Monday, May 16, 2005

Property Tax Backlash

On Thursday, a judge ruled that the proposal by Allegheny County Executive, Dan Onorato, to limit the rate of assessed increases in value of property for the next assessment to 4% was illegal for numerous reasons. This was not an unexpected development as the law is pretty clear on the requirements. There is a great deal of gnashing of teeth and rendering of laments as people don't want to pay more in taxes despite the increased probability of their being able to sell a home for substantially more than they paid for it.

We are living in an economic environment where the majority of the increases in wealth or at least the ability to borrow the appearance of wealth is being derived from home values and not income. Median wages are, in real terms, flat or declining, and purchasing power is fairly stagnant unless a consumer is able to go further into debt. The American Dream of being able to own the powerboat, three luxury SUVs, boarding academies for both kids and regular spa treatments for Sparky the dog is under threat. Hell, the real American Dream of doing a little bit better than your parents has not been working out all that well lately. The one exception to this has been the class of people who bought their homes before the real estate bubble started to really get chugging along.

This group of people are able to extract from their houses ever higher amounts of cash flow without driving down their ratios or increasing their monthly interest payments as they can take advantage of both the generationally long trend and the five year trend towards very low interest rates. It is a damn good deal for them. However the deal gets a little bit worse every time that their property tax bill increases as they are now taxed on the higher value instead of the original value. It is still not that bad of a deal but it gets a little more expensive for the cohort of pre-bubble owners to maintain their houses.

However, if an individual has bought a home in the past five years or so, there is not a lot of room left for same term refinancing. The only significant refinancing deals are for consumers who are willing to go for higher risk and more sophisticated mortgages such as interest onlies, 3/1 adjustables, balloon payments etc. These buyers are on the whole more marginal buyers whose finances are shakier and thus more vulnerable to any income disruptions or expenditure increases. The decrease in national and personal savings means that there is less of a buffer for any change.

Increased property taxes is such a negative change that eats into the buffer. Higher assessed values, which if done properly, should reflect the probable sales price, and thus value of a home which allows for borrowing against the equity built up. Yet not everyone can access their equity immediately or cheaply, and thus the tax payment on a home that increased in value by 20% over the past two years is not met by an equity outflow adequate to cover this increased expenditure. Instead, the increased tax payments come out of current cash flow which for the marginal home buyer is not that flexible and insufficent to deal with a new expense.

Therefore, we have plenty of people bitching about taxes beyond the normal grumbling, and the start of of a potential property tax backlash --- people only see the increased values that drive the increased tax rates when they either refinance or sell their homes, but the expenses are immediate and upfront. Given American economic myopia, the political solution is to continue to prop up the housing bubble AND kill the major income stream for local governments in order to allieviate short term pain.

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