One of the revenue streams that has boosted the coffers of local governments in recent years is about to take a big hit because of rising mortgage rates, McGuireWoods’ Mike Andrews wrote in a Nov. 4, 2022, article in Fortune.
Andrews — a Washington, D.C., McGuireWoods partner and a senior vice president with McGuireWoods Consulting — wrote that many localities and state governments have built healthy rainy-day funds, in part through fees and supplemental taxes generated from record-high levels of refinancing and homebuying. But those funds are likely to dry up as soaring mortgage rates already have started to put a chill on home sales and refinancings.
Andrews noted that the Federal Reserve hiked interest rates in 2022 to combat inflation, and economists expect rates to continue to rise and not come back down anytime soon. Those unattractive rates are driving would-be first-time homebuyers out of the market and dissuading existing homeowners from refinancing. That, in turn, pinches what had become a multimillion-dollar revenue stream for local governments.
“With the record low of homebuyers caused by high interest rates, inflation, and a sporadic bond market, local governments will need to look elsewhere to supplement this revenue loss and maintain even smaller rainy-day funds,” Andrews wrote. “Sadly, this could result in either higher taxes or a loss of substantial assistance to the residents they serve.”