Municipalities Overcome Mortgage Rates, Recession Fears
September 20, 2022
Read Time 2 MIN
Why Local Government Bonds Remain Less Volatile than Home Values
Monthly mortgage payments have increased by 58%1 over the past year due to the combination of soaring home values and rising mortgage rates. Despite the fact that property taxes are closely linked to home values, there are rarely severe fluctuations in tax bills. We explore why below.
Property Taxes: The Market Value vs. Assessed Value Calculation
City, county and school district budgets are highly dependent on property tax revenues which are derived by multiplying a tax rate by an assessed home value. The assessed value is a fraction of a property’s market value and is calculated differently by each state.
Assessed values do not fluctuate as much as market values due to caps on growth. For example, in New York City, assessed values equal 6% of market value and cannot increase by more than 6% annually or 20% over five years. Property tax rates can also be capped. Many states currently cap the rate at 2% annually.
These broad rules are designed to protect homeowners from sudden unaffordable annual increases due to housing booms. They also protect local governments in the event of housing busts that would cause severe declines in revenues and hinder their ability to provide services.
What are Unlimited General Obligation (ULTGO) Bonds?
Above, we discuss the property taxes that fuel the general expenses of a local municipality. Many municipal bonds are also secured through those same funds, including appropriation debt, limited general obligation debt, and lease debt. As such, the security is protected from home value volatility.
ULTGO debt is an even stronger security. These bonds are secured by a voter–approved property tax in addition to the general property tax. The tax rate is calculated annually to meet debt service requirements, and this tax revenue is legally restricted for this purpose and cannot be transferred to cover any other municipal expenses. While the caps on assessed value and tax rates are not present, the repayment schedule for the ULTGO bonds is generally smooth to reduce the likelihood of shocking increases.
Stable Outlook for Muni Bonds Secured by Property Taxes
Municipal bonds that are secured by property taxes see steadier revenue streams than home values would imply. Furthermore, the property tax calculations are designed to prevent abrupt changes to property tax bills, ensuring the revenue stream remains reliable.
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IMPORTANT DISCLOSURES
1 30–year fixed mortgage rate of 3.13% on 6/30/2021 vs. 5.83% on 6/30/2022; Bankrate.com. St. Louis Fed median home value of $382,600 on 6/30/2021 vs. $440,300 on 6/30/2022.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this email.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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IMPORTANT DISCLOSURES
1 30–year fixed mortgage rate of 3.13% on 6/30/2021 vs. 5.83% on 6/30/2022; Bankrate.com. St. Louis Fed median home value of $382,600 on 6/30/2021 vs. $440,300 on 6/30/2022.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this email.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.