patrick.net

While Obama was eating a baby for breakfast, he seems to have had an epiphany.

How dare he suggest that not everyone should buy a house merely because they can't afford it? How dare he suggest that government backed loans for deadbeats - who bought more than they could afford, then whined during their foreclosure that the very government that guaranteed their loans should modify them to what they can actually afford and should have spent in the first place -that these people should rent until they can afford it?

What the hell was he thinking? All those poor realtors who are losing their homes right now and haven't made a sale in months or years are probably pissed off right now while they continue to pay tithing to the organization that helped create the housing bubble. This could put their high-paid lobbyists out of work...

Next thing you know, he'll want affordable healthcare for all. The bastard!

I don't know,...not if the challenger is Palin ( kidding obviously )

Actually, if the republican nominee is Palin, then we know that the powers that be want Obama in there another four years.

I have a difficult time believing that a president who eats babies for breakfast will be re-elected.

We need to go back to Bush, who washed his hands with the blood of the innocent young men and women he sent to war to deflect the fact that he couldn't find the person responsible for 9/11.

This is a depressing article. There's a lot of bias in here since the standard wisdom is that government should do things to make housing "more affordable".

Of course, in doing so, it is just raising housing valuations, since demand for housing exceeds supply most everywhere.

The core problem AFAICT is not government policies but the significant presence of buy-to-let landlordism in the market. This is what is making housing unaffordable and what government intervention is fighting.

Instead of making buying "easier", we should make leasing "harder". This will increase supply and drive housing costs down.

Not going to happen in a million years though since LLs vote with their money, and renters don't vote at all.

late edit: . . . and declining house prices is the LAST thing anyone (who matters) wants

I thought you were a liberal libertarian Troy (maybe I'm thinking of someone else). But I don't see how it can be governments business to affect how easy it is or not to buy real estate with the intent of leasing it. If this appears profitable to investors now, with current interest rates, meaning they can rent it out for an acceptable return, then the price to a perspective owner to live in must not be that bad. And once the perception is that real estate is not going right back up, and that it may even drift lower first, as interest rates go up, then some of the recent cash buyers will step back.

Some real estate investors of the past two years may soon find out they would have done better to wait. Ultimately, you are right that those investors in residential property do support prices. But I just don't see that
it's right to prevent them from investing.

In the medium term, there are a lot of people that own homes, are renting them out, and who wish to sell. In a way this is on the supply side of the market.

When I'm down...
Obama turns me around

When I'm blue...
Obama knows what to do.

Oh Mama, Obama, he makes all the bad things the republicans done go away.
Obama Oh mama, he's quick with a quip and knows just what to say.

He done so much, the tea baggers are out of touch, I don't care what they say.
He brought hope and change, through a Wealth rearrange, and made the lost jobs go away.
He rescued the cars, brought man back from Mars, while in Iraq we will stay.
He capped the Oil , even Lanced my boil, Fixed health on a bet and a dare,
And No one knows what is in there.

Oh Oh Bah Bah MA!

marcus says

But I don’t see how it can be governments business to affect how easy it is or not to buy real estate with the intent of leasing it.

two words: tax rents. Paraphrasing Madison, if men were angels I would be a geolibertarian

http://en.wikipedia.org/wiki/Geolibertarianism

But I just don’t see that it’s right to prevent them from investing.

Oh, they can invest in the fixed capital to their black hearts' content. The Ground Rent (aka Site Value) is what rightfully belongs to the community / State.

Troy says

two words: tax rents

I have to think about this more later because of some work I need to do, but at present I don't see why that's much different than property taxes. Maybe having different property tax rates for landlords would achieve close to the same as what you suggest.

This can't be changed anyway. We have a long history of land ownership, and certainly you don't advocate confiscating land (or do you ?). As for taxing rents, I don't know how it would work in the long run, but in the short run it would drive rents up, and thus home prices too. I guess they could start small, and raise them very gradually.

People should only buy if they have a reasonable chance of paying it back. Wishing doesn't make it so.

No, still not seeing it. The other thing is that Landlords actually provide something valuable. That is reasonably priced housing for those who for whatever reason aren't going to buy. Making it costlier to own rental housing, raises rents, it doesn't lower them.

marcus says

The other thing is that Landlords actually provide something valuable.

The only thing LLs provide is liquidity to the market for used homes.

The original wealth-creation was done by the original home builder and home-buyer. LLs of SFH do not cause more housing to be created and any rehab they do can equally be done by actual owner occupants (and of course LLs main profit center is not their services as rent check takers or rehabbers, its the massive ground rent they collect, site value they, by definition, had absolutely NOTHING to do with creating).

