California Treasurer: We will not default on bonds

[big67]

Re: California Treasurer: We will not default on bonds

Sorry newnewthing, but I don't understand your comment.
I am positive they will roll the IOUs over in October: please note that the green and red lines in August and September are diverging... I do not believe that for some magic reason they will be converging in October without a budget fix.
On the opposite, maybe they will need also to add to the IOUs amount.

[newnewthing]

Re: California Treasurer: We will not default on bonds

Sorry newnewthing, but I don't understand your comment.
I am positive they will roll the IOUs over in October: please note that the green and red lines in August and September are diverging... I do not believe that for some magic reason they will be converging in October without a budget fix.
On the opposite, maybe they will need also to add to the IOUs amount.

If the charts were based on continuring the IOUs past Oct., they would not converge in Oct. The green line would continue to diverge from the red. The charts are designed to demonstrate the severe cash situation and the immediate need for rather steep cuts and/or tax increases.

That the charts show the lines converging deep in negative territory is the Controller's office way of saying nothing works past Oct. and only the green line (IOUs) work until then. All the lines below zero are pro-forma theoretical cash positions. Ie, they can't actually happen and other things break first.

ETA:
Note that the cash need from Sept-Oct is far larger than continuing the IOUs could provide so if things aren't fixed by Oct. things will break even if the IOUs are continued.

[c1ue]

Re: California Treasurer: We will not default on bonds

What does prop 13 do? It says in wikipedia "People's Initiative to Limit Property Taxation" to 1 percent of cash value.

So does this mean a house in California that costs $500,000 can be taxed 'only' up to $5000 a year?

The Mooster pretty much covered it - although in reality it is 2% a year max increase. In addition local governments and municipalities have tacked on surcharges surcharges such that the actual rate is more like 1.2% in most parts of California.

But the real kicker - and Prop. 13 is the biggest can kick of all time - is that over time you get ridiculous relative tax burdens.

I posted some time back of 3 houses in Huntington Beach, CA.

One house is 2 bedrooms, 1 bath, and was purchased in 2007 for $850,000. Property tax for this house (original ranch house of the development) is roughly $10000/year.

The house next to it was rebuilt as a McMansion: 5 bedrooms/6 bathrooms. Purchased in 2004 for $2.1M and pays $25000/year.

The house next to that one (i.e. ranch and this house on both sides of the McMansion) is a 6 bedroom/6 bathroom affair but is not a new built McMansion. It is also an original ranch house which has been expanded to touch all 4 sides of the land via extensions.

This property pays less than $3000/year property taxes. Because it was last bought in 1974 for $26,000.

If Prop 13 was repealed for residential owners, then many long standing owners would suffer substantial upward shocks in their real estate taxes, resulting in more foreclosures and tax lien sales.

Upward shocks in property tax, yes. But again - unless they drew money out via HELOCs, unlikely to result in foreclosures. And if they DID draw money out via HELOCs - more than likely to foreclose anyway.

A study done in Austin in its real estate bubble era (1996-ish) found that while a number of property owners had to sell their house and move on due to spikes in the property taxes due to rapidly increasing prices, the vast majority were gifted with significant cash to ease the pain of the move.

Sure, it sucks when a fixed income senior is forced to move from their home of 30 years. But it equally sucks when the grandkids can't afford to live in the same area.

The point Dr. Michael Hudson has made is that low real estate taxes distort the price of real estate upward. This disintermediates the money normally gathered for the government via real estate taxes into interest and fees for banks.

Government then gets its cash via raising other taxes: income, capital gains, sales taxes etc.

The point is that having a flat yet high property tax smooths out asset price growth - ridiculous gains in prices are automatically compensated for by higher tax payments. In places with Prop. 13 - you have an opposite dynamic: increased prices in turn drives supply down as existing homeowners now must factor in their tax subsidy, which in turn drives prices even higher.

It is no coincidence that the places with the LEAST amount of real estate bubble up and consequently bubble down are those states with the highest property tax rates and no Prop. 13 equivalents.

In fact in Illinois you even have a single county different than the rest of the state: Cook county vs. everyone else.

[touchring]

Re: California Treasurer: We will not default on bonds

Thanks, that will probably explain why real estate price is many times higher in Asian cities relative to income.

In Singapore, property tax is assessed based on a percentage of rent (if rented out), or an assessed annual value, wihch is based on the rent potential. For owner occupied, the tax rate is at 4% of annual value. Since rent is generally between 3-5% of capital value. 4% of that 3-5% works out to only 0.12% to 0.2% of market value.

So, ThePythonicCow's $800K house will only incur a tax of $960 to $1600 a year if the house were in singapore.

If the property tax system were to be revised to 1% of market value as in the US, prices can easily halve.

[big67]

Re: California Treasurer: We will not default on bonds

Very interesting comment. Same in Italy, where the property tax on first house is, since last year, effectively 0% (provided it is not classified as a luxury home).
Should this situation reverse the housing market may drop further.