Standard & Poor’s released the latest Case-Shiller data on house prices on Tuesday, and the results weren’t pretty. In the past five years, house prices have declined to 2003 levels, and the average home declined in price by 3.9 percent over the last year alone. National politicians are scrambling to reverse the trend. But the remedy lies in state houses and town halls.
Two weeks ago, both Republicans and Democrats in Congress cited the struggling housing market as their reason for extending an “emergency” subsidy for homebuyers. The taxpayer-backed Federal Housing Administration will continue to guarantee mortgages on houses worth as much as $729,500, something it has done for three years. No middle-class family can afford such a home. But the home-builders lobby argued that a reduction in the guarantee would mean less demand and thus lower home prices not just at the top, but throughout the market. If you can buy an “expensive” bottle of wine for cheap, why buy the cheap bottle? The same thing goes for houses: When expensive houses become cheaper, there is less demand — and thus lower prices — for even cheaper houses.
No matter how hard Washington tries, though, it can’t legislate away reality. And the reality is that even half a decade into a housing slump, Americans still
have good reasons to be wary of plunking down their hard-earned cash and signing up for a long-term mortgage. These reasons are closer to, well, home, than to Washington.
A house is worth what a buyer is willing to pay for it in monthly costs. That’s why if mortgage interest rates go down, house prices go up (or at least fall less than they would have otherwise). When a potential homeowner has to spend less on mortgage interest, he can devote more money to paying principal, and therefore is willing to make higher bids. So the house is “worth” more — at least until interest rates rise again.
But when you buy a house, you’re not just committing to a mortgage. You are also promising to pay the future property taxes on that house. What drives those local property taxes are the future costs of paying state and local workers and retirees, particularly retirees’ pensions and health care. These costs are going in one direction: up.
Unless state and local governments take steps now to reduce future costs, or unless they plan on suddenly repudiating their promises to their public-sector work forces one day, every dollar in unfunded pension and health-care costs is up to a dollar less in the future value of a house.
Take one example, New York’s Westchester County, the highest-taxed county in the nation. According to the Tax Foundation, property taxes in Westchester average $9,044 annually — up by $1,707, or 23 percent, in the five years from 2005 to 2009. Inflation accounts for less than half of the increase.
What if property taxes in Westchester were to increase by another 23 percent, to $11,124, in the next half decade, or even the next decade? That’s an extra $2,080 in annual costs per house, or nearly $175 every month. Even after deducting these levies from his federal tax bill, a homeowner would end up losing $1,456 a year. Families that considered buying a house would sensibly lop that extra amount off the price they are willing to pay — and the seller would lose about $23,500 in investment value.