Property Value Drops Have Ripple Effect on Clawson

After years of frustration among homeowners and local officials alike, all eyes are on this year’s summer real estate selling season as the effects from the landslide in property values continue to ripple across Clawson.

With recent reports placing Metro Detroit's property values on par with 1990 levels, some observers are optimistic that the market has hit the bottom and will begin to rise. Others still wonder whether the worst is yet to come and are concerned that further declines will lead to more layoffs and cuts in municipal services.

According to data from the city of Clawson, property values dropped nearly $80 million during the past three years, from a peak of $408 million in tax year 2007 to $325 million in tax year 2010 – a 20 percent decline. With that decline, Clawson’s municipal revenues dropped roughly the same percentage, from $7.6 million in fiscal year 2007 down to $6.2 million in fiscal year 2012. Clawson's fiscal year begins on July 1 of every year.

While local revenue cuts have been significant, the majority of city services and educational programs have largely remained intact.

Should property values continue to decline, however, further cuts will be necessary to make ends meet.

Many officials are also concerned about the end of federal stimulus funds, which buffered lagging state revenues during the worst of the recession, and about Gov. Rick Snyder's proposed state funding cuts.

Compounding those worries are new Michigan laws authorizing the state to take over financially struggling municipal entities if they run out of funds.

Housing Sales

Kathy Phillips sees the challenges from both sides of the street. As a real estate agent and homeowner, she’s been in the eye of the storm, and as a Clawson City Council member, she’s also had to clean up after it, having to balance the city budget amid steep declines in property tax revenues.

Despite the hard knocks, she’s optimistic that things are going to improve.

“I do think we’ve hit bottom," Phillips said. "I had my busiest year last year, and I’m expecting to do even more this year. It’s been a market where you have to fight for everything, and everybody has had to work twice as hard.”

While she’s concerned about foreclosure inventory yet to hit the market, investors have been snapping up bargains, and good housing deals — combined with favorable interest rates — will likely keep first-time home buyers coming into the market.

Tierney Keys and her husband Brian are among the homewoners in Clawson looking for a buyer. They paid $187,000 for their 1,100 square foot home on Shenandoah in 2006, and now have it on the market at $127,000, which is less than what they owe.

The family has to move to Indiana where Brian will begin a fellowship at Indiana University in August and they can't afford to list the house with an agent because they would have to pay commissions out-of-pocket.

"It's really sad and frustrating," Tierney Keys said. "We redid the bathroom, painted it throughout, and it has a nice fully-finished basement. It's a really nice house."

She says the competition is not from similar "good condition" houses on the market, it's the foreclosures and short sale homes that are dragging prices down.

"If you look at what has sold recently, there's very few solid houses," Tierney Keys said. "Many are foreclosures with kitchens torn out, busted pipes and water damage," she said, "but we're not there morally to just walk away. I don't know what were going to do, but we don't have thousands of dollars to put down at closing either."

In the mean time, buyers are looking for deals and many properties are still selling for lower prices.

"It's a great time to buy," said Bill Kelly, a Clawson resident and owner of BK Properties, a property management company, despite the fact that he feels the market may continue its decline.

"I think there's more heartache to come," he said. "There's still more financial difficulties out there, so there's a lot still under way that we won't see until later in the year.

"But for every family that looses a house, there's an opportunity for another family to buy one for a lot less, maybe even at half the cost," he said.

Downward pressure on household income has led to downward pressure on rental rates, Kelly added. That has made it tough for rental property owners to make ends meet, despite a strong rental market from displaced homeowners and even lower-cost mortgages.

One silver lining for property owners is that their taxes have gone down during the past few years. Clawson City Manager Mark Pollock said city tax assessments have followed the decline in property values, and appeals have leveled off the past year.

“It’s very unusual for a municipality like ours to see it drop as it has, but it’s been nationwide,” Pollock said.

So far, city services have remained pretty much the same despite trimming 14 full-time employees since 2001. Among the cuts have been contracting police dispatch and animal control services, leaving positions vacant and pay freezes for current employees.

“We still provide all the same services we did then, except for free curbside brush chipping,” Pollock said.

Maintaining Services

Despite the declines in revenues, Clawson’s city services and Clawson Public Schools have managed to maintain a relatively consistent level and quality of services while balancing the financial integrity of their respective operations.

In recent years, the school district’s overall budget has actually increased as student population has increased. The district also has cut costs in recent years by eliminating a top layer of management, consolidating services such as non-core curriculum instruction and busing, refinancing its bond debt and opening a low-interest line of credit for short-term operational funding.

“We’re in relatively good shape compared to other districts, but we do have long-term challenges like anybody else,” school board member Mike Bosnic said, adding that despite the many cuts, “it still costs us around $22 million each year to educate our kids.”

To offset costs, the district has opted to ask voters for a 1.3-mill technology bond that would generate the $4 million the schools need to upgrade computers and classroom technology within the district. At the same time, the district’s teachers are being asked to make concessions as their contract is up for renewal, Bosnic said.

For the city, its fiscal year 2012 budget is currently being hammered out. Pollock remains optimistic but noted that services could be cut, and more layoffs could occur.

“Wage and benefit cuts for all employees will have to be agreed to this year in order to balance our budget,” Pollock said, adding that “it is possible that we will have to close city buildings on Fridays starting July 1st.”

The city is also asking voters in May to approve a 0.3 mil tax increase to help pay for a portion of the operational costs.

Forcing Change

While the city and school district currently appear to be balancing their budgets, many believe there could be larger problems on the horizon. As Pollock explains, the combined effects of Michigan’s constitutional property tax amendments have a multiplied effect against municipalities in a deflationary housing market.

The Headlee Amendment, approved by voters statewide in 1978, requires local governments and taxing authorities to limit the total amount of municipal taxes received. If property tax assessments rise, the city must reduce millage rates so they do not take in more taxes than the previous year, adjusted for inflation.

When combined with Proposal A, which caps local property tax assessments, the possibility exists that the city and schools could get caught in a downward cycle that could severely limit operational funding and force municipalities into state receivership.

“The whole system was never designed to handle the decreasing values we’ve seen across the state the past five years,” Bosnic said. “When values decrease, the property owners get the short end of the stick. When property values increase, municipalities get the short end of the stick.”

According to Gary Jackson, Clawson Schools business manager, a perfect storm could be on the horizon as federal stimulus funds that helped balance Michigan’s foundation allowances (district funding) is set to expire and the governor's proposed cuts of 7.3 percent in education funding.

Gov. Rick Snyder "talks about shared sacrifice, yet he’s increasing attorney general’s budget and prison spending and cutting education spending – so that’s really not shared,” Jackson said. “If we don’t educate our kids properly, we’re going to have to give corrections a whole lot more.”