The sting of soaring property values

Recently, Iowa City has experienced a significant upswing in property values, a trend that comes with a less celebrated downside: a sharp increase in property taxes. This rise has been primarily fueled by the COVID-19 pandemic as well as certain supply and demand imbalances. With the release of the 2023 assessments, Johnson County underscores the heightened value of your home, evident in your Sept. 1 property tax bill. Across the county, most residents are seeing their property assessments jump by around 15 percent, although increases in Iowa City range from 15 percent to an eye-popping 30 percent from 2021.

This issue deserves our attention, as it not only affects homeowners but also the long-term well-being of our community.

The current real estate market is an oasis for those looking to sell, offering the opportunity to command prices far beyond a property's intrinsic worth. However, this bonanza offers little relief to homeowners not actively participating in the market, many of whom find themselves particularly burdened. For retirees, young families, and those on limited incomes, the increase in property taxes adds to the existing financial strain exacerbated by recent inflation in essential goods and services.

State regulations require that properties in Johnson County be assessed within 5 percent of their current fair market value. This methodology leans heavily on sales comparisons, making it vulnerable to the whims of market sentiment. Consequently, assessments can rise sharply in a bullish market, even when the intrinsic value of the property remains largely the same. The recent boom has been fueled by a cascade of factors — pandemic, urban exodus, rock-bottom interest rates, increased telecommuting, and skyrocketing construction costs — each contributing to a market dynamic that resembles commodity trading more than traditional home buying.

The real estate market in Johnson County, particularly in Iowa City, is currently experiencing what can be described as “irrational exuberance.” Despite a decrease in the number of transactions compared to last year, the average sale price continues to climb. For example, among the 15 newly constructed homes featured in the 2023 Iowa City Parade of Homes, eight had publicly available prices, with a median listing or selling price of $869,950. With an annual tax bill estimated at $18,269 for such a property, Johnson County's effective property tax rate stands at 2.1 percent — one of the highest in the nation. According to the local assessor's office, homeowners should generally anticipate around $2,100 in property taxes for every $100,000 in home value. While market temperatures may fluctuate, taxes tend to remain sticky.

Although higher property taxes translate to more resources for local governments, the risk of long-term consequences looms large. Unsustainable taxation levels can lead to a slew of unwanted outcomes, including displacement and erosion of community fabric. Importantly, taxes also serve as behavioral tools; through taxation policies, governments can effectively steer individual choices and societal behavior. At some point, every taxpayer will question their limit for elevated property taxes.

The crux of the issue lies in adopting a balanced approach to property assessment — one that marries current market conditions with homeowners' ability to shoulder the financial burden. This might involve reassessment protections or having a more comprehensive property tax policy that has a more nuanced understanding of the market that yields sky-high property valuations.

The health of the real estate market is only as strong as its participants. The current euphoria surrounding soaring property values should not overshadow the complexities and potential pitfalls and long-term consequences of rising property taxes. A nuanced understanding of this relationship, coupled with thoughtful policies, will not only protect individual homeowners but also preserve the integrity and diversity of our communities.

Sean Farley of Iowa City has a background as an economic analyst in real estate appraisal and academic credentials that include a BA in economics, MA in psychology, and a Ph.D. in Neuroscience. He’s spent years examining the complexities of financial decision-making and value assessment.