This "something of value" line really gets my goat, btw. Page through any CL ad and you'll see mention of access to schools, parks, shopping, transportation as salespoints. THIS is what LLs are providing, access to existing community amenities. That they profit from this so-called service is one of the larger injustices and imbalances in the present economy, some estimates put uncaptured ground rents at up to 20% of the total economy.

That is reasonably priced housing for those who for whatever reason aren’t going to buy.

This is pretty self-serving for LLs to assert that themselves. "Aren't you glad I bought this house, so now you can rent from me instead of owning your own place?"

In a less screwed up system there would be a lot more liquidity in used homes and acquisition costs would be much, much lower, more towards the undepreciated value of the fixed improvements, as the capitalized ground rents would be taken out of the purchase price by the unavoidable long-run tax burden of ownership, something on the order of how Mello Roos and HOA fees subtract from valuations.

Making it costlier to own rental housing, raises rents, it doesn’t lower them.

This is incorrect in theory. Rents are always set at what the renter can pay, not what the owner requires.

We can argue about this in practice, as there are LLs that are more willing to cut deals to desirable tenants out of their surplus, but this is not necessarily the norm.

IMV, if LLs want to get into the landlording game they should look to multifamily. I would toss Prop 13 in the trash but NOT tax one cent of the value of IMPROVEMENTS of a property. This would increase supply of quality rental housing and of course lower rents, and what rents people did pay, more would go towards the services of the community via the land value tax component of their rental payment.

Instead, Prop 13 is doing precisely the opposite, penalizing redevelopment. Sometimes I feel like I'm living in the Tardville portrayed in Idiocracy.

I was including multifamily in my thinking. They are obviously a majority of rentals. If rents were taxed, then rents would go up, or in time the quantity of rental housing would decrease relative to demand again pushing rents up and indirectly house prices up.

If you meant only taxing SFH rentals, then that is different. Although you wouldn't want to start it now, because of all the people who currently choose to rent out their homes at a small loss rather than "walk away."
Troy says

his is incorrect in theory. Rents are always set at what the renter can pay, not what the owner requires.

I think that assumes more units to rent than renters. If you have 100% occupancy, for the whole city, with 1000 more people still wanting to rent. Then rents go up if possible to a price that will make constructing more rental units profitable. If not then over time things would go up until the 1000 poorest people are the ones out in the cold.

I don't know. Neither supply nor demand set the rent alone. But it's not easy to see what would happen if you tax rents. But as I initially said, I need to think about this more. Not whether its feasible politically, but just understanding the theory.

marcus says

If you meant only taxing SFH rentals, then that is different. Although you wouldn’t want to start it now, because of all the people who currently choose to rent out their homes at a small loss rather than “walk away.”

Absentee owners walking away is fine by me. Let the renter buy the place. By taxing land values we could get rid of the sales tax and perhaps even the individual income tax.

As for taxing multifamily, I would only tax some fraction of the site value, relative to the zoning.

Not taxing the fixed improvement value would strongly incent investors to both increase density up to zoning limits and replace the generally decrepit stock we are stuck with new & better improvements.

With the current system we are basically overpaying for land, which means more money is chasing land value and less is being spent in the actual wealth-creation of the improvements.

By taxing the site value, MFH mgmt becomes entirely the providing and profiting from the actual HOUSING service and no longer profiting from the location service.

Philosophically, we should all agree that since LLs didn't create the location, they shouldn't necessarily profit from its advantages -- all the externalities OUTSIDE the lot lines that renters are paying for. If we can agree on that, the debate just becomes one of logistics and practicalities.

The land ownership system we have now is a total crock, with a lucky few getting something for nothing from those who are doing the actual wealth-creation work in the economy. Most other places are worse perhaps, but I think there is a much better alternative. http://en.wikipedia.org/wiki/Land_value_tax

Not whether its feasible politically

um, yeah, all this is never going to happen in a million years. Even the Scandinavian countries don't do a good job in this area. LLs have way too much power in the current system. Most legislators are no doubt LLs, and renters don't vote anyway, plus this rent issue is easily demagogued to create the threat of rising rents in response to any gov't interference in the rental market.

Under a land value tax situation, how would you deal with the following ?

Say a guy has a house that he inherited or bought long ago, under a land value tax system. In the last 30 years, the neighborhood not only gentrified, but on top of that, zoning for the area allows 4 story multifamily apartments that now go for very high rents. His house has a garage and a good size lot, one that would support an 8 unit apartment building. His house is old, but his family likes it, and they would like to stay.

