Asymmetric Risk of Housing Distress from Property Tax Limitations
74 Pages Posted: 24 Jan 2023 Last revised: 23 May 2023
Date Written: January 21, 2023
Homeowners face risk due to variation in annual property tax liabilities, which may result in financial distress and eventual mortgage foreclosure. By reducing the pro-cyclicality of property tax liabilities, we show that property tax limitations can expose households to greater systematic risk despite reducing intertemporal variation in tax amounts overall. We develop an innovative measure of tax policy risk using Arrow-Debreu securities and obtain simulated measures of risk that capture all of the key characteristics of states’ property tax regimes. Using a state border dis- continuity design and parcel-level data for the universe of U.S. residential properties, we show that a one standard deviation increase in tax policy risk (≈ $200) increases the probability of mortgage distress by approximately 0.19 percentage points. The magnitude of this unintended effect is comparable to the increase in probability of mortgage distress associated with owning a home in disrepair and is approximately one eighth as large as the effect of moving between the third and fourth quartiles of the loan-to-value distribution (near the threshold for being underwater).
Keywords: Property Taxation, Assessment Limits, Distress, Mortgage Default, Foreclosure
JEL Classification: G21, G28, E44, K34, R20
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