Bacon's Rebellion

Democracy Thrives in Sunlight

Housing Bubble Watch: Costs of Rent vs. Costs of Home Ownership

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by

James A. Bacon
in

The latest warning comes from the “State of the Nation’s Housing 2005” report released Monday by Harvard University’s Joint Center for Housing Studies, as reported by SmartMoney.com. The bubble in prices is most acute in California, southern Florida and New York, the article says, but graphic information in the article indicates that the surge in housing costs in Washington, D.C. is comparable to those in New York (as measured by the dollar increases in monthly mortgage payments in 2003 to 2004).

A big problem, notes the report, “is the disparity between the residential home and rental markets. The after tax cost of owning now exceeds the cost of renting a comparable home by 28% nationally, and by much more in certain areas of the country, according to the report. In 2003, it cost 23% more to own than rent a comparable home.”

There are solid fundamentals underpinning the market in metro Washington, including strong job and income growth. But bubbles always start where the fundamentals are sound, and then escalate beyond all reason. Local governments across Northern Virginia had better batten down the hatches. The storm is coming.

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  1. Anonymous Avatar
    Anonymous

    The Storm I’m really waiting to see is the one where local governments, having cut rates in the face of rising assessments will have to reverse course as assessments fall. My suspicion is that it will be harder to ratchet up the rates than it was to take them down (unless you’re Sean Connaughton, who gets the daylights kicked out of him in either direction), but there will be very little choice if there is a major downturn in assessments. This, if it comes to pass, will be a killing field for local officials. The carnage will be enormous. Maybe it will take something like this to create the conditions for intelligent discussion of radical revision of state/local tax structures (as opposed to the bloody rates).

  2. Anonymous Avatar
    Anonymous

    I have to agree with the first comment. For a moment I almost wondered if Jim was trying to argue against the rate cuts approved this year in almost every county, or against the pie-in-the-sky schemes to limit residential property taxes being advocated by Kaine and Kilgore. For a moment.

  3. James Young Avatar
    James Young

    Anon 2:36 — Please explain your comment “Sean Connaughton, who gets the daylights kicked out of him in either direction.” Since Sean Connaughton has increased taxes in every year of his tenure, I cannot understand how you can make this statement.

    On the other hand, as a Prince William County taxpayer, I would love to have the opportunity to kick the daylights out of him when he actually reduced my taxes. Just the opportunity. Not that I would do kick the daylights out of him for doing so.

    I’m not holding my breath.

  4. Jim Bacon Avatar
    Jim Bacon

    Bingo! The first Anonymous post got it exactly right. The way to batten down the hatches is to start curtailing spending and strengthening municipal balance sheets — now.

  5. Ray Hyde Avatar
    Ray Hyde

    Let’s see now, if they took the rates down half as much as required to compensate for the increased assessment, then that is already a tax $ increase.

    If the assessments return to their former level, then they should only have to raise the rates to the previous level, which would amount to a tax $ cut.

    In which case we will have politicians campaigning that they lowered taxes when they raised the rate.

    Problem is they will probably rais the rates enough to keep the present tax dollars, in which case we will have had a tax increase when assessments went up and another when they went down.

    By the time the next round of assessment increases come around people will have forgotten about this and the next rate reduction will look like a tax reduction.

  6. subpatre Avatar
    subpatre

    What’s wrong with a “fixed amount” concept on real estate taxes? Everyday voters know how many dollars they paid last year. Rates can be halved, or tripled, and nobody will object if the actual tax fee remains the same.

    The tax rate is smoke and mirrors, it’s sole function is to extract a set amount of cash from the citizens. Whether the assessments rise or fall, the rate is relative. A house worth 75% of surrounding houses is taxed at 75% of surrounding houses, whether the house value is $50 thousand or $5 million. The county’s revenue needs remain the same, no matter what value is assigned to the homes.

    Any government that, even moderately, attempts to maintain or stabilize tax dollars will be on solid ground. If assessments soar (the case in this county) then set whatever rate is needed to keep revenue constant. If assessment drop in the future, there will be little objection to constant revenue, even if the rate must be raised.

  7. Anonymous Avatar
    Anonymous

    Subpatre, unfortunately your solution makes too much sense. Certainly when our government leaders are unwilling to cap revenue growth based on real estate taxes to the very generous rate of inflation plus population growth, they would never be willing to limit it to a constant.

  8. Sorrel Avatar
    Sorrel

    I need to put my call sign on the first comment. Pushed the wrong button. But to amplify on the point, I wonder if those who have complained most heartily about the tax impact of rising assessments will reward pols who raise the property tax rates but who, because of tumbling market values, end up presiding over falling tax bills (in absolute numbers). That seems to be the logical implication of some of the heart-felt rhetoric that has been tossed around here in the last couple of months. Sure beats me. I’m going to be very unhappy if the bottom falls out of the market. I will pine for the time when my taxes in PW went up $800 (29%) over 4 years while my property value increased $131,000 (64%) (a real world example that I suspect is not atypical). I will not reward politicians who preside over the reverse, whether it’s their fault or not.

