patrick.net

I am interested to hear how prop. 13 “artifically limit(s) housing supply”

@MC & Peter

This is a very good question, and one I had to do some research to answer. Here's the nutshell version:

According to many of Prop. 13's critics, one of its unintended consequences is that it limits residential housing supply.
Q: How does it do that?
A: By providing a financial disincentive to local governments from zoning/approving more residential construction (because Prop. 13 limits their ability to raise residential property taxes), while providing a strong incentive for them to green-light retail business contruction (Prop. 13 does NOT limit their ability to levy sales tax).

Therefore, the end result (unintended) is:
"...more box stores and strip malls. With property taxes staying in Sacramento, desperate cities became sales-tax junkies, and there's more sales tax in a Wal-Mart than in a factory or a neighborhood. Cities wage hair-pulling battles, pitted against each other by malls and box stores coyly auctioning themselves off for the biggest tax break. The sales-tax addiction explains stretches like "sales tax canyon," a 10-mile commercial strip on what was once farmland between Camarillo and Ventura."

tinyurl.com/d6eo9

As always, I recommend viewing any form of government/ballot-initiative interference in free markets in the name of "helping" or "problem-solving" with considerable suspicion.

The Law of Unintended Consequences rules.
("Rent control" is another good example)

HARM, under the shadow (or shade, depending on your POV) of Prop 13, don't local governments have more incentive to approve new, high-density housing projects?

(For the same plot of land, a high-rise condo can yeild 10X more property tax and potentially 10X more turnover, which resets tax caps.)

under the shadow (or shade, depending on your POV) of Prop 13, don’t local governments have more incentive to approve new, high-density housing projects?

Compared to using the same land for low-density SFRs, yes one would expect they do. However, remember that the Prop. 13 tax caps are only reset at the time of sale, and over time, the tax revenue from that same condo/townhome complex gradually diminishes (as a percentage of total revenue). So long-term, retail still has the edge.

However, remember that the Prop. 13 tax caps are only reset at the time of sale, and over time, the tax revenue from that same condo/townhome complex gradually diminishes

I agree. However, doesn't this push local governments to keep increasing new housing supply so that they can tax at market rate? :)

My point is that Prop 13 itself is probably innocent. However, the combination of Prop 13 and NIMBY can have bad consequences.

doesn’t this push local governments to keep increasing new housing supply so that they can tax at market rate?

Not really. While new/re-sold residential property --even high density-- does generate *more* tax revenue than pre-existing property, retail property generates a *whole lot* more (think property tax + sales tax). Plus --as the article points out-- most of that property tax now goes directly to CA State Legislature, not local communities (schools libraries, etc). Prop. 13 essentially redistributes property tax revenue from cities to our Dear Leaders in Sacramento.

Excerpt from Sacramento Bee 2003 editorial:

But the worst -- and most ironic -result of Proposition 13 is how it promoted centralized power. The measure and its progeny gave the Legislature control over how the property tax would be divided among schools, counties and cities. The result has been a system that pulls decision-making and flexibility away from local communities, and blurs which elected officials are accountable for what.

tinyurl.com/8lq74

But I don’t agree that in either of the locations you mentioned, nor in the vast majority of this state, that there is an actual shortage of undeveloped residentially zoned land.

@MC,

I certainly don't buy the Realtor hype about "running out of land", but whether or not sufficient land is zoned for residential property is a tricky question to answer in the general sense. In many areas there's plenty of it, like you said (btw - did you build in NCal or SCal? Just wondering). In other areas, you get these extraordinarily restrictive Urban Boundary Limit laws, like in Contra Costa County.

I think Peter made a good point about the toxic combination of UBL laws + Prop. 13 on housing construction. I also have to wonder if those sky-high pre-construction fees (highest in the nation) are not a direct result of both.

@MC,

I also understand your point about retail construction as I built more then 1 billion dollars of it here in CA prior to retiring

Wow - is that all over CA or in just one region?

@ Mike Linksvayer,

A recent paper says “affordable housing” mandates actually increase housing prices... Such mandates may seem the opposite of NIMBY, but they’re two sides of the same coin–control–everything must either be prohibited or encouraged, with unintended consequences either way.

Another great example of "Law of Unintended Consequences" and government attempting to "solve" problems that it created in the first place with yet more ill-considered legislation. --thanks Mike.

I checked on Ben Jones' site, and he turned off the posts because of "heavy troll traffic." He's going to institute some form of registration so he can kick them off if necessary. There must be a lot of nervousness out there for the trolls to be coming out in droves.

I don't think the posting here has dried up. People have lives to live and don't have time to constantly monitor a blog (except for trolls). I've noticed that the post's come in waves.

