Assessment Increase, Properties Assessed Every Three Years, FY1991 through FY Source: Maryland Department of Assessments and Taxation The Maryland Real Estate Tax Burden Maryland has one of the most aggressive real estate tax structures in the nation. As Exhibit 17 indicates, Maryland ranked 11 th in the nation in terms of median total real estate/property tax collected in 2011, about 44 percent above the national median. For purposes of comparison, the median home is worth 34 percent more than the national median and the median household income of Marylanders is 39 percent greater than the national median. 4 In 2011, the median value of real estate taxes for Maryland was $3,152, while the median value for the country was $2,331. While Maryland is among the highest ranked states in terms of property taxes, when 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. 4 Median sales prices of homes are based on July 2013 prices provided by the National Association of REALTORS and the Maryland Association of REALTORS. Median household incomes are based on 2011 values provided by the U.S. Census Bureau American Community Survey. 18

19 Exhibit 17: Property Values and Real Estate Taxes (RET) in 2011 State Median Value of Homes Median RET RET Rank New Jersey 332,100 $7,188 1 Connecticut 282,900 5,152 2 New Hampshire 243,100 5,050 3 New York 303,500 4,606 4 Illinois 190,100 4,206 5 Rhode Island 244,400 3,796 6 Massachusetts 330,500 3,735 7 Vermont 220,700 3,647 8 Wisconsin 172,100 3,302 9 California 363,600 3, Maryland 293,800 3, Alaska 255,000 3, Texas 144,100 3, Washington 263,100 2, Pennsylvania 178,800 2, District of Columbia 426,800 2, Nebraska 137,800 2, Oregon 238,600 2, Michigan 126,600 2, Minnesota 191,400 2, United States 190,200 2,331 Source: American Community Survey, U.S. Census Bureau In 2012, 4.4 percent of Maryland s state tax revenue came from property-related taxes. That may not sound like a significant amount until one considers that most states generate much less, leaving real estate related tax revenues largely if not exclusively to their respective local governments. In fact, the State of Maryland s 4.4 percent figure compares to an average of 1.6 percent nationwide. Maryland ranks tenth among all states nationally and is the Mid-Atlantic regional leader in terms of real property taxation (this statistic does not embody local government taxation). Other Mid-Atlantic state governments are far less real estate tax dependent, including the Commonwealth of Virginia (0.2% share of revenues), the Commonwealth of Pennsylvania (0.1%), and the State of West Virginia (0.1%). Delaware does not assess state property taxes. See Exhibit 18 for relevant statistical detail. Exhibit 18: State Reliance on Major Tax Sources, Ranked by Reliance on Property Taxes 2012 State General Sales and Gross Receipts Individual Income Selective Sales Taxes Corporation Net Income Other Taxes Property Taxes 1. Vermont 12.41% 21.70% 22.71% 3.50% 5.27% 34.41% 2. New Hampshire N/A 3.69% 39.66% 23.63% 15.77% 17.25% 4. Wyoming 38.97% N/A 4.94% N/A 43.67% 12.42% 6. Arkansas 33.90% 28.98% 14.16% 4.88% 5.91% 12.17% 3. Washington 60.22% N/A 20.18% N/A 8.84% 10.76% 7. Montana N/A 36.60% 22.15% 5.38% 25.41% 10.46% 5. Michigan 39.91% 28.49% 14.82% 2.54% 6.74% 7.50% 8. Arizona 47.87% 23.85% 14.30% 4.99% 3.17% 5.82% 9. Kentucky 29.14% 33.54% 18.93% 5.49% 7.84% 5.06% 10. Maryland 23.89% 41.70% 18.15% 5.16% 6.70% 4.43% United States 30.54% 35.20% 16.62% 5.25% 10.75% 1.64% Note*: N/A indicates data that is not available Source: 2012 Annual Survey of State Government Tax Collections 19

20 Impact of Foreclosures In our last study, we noted how foreclosures had diminished property values, resulting in lost tax revenues and reduced demand for new construction. Foreclosure events during the third quarter of 2010 totaled 14,087. By the fourth quarter of 2012, this figure had declined to 6,381, less than half. (Some of that decline can be explained by the introduction of Maryland s foreclosure mediation program, which became law in July ) However, since that time, foreclosure activity has increased. Maryland is a judicial foreclosure state, which means that processing foreclosures requires judicial participation and therefore often takes considerably longer than in non-judicial states. For a time, processing delays resulted in declining foreclosure activity. That is no longer the case. According to the Maryland Department of Housing and Community Development (DHCD), the State posted the second highest state foreclosure rate in the nation in July of 2013, due primarily to the slow nature of the judicial process and the shadow inventory it creates. 6 As these distressed properties make their way onto the market, they can place downward pressure on local property values. Exhibit 19 provides a geographic breakdown of foreclosure events in Maryland for the second quarter of Exhibit 20 provides a historical look at foreclosure activity in Maryland between the second quarter of 2009 through the fourth quarter of Exhibit 19: Property Foreclosure Events in Maryland Jurisdictions, Third Quarter 2013 Jurisdiction Notices of Notices of Lender Total Default Sales Purchases Number County % Change from (REO) Share 2013Q2 2012Q3 Allegany % 11.1% 682.1% Anne Arundel , % 5.0% 408.1% Baltimore City , % -8.1% 225.3% Baltimore County 1, , % -1.5% 257.7% Calvert % -14.6% 189.1% Caroline % -6.4% 282.4% Carroll % -6.8% 280.6% Cecil % 0.6% 304.4% Charles % 2.6% 263.4% Dorchester % 10.6% 480.5% Frederick % -0.3% 118.6% Garrett % 39.6% 284.1% Harford % 27.3% 220.1% Howard % -8.7% 185.0% Kent % -27.6% 145.9% Montgomery , % 10.4% 119.2% Prince George s 875 1, , % 32.6% 55.9% Queen Anne s % 16.2% 280.2% St. Mary s % -15.1% 651.8% Somerset % 18.1% 387.9% Talbot % -9.2% 185.0% Washington % -9.0% 187.8% Wicomico % 24.0% 463.7% Worcester % 45.9% 513.0% State of Maryland 6,120 4,619 1,304 11, % 5.7% 179.7% *The sum of the three stages of foreclosure will likely exceed the total since a single home can be reflected in more than one category. Total number of foreclosures does not include this form of double counting. Source: Maryland Department of Housing and Community Development 20