patrick.net

Once again:

Here’s my main beef with Prop. 13:

a) It’s not really about “saving grandma from eviction”, the way it was sold to the public 30 years ago. It’s all about providing a perpetual tax shelter for big business and for a select group of fortunate-born wealthy Boomers and their lazy, greedy Trustafarian spawn, who disproportionately benefit from it.

b) It’s a form of discriminatory taxation that –despite what the Supreme Court said– clearly violates the “equal protection” clause of the Constitution. Age discrimination is no better than race or gender discrimination. If you’re going to lower taxes for one group of people, why not lower it for everyone?

I would be in favor of the following:

–Eliminating property taxes altogether (better no tax than one that taxes me to death, so my scumbag Boomer/Trustafarian neighbors and CEOs can continue to fund their lavish lifestyles).

–Expanding Prop 13’s 1978 tax-basis to EVERYONE who buys a home –not just the Birth Lottery winners.

You’ll notice that *neither* of these proposals would RAISE taxes one cent for anyone now benefitting from Prop. 13, and the former would actually LOWER taxes for them. But you’ll never get a Boomer or Trustafarian to go along with either one, becuase it’s never really been about “lower taxes”. It’s really all about “I got mine, so F**k you!” It’s really about keeping privileged tax benefits for the lucky few, not about helping out the rest of us Hoi Polloi.

NVR,

Yeah, but isn't Prince William one of the wealthiest counties in the country? Probably wouldn't go over so well elsewhere?

Instead of eliminating property taxes, I agree with ol' Henry George that a land-value tax should be the only tax. Here's the argument:

* Most wealth is land.
* No one creates land (except perhaps in Holland).
* Collecting rent on land is merely sponging off of the increased productivity of dense communities, without giving anything back.
* Homelessness and poverty are the result of city land monopolization by the rich.
* It's impossible to hide land, so tax collection is easy.
* Taxing income and sales is bad, because it discourages commerce.
* Taxing building value is also counterproductive. You want good buildings and maintenance. Tax only the land value.

DinOR,

Prince William is actually not exceptionally wealthy comparative to the suburbs of washington dc. Its an outlier, traditionally a 45 min - 1 hour commute into DC. IBM was a major employer, making chips and submarine stuff there for awhile. New chip plant there, and some DHS and spook stuff going on, but its well below median wealth measures compared to Fairfax, Arlington, Loudoun, Alexandria counties.

Its the first county in the country, I believe, to allow local LE officers to check immigration status of everyone they encounter in a violation situation, and then begin deportation proceedings. The county had an enormous Latin community (cheapest county to live in this area). Backlash resulted in this policy, the Latino's are bugging out and leaving blight, foreclosures, and crashing property values in their wake. Its a mess there man. I'm pleased with the results of this ridiculous policy decimating their tax base.

No, this is not a county that can afford this one at all, already largest value declines in NOVA prior 12 months. Every county in NOVA is facing a serious budget crisis, this increase will be close to the norm.

Cash would be A-ok for me: Unlike ~95% of the public, I actually *have* some.

That would benefit downsizing boomers and foreigners much more so.

I tend to think that when tax revenue is being slashed it is time to cut services. Raising tax does no good. It will only chase people away, further decimating the tax base.

"Tax only the land value"

That's why I'm buying a f@cking houseboat! :)

I'll take delivery in Oregon (no sales tax) and plunk it down in Lake Mead, NV (no INCOME tax) where I will promptly declare that I own no land!

(It's all part of my plan to stick it to da' man!)

Clarification relative to Prince William County tax increase:

A 28% tax rate increase will result in an effective 8% increase in the actual tax bill. I was unclear in earlier post.

The county's official numbers indicate a 16% drop in property values in 2007, just fyi.

NVR,

My bad. It's just that often they're mentioned in the same breath.

That would benefit downsizing boomers and foreigners much more so.

How so? If I pay $150k cash for the same 3Bdm/2Ba ranch (what it *should* sell for in a NINJA/neg-am-free market) vs. $750k (+30 years of interest & tax) using a NINJA-ARM, the seller takes an 80% price hit, and I get a no-interest, no-PMI house at a very low cost basis.

Looks like a win-win for me, and lose-lose for Mr. Boomer. What's not to like?

