Here come the California Prop. 13 attacks...

[c1ue]

It has begun...

http://www.latimes.com/business/la-f...1855764.column

Proposition 13 has overstayed its welcome.

I say this as my colleagues Marc Lifsher and Evan Halper bring word elsewhere in the paper today that Gov. Arnold Schwarzenegger wants to impose a fee on property insurance premiums as a way to help close the state's estimated $14-billion budget gap.

That's just dandy, isn't it? A surcharge on insurance that's based on a property's replacement cost, and hence much of its market value. That may not be an honest-to-goodness property tax increase, but it's about as close as you can come without getting your hair mussed.

...

In 2003, billionaire Warren E. Buffett, while serving as an economic advisor to then-candidate Schwarzenegger, suggested that maybe it was time to revisit Proposition 13.

He pointed out that the tax on his $500,000 home in Omaha increased by $1,920 that year. Meanwhile, the levy on Buffett's $4-million house in Laguna Beach, which he bought for less than $100,000 in 1971, rose by just $23.

[zoog]

Re: Here come the California Prop. 13 attacks...

It has begun...

http://www.latimes.com/business/la-f...1855764.column

This is the first time I realized Prop 13 was passed back in the late 70's. Have heard so much moaning about it in the past 5 years or so I thought it was more recent.

We have a similarly questionable property tax system here in Oregon, with the notable difference that we don't get the reassessment-at-sale bump.

This 1996 measure pegged a home's assessed value back to the level in 1995, cut that value by ten percent, then capped its growth at three percent a year. This measure did not call for a reassessment when a home sold.

...There are exceptions to this limit, however. The addition of a new structure, major construction to an existing structure, subdivision or partition of the property, and voter approved bond issues (e.g., parks, libraries, etc.) are examples of exceptions...

...The net result is that Portland, along with the rest of the state, remains suspended in the 1995 time period when it comes to property taxes. This means that neighborhoods and areas within Portland have many disparities for homes of equal value.

"Oregon's property tax system is the most ridiculous thing I've ever heard of. It permanently locks in inequalities, it doesn't reflect at all the market value, and over time it can get persistently worse."

Steven Sheffrin, Director of the Center for State and Local Taxation at the University of California, Davis.

Many close-in neighborhoods gentrified considerably in the housing boom, but taxes did not rise accordingly, unless there was extensive remodeling, or a new house was built, etc. I've seen at least one article in the newspaper highlighting two families with essentially identical houses bought for similar prices around the same time, but paying wildly different property taxes.

As in California, the cities and state have missed out on potential tax revenues while the boom was on. Little late now to be calling for changes, IMO...

[grapejelly]

Re: Here come the California Prop. 13 attacks...

the exact environment that created Prop 13 is going on now.

Housing prices peaked as they did at this time in California.

Assessments soared based upon higher property values.

Local governments geared up their expenses.

And now, even the 1/3 of folks who own free and clear face crippling taxes. They are no longer delighted to pay enormous $500 or $1000 property tax bills every month, equivalent (or more than) what their mortgage payment used to be!

Now I expect a huge property tax revolt everywhere. Arnold is dreaming...the bulk of the middle class are not going to stand for it.

[c1ue]

Re: Here come the California Prop. 13 attacks...

Grape,

The difference this time is the 2/3rds of people who don't own their homes outright - including the 35% or so who have only been in their homes 10 years or less - will be pushing to get rid of Prop. 13 as a leveling of taxes means lower property taxes for those who bought recently.

The real estate brokers and mortgage people also will probably net want this as lower property taxes on newly purchased homes improves their prospects to get new business. That and older homes with sudden new large tax bill also represent potential forced sales and/or MEWs.

[grapejelly]

Re: Here come the California Prop. 13 attacks...

Grape,

The difference this time is the 2/3rds of people who don't own their homes outright - including the 35% or so who have only been in their homes 10 years or less - will be pushing to get rid of Prop. 13 as a leveling of taxes means lower property taxes for those who bought recently.

The real estate brokers and mortgage people also will probably net want this as lower property taxes on newly purchased homes improves their prospects to get new business. That and older homes with sudden new large tax bill also represent potential forced sales and/or MEWs.

good point!

I'm not sure the solution arrived at with Prop 13 will be adopted in other states. But I am sure we are going to see a huge property tax revolt in many states...

I always marveled at how "happy" homeowners seemed to be to pay these gi-normous property tax bills that doubled in my area from 2000 - 2006.

They were happy to pay cuz they felt rich.

