Are Home Prices Falling in South Bend?

by Nick Molnar on June 14, 2006

South Bend real estate has been the unlikely subject of some recent media attention. The South Bend news agency WNDU quoted USA Today’s statement that, “[South Bend] saw a drop in the average home price during the first quarter.” The article goes on to explain that the median price of a home is now $82,000 – a drop of more than 10% from one year ago and that this is the second greatest decline in the nation. CNN‘s article on the cooling real estate market notes “South Bend, Indiana also experienced a double-digit decline, falling 10.2 percent [from a year earlier].”

What these stories neglect to mention is that the statistics they reference have been skewed by the enormous number of foreclosures in the area. A quick check on-line reveals 456 properties in foreclosure on June 14th. Real estate prices in this area generally appreciate 3 – 5% per year and continue to do so. Prices are not falling, but more low price properties are being sold and this has influenced the median home value figures.


{ 4 comments… read them below or add one }

Anonymous June 21, 2006 at 1:59 am

That’s very interesting.

Do you have any insights into why there are so many foreclosures in the area?

Thanks.

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Nick Molnar June 28, 2006 at 7:59 am

While no one can tell you the absolute reason for the high number of foreclosures, I have heard several hypotheses. The most prevalent is that the recent relaxation of credit policies has allowed people to obtain more expensive homes than they can actually afford.

In some cases, lenders have financed 100% or more of a home’s value and offered innovative loans to people who may not have qualified for a mortgage under conventional programs. These policies remove many of the barriers to home ownership, but may allow people to become overextended financially. In this situation, individuals are vulnerable to any income disruption, the most common being divorce and layoffs.

Another view is that the ancillary costs of owning a home have risen lately. Mortgage rates have risen from their recent lows and people with adjustable rate mortgages have seen their monthly payments increase. In South Bend, property taxes were recently reassessed, leading to larger payments in many cases. The higher cost of natural gas and electricity also make it more expensive to heat and cool homes. Taken together, these factors can significantly increase the cost to own and operate a home.

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Anonymous June 29, 2006 at 8:21 am

Thank you for your response.

The factors you mention apply across the nation, not just South Bend (except the local property taxes). This makes me wonder whether the foreclosure rate in South Bend is higher than the national average. If so, how much of that can be attributed to the distinguishing factor (of changed South Bend property taxes)? Are there are other areas nationally that have experienced similar taxation rate changes? Did their foreclosure rates become similar to South Bend’s? If not, there must be another factor at work. In the latter case, I’d be curious to hear hypotheses on what that may be.

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TD Mitchell February 19, 2008 at 10:14 pm

I have my own hypothesis:

1) Departure of manufacturing jobs from St. Joseph county and South Bend have, over time, resulted in population migration patterns away from South Bend, compounded by a lower income base for those remaining. This results in less housing demand, causing prices to decline.
2) As the value and number of taxable properties decline (look around at the vacant housing), then either a) local government must shrink commensurately or b) the additional tax burden is placed on those remaining. I believe it is the latter.
3) The city and county budgets continue to grow, while the taxable population declines. This results in higher tax rates for those remaining. Tax rates on homes without exemptions are approximately 5.95% of assessed value in St. Joseph County.
4) The increased tax burden on those remaining creates a disincentive to live in St. Joseph County, and particularly South Bend (I’ll get to this later). As a result, this makes home ownership even more difficult, stifling demand, and causing additional emigration from the area. Thus, tax base is even smaller.
5) As described, the declining demand for housing has a depressing effect on home prices in South Bend, resulting in lower home prices. Still, assessed values have not changed. Real example of a rental property I own: 1148 South Bend Avenue, assess at 90K, purchased for just over 1/3 that amount. This means that the tax rate is approx. 6% of 90K, or 5600 ($466/mo). Principle plus interest payments are in the neighborhood of $250/mo. With taxes at nearly twice the mortgage payment, you’ve effectively priced potential homeowners out of the market.
6) The final piece is very specific to South Bend and taxation by local governments. Local governement typically generates nearly all taxes through either a) property tax or b) income tax. South Bend does not have income tax, and relies on almost exclusively on property tax. Granger, Mishawaka, Elkhart, etc., have a blended property / income tax. This means that tax rates are lower in these areas, but offset by income taxes generated by workers in those areas. Since South Bend relies solely on property taxes, citizens have sought areas with lower taxes such as those mentioned above – yet these citizens still WORK in South Bend, thereby avoiding the income tax entirely. Think about all of the doctors, lawyers, etc -> barely any live in South Bend! Since there is no blended tax, people are encouraged to move out of South Bend but to continue working here. Thus….an even smaller tax base, and higher bills for those of us remaining.

There is light at the end of the tunnel. The circuit breaker law seeks to solve this by capping tax rates at 1% of assessed value for homeowners, and 2% of assessed value for rental properties. This will force South Bend to find a blended method of generating taxes. Call your local state representative to encourage support of this bill.

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