Drop in housing sales means city's losing tax $

The downturn in Philadelphia's housing market - fewer homes changing hands, at lower prices - has created a growing hole in the city budget, likely to reach $10 million to $15 million by midyear.

Income from the city's real-estate-transfer taxes has been running about $5 million below estimates for each of the past three months, according to figures provided by the city Finance Department.

"It's hard to imagine we wouldn't fall short of the $205 million in our revenue estimates," said city Finance Director Rob Dubow. "When the current budget plan was put together [last spring], they expected a dropoff, but this is probably bigger than anyone anticipated."

Cities throughout the country are experiencing similar downturns. Philadelphia's is not so severe as cities with more expensive real estate, like Boston, San Francisco and Miami, according to Uri Monson, acting executive director of the Pennsylvania Intergovernmental Cooperation Authority.

But it's another problem that the Nutter administration will have to address when it presents its first budget to City Council next week.

Kevin C. Gillen, an economist at the Wharton School, reported this week on the Web site Hallwatch.org that city housing prices declined an average 4.4 percent in the last quarter of 2007, and that only 4,725 homes changed hands, the lowest number of transactions since spring 2003.

The city transfer tax is a flat 3 percent of all real-estate sales (an additional 1 percent goes to the state), so revenues are directly impacted by both the number of sales and the prices.

Gillen said that the prime reason for the soft market is the high number of houses listed for sale - nearly 11,000, roughly twice the inventory on sale four years ago. Also, potential buyers may be facing tighter credit in the wake of the subprime-mortgage fiasco, and they may be hesitant to invest in real estate because of publicity about the weakening economy.

How long will the downturn last? Gillen is bearish.

"Downturns in real estate tend to be prolonged, generally measured in years, not months," he said. "Housing markets usually adjust very slowly."

Looking at the city's transfer tax, he said, "Even if prices remain stable, houses have to change hands [for the tax to be collected], and right now, they're not."

Brett Mandel, executive director of the tax-reform group Philadelphia Forward, said that the rest of the city's taxes appear to be coming in as expected.

"The transfer tax is the one place where we feel the effect of the housing slowdown, but it's a smaller piece of the revenue picture than the wage tax or the business-privilege tax," he said. *