Now they don't feel rich and the bills are like an ashtray full of butts the morning after a big party...

So *everyone* is unhappy with this situation...and nothing is quite like taking away something that people are used to...how those local government employees SCREAM.

I expect a federal bailout and I am not kidding...because only the federal government can print the money to "maintain services" and "provide for a decent retirement" honoring the promises that were made to public employee retirees.

[Andreuccio]

Re: Here come the California Prop. 13 attacks...

It has begun...

http://www.latimes.com/business/la-f...1855764.column

I say this as my colleagues Marc Lifsher and Evan Halper bring word elsewhere in the paper today that Gov. Arnold Schwarzenegger wants to impose a fee on property insurance premiums as a way to help close the state's estimated $14-billion budget gap.

The recall of Gray Davis gained a lot of momentum when the budget deficit hit about $35 billion. If we tack on another $20 billion, can we recall Schwarzenegger?

[SeanO]

Re: Here come the California Prop. 13 attacks...

Grape,

The difference this time is the 2/3rds of people who don't own their homes outright - including the 35% or so who have only been in their homes 10 years or less - will be pushing to get rid of Prop. 13 as a leveling of taxes means lower property taxes for those who bought recently.

The real estate brokers and mortgage people also will probably net want this as lower property taxes on newly purchased homes improves their prospects to get new business. That and older homes with sudden new large tax bill also represent potential forced sales and/or MEWs.

c1ue, do you really think the result of eliminating prop 13 would be leveling taxes (meaning lower rates, but on current values)? I think there is zero chance of that - especially given our current budget issues. I think the only goal would be to raise revenue... but any imagined gain in tax rev would be instantly lost in declining home values due to forced sales and foreclosures - especially with CA's current supply and demand problems.

Also: 2/3rds don't own?? How do you figure? And even if right what would it have to do with anything. The tax isn't based on equity, just value. Second CA prices have doubled to tripled in the last 5 years, and many who bought in the last 2 are in foreclosure anyway. So your estimate of 35% who haven't seen increases is likely closer to 10% though perhaps increasing to 15% with recent price declines.

Sean

[c1ue]

Re: Here come the California Prop. 13 attacks...

c1ue, do you really think the result of eliminating prop 13 would be leveling taxes (meaning lower rates, but on current values)? I think there is zero chance of that - especially given our current budget issues. I think the only goal would be to raise revenue... but any imagined gain in tax rev would be instantly lost in declining home values due to forced sales and foreclosures - especially with CA's current supply and demand problems.

Sean,

I get this belief when I looked at the average property tax vs. value in a number of Bay Area zip codes.

At present % property taxes collected net vs. average home value is 50% in a significant number of Bay Area zip codes.

This tell me that the people who bought recently are paying much more than their relative share, while those who have held for more than 10 years are being subsidized heavily.

Some examples:

http://www.city-data.com/zips/94024.html

This is Los Altos - theoretically a haven for the wealthy in the South Bay area.

Real estate property taxes paid for housing units in 2000:

This zip code:	0.4% ($3,798)
California:	0.7% ($1,564)

Median real estate property taxes paid for housing units with mortgages in 2005 in Santa Clara County: $4,289 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2005 in Santa Clara County: $1,497 (0.2%)

Note that the average across all 7,792 houses and condos is less than half the actual property tax rate when you buy a new house. Note also this data is from 2000, well BEFORE the asymptotic part of the recent housing bubble.

In fact, a 0.4% number implies there are at least 2 or more 'long term' property owners for any new purchase, since even a nominal '0%' property tax payer with a single new buyer would yield a net of 0.5%.

The California average is higher, 0.7%, but still represents significant segments paying significantly under average property taxes.

The recent jumps in nominal value, I'm guessing, likely would have reduced this average although it is possible it went up if many of the 'long term' owners sold out or up.

Also: 2/3rds don't own?? How do you figure? And even if right what would it have to do with anything. The tax isn't based on equity, just value. Second CA prices have doubled to tripled in the last 5 years, and many who bought in the last 2 are in foreclosure anyway. So your estimate of 35% who haven't seen increases is likely closer to 10% though perhaps increasing to 15% with recent price declines.

I was referring to mortgages; of all of owned property around the US, I have seen figures a number of times referring to roughly 35% of all owner occupied housing not having a mortgage.

