Local governments throughout much of the country – and particularly on the East and West Coasts – have seen their assessed valuation bases grow strongly in recent years as real estate values have moved up sharply. Higher property values usually mean that cities, school districts and other local governments are likely to enjoy healthier property tax rolls, lower tax delinquencies, and sometimes lower tax bills for existing property owners.

If the recent slowdown in real estate activity accelerates, the trend will more than likely have a negative effect on the property tax base. For the healthiest communities with solid job bases that cushion real estate bubbles, the overall effect may be deferred as real estate prices will slow but not cascade downward. For local economies that fall into a steeper downward slope, the risk of translating into the tax base within a year after the drop is more possible as valuation reassessments could be exacerbated by tax delinquencies.

How badly will a real estate slowdown affect local government tax rolls? It’s too early to tell if it will even happen in 2006. But the question is an important one for local governments whose base support often comes from the property tax. The National Association of Realtors is forecasting that home values will rise 6.1% in 2006 (See: Transitioning to a New Year) despite the slowdown in home sales for the last two months.

Since the stakes are high for local governments and schools, just like they are for homeowners, this issue deserves to be monitored closely. In addition to the Realtors website, which includes an online “Insights” newsletter and housing statistics, interested parties will want to periodically check out Urban Land Institute’s “research” section, along with the Mortgage Bankers Association Mortgage Forecasts.