Gauging the Impact of Home Foreclosure on Neighborhood Property Values Improving Assessments to Help Struggling Homeowne

1. Gauging the Impact of Home Foreclosure on Neighborhood Property ValuesImproving Assessments to Help Struggling Homeowners Community & Economic Development Committee City of Milwaukee October 26, 2009 Robert Weissbourd, RW Ventures, LLC

2. The Tax System Mediates the Role of Housing in Neighborhoods, Markets, and Local Government Why Should We Care?

3. Housing Defines Our Communities Real Estate Matters

4. Housing Builds Individual Wealth Real Estate Matters Source: Net worth and the assets of households, US Census Bureau 2002.

5. Housing Supports Government Real Estate Matters Source: US Census Bureau

6. Housing Bubble Aftermath: One in Four Homes Are Now “Underwater” When Real Estate Markets don’t Work...

7. Bad Things Happen to Our Cities Photo: Doug Benz, The New York Times

8. The Devastating Impact of Foreclosures Source: Center for Responsible Lending Press Release, May 2009

9. Greatest Impact in Low Income Neighborhoods Data: HUD, Neighborhood Stabilization Program

10. A Good Property Assessment System is Key to Households, Communities, and Government. • Property Assessments influence • Investment in housing stock • Which communities residents choose • Households wealth • Government receipts

11. For Struggling Homeowners, Property Taxes are a Substantial Additional Burden Property Taxes: A Significant Household Expenditure • In 2007, the typical U.S. homeowner spent 2.91% of annual income ($1,838) on property taxes. • In Illinois, this figure was 4.76% of annual income, or $3,203. Source: Property Taxes on Owner-Occupied Housing by State (2007 Tax Foundation report)

12. The Assessor’s Role in the Tax System Assessments Are Intended to be Accurate, Uniform, and Equitable

13. The Assessor’s Role in the Tax System Accuracy Ensures Uniformity and Equity in the Tax System

14. The Assessor’s Role in the Tax System Non-Uniformity: Similar Houses Assessed Differently

15. The Assessor’s Role in the Tax System Inequity: Different Assessment Ratios for Different Values

16. But Current Market Conditions Present Serious Challenges...

17. Volume Has Dropped by 64% Between the Peak in 2005 and 2009 Dramatic Decrease in Sales Volume Total Sales of Residential Properties 68,241 24,445 Source: Cook County Assessor's Office, Single Family Only

18. Compounded by Skyrocketing Foreclosure Rates Source: Cook County Assessor's Office, Single Family Only

19. Result in Legal Challenges, a “Flood” of Appeals... • “...Officials across the country say there is no question that the number of [assessment] appeals has risen from the usual trickle to a flood.” (NYT, July 4, 2009) • Lou Dobbs Tonight reports on assessments and property tax protests (CNN, April 1, 2009) • City of Philadelphia sued over assessment practices

20. And Serious Community Development Implications • Greatest challenges in neighborhoods that are most affected by foreclosure crisis • Risk of over-assessments for homeowners who can least afford them

21. The Cook County Assessor’s Office (CCAO) Took Action • Project Goal: Enhancing the Assessment Process to Better Estimate Property Values in the Current Environment • How to account for the recent downturn in the market after years of steady growth? • How to account for the increased influence of foreclosures?

22. 1.8 Million Total Parcels North 2010 & 2013 (450,679 parcels) City 2009 & 2012 (855,140 parcels) South 2011 & 2014 (526,799 parcels) About Cook County

23. The CCAO Is One of the Largest and Most Sophisticated Assessor’s Offices in the Country About Cook County

24. Assessment Practices and Considerations Vary Widely • Size of Jurisdiction • Method and Technology • Manual Re-calibration • Computer assisted mass appraisal • GIS Systems • Frequency of Reassessment • Governmental Considerations • Tax Base and Levy • Assessment Caps

25. Project Structure • Build from Existing Models • Operate within current systems (data, software and staffing) • Deliver under tight timeline dictated by assessment process

26. Criteria for Success • Accuracy, Uniformity, Equity • How close are assessed values to actual market values? • Are similar homes assessed at similar values? • Are different value homes assessed at the same rate? • Practical Considerations • Ease of implementation, transparency

27. Process and Diagnostics • Evaluation of current model • Introduce modifications, from simple to complex • Evaluate each step using rigorous statistical techniques • Review outcomes • Develop recommendations

28. Evaluation via Out of Sample Testing Enables readily determining quality of current systems and modifications

29. Detailed Reports Generated for Each Model Modification

30. DISCLAIMER To preserve confidentiality, the following graphs and figures were constructed for illustrative purposes only, and do not reflect specific project data or results.

31. Defining the Problem: A Major Market Downturn

32. That Impacted Neighborhoods Differently

33. Model Improvements Goal: Accurately Capture Both Trends

34. Tested Multiple Foreclosure Measures • Number of foreclosure filings in the neighborhood within the past year • Presence of foreclosure filings on the same block within the past year (dummy) • Also tested: Block-level number instead of dummy, REO instead of filing, different distances (1/32 mile, 1/16 mile, 1/8 mile)

35. Accounting for the Impact of Foreclosures • Created new variables that capture and account for nearby foreclosures • New variables better assess the value of the foreclosed property as well as non-foreclosed properties on the same block

36. What Does This Mean for the Assessment of Individual Properties? Filing Nearby No Filing Nearby

37. Accounting for the Downturn in Housing Trends • Created new variables that track the housing market on a more “real time” basis • New variables adjust to market trends – regardless of whether they are up, down or flat

38. Capturing Market Trends: Time Dummies vs Linear Model

39. Capturing Market Trends: Time Dummies vs Linear Model

40. Capturing Market Trends: Time Dummies vs Linear Model

41. Capturing Market Trends: Time Dummies vs Linear Model

42. Capturing Market Trends: Time Dummies vs Linear Model

43. Capturing Market Trends: Time Dummies vs Linear Model

44. Model Enhancements Make a Big Difference Graphics are for illustrative purposes ONLY

45. Changes do not Affect Overall Tax Collection (a Function of Levy), but Preserve Accuracy and Equity in the Tax System Improvements Change Distribution, not Tax Collection Amount

46. Project Impact • Savings for lower income homeowners (holding aggregate tax revenue constant) in the order of sixty million dollars. • The changes have been incorporated into the current round of assessments and will be applied to all future assessments. • Additional assessment model improvements have been identified and are being explored together.

47. The “New Frontier” of Property Assessments • Opportunity to apply newest statistical and data mining techniques to assessment models • Potential to deliver assessments more accurately, equitably and efficiently, leading to a new generation of property assessment practices

48. In Sum... • Time to revisit “one of the most important, easily documented, and manipulable of all influences upon the social geography of cities, and also one of the most neglected.” (Harris and Lehman, 2001) • A modest investment generates a large financial impact for neighborhoods and homeowners who sorely need help. • The approach, techniques and solutions of the project are easily transferable to other counties.

49. Gauging the Impact of Home Foreclosure on Neighborhood Property ValuesImproving Assessments to Help Struggling Homeowners Community and Economic Development Committee City of Milwaukee October 26, 2009 Robert Weissbourd, RW Ventures, LLC