I use this as a proxy to represent the 'long term' segment; certainly there are 30 year mortgages with just 5 or 10 years left, but both from the growth of outstanding real estate loans and the growth in property prices, as well as the relatively high interest rates from 20 years ago, I'm assuming that most of those with a mortgage today bought a home in the last 10 or 15 years max.

Thus the 'long term' owners are paying significantly below 'present value' taxes, but those in the 10 or 15 year range are much more likely to be paying this value. Those 10 or 15 years out of course are paying much less than those 5 years or less.

Thus my implication of leveling taxes is not a reduction in overall taxes paid - in fact the level will have to rise - but more importantly a redistribution of the tax burden to the overall eligible base.

This would effectively lower taxes for those buying a home now.

[SeanO]

Re: Here come the California Prop. 13 attacks...

Sean,
I'm assuming that most of those with a mortgage today bought a home in the last 10 or 15 years max.

Couple of additional thoughts:

CA turns over about 5% of homes per year, so figure average length of ownership is 10 years, regardless of mortgage. That said, it is fair to say that those without a mortgage skew to longer term ownership for obvious reasons. Also there are plenty of refi's among long term owners.

Los Altos is probably not the best example. It is a pretty exceptional community in terms of demographics, and a lot of long term owners couldn't afford to live there at today's prices - and have made a conscience effort to stay. For example my friends father has been their 40 years - he is a retired baker. Bought when it was a farm town, his home in now worth $2M - at that value his property tax would be $2k/mo. Game over, without prop 13 he would have been forced out 20+ years ago during the first silicon valley boom. I'm not sure that displacing folks is something our towns and cities should aspire to. (Sure he "made" $2M on his house, but it is meaningless because he'll never see it - and in fact his kids likely won't either as they'd like to continue to live in their town and staying in the family house is their only chance).

Finally Prop 13 does allow a 2% annual inflation adjustment. Obviously this isn't enough to keep up, especially the last few years, but it compounds and still adds up over the years.

Sean

[c1ue]

Re: Here come the California Prop. 13 attacks...

I'm not sure that displacing folks is something our towns and cities should aspire to.

I agree in principle with this statement - it is also the political rallying cry behind the original Prop. 13 passing.

The question isn't the displacement, however. The question is - is this policy a net positive or negative?

In Texas there were plenty of people displaced by the yearly property tax reassessments. These people therefore had to make the choice of convenience vs. cost - something which pretty much everyone has to make anyway.

Curiously enough, Texas properties did not increase nearly as much as California during the real estate bubble.

(Sure he "made" $2M on his house, but it is meaningless because he'll never see it - and in fact his kids likely won't either as they'd like to continue to live in their town and staying in the family house is their only chance).

So here's the rub: where will his kids live? Unless he is undergoing exact population replacement (i.e. 2 kids to replace himself and his wife), any extra kids or new entrants to the area face a major financial challenge.

What we have going on now in California is the parents may be able to stay in the house, but the kids can never afford to buy one of their own.

Not only that, a more recent law allows parents to deed the cost basis to their children. So we now have generation crossing subsidies even.

Is this truly a net benefit? Or is it a typical 'New Deal' type of postponing the reckoning via a short term populist solution?

I argue that Prop. 13 and its other state likenesses distort the market to the net detriment of all in the long term.

Finally Prop 13 does allow a 2% annual inflation adjustment. Obviously this isn't enough to keep up, especially the last few years, but it compounds and still adds up over the years.

Yep, but with nominal inflation well over 2% pretty much constantly, does it not seem that this policy is clearly not in line with economic reality?

Inflation, wage increases, etc also compound and add up over the years.

If we have merely 2.5% inflation per year for 20 years, the delta vs. the property tax adjustments is already 64% vs. 49% - or in other words prices of everything will outperform taxes gained by nearly 1/3.

If inflation is higher (and it will be), the result is skewed more.

These property taxes in turn pay for various government, school, etc salaries. Are the recipients of these funds getting only 2% or less raises per year? I think not.

The entire principle behind Prop. 13 is the belief that both property prices will continue rising and turnover will be significant.

Both assumptions are going to be proven wrong in the years to come.

[c1ue]

Re: Here come the California Prop. 13 attacks...

Los Altos is probably not the best example. It is a pretty exceptional community in terms of demographics, and a lot of long term owners couldn't afford to live there at today's prices - and have made a conscience effort to stay.

Forgot to address this point. Lest you think I chose an extreme example, a random sampling of South Bay and Peninsula communities shows a clear skewing of property taxes paid being under state averages by percentage.