The "highest and best use"( an appraisal term ) of the land is MFH. What happens to his land rent ? Is the govt basically going to raise his rent to where he has to completely lose out ? Or would they buy him out ? How does the government determine "highest and best use" nearly as well as "the market" does now ?

Under our system, someone would buy him out, at a price that even rewards him, yes for what is basically the luck of being in that location. By the way, at some initial point, someone took a calculated risk with a purchase at that given location, or at least paid the value that it was assigned by the market at that time.

Maybe your answer is going to be that under a LVT system, improvements become a consumable, almost like a car, and that therefore he already got his moneys worth out of the improvements to the land, whatever he or his family paid for it.

I see some of the advantages. But the "logistics and practicalities" such as dealing with the above would be huge.

One other consideration. And that is that while our current Real Estate system probably does grant "the rich" some unfair wealth building opportunities, those opportunities are also one of the ways that middle class families have been able to build wealth. This wealth does in fact trickle down to the next generation (poor choice of words), and can be applied to education or investments that lead to more members of middle class. I guess my feeling is that LVT would only work in a country that was otherwise more supportive of a middle class than the US currently is.

Put differently, our middle class is already in trouble, we don't want to take away the wealth building potential of a home at this point, unless there were many other reforms, including more progressive taxes. Although for now, I know, the housing bubble took away that potential for a little while anyway.

One other problem. If the government is the lessor of the land. Then assuming it was our corrupt dysfunctional government that we all know and love, wouldn't the government eventually raise the land rent as high as they could, eventually squeezing the tenants, but just in a different way than they now get squeezed by the high cost of the land component ?

Seems like the government could ultimately raise and squander the land rent. ( I sound like a conservative )

I don't have any answers for these detailed what-if questions, we're so far away from any implementation that swatting down these what-ifs is just a waste of time.

Churchill said it best 101 years ago:

"But when we seek to rectify this system, to break down this unnatural and vicious circle, to interrupt this sequence of unsatisfactory reactions, what happens? We are not confronted with any great argument on behalf of the owner. Something else is put forward, and it is always put forward in these cases to shield the actual landowner or the actual capitalist from the logic of the argument or from the force of a Parliamentary movement.

"Sometimes it is the widow. But that personality has been used to exhaustion. It would be sweating in the cruellest sense of the word, overtime of the grossest description, to bring the widow out again so soon. She must have a rest for a bit; so instead of the widow we have the market-gardener -- the market-gardener liable to be disturbed on the outskirts of great cities, if the population of those cities expands, if the area which they require for their health and daily life should become larger than it is at present."

http://www.wealthandwant.com/docs/Churchill_LPCP.html

Perhaps you could come up with some ideas. There will always be problems with any system. I am arguing on the moral, philosophical, and (overall) practical planes. The details of implementation are far, far away, more fitting for a Science Fiction story than public policy discussion.

Seems like the government could ultimately raise and squander the land rent.

If you've got problems of that magnitude then you've got bigger problems than any land tenure system.

Anyhoo, I like this guy's argumentation:

Fear of a funded government

There is also a well founded libertarian concern that land rent could provide funds enough to support a corrupt and oppressive government. Most libertarian supporters of the governmental collection of land rent therefore fall into two camps. One would give the people power to limit how much money the government can take, but would stipulate that all such money come entirely from ground rents and natural resource severance royalties. The other would take the full rent, but would stipulate that the government can still only spend what the citizens authorize it to spend. The rest would be distributed on a per-capita basis.

http://geolib.com/essays/sullivan.dan/royallib.html

Put differently, our middle class is already in trouble, we don’t want to take away the wealth building potential of a home at this point,

Thing is, the rich own most of this wealth. Glance through the Fortune 500, and you will find a lot of real estate and natural resource fortunes.

Here's some data:

Ownership of Non-home real estate

Top 1% -- 28.3%
Next 9% -- 48.6%
Bottom 90% -- 23.1%

While it is true of the "Principal Residence", the bottom 90% own most of this asset class:

Principal residence

Top 1% -- 9.4%
Next 9% -- 29.2%
Bottom 90% -- 61.5%

http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

Not much of "Principle Residence" is site value for the average Joe, and anyway I think median (or below) land tenancy should be on the order of a homestead right.

Escalating real estate valuations is not "wealth building" since land values are a form of negative wealth and not actual wealth (you can't eat land value). Wealth must always come from labor, yet site values, by definition, are not created by anyone's direct labor.

So "Wealth through RE" is just a form predatory quasi-capitalism, transferring money from the productive who have to acquire land tenancy rights to the unproductive who sell these rights.

By the way, at some initial point, someone took a calculated risk with a purchase at that given location, or at least paid the value that it was assigned by the market at that time.