TWIT

There was a guy here on the news who is suing a local car dealership over the "fine print" in a car ad. It claimed no down payment, but there was a $3500 (approx) "drive off fee." I don't have a lot of sympathy though, he knew what he was signing when he bought the car. He's just having second thoughts (or a problem paying) and is trying to get out of the deal. Makes me wonder how many lawsuits were going to see when all the neg-am loans start coming due, and all those unwary homebuying start claiming they "didn't know" the payments were going to go up.

@SactoQt
Makes me wonder how many lawsuits were going to see when all the neg-am loans start coming due, and all those unwary homebuying start claiming they “didn’t know” the payments were going to go up.

You mean my 1% "teaser" rate won't last forever?? I'm calling my lawyer right now!

@Tom
Read SactoQt's 8:33am post -- it's no conspiracy that shut down comments on Ben's site, just heavy troll traffic. Unless... the trolls ARE the conspiracy!! (cue Hollywood 'dramatic revelation' music)

I guess Ben's lock-down could means more traffic for us. Too bad, though --the genuine posters provided tons of good info.

While I agree that comments really add to his blog

This is the understatement of the week. The "comments" is the blog. ;)

Comments are important because they drive traffic to his site, creting more comments. Of course he worked very hard to have great information frequently. The relationship between blog and comments is like that between creative financing and housing bubble.

Back on the subject of bad government policies and Unintended Consequences:

"A Housing Boom Built on Folly"
tinyurl.com/bhel3

What accounts for the housing boom? Economists have cited a number of fundamental factors, including low interest rates, favorable demographics, and restrictions on development. But the unappreciated force that may have infected a strong housing market with home-buying mania is bad tax policy. Specifically, I mean the Taxpayer Relief Act of 1997, signed by President Clinton.

"We're overinvesting in housing as a nation," says Mark Zandi, chief economist at economic-consulting firm Economy.com. And we have the 1997 tax-law change to thank, because that created much of the economic incentive to buy, flip, and buy again every two years.

I'd rather delete the trolls entirely rather than let them shut down the blog.
Lets ban troll breeding.

I agree. Let's delete all troll comments and any reply to them.

Ben Jones has turned off comments in all of his new posts. Brace for increased troll traffic here.

@primetroll,
Nice screen name!

primetroll, I have to say that Vancouver is a very desirable place to live though (much nicer than San Francisco). I thought the market is highly immigration driven, is it so?

The Marin housing bubble blog is quite informative and it definitely worth visiting.

http://tinyurl.com/9sqr8

(Sorry, Jack)

motorcityjim, gas will probably be $7 a gallon in a few years. We will see.

Personally, I do not mind gas being $10 a gallon if it means more sensible use of resources and more interest in alternative energy research.

primetroll, my feel is that Vancouver has a rather different timetable for its boom/bust cycles.

On the other hand, with so much new development going on a bust will not be too far away.

Perhaps I will move there after 2010 with all the infrastructure there and the speculative boom over.

Wow, more than 50% chance of declining prices: Uh oh

http://tinyurl.com/8nv4w

East Bay and South Bay are at great risk because they are arguably the most overpriced (least desirable) regions near Silly Valley. 50% is a severe under-estimation, but it is a useless probability number anyway.

Hey PeterP! That’s around October.

I sense pain and chaos around that time.

I thought the Marina was the most overpriced and undesirable place in the BA.

I forgot that such a place even exists!

TWIT, that makes you a non-troll. ;)

... or an unsuccessful troll (just kidding).

The Final Months of the “Housing Bubble

sold my home three weeks ago anticipating what I believe will be “Economic Armageddon” in the United States. It wasn’t an easy thing to do. My wife and I have lived in the same home for 25 years, raised both of our children there, and owned the property outright without any loans or mortgage. The house was paid for in “sweat-equity”, that is, by wielding a shovel day in and day out in my one-man landscape business. I don’t say that for sympathy, but to illustrate that we played by the rules, worked hard, paid our taxes, and took advantage of the American dream of home ownership.

All that has changed.

I sold my home for one reason: George W. Bush. He and his protégé at the Federal Reserve have submerged the country into a morass of “unsustainable” debt, disrupted the nation’s economic equilibrium and thrust us towards fiscal disaster. They’ve also generated a humongous housing bubble through their irresponsible and self-serving manipulation of interest rates.

The facts are astonishing.

The current housing bubble is “larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.” (The Economist, June 16, 2005)

The banks have lowered the standards for home loans to such an extent that the traditional loan of 20% down and a fixed interest rate is virtually a thing of the past. Instead, those conservative practices have been replaced with “creative financing” schemes that put the entire housing market at risk.

Consider this: In 2004 “one-fourth of all home-buyers -- including 42% of first-time buyers -- made no down payment.” (New York Times, July 7, 2005)

No down payment?!

Sorry, but if a buyer can’t come up with at least $5,000 dollars for a down payment, he shouldn’t qualify for a home loan.

