Property Taxes Emerge as Latest Front in Housing Crisis

BY Lee Banville  August 9, 2010 at 1:00 PM EDT

Home for sale in Lake County, Mont., near Flathead Lake; photo by Rollo ScottMISSOULA, Mont. | Foreclosures make headlines. They are a big focus of the media’s attention as the troubled economy continues to dominate the news. But even where banks aren’t taking over properties, the collapse of the real estate market is having profound effects on local politics and county and city policymaking.

Here in Northwestern Montana, one needs only look at the situation happening on the shores of stunning Flathead Lake to see the housing crisis will continue to haunt communities for years to come. Residents along the largest natural freshwater lake west of the Mississippi had watched as property values climb throughout the 1990s and early 2000s.

Fueled by many out-of-staters looking for a second home with views of the glacier-carved Mission Mountains and only miles from Glacier National Park, property reappraisals including land and home soared to as much as $10,000 per foot of shoreline along the lake.

Those increased values helped push Flathead County, which abuts the lake into the Monied ‘Burb county classification in Patchwork Nation. And like other communities that experienced rapid growth in real estate assessments those ballooning values came with other costs.

The Price of Value

On Flathead Lake, the complicating factor has been rising property tax bills. For the new residents who had dropped $1 million for a home, the bill was no shock, but for the residents who had owned their home for 20 years, the new levy threatened to tax them out of their homes.

In Montana, reappraisals happen every six years under state law and many residents, myself included, just received the reappraisal done in 2008. For most residents in Flathead and Lake counties that abut the lake, the reappraisal showed an increase in value, but nothing too dramatic.

The story is different on the lake.

Take, for instance, the story of the Pettinatos. Judy Pettinato’s parents bought a piece of property on nearby Whitefish Lake in 1957 for a whopping $6,500. They built a home and left it to their daughter after both passed away.

When Judy and her husband retired to the home in 2008, all seemed right with the world, but then the reappraisal came. The Flathead Beacon reported, “The reappraisal showed the property’s total market value in 2002 at $374,654. Pettinato said they were expecting an increase for the reappraisal, but the July 2008 market value – more than $1.8 million – was shocking, ” Molly Priddy wrote last year. “Even more shocking were the estimated tax payments. The tax calculator from the Department of Revenue showed payments increasing from over $4,000 in 2008 to more than $13,000 in 2014.”

A Tale of Two Tax Rates

Flathead and Lake Counties on the surface could not be more different. Flathead, with the towns of Whitefish and Bigfork, is a Monied ‘Burb in Patchwork Nation. Through the last few years the average income had continued to climb as many out-of-staters, especially from California, bought property and settled there. Lake County, which we have been tracking for a year, is on the south side of the Flathead and is a Tractor Country. Largely rural and dotted with a small towns, one thin strip of the county, along the lakeshore, has seen home values climb.

And so residents of these two very different counties found a common enemy in the state reappraisals.

The Pettinatos are not alone in bemoaning their new tax rates, locked in at the moment the real estate market was at its zenith and now set until 2014. Many residents along the picturesque lakes of northwestern Montana are reeling from tax bills that are due to double or triple.

And, of course, the kicker is most of their homes are not worth those sky-high prices any more. Although the real estate implosion that has ravaged Nevada, Florida and California has not slammed Montana as much, the sky-high prices for these sought-after lakefront properties have taken a beating.

“Homes that were worth $200,000 or $250,000 have not seen their value fall that much,” Kellyn Brown, editor the Beacon said this week. “But for places that were selling at $350,000 and up we have seen a real drop. You are seeing property along the lake go to auction and that just wasn’t happening a couple years ago.”

A recent article in the Missoulian newspaper in nearby Missoula County reported that lakefront property sales along Flathead had plummeted from $61 million in 2006 to $19 million in 2009.

It should be noted this is a common problem in places that have seen stratospheric property assessment increases in recent years. The crash has been so hard in Eagle County, a Boom Town in Colorado, that some neighborhoods have seen special assessments that cut values across the board designed to make home values more realistic and more current.

A Plea for Mercy

The drop in values in Montana has led many people to request such reappraisals from the state, but now some in the Legislature say the entire process needs reform. Not surprisingly, lawmakers who represent the lakefront homeowners are proposing more drastic changes.

One idea floated this week would allow homeowners to pay a lower tax rate if a private reappraisal shows their property value has dropped. Another proposal would base the value of the property on its most recent selling price. But the Legislature, which meets only every other year, will not take up the matter until next year and there is an election before then.

“A lot will depend on what happens in the election,” Brown said. “If the Legislature is evenly split like it was last time, it may be tough to get this changed,” adding that the reappraisal issues only effects some people in northwest Montana and has not been an issues in the windblown Tractor Countries of sparsely populated eastern Montana.

For the time being, the state is standing by its assessment of the property values, saying that they are comfortable with their numbers and that the appraisals of homes in the two Flathead Lake counties were deemed most accurate by an outside consultant.

And Montana at the state level is facing the same rock-and-a-hard-place issues as Washington. To wit, how can elected officials balance the economic needs of individual citizens with the larger needs of the general fund?

In Montana, the average household income is just shy of $44,000. In Flathead County, it’s slightly over that, but in Lake County, the average family brings home $38,505. With property appraisals soaring along some parts of the lake, the average family can only afford so much in terms of land and taxes. But any reappraisals will shrink an already anemic tax base and that could mean trouble for communities trying to keep their services running and financial house in order.

There is no easy answer to the challenges presented, and until the housing market settles into some new norm it doesn’t look like there will be.

Dante Chinni contributed to this report from Eagle, Colo. Lee Banville is the former editor of the Online NewsHour and a digital strategy adviser to the NewsHour.