Who would think low-taxed Texas would have tax on aesthetics, curtailing the construction of architect-designed homes? There are many unintended consequences of high taxes such as impeding economic growth or high tax rates reducing tax revenue collected (i.e., New Jersey and Connecticut). Only now do I realize that Texas’ high property taxes impede the building of architect-designed homes—in essence a tax on aesthetics.
This revelation came when I asked Steve Levine, a friend, client, and architecture aficionado, why when the Dallas real estate market was robust, and architects were busy designing extremely expensive large homes, Dallas architects were receiving very few calls to design normal sized homes. New projects are not coming across their desks. Steve suggested high property taxes were to blame.
Why such a dearth of new architect-designed homes on the boards of the best architects? Steve believes the homeowners’ hesitancy on moving forward with an architect-designed home is rooted in high property taxes. Consider the $10,000 cap on property tax deductions, a $750,000 cap on mortgage interest deductions, AND no interest deductions on second homes. An increasing property tax burden makes architect-designed homes more vulnerable as they cost more per square foot than a builder home or older home.
Further, it is not just the property tax rate but the Dallas County Appraisal District (DCAD) tax formula that creates a disadvantage for most architect-designed homes. New homes are appraised by DCAD at the highest value per square foot while the same tax formula discounts homes increasingly with age. A homeowner can hire an architect to design the renovation of an existing home that costs as much per square foot as the construction cost of a new home, but the appraised value of the existing home will hardly change.
As a result, it is tempting for a homeowner just to drop in a Bulthaup kitchen, make complete cosmetic changes, and extensively landscape the property incurring no change in the property taxes.
Spec builders can erect a generic builder modern home for much less per square foot than an architect-designed home which also allows a homeowner to offset the higher taxes with a less expensive home. Builder modern homes become a diversion from better designed architect-designed modern homes. Builder modern spec homes also have an advantage because they are immediately available for purchase, eliminating the two years of waiting, paying taxes and incurring holding costs on an architect-designed home while it is being built.
Even the beneficial national tax cuts have worked against new architect-designed homes. The tax cuts have been a boon to the economy, particularly to minorities, low income wage earners and laborers. Employment for people in these groups is at historic highs resulting in increased wages and a shortage of labor, and a short supply of labor further raises the cost and time required to build a bespoke “one‑off” architect-designed home which relies heavily on independent contractors and freelance labor.
There are other factors contributing to the slowdown of calls to architects to design new homes. Interest rates have almost doubled, material costs have gone up 20% in the last year, and the artificially low prices of available lots over the last several years have gone away. Average size lots have often doubled in price and have been gobbled up by speculative builders, leaving a very small inventory of building sites available for individuals to purchase. Further, production builders can always turn to building mid or high-rise condominiums or purchase a large tract of vacant land for a builder development of homes. Finding a single lot that is desirable for an architect-designed home becomes more challenging.
Why then are architects busy designing very expensive homes on very large lots? There are two reasons for this. First, extremely wealthy homeowners generally pay cash for the land and construction of their new architect-designed home. The increase in interest rates does not affect their annual cost as they do for the successful professional who is financing their new home. Second, while average sized lots in Dallas have doubled in price over the last seven years, the per-acre cost of large lots over one acre have actually decreased during this time period. This makes it an opportune time for wealthy homeowners to buy acreage and build a new architect-designed home. Even the DCAD tax appraisal formula for tax valuations works in favor of the homeowners of these very expensive architect-designed homes. While a builder home might cost $200 to $300 per square foot for construction, and an architect-designed home costs $350 to $500 per square foot for construction, very expensive architect-designed homes might cost $1,000 to $2,000 per square foot for construction. The DCAD formula does not calculate construction costs over a few hundred dollars per square foot, so these very expensive homes are valued dramatically less than their actual construction cost. Since spec builders generally avoid purchasing very large acreage lots, this leaves ample inventory of desirable building sites for the very expensive architect-designed homes.
Dallas is a prosperous city with emerging wealth and a growing number of families that desire architect-designed homes. Currently, successful professionals desiring an architect to design a home for them are caught between higher property taxes that impede the affordability of an architect-designed home and beneficial tax cuts that have boosted the economy and created a shortage of laborers available to build an architect-designed home. Higher property tax rates and aggressive tax reassessments can create an annual tax burden as high as a mortgage payment.
However, the DCAD tax formula and the real estate market can also make it an ideal time to hire an architect. When a talented architect has time to devote to a project, the better the project becomes. While production builders can always build for less money per square foot, architects can design a smaller home that lives larger than a builder home. DCAD tax formulas will now work in favor of new architect-designed homes. DCAD will not appraise a smaller architect-designed home for as much as a larger builder home that actually costs less to build than the architect-designed home. Spec builders also have curtailed stockpiling lots because of the higher interest rates and holding costs. This allows individual homeowners greater opportunities to purchase a great lot for an architect-designed home. Most important, it is always a good time to build an architect-designed home—one that you love living in and that will make you happy every day. Aesthetics can trump tax policy.