Almost everyone has either experienced sticker shock at their most recent property tax assessments, or they soon will. Fayette County PVA, David O’Neill explains how soaring home prices are behind larger than usual assessment increases, offers historical context and provides forecasts regarding supply and demand for housing in Lexington and what it means for those wanting to buy or sell a home. More data can be found at FayettePVA.com, the official database for all real property in Fayette County.
David O'Neill Fayette County PVA
My property tax assessment jumped almost 50% this year. Why? Property tax assessments are determined using the sale prices of comparable homes. The median sale price of a single-family home in Lexington has almost doubled over the past 10 years, from $159,000 in 2013 to $310,000 today — a 95% jump. That’s what’s driving the increases.
Why are home prices going up? Don’t higher interest rates usually lower housing demand and bring prices down? Yes. Historically, during periods of inflation, when the Federal Reserve Board raised interest rates, home prices declined, helping to bring inflation under control. But that has not been the case this time because significant economic forces — including the pandemic’s impacts on labor and housing-related supply chains — have limited the supply of new housing.
Consumers are currently skeptical that interest rates will return to their previous levels. It is important to remember that interest rates were extremely low by historical standards thanks to monetary policy put in place during the recession. It is estimated that nearly 60% of all existing home mortgages are locked in at or below 4%, and 75% are below 5%. Those owners are very reluctant to give up their locked-in rates for a new mortgage that would cost 6.5% or 7% when there’s little expectation that 3.5% mortgage rates will return in the foreseeable future. So, they are holding on to their homes, limiting supply and forcing prices up.
When the Fed finally gets around to cutting rates, will a flood of houses hit the market and stabilize prices? When interest rates come down, it is reasonable to expect a wave of new real estate listings. However, on the demand side of the equation, current homeowners with their locked-in low interest rates are not the only ones who have been trying to wait out the Fed. Millions of millennials have been putting off home ownership creating a swell of pent-up demand. When they re-enter the marketplace, there will be significant upward pressure on prices. Also worth noting: We are in the early stages of one of the greatest transfers of wealth in human history. Estimates suggest upwards of $70-$90 trillion dollars in wealth will transfer from the boomer generation to millennials over the next 20 years, setting the stage for a surge in real estate transactions.
Data furnished by Fayette County PVA
Are the rapidly rising prices and lack of homes for sale a national issue or unique to Central Kentucky? The housing affordability crisis is not unique to Lexington. It is an increasingly significant issue almost everywhere. Factors contributing to the supply and demand imbalance are similar across most markets. But some locations, including Lexington, have particular situations.
The current inventory of houses listed for sale in Lexington is very low by historical standards, with two significant drivers at play. First, we have been very slow in bringing new homes to market since the recession. As shown in the accompanying graph, new construction was a robust local industry in the early 2000s, providing between 1,500 and 2,000 new single-family detached houses per year. Heading into the recession, that number began to dwindle, ultimately dropping 75% to a low of 500 houses in 2011, an annual rate of production that persists to this day.
Currently, new construction only makes up about 10% of all home sales in Lexington. Nationally, however, that ratio trended back up with the recovery from the recession. Of the 1.5 million homes sold in the United States in April, 31% were new houses.
One obstacle unique to a handful of cities, including Lexington, is the existence of an urban service boundary designed to limit urban sprawl. Subdivision of land in Fayette County that lies outside the urban service boundary is limited to parcels no smaller than 40 acres. The extent to which these preservation efforts suppress the supply of new housing is a decades-old ongoing debate. But, it appears Lexington will soon move forward with a plan to expand the urban service boundary for the first time since the mid-1990s, allowing for the development of almost 3,000 acres.
Property assessments are understandably increasing, but surely there is a limit to how much they can increase annually? Unfortunately, no. The Kentucky constitution requires PVAs to shoot for 100% fair cash value each year. However, the Kentucky Department of Revenue (PVA is a state office, not a city function) recommends reassessing on a quadrennial review plan, whereby each property is visually inspected and evaluated for a revised assessment once every four years. The quadrennial plan usually works well, but in the current market, where values are increasing on average 10% each year, reassessing only once every four years often results in shocking increases.
