Areas of the country that have enjoyed a big run up in values the past year are now paying for it. Local tax assessors doing their jobs, based on comparable sales, are moving assessed values up to increasingly high levels. Housing affordability is a function of interest rates, housing prices together with the taxes and insurance and income levels of the citizenry. With the recent run up, in some cases the property taxes have more than doubled. What is particularly disturbing is that many municipalities (NOT ALL OF COURSE) are awash in cash with this new surge in revenue. These governing bodies have the power to reduce the milage rates to offer some sanity to these homeowners. Like found in the most recent Congress they are on a spending frenzy. Yes, there are always projects and departments that can use more cash, but every stinking penny of it?
Rainy day funding begs for savings and cost cutting measures with tight budgeting that will insure a governmental structure when the pendulum swings back. Typically the taxes go up and rarely go down. It’s just the way it is. Like it or not. A recent example follows: Pete and Betty bought their three bedroom, two and one half bath two story home with a two car garage and 2,500 square feet for $417,000. The taxes going in were $2,800 per year. Six months after moving in the new tax bill is now $6,500. Since the taxes are in the tax escrows the monthly went from $2,800/12=$233.33/month to $541.67/month or a 232.14% increase. Going in Pete and Betty put 5% down and qualified for 80% first mortgage and a 15% second mortgage to avoid PMI (Private Mortgage Insurance). The rate on the first mortgage is 6.25% with a 7.99% on the second mortgage. The payments are $2,054.03/month on $333,600 first mortgage and $458.54/month on a $62,550 second mortgage. Then the total monthly mortgage payments is $2,054.03 + $458.54 for a total principal and interest of $2,512.57 per month plus the taxes and insurance. The insurance based on a replacement value with $100,000 land value backed out is $3,600/year or $300 per month. The taxes at purchase were $233.33/month making for a total payment of $3,045.90/month. When qualifying for the mortgage Pete and Betty together with some small debts had a Debt To Income Ratio with all debts including housing and installment debt of some $1,000/month (car payments, credit cards, student loans, etc.) of 37%. Between Pete and Betty they earned $10,950/month. In some parts of the country that’s a lot, other areas it’s just squeezing by. In this case, this home and neighborhood was nothing special and was regarded by many as entry level. Now with the tax increase the monthly tax escrow moved up some ($541.67-$233.33=) $308.34/month. Upon purchase of the home some needed items were upgraded such as carpet, paint, furniture, counter tops thinking they had their budget was under control. Now their Debt To Income was stretching to 50% of their income before taxes and reductions for social security taxes and Medicare taxes. Things were now officially in a tight financial pinch. They had saved the 5% down payment and closing costs for three years and had $38,000 to put down and satisfy the two-month housing reserve requirement. About two weeks after their purchase the neighbors next door, who have since become friends, bought a similar home but utilized an Option ARM and now with the negative amortization kicking in found themselves really over the barrel with the new tax bill. Municipal success is great. Everyone loves the area and tries to get in to enjoy the amenities such as schools, employment centers, shopping and the whole enchilada. Then affordability begins to raise its ugly head and suddenly the area is not so attractive. Pete and Betty were now officially working for the lender. They committed over a two-year period to find another city for jobs and housing. They decided to take their life back and determined the price to be paid-just too high.
Employers looking to establish new locations are making surveys and performing due diligence studies which includes housing affordability. The trend and shift is noted. With higher prices and higher property taxes the relocation of key employees is weighed against what is available in the area versus housing in the area they are leaving. All of this is factored in. With the housing market slowing down and average sales times extending out to three to four times from six months prior sales period. Prices will drop but the tax load may be slow to follow with neighborhood comparable sales. Relocating companies finding an unfriendly tax structure keep looking.
With many municipalities experiencing similar rising tax assessments this phenomena is being repeated. An extra tax layer is burdening the homeowner. Many governments to blunt this trend enacted homestead concessions whereby owner occupants are giving some tax relief. Some states are even considering enacting legislation to make the homestead benefits portable. If that happens some relief may ensue. However, the commercial, industrial and investor properties are left to take it in the neck. This will only go on so long before market forces will compel these taxpayers getting the short end of the stick to move on. Rental homes begin to make zero sense and investors throw their hands in the air and move to other options. Rental customers are hurt.
Some rust belt cities of old, are starting to look really attractive as tax friendly states. At one time everything was going great for them then changing industries, markets and such turned everything upside down. People left in droves for jobs and good housing. Now, there might be a case for coming back based on a housing affordability index which is key for company relocations that weigh tax levels and user friendly governments with ready trained and skilled labor markets.
What is a homeowner to do? It’s tough for one person to tilt at windmills. The assessors are doing what they are instructed to do without deviation. However, the decision-makers are the budget makers and elected commissioners and such who set the millage rates and dictates the levels of assessments. It is this target group that one might achieve, with the help of his affected neighbors, some results of rollback by pressing for accountability on budgets, expenditures, entitlements, ear marked funds that seldom get review. Everything needs to be examined very closely. One of the great moves of this past years Congress is to commit the entire Federal Budget for review on the Internet. This will put all the dark corners of the budget in the white-hot light of review by the public. BLOGs will put a spotlight on egregious items begging for publicity and review. A similar move would be good for local municipalities and states where the entire budget is set online.
The bad news for local communities that have now become burdened with higher property tax loads is that housing affordability suffers. Now with a spike in foreclosures and the popularity of hybrid loans such as Option ARMs, Interest Only, have now become an added burden by way of property tax increases laid on top and further greased the skids to accelerate more non performing loans for lenders. With this dynamic imputed into the housing affordability index buyers begin to migrate to outlying areas trading higher tax burdens with higher fuel usage to get to the same employment centers. It is a negative. The rust belt cities of old would be happy to share what happened in their areas twenty to thirty years ago. It didn’t have to be that way. Excessive taxation kills businesses and homeowners. Credit is destroyed, bankruptcies occur, foreclosures are accelerated, housing markets sag and people use the freedom of their feet to find greener pastures.
If elected officials awake from the coma caused by drinking out of the punch bowl filled with the euphoria of the new found tax monies it may give them cause to contemplate what is coming. In this case voters can exercise their rights while they are still in the district. Assessment levels can be reduced, and millage rates can be lowered and businesses can be evaluated on the basis of the Income Appraisal Approach with a reasonable return on investment. Comparable sales can squeeze the small business and investor out the door. This would be a fair policy to use the Income Approach for this segment of the market. Municipalities, counties, states need to adhere to recent budgets and commitments with community leadership responding with sound fiscal policy.
Excessive taxation kills businesses and homeowners. Seems like there was a Tea Party in a harbor once.
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