How Rising Home Prices Will Affect your Property Taxes in 2022

If, like many, you’re part of a double-digit price increase in U.S. home values, take heart: It won’t necessarily lead to large property tax increases. Housing prices increased 15.9% in 2021 from 2020 and were up 16.9% this January from a year earlier. Surging demand, a low supply of houses, a labor shortage, and inflation have created a wildly unpredictable market. Inflation, which ran at 8.6% in June, hasn’t been this high in the United States since the late 1970s and early ’80s. Some states have laws in place that limit property tax increases. Others don’t. Here is a look at some of the factors affecting your property taxes.

Related: Counties With the Highest and Lowest Property Taxes

It’s difficult to predict the effect inflation has on property taxes because each state has its own formula to calculate tax bills, and many have levers in place that cap the amount that property taxes can be raised in a year. Dramatic market shifts, such as the current one, create anxiety for homeowners who don’t want to deal with sticker shock. While Barrons says “rising property values will increase property liability,” when that happens depends on how quickly local assessments are completed. Cities and towns can have a big say too, depending on the state.

Related: The Best Money-Saving Tax Tips for Each State

Property taxes didn’t rise that much in the United States last year: just 1.8% for a single-family home, according to ATTOM, a real estate data company. That was the smallest increase in the past five years. The modest increase could be deceiving, say experts who believe that valuations aren’t keeping up with the upswing in housing prices. Taxes could rise substantially in 2022 and 2023 because of the lag effect.

Related: Watch Out for These Added Costs When Buying a House

States that perform annual property reassessments factoring in a fair market value of your house are in the best position to make a case for raising property taxes immediately because of surging house prices. 

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Sticker shock could be a big buzzkill for municipalities that assess fair market value of homes only every two or three years. It’s only one factor that goes into figuring out property tax bills, but a big one. In Chicago, Cook County recalculates every three years, which could lead to a big jump — that’s three years of rising house prices to take into account at once.

What happens when there’s limited supply with high demand for houses, as in many states right now? It creates a surge in home values. Add that to inflation-driven price increases such as those afflicting Michigan and Chicago, and homeowners could have a real problem. On the one hand, everyone wants their house value to appreciate. But longtime homeowners are reluctant to move because they will have to overpay to get a comparable house; when property taxes creep up on a home someone has owned for years, it’s a losing situation leaving no choice but to write a check for an inflated property tax bill.

Where did property taxes rise the most last year? ATTOM’s data looking at metro areas with at least 1 million people shows that the unhappiest homeowners are in Nashville, Tennessee (up 27%); Milwaukee (18.6%); Baltimore (12.3%); and Grand Rapids, Michigan (also 12.3%). In Nashville, it’s growth and demand for residential and commercial properties getting the blame; in Milwaukee, it’s that assessments weren’t done in 2021 for 2020. Cities where property taxes decreased got only a temporary reprieve, of course: They can look for property taxes to increase for 2022 as assessments catch up to home values.

Governments can try to blunt increases in various ways. Examples: California led the way in 1978 by capping assessed increases to no more than 2% annually until a home changes owners; in Texas, a no-sales-tax state where property taxes have long been among the highest in the country, politicians have raised a homestead exemption — the portion of a house that isn’t subject to taxes — and an initiative could do it again, to $40,000 from $25,000; in New York, homeowners who make up to $250,000 yearly could get a property tax relief credit “if their total property tax exceeds a fixed percentage of their income.”

In California, the fluctuation of property taxes is distorted because of that 1978 measure, called Proposition 13. Because Prop 13 is based on the original purchase price of a home, one bought in 2021 could have the same value as a house next door bought in 2000 but pay two, three, or four times more in property taxes yearly. That makes the market less susceptible to inflation and rising house prices, but new homeowners get socked.

States that rely heavily on property taxes as a percentage of their total tax revenue, such as New Hampshire, Alaska, and New Jersey, will continue to see surges as home values go up. New Hampshire relies on property taxes the most of any state; they supplied 64% of total tax collections in the 2018 fiscal year, according to the Tax Foundation. That figure was 46% in Alaska, where single-family home values just jumped 8.6% on average in Anchorage. Residents are waiting to see the impact on their tax bills.

The good news is that housing prices should stabilize in the next year as mortgage rates continue to rise and inventory builds up. According to Realtor.com, housing prices are expected to rise 6.6% in 2022, which is 9% less than in 2021. Housing sales are expected to decrease by 6.7% in 2022, though still “the second-highest tally since 2007, trailing only 2021.” If appreciation for houses starts to normalize, it’s one less variable affecting property tax rates.