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What happens to real estate when COVID-19 busts state and local budgets?

"We’re going to see some cuts to services,” Detroit's mayor says

As COVID-19 starts to loosen its grip on some of the nation’s coastal cities and begins a relentless march across the parts of the nation it hasn’t walloped yet, the rest of America is set to find out what happens to neighborhoods when the full force of the pandemic comes to town.

When the virus sickens large numbers in a community, costly services from first responders spike as residents call for help, much like a natural disaster. But unlike a hurricane or an earthquake, a pandemic isn’t over in a few hours or a few days. The economic disruptions go on for longer, reducing revenue sources like sales and income taxes that fund those services.

So far, the impact has mainly been felt in so-called Blue States that tend to support Democrats.

There have been some geographical exceptions, like Ohio, a Red State where COVID-19 cases started spiking in early March. Republican Governor Mike DeWine earned an 83% approval rating for his daily briefings at 2 p.m. that residents began calling “wine with DeWine” – an excuse to pour a glass of Chardonnay as they listened to the mounting death toll.

The city of Dayton, Ohio, has already furloughed almost a quarter of its workforce because of COVID-19 costs and is planning to cut more.

In Michigan, a midwest state devastated by more than 5,100 COVID-19 deaths, Detroit Mayor Mike Duggan last week announced layoffs and a reduction in hours and salaries for city workers.

“We’re going to see some cuts to services,” he said.

States where COVID-19 arrived early spared no dollars as they competed against each other and the federal government in a free-for-all to buy N95 masks and ventilators from across the globe. Now, they are finding they’re running out of funds to pay first responders and teachers.

Without a federal rescue, similar to what happens after major hurricanes or other natural disasters, they say there will be mass layoffs of state and local workers.

What happens to property values in cash-strapped states if municipal workers are laid off and school staffs are slashed? What if trash pickups don’t happen, or firefighters don’t come when residents dial 911?

Homes are set in communities, with the quality of services reflected in the property’s value.

If you live in a town that has great schools, for example, your home is going to sell for more than if it’s set in an area known for lower-quality education.

In other words, no one is moving to Alabama for its school system. There are plenty of other reasons to want to live there, but the Gulf Coast state is No. 50 in U.S. News’ quality-of-education ranking.

And, that’s reflected in real estate values. The median home price in Alabama was $168,800 in February, 33% below the U.S. median of $250,000, according to Zillow data.

In Massachusetts, which was No. 1 in U.S. News’ ranking, the median home price was $404,500 in the same month, 62% above the national median.

The correlation between school quality and home prices is well established, with housing prices in counties with highly rated school districts averaging 25.09% higher than state averages. How states and local communities deal with reduced tax dollars during and following the pandemic period could have long-lasting effects on home equity, which would in turn have long-lasting effects on tax dollars.

“If a community suddenly has larger classes, parents would want to seek other school systems and real estate would lose some of its value,” said Lawrence Yun, chief economist of the National Association of Realtors. “Over the long-term, people would want to move out.”

If school layoffs come, they would happen right when the Centers for Disease Control and Prevention is recommending smaller groupings of children and additional cleanings by janitorial staffs to stem the spread of COVID-19.

The relationship between real estate, taxes and community services is a complicated one, Yun said, and he didn’t want to speculate how much housing values would be hit by a loss of community workers. But, generally speaking, it would have an impact, he said.

“It’s really about whether there’s money coming in to support the fire department, police officers and school teachers,” Yun said. “Where communities cannot provide those services, it is going to hurt real estate.”

One form of local revenue is real estate taxes, which typically are assessed at a rate per $1,000 of a property’s value, so communities would get an additional hit if the home values were lower – property tax revenue would be lower, too. That happened during the financial crisis when real estate values tumbled.

House Speaker Nancy Pelosi (D-CA), who last week oversaw the passage of the $3 trillion Heroes Act that would provide close to $1 trillion in emergency aid to state and local governments, didn’t seem at all frustrated at a Thursday press conference on Capitol Hill when asked about Senate Majority Leader Mitch McConnell’s (R-TN) position that Congress had done enough for now and the Senate wouldn’t be considering her bill.

McConnell initially said states overwhelmed with COVID-19 costs should just be allowed to go bankrupt, before walking back that position and simply advocating for a “pause” in Congressional action.

With COVID-19 devastation now mounting in Red States that traditionally support Republicans, the G.O.P. will be forced to act, Pelosi said.

“They may not know it yet, but they will come to the table and they will do so because it is absolutely essential,” Pelosi said. “Our bill is focused, disciplined, and what is necessary.”

Of course, Pelosi could be wrong. Maybe the virus won’t do to Red States what it did in April to Blue States like New York, New Jersey, Connecticut and Massachusetts.

Perhaps it’s possible for thousands of people – proudly mask-free – to crowd the beaches of Galveston, Texas, for the “Go Topless Jeep Weekend,” as happened on May 16 and 17, without spreading COVID-19. Or go to waterparks and amusement parks, which reopen on Friday in South Carolina, and not see infections spread.

Alabama is reopening arcades, theaters and bowling alleys on Friday as the number of COVID-19 deaths rise to 528, up 78 in the past week. Hospitals in Montgomery, the state’s capital, are running low on ICU beds, Mayor Steven Reed said on Wednesday.

We’ll find out in a few weeks if COVID-19 gives the majority of Red States a pass. The incubation period is under 14 days, but it takes time for infected people to pass the disease to others and for those folks to incubate, before the ventilators start running low.

The median time from onset of illness to ICU admission is 10 to 12 days, according to the CDC.

In New Orleans, the Mardi Gras celebrations ended on Feb. 25. It took four weeks before the city had the highest per capita COVID-19 death rate in the U.S. and the city started running out of ICU beds.

So, if there is going to be an influx of hospital admissions along the Gulf Coast of Texas from “Go Topless Jeep Weekend,” it won’t be until June, based on that timeline.

It’s also possible that Republicans would come to the table before then with their own plan for federal disaster aid for hard-hit states, without the push of a mounting Red State death toll.

But if they nix COVID-19 relief for states, some Americans may find out what it’s like to live in communities where calls to 911 don’t get answered.

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