You'll note a clear pattern in the 2x, 3x, sometimes higher multiple of real estate taxes paid on homes with mortgages vs. homes without.

This would seem to anecdotally support the thesis that Prop. 13 is distorting buying patterns.

-----------------------------------------------------

95135: San Jose:

Real estate property taxes paid for housing units in 2000:

This zip code:	0.7% ($3,493)
California:	0.7% ($1,564)

Median real estate property taxes paid for housing units with mortgages in 2005 in San Jose: $3,951 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2005 in San Jose: $1,359 (0.2%)

95002: Alviso:

Real estate property taxes paid for housing units in 2000:

This zip code:	0.5% ($1,174)
California:	0.7% ($1,564)

Median real estate property taxes paid for housing units with mortgages in 2005 in Santa Clara County: $4,289 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2005 in Santa Clara County: $1,497 (0.2%)

95132: San Jose:

Real estate property taxes paid for housing units in 2000:

This zip code:	0.6% ($2,367)
California:	0.7% ($1,564)

Median real estate property taxes paid for housing units with mortgages in 2005 in San Jose: $3,951 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2005 in San Jose: $1,359 (0.2%)

94403: San Mateo:

Real estate property taxes paid for housing units in 2000:

This zip code:	0.5% ($2,391)
California:	0.7% ($1,564)

Median real estate property taxes paid for housing units with mortgages in 2005 in San Mateo: $4,803 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2005 in San Mateo: $1,865 (0.3%)

94539: Fremont:

Real estate property taxes paid for housing units in 2000:

This zip code:	0.6% ($3,283)
California:	0.7% ($1,564)

Median real estate property taxes paid for housing units with mortgages in 2005 in Fremont: $3,853 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2005 in Fremont: $2,144 (0.3%)

94063: Redwood City:

Real estate property taxes paid for housing units in 2000:

This zip code:	0.6% ($1,878)
California:	0.7% ($1,564)

Median real estate property taxes paid for housing units with mortgages in 2005 in Redwood City: $4,624 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2005 in Redwood City: $1,650 (0.2%)

[Jim Nickerson]

Re: Here come the California Prop. 13 attacks...

C1ue,

I'll tell you one thing, when you get onto supporting a position you do a helluva good job with it. I don't read every word or analyze every table of data you put forth, but only because my interest is marginal. I think a lot of individuals can profit from attempting to adhere to your style if, of course, they are willing to do the work, which unfortunately many are not.

[SeanO]

Re: Here come the California Prop. 13 attacks...

C1ue,

I'll tell you one thing, when you get onto supporting a position you do a helluva good job with it. I don't read every word or analyze every table of data you put forth, but only because my interest is marginal. I think a lot of individuals can profit from attempting to adhere to your style if, of course, they are willing to do the work, which unfortunately many are not.

No kidding Jim. I wish I could make the same level of contribution, but I'm glad I was at least able to get c1ue to delve deeper. :-)

[c1ue]

Re: Here come the California Prop. 13 attacks...

wonk wonk wonk :p

Appreciate the compliment - I have always tried to demonstrate where my convictions arise from. And as can be seen, I am VERY data driven.

[SeanO]

Re: Here come the California Prop. 13 attacks...

I agree in principle with this statement - it is also the political rallying cry behind the original Prop. 13 passing.
...
Is this truly a net benefit? Or is it a typical 'New Deal' type of postponing the reckoning via a short term populist solution?

I argue that Prop. 13 and its other state likenesses distort the market to the net detriment of all in the long term.
....
Yep, but with nominal inflation well over 2% pretty much constantly, does it not seem that this policy is clearly not in line with economic reality?

c1ue, a couple of thoughts on the above excerpts.

1. I believe government will always grow as large as you let it. And I see no reason it should grow directly in proportion to property values - why should people who happen to live in places that later become popular always lose? I grew up in a sleepy town on the coast - that has now become a popular retirement spot for Bay Area execs sending prices through the roof. There has been little fundamental change in infrastructure costs (outside of inflation) - so why should the government benefit from this at the expense of long term residents??? Why shouldn't new comers pay a disproportionate share - they are making a choice to move there, and doing so in mass has caused the inflated values.

2. I agree that the 2% cap is probably not well aligned with reality. But I absolutely think value at acquisition plus an annual percentage increase that over the long run corresponds with inflation is the right number. Note that house prices have outperformed inflation in CA more so than in many places... like Texas - so I'm not sure that is a fair comparison. What Buffet failed to mention is that he pays less property tax for his Ok Mansion than I do for my house.