If I pay $150k cash for the same 3Bdm/2Ba ranch (what it *should* sell for in a NINJA/neg-am-free market) vs. $750k (+30 years of interest & tax) using a NINJA-ARM, the seller takes an 80% price hit, and I get a no-interest, no-PMI house at a very low cost basis.

A 750K house may drop to 350K in a no-mortgage environment. 150K is a bit of a stretch, unless there are other significant economic shocks (e.g. waves of bank failures) at play.

NVR,

I also noticed that the couple mentioned in the WaPo article had a 5.75% FIXED RATE mortgage (but w/ kids in college!!) felt that was 'too high' and jumped at the chance to gorge on a 1.95% ARM! "It seemed like a godsend". Yeah, you're right, under 6% for the first time since Sputnik is pretty abusive?

I suppose there are things we could be willing to look past (as this was in 2004 before toxicity was widely known) but what did they THINK was going to happen? That aside I hope they do get their case heard.

A 750K house may drop to 350K in a no-mortgage environment

You're kidding here, right? $350k would still represent a 6-7x multiple of median CA HH incomes, which is *still* higher than the long-term historical average of around 5x. And we're talking what prices might theoretically be in the complete absence of mortgage lending. Without loans, prices would have to crash to levels supported *only* by buyer incomes and savings.

Without loans, prices would have to crash to levels supported *only* by buyer incomes and savings.

If I have to bet:

2M will drop to 1.5M
1M will drop to 600K
750K will drop to 350K
500K will drop to 200K
400K will drop to 100K

(NOT FINANCIAL FORECAST. NOT INVESTMENT ADVICE.)

Without mortgage, the low-end will be decimated, but the higher-end will come out relatively fine.

Don't forget that even without mortgage, people can still rent.

The lower-end will still be partially supported by cash buy-to-let investments.

"Instead of eliminating property taxes, I agree with ol’ Henry George that a land-value tax should be the only tax"

Even better... instead of taxing based off the value of that land, come up with a flat rate for a square foot. How could you get more fair than that?

Sounds good but then the guy with the quarter of an acre on the beach pays the same property tax as the guy living in the desert.

What is everyone's gut feel for the future of mortgage interest rates? Seems like their slipping upward even while the Fed is lowering.

If Bernake somehow stimulates the economy a little bit, what is the likelihood he will start raising the rate like mad to combat inflation?

Seems like alot of the price drops in housing could be moot for buyers sitting on the sidelines waiting for the bottom. By then the rates could be significantly higher. A 5% hike in rates would take away about 50% buying power. 50% seems to be the biggest drop I've seen predicted for housing (by Schiller), and only in certain markets. And a 5% hike up in rates seems likely in the next 5 years unless our government decides to make the dollar toilet paper.

Any thoughts?

Peter P,

I don't know if your "model" is BA specific but we've already seen huge price plunges in I.E and SAC etc. and that's WITH... "something" of a mortgage market.

Well, many here have said lowering the rates was not going to do anything for the lending business or to stabalize home prices. Seems that was the correct prediction. Government backed loans will continue to be cheap, with the increased risk unsecured loans and mortgages/TDs will become more expensive. The market will determine the risk premium built into the rates. Some subsidized rates, like dealer financed car loans will probably drop as an incentive to keep the production lines running. It is going to be an interesting time where we can all make a lot of money if we figure out the directions things are going.

I don’t know if your “model” is BA specific

It is mostly BS specific. :)

Yeah, it is a guesstimate about the Bay Area.

Fuzzy Math,

Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!

Down the road rates will come around and you can always refinance the loan. You can't renogotiate the price of the home.*

Patrick 101*

"Sounds good but then the guy with the quarter of an acre on the beach pays the same property tax as the guy living in the desert."

Yeah, not really sure what unintended consequences that would have. We are used to thinking of tax on dynamic quantities like income and value... not a tax on some unchangeable quantity like square footage of land.

That would probably just create alot of highrise buildings.

I do like the idea of not needing appraisers though.

Well I don't know about "BS"? I just appreciate your quick-and-dirty "sliding scale matrix"! (Someone had to do it)

DinOR Says:
February 27th, 2008 at 12:46 pm
Fuzzy Math,
"Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!"

Yes, yes, and yes!!!
God, I can't tell you how stupid I think people are who say, buy now interest rates are going to go up!

