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.
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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.
The housing market's stagnant because people are afraid to buy a house. People are afraid to buy a house because they fear their (and/or their spouse's) decent, full-time job may be moved halfway across the country, downsized, or eliminated.
Houses are usually the biggest thing people buy in their lives. If you lose your job, you're often over a cliff like Thelma and Louise. That prospect is so daunting, house prices are going down while rental values are going up.
Mike,
I agree with your assessment of why people are not buying houses. However, it is probably correct to say tax burdens contribute to lackluster housing sales. The pressure might be on the margins but it is certainly there.
On a more philosophical note: So what if housing prices are decling? They were artificially inflated and hopefully are heading to a more reasonable price structure. The housing bubble created faux wealth, it should be no suprise when that 'wealth' disappears as the bubble deflates.
Well said, sir. If one takes a graph of home prices over the preceding decades and flattens out the bubble and applying a best fit line one will see that home prices are just about where they ought to be given historic trends.
Another interesting fact. There was recently an article discussing the declining rate of home ownership in the USA. It is, of course, way down. The interesting thing is that Canada did not force its banks to make bad loans and maintained its standards for qualification. After all is said and done the home ownership rates between the two countries are comparable. We went down a long, hard, financially destructive path to end up at the same place where sound economic and banking principles would have gotten us anyway. We are a nation of fools led by even greater fools.
Amen to that brother. fnm/fre were unbelievable. Imagine you are Mozillo and you wake up one day and think "these morons will buy anything we give them, we are sending them the loans on a computer now. All we have to do is get someone to sign the papers and we get the points and the fees". And Mozillo got rich because he realized there was an non-economic player (fnm/fre) in the market doing a stupid thing. And Barney Frank got head of the Finance committee for giving Mozillo this freebee.
Faux wealth? what is that? If you sold your house in 2006 for an "artificial" price much higher than it is worth today, do you have to give the money back?? The point of this article is that taxes kill home values!!!!! Read my other post here about the governmental destruction of home values in Scranton, PA. The homeowner get penalized for the government's ineptitude. The market is designed to adjust to the ebb and flow of prices stemming from a myriad of factors. Taxes are independent of the market and are uncontrollable by the property owner.
BC,
What wealth,and money is not wealth, did the housing bubble create? All it did was impoverish some, those paying artificially higher prices, while enriching others. It was the semblance of wealth and happy times were had by all, until the day when people could no longer pay their mortgages. Your seller in 2006 indeed realized monetary gain. But guess what? It was offset by the monetary loss of the buyer. There is no net increase in wealth.
"The point of this article is that taxes kill home values!!!!! "
Yes, and what did I say to indicate I did not think that was true? I am replying to a post suggesting that the OP was incorrect in his suggestion that taxes did not play a part in the slowing of housing sales.
Tom, Your reply attempts to address so many aspects of housing and the "bubble" it is difficult to respond to adequately. Many of those who couldnt pay their mortgages wouldnt have ever had one were it not for government interference. But that isnt the point of this article nor any of my posts. If money isnt wealth, I wonder how it is that you define it. Again, not the point but it begs the question how you can assert that a seller in 06 didnt accrue wealth which isnt a finite thing. You either dont believe in the market or you dont understand it. The point was nothing more than the fact that taxes undermine values. You incorporated other unrelated factors. That was all I was attempting to illuminate. I still have a difficult time understanding your seemingly socialist approach to the 06 buyer though. As if this transaction is in a vacuum and one loss and gain must balance out. That doesnt make a lot of sense to me and that thinking fuels the rabble of the occupy movement that the 1% are unequally successful. What if the 06 buyer was well aware of the looming crisis? is he a cheater or a successful capitalist? I know its off topic but I cant believe you said that in the same post in which you denigrate taxes.
I have a more fundamental problem with property taxes.
I had a friend who once told me that he had paid off his house and that now he finally owned it. I replied that no, he did not own his house. He argued that he did and the deed proved it. I replied that every year he must render unto Caesar tribute and that if he did not render tribute what will Caesar do to his house? At which point he realized that Caesar owns his house.
Once a man buys something and pays his taxes on the sale he should own it free and clear.
So long as the government has the right to demand payment every year and the right to seize your property if you refuse then the government owns the property.
Whoever can demand money from you for property you 'own', property that is fully paid, and can legally take it from you if you refuse to pay is the true owner of the property.
Alas, Eristic has hit on a sad fact. I "own" a home and I do not mind paying the Ad Valorem taxes now, while I am still working, but when I retire (a hopeful option that seemingly gets more elusive as the economy flails), the taxing entities will continue to erode the calital that I saved and built over my lifetime.
It is a real problem, particularly for those on fixed incomes.