Equally troubling is the fact that “nearly one third of all new mortgages this year call for interest-only payments (in California, it's almost half)” (NY Times) This tells us that a large number of new buyers can barely make their payments, but are gambling that their property value will go up enough to justify their investment. This is “equity roulette.” a shell game that anticipates that salaries will go up while interest rates stay low.

Is that a reasonable judgment?

No, Greenspan has said that he will continue to ratchet up interest rates to head off inflation. This means that an economic slowdown is a near certainty. Remember, “class-warrior” Alan Greenspan lowered the prime rate to a ridiculously low 1% in 2002 to keep the economy humming along while $300 billion was sluiced into Bush’s “preemptive” war in Iraq and while the tax cuts were siphoning the last borrowed farthing out of the public coffers. The Bush tax cuts transferred an average of $400 billion dollars per year into the pockets of America’s plutocrats. Now, the country is flat broke and Greenspan will have to “incrementally” raise rates to stabilize the sagging dollar. This means a sluggish economy for most of us and doomsday for over-extended homeowners.

One observation: those with "troll" in their screen names are likely to be non-trolls.

Housing Bubble Troll, I think I read that in the Marin blog, if I remember correctly.

Housing Bubble Troll, I think I read that in the Marin blog, if I remember correctly.

No, I posted this on the Yahoo Fannie Mae (FNM) message board.

Yes, no troll here...just think that this whole troll babble posts are too funny. :-)

Peter P

It was on the Marin site too, I read it earlier. I like that site btw, it had some good articles.

SactoQt, I like the Marin blog very much too. Looks like it is going to be yet another site that I have to follow.

Jack is not going to be very happy though.

Why don't you start a Sacto bubble site? I will have a south bay bubble site then ;)

Instead, we should have a "Start you own housing bubble blog" late night infomercial.

I cross over from right to left on this one.

I got no problem with growth limit laws. I do not want to see a f&@$ing Wal-Mart on the slopes of our beautiful hills along highway 280. I don't want to see Miami-style condos cluttering the coastline. SJ already looks like Mexico City (crowded, stinky, ugly - sorry SJ owners, there are some nice pockets)...let's not ruin the peninsula too.

I *salute* Prop 13 too. It was a successful taxpayer revolt. Without Prop 13, long time residents (esp old people) would be kicked out of their own homes by rising taxes. I lived in Illinois...and there, they would patrol neighborhoods to find new decks so that they could 'dynamically' adjust your bill from year to year. No thank you.

We need more tax revolts - but people today OPPOSE tax cuts. Talk about mass delusion.

Anyway, even if you doubled the property tax money and corresponding school funding I would take all comers with ANY BET that student would end up better educated. You would just have more money for useless multiculturalism, pools, ski trips and sensitivity indoctrination.

So, in conclusion, if NIMBY legislation and Prop 13 equate to a increased house price 'tax', I'll GLADLY pay it.

Housing Bubble Troll,

You sort of lost me on why you sold your house. I'm as much of a bubblehead as anyone, but if I *owned* my house outright, man I'd never sell unless it was the wrong size or I hated it. Are you in CA? Have you done the math?

Most of all I would not do it as some kind of protest or reaction against our President. Now look, although I never vote blue, W. is far from my favorite President. But blame our state of affairs on the right forces, not our President and Fed Chief.

The basic forces that cause the bubble - fear (of being priced out), greed (flippers), a universal desire to own a home, and cheap money - are only slightly influenced even by Greenspan, much less Bush. The fact that Greenspan's rate increases aren't having much of an impact should prove this out to you.

What you should do, IMO, is
(1) wait for the crash
(2) buy a second house
(3) sell house #1 at the next rise
(4) Repeat
(5) Profit!

That way, you never have to rent, and you can ratchet yourself up.

Matt,

As far as Wal-Mart goes, I'm no fan either. Urban Boundary Limits generally have nothing to do with retail development. Though UBL's vary from area to area, they are almost always about stopping residential development.

So, if you really don't want more Wal-Marts blighting the landscape, then you'll join me in OPPOSING Urban Boundary Limits.

I *salute* Prop 13 too. It was a successful taxpayer revolt. Without Prop 13, long time residents (esp old people) would be kicked out of their own homes by rising taxes. I lived in Illinois…and there, they would patrol neighborhoods to find new decks so that they could ‘dynamically’ adjust your bill from year to year. No thank you.

Well, I can't comment intelligently on how property taxes work in Illinois, but I can tell you that here in CA, Prop. 13 started out as a nice idea --limit property taxes and help out "old people on fixed incomes". As usual, few people who voted for it anticipated those unintended consequences that usually seem to result from government/special interest attempts at "controlling" prices and free markets. Things like new homebuyers getting charged 10X what their neighbor gets charged in prop. tax for the same sized house in the same development.

So-called "Tax-revolts" almost never keep government from raising taxes or overspending our money. All it does is arbitrarily shift the burden from one group to another.