Administrator Says:

> I agree with ol’ Henry George that a land-value tax
> should be the only tax. Here’s the argument:

Since land does not always generate income a high tax on land will basically take land away from anyone that does not own land producing a lot of income.

Does it make sense that an older couple retired and living on Social Security in Sonoma County would pay higher taxes than a NBA player making $5mm a year renting in Mahhattan?

> * Most wealth is land.

This is not true since most land generates little or no income.

> * No one creates land (except perhaps in Holland).

It would not be hard to turn Richardson Bay in Marin in to a subdivision since at high tide it is only a few feet deep.

> * Collecting rent on land is merely sponging off of the
> increased productivity of dense communities, without
> giving anything back.

Just like collecting a high salary in a dense community could be considered “sponging off of the
increased productivity of dense communities” unless you gave it all back.

> * Homelessness and poverty are the result of city land
> monopolization by the rich.

Homelessness and poverty (in the US) are caused by stupidity and/or laziness and have nothing to with land use or the rich…

> * It’s impossible to hide land, so tax collection is easy.

True

> * Taxing income and sales is bad, because
> it discourages commerce.

We have been taxing income and sales for my entire life and we sure don’t have any lack of commerce in the US.

> * Taxing building value is also counterproductive.
> You want good buildings and maintenance.
> Tax only the land value

This makes no sense and would have a strawberry farmer in the Silicon Valley who makes $70K a year on a few acres paying the same tax as the owner of a 10 story office building who makes $10mm a year from the land (and building)…

Thanks, DinOR --beat me to it.

“Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!”

Even better, cheap money and cheap asset!

There are always undervalued assets at any point in time.

"Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!"

Not gonna argue that!

Fuzzy, the appraisers aren't really needed for the general assessments. There are standard construction costs that can be backed off to calculate the raw land value. The tax bill and assessor records actually do seperate the two and then track both. For an income property you use that figure to depreciate the structure. I am interested in the concept of raw land taxation. Again though you will run into that prop 13 dilema when a forward thinking types buys a bunch of gold or other hedge for the future tax increases and for all intents and purposes keeps the original basis and finds a way to pay the tax from an endowment type setup. Then 20 years from now people will be complaining that they have to pay more for gold than the older people did.

Not to be picky, but it's important to point out that it's always better for the borrower, but not the seller (and possibly the lender).

Peter P Says:
February 27th, 2008 at 12:55 pm
“Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!”

"There are always undervalued assets at any point in time."

All things being equal it is a inarguable concept. I'll trade a lower purchase price for a higher interest rate any day of the week. That's what caused the bubble in the first place, the opposite tradeoff.

Yes, it is the purchase decision. As a seller you want interest rates to drop, then you can push the price higher for the next fool.

an inarguable

I suppose one could also argue that cheap money (in and of itself) doesn't necessarily create value? Let's just look at lumber/bldg. mat. prices. At the height of the boom dimensional lumber went sky high. Why? Was it suddenly of better quality?

Yet the slightest uptick in rates and all of a sudden building suppliers were stuck with a pipeline of over-priced inventory. I guess one of the ways going forward we can determine if we're over-bidding on tulips is to simply take a step back and ask; "Is this demand truly needs driven (or propelled by access to too much cheap money?)"

Oh, that's what we've been doing here the last 3 years! My bad.

Cash would be A-ok for me: Unlike ~95% of the public, I actually *have* some.

A-OK for me also. If cash does become king, we may find out we have more savers than we think. Savers tend to put away cash quietly in contrast to the loud complaining of the debtors.

Perhaps we should... ahem, amend Patrick's contribution ever so slightly?

In a n-o-r-m-a-l world you can't renogotiate the price of the home!

With all the "Mod-Squading", Don't 1099 me bro', Jumbo raising (rate lowering) "mortgage rescinding" and Cap Lifting going on I'll have to re-think my position? :(

@DinOR, word.

How does the old saw go? "If you're going to do something stupid, do it with large numbers of other people."

DinOR, in 2004 I hit the 1 million mark in net worth and felt poor because everyone had access to cheap money. It was one of those flukey situations where everyone with a house thought they were Donald Trump and moved massive amounts of borrowed money around.

Next bubble coming, collector cars. Now instead of "What's my house worth?" the new show on is "What's my car worth?"

Guys, can we please stop the madness?