The recent Real Estate meltdown has been blamed on a number of factors. One that I think has been overlooked has been the rapid increases in property taxes in the last decade.
Once upon a time, property taxes were not too big a deal, even if you owned a substantial home. You paid them as part of the escrow in your mortgage and rarely gave them much thought. Property taxes were inevitable, and most folks never even considered how much they were paying or whether that amount was reasonable.
During the recent Real Estate bubble, however, many municipalities decided that this was a good time to cash in on the game. And unfortunately, this caught many folks by surprise.
For example, in Florida, property taxes on a home that had been occupied for many years (and Homesteaded) were fairly low. When a property was sold, the taxes might stay low for another year, and then be re-assessed at the new sales price. Many home buyers during that go-go period didn't factor this little surprise into their finances - and many Real Estate agents and sellers did not go out of their way to point it out to buyers. Bam! Suddenly your taxes are going from $2000 a year to $6000 a year or more.
The key words here being "or more". We left the Florida market when we saw rather pedestrian homes selling for nearly a million dollars, with tax bills approaching $15,000 annually. That's a lot of money for property taxes, regardless of whether Florida has no income tax.
Other States have followed suit. Some have used this windfall in income to pad their budgets or launch ambitious public works projects. But increasingly, property tax hikes have become necessary to make up shortfalls in State budgets.
For example, in New York State, property taxes have increased dramatically in the last two years. The State government has been described as dysfunctional and corrupt - on a level of that of Mexico. The State government mandates that the Counties provide various social services, but do not provide funding for them. As a result, Counties have to raise property taxes (their only source of income other than sales taxes) to pay for these services, which form an ever-increasing part of their budgets - 80% or more. Road repair and police protection are being slashed in favor of welfare and other social services. As this is handled on a County-by-County basis, some Counties, with high unemployment find themselves with more dependents on the rolls than income-earning taxpayers.
Suddenly, property tax rates in central New York are rivaling those of Florida - with a State Income tax added on to boot. How did this happen?
To some extent, the problem can be booted further upstairs to the Federal Government, which mandates to the States that certain programs be provided - but without providing funding. Due to tax cuts and the recession, the Federal Government is running a deficit, so more and more programs get pushed off into the States as a result.
This "trickle down" effect has worked its way down to the property owner. As a new property owner in New York, I was chagrined to see my taxes jump to nearly $7000 a year. Last year, they went down slightly, but only because the County re-assessed all of my neighbor's properties, dramatically increasing their taxes as a result. The net effect will be that eventually, I will probably sell my New York properties and leave the State. For many less well-off, the net effect of the recent assessment has meant they have been priced out of homes that have been in their families for generations. Older folks are being forced to downsize. Vacation homes, once a luxury of the middle class, are no longer affordable by anyone but the very rich.
The other net effect of high property taxes is that they deflate property values. If you are paying $1,000 a month in property taxes, that is $1000 a month that you can't be paying toward a mortgage (to many people, $1000 a month IS a mortgage payment). Since most folks buy property based on total monthly payment, high property taxes mean they can afford lower mortgage payments, which in turn means lower purchase prices.
As prices decline, the tax base will decline, causing the County to raise the millage rate, increasing taxes again, which in turn will drive down prices even further. It is a vicious circle.
Now some folks might say that if you own a fancy house, you should be prepared to pay high property taxes. But the tax bills I am talking about are not for mansions, but for rather plebeian homes - what a few years back would be considered a middle class house - the houses that the Brady Bunch or Leave it to Beaver lived in. Now they are taxed like mansions.
Many folks who bought "mini-mansions" during the go-go decades of the 1990's and early 2000's might especially find themselves in a bit of a pickle in coming years, if their property taxes continue to go up. They may have been able to (barely) afford the home initially, only to see themselves priced out by taxes - and unable to sell because values have dropped.
What will happen to these mini-mansion developments? Will they turn into exurban ghettos or rental properties? Will they be divided into multiple family units?
It will be interesting to see how this plays out over time. I suspect that the demand for smaller, more practical sized, priced, and taxed homes may increase in the future, as our retirement class grows larger and decides that four extra bedrooms for the Grand-kids is just not worth paying the taxes on.
It also will be interesting to see whether these property tax increases result in real changes in and reforms in Government spending. Pushing the burden for Government programs further down the tax food chain was a convenient way to do things, initially. Minor increases in mortgage payments (through escrow) were not noticed by most folks. But sudden tax increases in property taxes are become more and more noticeable, and many folks simply cannot afford them, particularly those on fixed incomes.
Recent administrations have made political hay by cutting income and capital gains taxes. But this has come at the expense of local Property taxes, which in turn hit the average homeowner where they live. Whether or not these homeowners recognize the true source of their pain, however, remains to be seen.