The alternative would be to abandon the quadrennial plan and reassess every property annually. However, PVA offices are not funded nor staffed at a level that would make quadrupling the workload feasible. This is why following events like the recession and pandemic lockdown, when reassessments were suspended, it takes several years to get fully caught up with reassessments.
Now that I understand the process better, I want to protest my reassessment from last year. Is it too late? It is too late to change the value for your 2024 tax bill, but you can protest next year. Each tax year stands on its own and any property owner can protest any of their properties every year. There is no requirement that a property’s value has changed in order to protest.
Data furnished by Fayette County PVA
If assessments are already decided, what good will it do to go through the protest process? The most important message here that I want readers to take away is that I strongly believe that for tax assessments to be fair and accurate, the assessment process must be a collaborative effort between the property owners and the PVA.
The PVA performs mass assessments, not full appraisals; we never go inside homes. There are 114,000 properties in Lexington and only a handful of PVA staff. Without input from the owner, we cannot possibly know enough about each property to arrive at an accurate opinion of value. Every four years, assessors drive up and down every street in their assigned neighborhoods and perform “windshield inspections” of the home. Based on these observations, assessors make significant assumptions about the overall condition of the home.
The assessment notices we mail to property owners in mid-April include our educated best estimate of value, but that’s meant to be the beginning of the process, not the end. The next step is for property owners to fill in the gaps in our knowledge about their property, and that happens through the protest process.
Most property owners will receive an adjustment in their assessment after reviewing their home’s condition in greater detail with a PVA assessor. We try to build in an adjustment factor for the fact that most houses sold have had at least some cosmetic updates before hitting the market, whereas most of us do not keep our homes in market-ready condition. Specific items that can affect value include the quality of finish of the basement, attic, and upper floor spaces; effective age of the roof, windows, and HVAC systems; years since updates to kitchens and bathrooms; deferred maintenance, etc.
What other information should homeowners provide the PVA when protesting their assessment? Several years ago, we redesigned the assessment notice to include the five comparable sales used to derive a value for the subject property. To the best of my knowledge, there is not another PVA jurisdiction in the country providing comps directly on the notices. The comps are 100% computer generated, and while they continue to get better with each year that we further refine the assessing software, a homeowner may find other sales that are more relevant. We are always happy to review any other comps. Other helpful information includes recent appraisals, estimates of repair, and photographs.
Data furnished by Fayette County PVA
What exactly is a “comp”? The ones on the notice don’t look like my house. Our assessing software chooses comps based on criteria including overall square footage, number of stories, exterior finishes, basements, etc. The computer will always try to limit comps from only within the PVA-designated neighborhood boundary. Sometimes a home is significantly different than other houses in the neighborhood and the computer must search from other neighborhoods that are identified as having similar characteristics.
Keep in mind that “comparable” does not mean identical. Comparable means the houses are similar enough that differences between the two can be identified, quantified, and adjusted to arrive at an opinion of value. Adjustments to a comp’s sale price are commonly made for differences in square feet of living area, whether there’s a basement, how much of the basement is finished, number of bathrooms, presence of a garage or other accessory structures, differences in land value, and a subjective rating assigned by the PVA assessor during the inspection process.
My house has not had a significant assessment increase in several years. What should I expect? If your tax assessment has not changed significantly since the pandemic, then you are probably in the upcoming 2025 quadrennial area in Southern Fayette County, which essentially encompasses everything outside New Circle Road south of Versailles and Winchester Roads. The assessors will be in those areas conducting inspections from now until December. The assessment notices will be mailed, as always, around April 15. Please note, as mail delivery can sometimes be unreliable, I cannot guarantee delivery. But, I can guarantee the new values will be updated on the PVA website at FayettePVA.com on April 15. Every property in the county has its own page or property record on the PVA website, and we encourage homeowners to familiarize themselves with it. On your property’s page, you will also find a PDF copy of the notice, as well as the comps used with hyperlinks to each comp’s property record. To access FayettePVA.com, you must create an online account. It is free to use for the first 100 property searches each month.