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Bay Area home values are falling. Here’s why most homeowners still shouldn’t expect a break on their property tax bill

Bay Area home values likely will continue to fall in 2023 — with the San Francisco area set to take the biggest losses in the country — but that doesn’t mean homeowners should necessarily expect a break on their property taxes.

By next fall, home prices in the San Francisco metro area — which includes the East Bay and Peninsula — are forecast to tumble 3.6%, the largest decrease of any big population center, according to Zillow. In the San Jose metro, prices are expected to fall 1.8%.

Bay Area home prices have come down in recent months as rising mortgage rates have boosted monthly home payments, squeezing many would-be buyers out of the market. The average rate on a 30-year-fixed home loan is now around 6.5%, about a half-percent decrease from November but more than double the historic lows from just last year.

Zillow economist Orphe Divounguy said prices should continue to drop through most of next year. And the Federal Reserve is expected to raise the cost of borrowing at least once more in hopes of tamping down widespread inflation, in turn keeping mortgage rates high.

The impact could be felt most in the Bay Area, where already staggering home values soared to record highs during a pandemic homebuying boom. Now, with a typical home in the region going for over $1.2 million, local home values have the longest way to fall.

“These markets are so expensive compared to the markets across the country,” Divounguy said. “The most unaffordable markets are going to take a larger hit.”

But just because you’re seeing your home’s value go down on Zillow doesn’t necessarily mean you’ll get the silver lining of a break in property taxes, which — reminder — are due in most Bay Area counties on Monday.

That’s thanks to Proposition 13, passed by California voters in 1978. The law protects people from massive tax increases as their home value soars by capping the assessed value of residential properties — and the amount they are taxed — at 2% per year. Properties are reassessed at market value only when they are sold or renovated.

Unless you bought your home recently, chances are Prop. 13 already has depressed the taxable value of your home so much that a modest dip in the real estate market didn’t affect your tax bill this fall — and it won’t next year, either.

The only way to get a tax break is if the market value of your home drops below the assessed value determined by your county assessor’s office, on which you pay taxes. That’s unlikely in most cases.

If you bought your house in 1975 for $85,000, for example, even if its market value has since soared to more than $3 million, its assessed value may be closer to just $300,000, thanks to Prop. 13. As the economy cools, your home’s market value would have to drop below $300,000 for you to get a tax break — a trade that no home owner would ever want to consider.

“A lot of people don’t know that,” said Santa Clara County Assessor Larry Stone, acknowledging how confusing our state’s housing policy can be.

Those who did buy their home within the past year or so may see their home’s market value dip below their assessment. If that happens, their county might automatically reassess their home at a lower value and lower their taxes or property owners can request an “informal review.” If they are denied or if they are reassessed and don’t like the outcome, they can file an appeal.

As the real estate market continues to cool, Stone expects his office to dole out more property tax breaks. But since property taxes are paid in arrears, that discount is not likely to show up for another year or so.

“There’s going to be adjustments,” he said. “We understand that. And we’re prepared for that.”

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