The Texas real estate market seems to have reached its peak toward mid-2022. The year ended with lower demand in major cities, the beginning of a price drop trend, and a bit more inventory (or availability of houses for sale in the market) than buyers saw in most of 2021 and 2022. However, the potential price drops for buyers may or may not translate into lower property tax bills for residents. In this article, we examine the recent housing trends, what they could mean for your individual property, and — ultimately — how you can make sure you’re paying a fair amount for your property taxes, no matter the state of the market.
Property Value vs. Property Value: Two Different Numbers
When you think about your home’s property value, there are two different ‘property value’ numbers to keep in mind. In the real estate world, there’s the market property value: what your home would sell for on the open market. There’s no concrete property value number in this context; you might put your home on the market for one price, receive offers with higher or lower values, and finally settle on a different selling price entirely. A truism in real estate is that your house is worth whatever it sells for.
In the tax world, however, property value means something else. It reflects what tax assessors calculate as the market value of your home. While the two numbers can be very similar, as both consider the property’s location, the house’s features, and contemporary market trends, this number won’t see quite as much turbulence because of a motivated buyer or a sudden increase in interest rates. This is the number they use (along with the tax rates in your area) to calculate your actual property taxes.
So as homeowners consider putting their home on the market or simply try to pay a fair tax rate, it’s important to remember that these two numbers are distinct. The ‘real estate property value’ is your potential selling price; you (as the seller) want it to be significant, which can vary significantly in just a short time. The ‘property tax property value’ is more stable and can even be artificially suppressed if you have a homestead exemption; this is a good thing — a lower property value here equates to a lower tax bill.
However, the two numbers do interact with each other. Next, we’ll explore how real estate property values can affect your property value for tax purposes.
How Property Values on the Market Impact Property Taxes
Virtually everyone in Texas has seen the meteoric rise of homes’ selling prices, especially in popular suburbs. But the past few years of competition and the last few months of slower sales don’t just impact buyers and sellers. Look at how the real estate market affects your property tax bill, whether you bought a house recently or not.
Scenario One: You’ve Recently Bought a New Home
If you just bought a home, the selling price becomes a significant factor in how your local tax appraisal district assesses the property’s value. If you purchased it during the real estate surge, you may have paid $50,000 or even $100,000 more than the last property value number assessors had on the books. From that alone, you can expect a significant increase in property taxes from the previous owner’s final bill.
Also, you may not have a homestead exemption in place. This measure allows homeowners to reduce the property tax bill for their primary residence. It removes $40,000 of your home’s value from school district levy calculations and — more importantly, in this use case — caps the home’s property value increase to 10%. When you have a homestead exemption in place, the appraisal district can’t raise your home’s value by more than 10% except concerning any improvements you made to the property. But if you don’t file one on time, you may see your property value go up by 19.8% (the average price increase for mid-priced Texas homes).
Scenario Two: You Haven’t Put Your Home on the Market
Even if you haven’t bought a new home, your property taxes will reflect the red-hot market, especially if it reaches your neighborhood. Tax assessors use complex calculations to (i) appraise each property’s value at least once every three years and (ii) recalculate the property value for the in-between years. One factor in their equations will be “comparables” — the profiles of similar homes in your neighborhood or town.
For example, suppose you bought your home in 2008 for $200,000. Since then, the property value has crept up to $260,000. However, a couple of your neighbors with virtually identical homes (exact bedroom count, duplicate square footage, etc.) sold their homes over the past few months for $400,000. This will weigh on your home’s valuation, increasing it at a higher percentage than in previous years. If you have a homestead exemption, you have some degree of protection because that percentage can’t go beyond 10%—but the increase in your property taxes can still sting.
Related: House Prices and Property Taxes: How Are They Related?
Are Property Values Falling?
The dam has burst for large swaths of the Texas housing market. The market isn’t nearly as red-hot as it was, competition is cooling, and the average house price is dropping. There are a lot of different angles of analysis on this, and going beyond the surface can help you gain a better foothold in predicting your property taxes for 2023 and beyond.
