Homeownership isn’t called the American dream for nothin’. The benefits, of course, are myriad—among them, stability. After all, landlords can jack up rents whenever they like, but mortgage companies can’t just decide to do the same. You know how much you’ll be paying month in and month out, right?

Not so fast. Even homeowners who thought they were doing everything right by locking in their monthly housing payments for the next 30 years are seeing their mortgage bills spike. And rising property taxes are something that today’s homebuyers, squeezed by higher prices and mortgage rates, might not be taking into account when figuring out if they can afford to become homeowners.

Property tax bills have been rising or are slated to go up as local governments capitalize on the surge in home prices over the past few years. And there is little recourse for homeowners stuck with the higher tabs.

“Most people should expect a property tax increase,” says Carl Davis, a research director at the Institute on Taxation and Economic Policy. “We’re seeing [property] assessments catch up with the market right now. That process will continue to unfold over the next few years.”

Local governments are facing rising costs just like everyone else. And the wild price growth during the COVID-19 pandemic has presented municipalities with a golden opportunity to do something about it.

Nationally, the typical homeowner paid about $3,900 in property taxes on a single-family house in 2022, according to ATTOM, a property data provider. That was up about 3% from the previous year. Collectively, homeowners spent $339.8 billion on property taxes last year.

“In an environment where home prices are high, and in some areas still rising, local governments can essentially do nothing and assessed property values will go up and they’ll raise more tax revenue,” says Realtor.com® Chief Economist Danielle Hale. “They have to actively choose to lower the rate or limit assessment increases.”

The exact amount that homeowners are saddled with is going to depend on where they live. Property taxes tend to be higher in the Northeast, led by the state of New Jersey, but are generally lower throughout the Sun Belt.

Often, towns with fewer businesses, commercial properties, and residents will saddle homeowners with higher property taxes for one simple reason: They need the money. Taxes might also be higher in newer communities that are in need of infrastructure, such as new schools that must be built.

The good news for homeowners already grappling with high inflation is property taxes typically take one to three years to catch up to home prices. Most local governments don’t perform new property value assessments each year.

And before anyone panics, even if their home shot up in value, it doesn’t mean their taxes will go up by an equal amount.

“We have [seen] residential assessed property values rise 30% to 40% over the last few years,” says Katherine Loughead, a senior policy analyst at the Tax Foundation. That “doesn’t mean that property owners will see property taxes rise that much. A lot of jurisdictions do have some sort of property tax limitations.”

What homebuyers need to know about property taxes

When buyers shop for a house, they’re often focusing on the condition of the property and the location. Has the kitchen been upgraded? Is the home in a good school district? Is it large enough for a growing family?

They might not pay as close attention to property taxes, which can strain their budgets if they’re not careful. Few are budgeting for the impact of future tax increases.

“Homeowners should be prepared for 4% and 5% increases in their property tax bills in future years,” says Adam Langley, associate director of tax policy at the Lincoln Institute of Land Policy, a nonpartisan think tank.

In addition, property tax information might not be accurate on newly built or recently remodeled homes. In some places, the sale of a home can trigger higher taxes, especially if the residence is now worth considerably more. Or there may be exemptions or exceptions available that considerably lower someone’s tax burden.

“You don’t want to get into a situation where you’re surprised,” says Hale.

Sometimes, property taxes can determine where someone buys a home. In some areas, they’re very high; in the next town over, they might be much lower.

That can be due to higher home prices, higher property assessments, or a combination of the two.

“When taxes become too high, people may sell their property and move to a lower tax area,” says Lynn Krebs, a research economist at the Texas Real Estate Research Center at Texas A&M University in College Station.

Property tax relief for homeowners can come with catches

Some governments have capped taxes for existing homeowners to prevent longtime residents from being priced out of their homes. That’s what happened in California through Proposition 13, which freezes property values and caps annual property tax increases for longtime owners.

However, someone has to pay for those tax breaks—and it’s usually new homebuyers. The proposition also limits the supply of housing for sale as existing homeowners may not want to sell and lose their tax breaks, depending on the location.

“It creates an excessive burden on new homebuyers,” says Krebs.

Some states have created “circuit breaker” programs that tie the tax bill to a homeowner’s ability to pay. These programs help to protect homeowners who lose their job or retire or suffer a financial hardship from losing their home. It might also assist lower-income homeowners in areas undergoing redevelopment, who might not be able to afford the higher taxes caused by surging home values.

More than half of states consider property tax bills and a family’s income and then send annual rebates to homeowners who meet certain qualifications, according to the Institute on Taxation and Economic Policy. Some areas also offer discounts to seniors and veterans in some areas.

Homeowners who receive a high bill can challenge it in the form of a grievance. There are real estate attorneys who specialize in helping homeowners through the process. But it can sometimes be difficult to prove to local authorities that their initial home value assessment was bloated and walk away with a lower tax bill.

“There are concerns about people being taxed out of their home and be forced to live somewhere else,” says Loughead.

If home values fall, do property taxes go down?

Even if property values decrease, property tax bills usually don’t fall. Instead, governments typically increase the percentage at which homes are taxed to make up for the shortfall caused by the lower values.

About three-quarters of many local budgets come from property taxes, says Josie Faas, executive director of the Robert Schalkenbach Foundation.

In some places, local leaders will lower the tax rate when home values go up so homeowners aren’t stuck with higher bills. Others will figure out how much they need to plug budget holes and then figure out tax rates accordingly. But that doesn’t always happen.

“Property taxes go up, but they very, very rarely go down,” says Faas.

The post Feeling the Pinch: As Homebuyers Face Rising Prices, Homeowners See Property Taxes Go Up appeared first on Real Estate News & Insights | realtor.com®.