The unsustainable union golden parachute pensions and retiree benefits have other side effects also. Where I live we already have unsustainably high property taxes and perpetually low housing values. When there is nobody left to tax what do they do? Cut the bus route for the village kindergardeners. In other words make the 5 year old with a peanut allergy walk by herself across town, while the retired teacher gets his beach house ready for the summer.
I take issue with the knee-jerk idea that lower house prices are "a problem".
Firstly: If the original rapid rise in house prices was irrational, the the subsequent drop in price is merely a correction.
Secondly: If food prices at the grocery store dropped to 2003 levels, how many consumers would really complain? I car prices dropped to 2003 levels, how many car buyers would complain? If gasoline prices dropped to 2003 levels, how many car owners would really complain.
House prices at 2003 levels? If I'm in the market for a new house, you better believe that I'm celebrating!
Did anyone read the article? The value of a home (or anything else for that matter) is reduced by the costs to maintain ownership. in this case, its taxes which do not go down. Therefore the home's value is driven down as a result. This is exacerbated in the housing market where the commodity cannot be moved. You are inexorably financially linked to the local governments and pay the price (literally) for their incompetence. While the market will consider your efforts in maintaining and improving your home, the overriding consideration is taxes. MikeB seems to think it somehow balances out when rents go up. Well, somebody owns, maintains, and pays property taxes on rental properties too. A perfect example of this is Lackawanna County, Pennsylvania where Obama spoke yesterday. Scranton city taxes have already reduced home values there hugely. Generations of completely irresponsible governance have finally led the city and county to raise their already ridiculous tax rates by nearly 40% for 2012. For all those who believe low house prices are a good thing, start looking in Scranton!!!!!! A house valued at $75k today is worth much less after its tax burdens are increased by 40%.
It is the same story in upstate NY, low housing values and high taxes. What some people don't consider is that the higher priced house really is a better deal in the long run in a lower tax district because more of your monthly payment goes towards principal (equity), rather than being robbed by the union thugs. Whoever came up with the idea of taxing one of our most fundamental necessities, our shelters, deserves a spit of fire in their soul. I worry enough at this age about how to meet our monthly bills, when I am old and hopefully have my house payed off I fear I will end up eating catfood in a cardboard box after the union thugs confiscate my property. If they did that though, I would rip out every last thing I have added to improve it over the years right down to the bathtub, the kitchen sink, and the drywall. John Lennon can have some of that soulfire too for imagining a world without possessions. I'll take a world with respect for property rights. I dream of the day when the thugs get their jackboots off of our necks and let us live peacefully with what we have acquired through hard work and perserverence. Or at the very least we get back to respecting states rights I could move somewhere that respects property rights. In that case I would need to find a sucker to buy my house.
Ad Valorem taxes are insidious. I am OK with paying while I am still employed, but when I retire (a somewhat elusive target) it will be tough to stay in the house I built and live in. The taking of my net savings over my lifetime in little bites as I weaken with age is despicable.
What is Faux Wealth? I didn't learn that in Business School.
And, anyone who doesn't realize that recent Federal Tax relief has been slowly confiscated by State and Local Governments as well as commodity inflation isn't awake or even breathing.
We just moved back to NoCal after living in Colorado. Our property taxes doubled from Colorado for actually a cheaper house in California. Most of the places you live in California, people haven't moved for the last 20 years. I think prop 13 (and I fully support prop 13 and we would have been triple or quadruple without it) is a disincentive to move. I really wonder what people would think and what would happen if everyone had to pay the current full property tax (only new buyers pay 1.25% of purchase price). I think a lot of people would not be able to afford their house anymore. It's a payment with no withholding and most people don't plan very well. And I really agree emotionally with the sentiments above about having your house paid off and being able to live their in retirement without a lot of out of pocket expenses. I'm not sure Californians are as tax tolerant as everyone thinks they are. They brought Arnold in over a tax on motor vehicles.
"I'm not sure Californians are as tax tolerant as everyone thinks they are."
You forget that California is effectively under the control of Hispanic, Democrat legislators and the majority of the voting majority do not pay taxes and their numbers are inflated with non-citizens' voter fraud.
California is effectively lost to the gov't bureaucrats and the invasion of the Mexican illegals. Both groups think only of raising taxes to solve problems.
In the state of Washinton, a permit to build a 1700sf house is about $20,000. Just the permit. And of course you pay property taxes then entire time you "own" the house, mortgage or no mortgage. And when you sell "your" house the excise tax is 1.78% of the gross sale.
This means you never even "own" 100% of your house, but only 98.22%. The government owns the other 1.78% PERMANANTLY, because they will collect 1.78% of the sale, EVERY SINGLE TIME the house is sold.
