Asymmetric Risk of Housing Distress from Property Tax Limitations

74 Pages Posted: 24 Jan 2023 Last revised: 23 May 2023

See all articles by Sebastien Bradley

Sebastien Bradley

Drexel University

Da Huang

University of Utah - David Eccles School of Business

Nathan Seegert

University of Utah - Department of Finance

Date Written: January 21, 2023

Abstract

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

Suggested Citation

Bradley, Sebastien and Huang, Da and Seegert, Nathan, Asymmetric Risk of Housing Distress from Property Tax Limitations (January 21, 2023). Available at SSRN: https://ssrn.com/abstract=4332670 or http://dx.doi.org/10.2139/ssrn.4332670

Sebastien Bradley

Drexel University ( email )

1023 Gerri C. LeBow Hall
3220 Market St
Philadelphia, PA 19104
United States

Da Huang (Contact Author)

University of Utah - David Eccles School of Business ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

HOME PAGE: http://dahuang-finance.github.io

Nathan Seegert

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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