The Peak Is Past…
Redfin’s recent Texas housing market analysis shows that the sharp rise in house prices is no longer moving along such a steep trajectory:
In November 2022, 16.2% of homes in Texas sold below list price, down 21.4 points per year. … 35.3% of homes had price drops, up from 17.0% in November last year.
These numbers are far more valuable than looking at the average house price on the market (and we’ll explore why in a moment). When people put houses on the market, they usually aim for what they think will sell for. Sometimes, they are too optimistic or strategic, but they show people’s anticipations in the current market. Redfin found that the sales prices were too ambitious in November; many sellers either had to drop their prices or accept a lower-than-list offer, which means the market predictions were wrong. The demand for house prices is cooling, and buyers aren’t willing to pay as much as before.
…But The Focus Is Shifting to Mid- to Low-Market Homes
However, it’s essential to analyze the dropping numbers the right way. When the same house or even the same price tier drops, it serves as a clue to a particular market trend. But when the average price of homes on the market drops—like many headlines have been focusing on—there are a couple of different things that could mean:
- Prices may be dropping, which is undoubtedly part of the story, or
- Other types of houses are now going on the market, or
- People have smaller budgets because of less purchasing power and higher interest rates, so they’re looking at different types of homes altogether.
While the market is undoubtedly changing and the number of houses on the market is growing, that doesn’t necessarily mean house values are falling as fast as it seems. Combined with winter being the traditional slow season for real estate, it’s better to be cautiously optimistic than risk too much bravado.
If Property Values Are Falling, Will Property Taxes Go Down?
In that same vein, homeowners should prepare for their tax-based property values to continue to increase. Here’s why:
The Higher Property Values Will Stay in Appraisal Calculations
As we discussed earlier, tax assessors will continue evaluating the recent house prices in their calculations. Any homes sold at sky-high prices in your neighborhood in the last year or so will directly affect your valuation, and the residual impact will continue (albeit to a lesser degree) in the years to come.
Your Property Value Assessment Is Very Localized
Most neighborhoods include comparably priced houses. That means your property assessment will primarily feature comparable properties within a small geographic radius rather than your town or region. As a result, price drops and lower median prices of houses on the market won’t have as much effect on your property value.
However, if you live in a neighborhood where property owners had to sell their homes at a reduced price, you may see that reflected in a lower (or at least slightly less high) price.
Other Factors That May Make Property Taxes in Your Area Go Down
There is good news if you’re worried about your property taxes, not just your property value. First, some areas are considering a reduction in their property tax rates. Fort Worth officials recently proposed a 2-cent reduction that can help keep city taxes in check. Also, some of the factors that made local governments increase their budgets in the past couple of years — a bottlenecked medical infrastructure, ballooning construction and material prices, and COVID-19-related expenses — are starting to drop away, allowing local governments to do more with the budgets they have.
Related: 4 Ways to Get Texas Property Tax Relief
What Individual Homeowners Can Do to Fight for Lower Property Tax Bills
When you own a home in Texas, there are a few individual measures you can take to reduce your property taxes as much as possible by lowering your effective tax rate and keeping your (tax-related) property value controlled. Add these actions to your spring to-do list:
File for Exemptions
A homestead exemption is one of the most popular exemptions for Texans who own their primary residence. If you file for this measure, you can exempt $40,000 of your home’s value for school district levies, cap the amount your home’s value will increase yearly, and see additional tax benefits. Homeowners may also qualify for other exemptions.
Protest Your Property Taxes This Spring
Every spring, homeowners receive a Notice of Appraised Value if their property’s value has increased. If you receive this notice and think the new valuation is exorbitantly high or inaccurate, you can file a protest notice and do a counter-valuation. From there, you can speak with a county representative, negotiate, and even present your case in front of an appraisal review board.
Impact Your Property Taxes by Starting the Protest Process
Falling house prices may slow the upward momentum of property values and, by extension, property taxes. But you may need more than that to ensure you’re paying a fair tax. At Home Tax Shield, we help homeowners across the state fight for more equitable property taxes. Our team will conduct a property assessment, file your protest notice, and manage the process on your behalf. Sign up today to prepare for your 2023 tax bill.