  9. Anonymous Avatar
    Anonymous

    So if revenue in stays exactly the same year to year, then how are employees supposed to get raises?

    Not really arguing or disagreeing yet; I’m just trying to understand the logic of this “not one penny more” argument I keep hearing.

  10. subpatre Avatar
    subpatre

    Nitpicking. Inflation, whether small or not, is a [usually] needed part of any revenue stream, and voters know that. Since not all of government spending is subject to inflation (a considerable amount is typically in fixed rate debt) only revenue spent on services and goods should be inflated.

    What 5:54 PM Anonymous leaves out is that in today’s climate of rising assessments a county can (nitpickingly) maintain or even reduce tax bills; yet still experience a rising revenue stream. Part of the rising assessment phenomenon is new construction, which adds to the value of county real estate.

    To use an example, a county with 100,000 units valued at $100,000 each taxes the total value ($10 billion) at $0.50/$100 for $50 million revenue. New construction doubles the units, and the new values along with a hot market drives assessments up to twice the previous value.

    Total value is now $40 billion. Total of all services needed per unit doubled countywide, but centralized capital costs didn’t. Bottom line is the county doesn’t need $100 million, probably more like $80-90 million. If they can’t do that, the services are managed badly.

    To get that revenue, the county rate would be set (total value/100)*rate=$90M This is obtained with a $0.21/$100 rate. Further, the new units are valued at $225,000 each; they are brand new. Older units have inflated, and are worth $175,000 each.

    The tax bill (dollars) would be $472.50 and $367.50 respectively; compared to the previous $500 tax bill per unit. [Tax bills of $562.5 and $437.50 respectively if a county can’t use it’s centralized structure to contain costs.]

    Several notes are in order. This assumes the percent of revenue spent on entertainment stays level; new stadiums and art centers must stay within the percent previously dedicated to entertainment.

    The same goes for other areas of government discretionary spending. Capital upgrades made necessary by doubled growth should be financed as usual, balanced by proffered improvements needed by the new population.

  11. Ray Hyde Avatar
    Ray Hyde

    Subpatre: part of your argument is that centralized capital costs didn’t double, but in the current construction climate any new infrastructure required is likely to be very expensive. This is one reason that fighting new infrastructure eventually costs more than it saves.

    Overall, I agree with your argument, but the difference between $472 and $367 might be too high. Overall, your argument appears to me to suggest that if we can spread our costs over a larger base, economies of scale will allow us each to reduce our contribution somewhat.

    An additional problem is that the more we have to do, the more complex it is to get it all done, and complexity is a big cost driver. For this reason, it is important to keep government organizations/jurisdictions to a manageable size. This has the added benefit that citizens are more likely to be aware of what is going on, and have a bigger say in what happens, provided they go to the polls.

    What is curious to me is that anti-growth folks claim that growth always increases taxes, using arguments like “any home valued under $750,000 doesn’t pay its own way” etc. If we look around we see the most populous places have the highest taxes, as a general rule, which seems to support their argument, and my comment about complexity.

    As I said, I agree with your argument, but there seems to be a disconnect that we ought to be able to pin down, if we put rhetoric aside. Comments?

  12. James Young Avatar
    James Young

    Sorrel:
    Thanks for your response. You ask whether “those who have complained most heartily about the tax impact of rising assessments will reward pols who raise the property tax rates but who, because of tumbling market values, end up presiding over falling tax bills (in absolute numbers).” The answer for me (and I can speak only for myself) is yes, I would, because it would represent a real tax cut. You present a point of intellectual integrity, and I will attempt to maintain some.

    On the other hand, I don’t expect ever to have to, because — at least with our current breed in PWC — I don’t expect to see bills go down in such a happenstance. Bills that have gone down (I’ve heard of one) are the exception, not the rule.

  13. Sorrel Avatar
    Sorrel

    Well, I’ll credit you with consistency of the Emersonian variety. Supervisors who raise tax rates would be tax-cutters in your view if the real estate market were cratering enough to bring down the tax bill. I wouldn’t like to live there. I think, despite your consistency on this point, the voters would run your species of “tax-cutter” out of town.

    By the way, chekc the records on that example you gave of the tax bill going down. You’ll find that it is a fiction, probably invented and spread with malicious intent.

  14. James Young Avatar
    James Young

    sorrel:
    Calling me a “fool” isn’t any less offensive when rendered with a literary reference. And Emerson was wrong, anyway. Consistency is the characteristic of disciplined minds.
    My point is that Supervisors under your scenario who raised rates to keep revenues flat could not fairly be called “tax raisers,” any more than someone like Chairman Sean could have been called a “tax cutter.” It’s the difference between property taxes and income taxes. You might be right about what the voters would do, but that’s a chorus that I could not, in fairness, join.

    As for the example I cited, I am relying upon a post by Jim Riley (he posts under his own name), and I have no reason to doubt his representation on this point (he limited it to one year, ’04-’05, and conceded when pressed that over the entirety of Chairman Sean’s term, his bill had gone way up). It’s certainly within the realm of possibility, given the differences in assessment increases in micro-markets.

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