Inflated tax assessments spurred historic Detroit foreclosures, study finds

Ten percent of foreclosures, which deeply impacted poor, may have violated state law

Following a series of studies that showed inequities in Chicago-area property tax assessments, a UChicago scholar in a new study estimates that 10 percent of all foreclosures in Detroit were caused by illegally inflated property tax assessments.

The research, co-authored by Prof. Christopher Berry of the University of Chicago Harris School of Public Policy, calls into question whether roughly 10,000 foreclosures, predominantly affecting its poorest residents, violated the Michigan Constitution.

“Between 2011 and 2015, one out of every four properties in Detroit, and 30 percent of Detroit homes, went into foreclosure because of failure to pay property taxes,” said Berry, the William J. and Alicia Townsend Friedman Professor at Harris Public Policy. “Our research suggests that 10 percent of that unprecedented number of foreclosures—that’s 10,000 properties—were based on illegally inflated tax assessments.”

The extent of tax foreclosure in Detroit is unprecedented. In 2015 alone, 3,500 property tax foreclosures were conducted per 100,000 people—drastically higher than any other city in the United States, with St. Louis County a distant second with 197 out of 100,000 and Los Angeles County at only four per 100,000.

Berry and Prof. Bernadette Atuahene of Illinois Institute of Technology Chicago-Kent College of Law found that failure to properly assess properties and conduct mandated annual site visits, led to systematic violations of the Michigan constitution, which states that no property can be assessed at more than 50 percent of its market value.

The assessments are highly regressive, the study finds, with properties in the bottom 20 percent of prices being assessed at 7.5 times the actual sale price. Berry and Atuahene further found that:

  • The average home that was sold for $8,000 to $10,000 was valued by at nearly $50,000 by the assessor, while the average home that sold for $100,000 to $125,000 was valued at $87,000.
  • In the bottom 10 percent of sale price, properties were assessed at more than 10 times their sale price, while in the top 10 percent, the average property was assessed at only 39 percent of its sale price.

Combined with the regressive system, the poorest were the most hit, with 25 percent of tax foreclosures in the bottom 20 percent being due to unconstitutional assessments. While half of the properties in the bottom 20 percent experienced a tax foreclosure, only 37 percent would have if the constitution had been followed.

“Lower-priced homes are over-assessed at a higher frequency than higher-priced homes, which means that unconstitutional assessments—and subsequent foreclosures—have an outsized impact on the poorest Detroit residents,” Berry said.

The study finds a strong association between unconstitutional tax assessments and tax foreclosures in Detroit, with roughly 10,000 of the 100,000 tax foreclosures that occurred in Detroit between 2011 and 2015 the result of unconstitutional assessments.