Just because risk is involved doesn't mean it has to be rewarded. Bank robbers take calculated risks, too.

As for your specific what-if, re-reading it, I guess it would be useful to answer just to demonstrate the very basic principles and trade-offs involved, and the general state of my thinking, or lack thereof.

Since the land is zoned higher-density, the ground rents owed to the taxing authority would be quite higher than what the guy is willing to pay, because he is displacing 8 families who could use the land and 8 families can collectively outbid one dude.

How does the government determine “highest and best use” nearly as well as “the market” does now ?

They did that when they zoned it multifamily. After that planning decision, the market determines the site value of the parcel in question.

Theoretically, every piece of property would undergo repeated bidding wars on who wanted to pay the most property tax on the parcel, and high bidder wins. Practically, there would probably have to be 10 or 20 year quiet periods between changes in tenancy.

Security in tenancy is important in any system though, so SFH should be protected to some extent.

There's probably not an immense pressing need to convert every SFH to multifamily, so I would not force the dude off his property in this case, but give him a life tenancy (with the annual LVT charged as liens on the title as long as it remained occupied by him) and have the property come back up for redevelopment upon his passing.

Land uses change gradually enough that we don't need to sledgehammer in new developments. The core issues solved with LVT are directing actual ground rents from LLs to local government, anyway. Residential SFH is a sideline (and a hobby horse of mine for personal reasons).

Well, it is interesting, and will I continue thinking about it. Thanks for sharing the links. As you say, it won't happen here anyway, as land is privately owned and will continue to be.

Changing the subject a little:

Like all coastal urban areas, here in Los Angeles, the land value component of homes is huge. Often in the areas that I watch, which are not the expensive west side, you will see for example, $300,000 tiny homes where the improvements to the land are maybe worth 70,000 (not even really). They aren't "tear downs" although maybe close, because the market in these areas doesn't support $600,000 dollar homes. But the prices have been bid up essentially because of location (the land). In my view these homes are too expensive for what they are, even now after the bursting of the bubble.

Your discussion got me to thinking, would this land value issue always be this kind of a factor ? Also, a separate question, could different government policies have prevented this ? At some point maybe only hundreds of years from now (or less?), population growth will stop. At that point the escalating land value component is no longer an issue or at least less an issue. But until then what happens ?

In science fiction the implied answer often seems to be, incredibly dense urban areas with massive high rise housing communities. But if that is the way things go, it implies a long time frames and also serious state involvement that might conflict with the Donald Trumps of the world.

Not sure where I'm going with this, except maybe to say this: People reading your recent discussion might think it is some kind of intellectual masturbation, but actually beneath it is a very good point. And that it that we have bid housing up too high, essentially because the valuable land component. Now we find ourselves at a point where we have to ask, how can we even have a strong economy when housing costs so much ? How can young people afford to buy ? Where are the poor working people going to live ? (I know where they used to live).

I know for people living in many parts of the country two wage earners can still buy a single family home for a reasonable price. But in most of the big coastal cities and Chicago, even now, prices are arguably so high that it is another factor depressing the economy. That is, the housing problem is not just that prices are decreasing, and all that goes with that; underwater mortgages, banks with bad portfolios that aren't lending enough, the decreased wealth, and the psychological consequences. On top of all that is a housing market that is too expensive relative to the average income

and on top of that is the 5 - 10% of the population actively profiting from leasing land use tenancy of their land. Nice racket if you can get into it, getting something for nothing!

as land is privately owned and will continue to be.

Actually, the land value tax doesn't change who owns land, just the income streams from that ownership. There might be a 5% chance that Prop 13 is amended in my lifetime to exclude commercial land in its protections, that would be an immense fix to the present system. But it will be one helluva fight to get even that.

would this land value issue always be this kind of a factor ?

There is nothing "wrong" with land value. Market price is how we traditionally allocate access amid scarcity. (I love taking Redfin and scouting out all the wonderful coastal estates available in Orange County now -- how else can we apportion this resource but via public price discovery through bidding?).

The LVT doesn't attempt to fix this, it just attempts to remove profit from land alone from the present capitalist system, with a side benefit of hopefully shifting the tax burden from productive enterprise (ie. capital, labor) to these land values (via their rents).

underwater mortgages, banks with bad portfolios that aren’t lending enough, the decreased wealth, and the psychological consequences

Show me a recession and I'll show you a previous overinvestment in land. I didn't begin to understand the central role of real estate in the economy until finding Henry George's Progress & Poverty. Fitting that it was written from the perspective of the Bay Area. It's always been different here.