`Priced below assessment'

Falling prices have created a new twist in the suburban Boston real estate market: More homes are selling for less than their assessed values.

Massachusetts house prices slumped 3.5 percent in July, the biggest monthly drop since 1993, as a slowdown in sales brought about by rising interest rates created a glut of homes on the market. As a result, home prices are falling below assessments, which are the estimated values communities place on homes to determine property taxes, their primary source of revenue.

State law requires communities to assess properties at ``full and fair cash value." In a stable market, a property's assessed value can provide a useful estimate of the home's market value to buyers and sellers. But for the past five years, most homes sold well above their assessed values because prices were rising faster than assessments, which typically are at least a year old.

In today's declining market, some homes are now selling for less than the assessed value in stable communities like Newton, where top-ranked schools and a short commute into Boston help homes hold their values, and in volatile markets such as Lowell, where professionals and foreign-born residents drove up real estate prices.

``Before, it was, pay no attention to that assessment. Now it's, pay no attention to that asking price," said Bill Wendel, owner of a Cambridge fee-for-service brokerage firm, The Real Estate Cafe. Wendel's blog, realestatecafe.blogs.com, compares sale prices and assessments of Boston-area houses.

Indeed, house hunters are paying close attention to assessments to gauge whether a house is priced right in a tumultuous market. Sellers pricing their homes below assessments can spur multiple bids from buyers protecting themselves against anticipated price declines.

Wendel said 3.4 out of every 1,000 single-family listings in Massachusetts used the words ``below assessed" or ``below assessment" in the description agents use to promote clients' properties, according to a search in late August of the state's property-listing database. That is up from about 1.5 per 1,000 in late May, he said.

``Great entry-level property. Priced below assessment. WHAT A GREAT WAY TO START," reads a March listing for a Colonial near Newton Center priced at $499,000. Coldwell Banker agent John Milligan's said he hoped the advertisement ``might just motivate someone to make a phone call."

In April, Marc and Cheryl Stober purchased the red-shingled, two-story house for $490,000. The $511,700 assessment, Marc Stober said, indicated the house was ``a good deal."

The software developer said one reason for the price discrepancy was the outdated kitchen. But the roominess of the house, at nearly 1,700 square feet, and the oversized lot exceeded those of nearby houses. Stober said he outbid at least one other buyer.

One of Sriram Nookala's ``primary criteria" in his search is a house priced below its assessed value . The software engineer, his wife, Pallavi, and their two children have outgrown their Lowell condominium. The couple want a single-family in Stow, Acton, Westford, or Harvard.

``If the seller is interested in moving the house off the market, they make pretty aggressive reductions and usually those come under assessed value," Nookala said.

Under state law, assessments for fiscal year 2006, which ended June 30, were based on market prices as of Jan. 1, 2005. They reflected the 10.5 percent increase in 2004 in the median price of single-family homes. Because of the time lag, assessments in communities such as Newton, Belmont, Marlborough, and most other suburbs are expected to rise again for fiscal 2007, despite falling house prices.

An analysis of Newton home sales showed 16.5 percent of homes sold below assessment between January and June, up from 10 percent the prior two years. Newton assessor Elizabeth Dromey estimated the increase in the assessments that will be mailed by her office in the fall will not exceed 5 percent. ``By the time they come out, they're already almost a year-and-a-half old," she said.

In the $1 million-plus housing market in Greater Boston, sales plunged 62 percent this year, according to the listing database MLS Property Information Network. The drop is making it ``routine" for assessments to exceed asking prices in that market, said Landvest agent Terry Mailtland, causing problems for sellers whose assessments are so high that buyers perceive a big tax bill as ``an impediment to a sale."

But clients Diane and Richard Schmalensee view a slightly higher assessment on their home overlooking Chestnut Hill reservoir as a selling point. The house was put on the market in October for $2.95 million. In May, they dropped the price to $2.75 million, below the $2.84 million assessment on the 1-acre property with a three-car garage and tennis court.

``Right after we bought this, the prices began to shoot up, and we said, `Aren't we lucky,' " said Diane Schmalensee, a business consultant; her husband, Richard Schmalensee is dean of the Sloan School at Massachusetts Institute of Technology. With the market in decline, she realized perhaps ``we waited a little too long" to sell.

In Lowell, where housing values rose faster than Newton's, more than 20 percent of its residential and commercial properties sold below assessment in recent months, according to an analysis of property deed records by Richard Howe, head of the Registry of Deeds for Northern Middlesex County. In May through June 2005, less than 10 percent sold below assessments, he said.

If house prices continue falling, assessments eventually have to follow. But ``the taxes will always go up," said Richard D. Simmons Jr., the assessor for Belmont, a wealthy suburb northwest of Boston.

Under state law, communities cannot raise their total property-tax levies on residences and businesses by more than 2.5 percent per year, without putting the matter to a vote. But, city officials determine the size of the budget and assessors are free to increase the property tax rate to compensate for falling assessments to meet rising costs from inflation, higher gas prices for snowplows, or other increases in operating costs. The effect on individual homeowners varies, however, depending on their property's location and value.

``I don't want people to say, `My values are going down. My taxes are going down,' " Simmons said. ``That's not going to happen."

Kimberly Blanton can be reached at blanton@globe.com.