Feb062017
California’s housing policies hurt the working poor the most
Californians embraces housing policies that benefit high wage earners and homeowners over the working poor.
House prices in California surpass most of the rest of the United States both in real terms and relative to local income. Residents offer many bogus reasons for high house prices — everyone wants to live here, incomes are higher, the sunshine tax, foreign safe haven and so on — but none of these reasons accurately explain why house prices are so high. California housing costs rank among the highest in the nation because we don’t build enough housing units, resale or rental, to accommodate population growth and job creation.
To make matters worse, the solutions offered to remedy the situation fail to address the root cause and create problems of their own. The worst of these solutions, affordable housing mandates, is the one favored by the political left, the dominant force in California politics. Affordable housing mandates fail because while they may provide payment assistance for a lucky few, such programs provide insufficient housing to meet the overall demand.
Even the winners in the affordable housing lottery end up losing in the end. First, the application process turns them into beggars, an emotionally degrading experience. Who really wants to spend their lives dependent upon the State?
Second, even those obtain some form of affordable housing assistance later realize they are trapped by it. If they live in rent-controlled housing, they can’t leave and take the subsidy with them, so their mobility is curtailed. If they obtain some other kind of State or local assistance, they must remain in the jurisdiction to keep their benefits.
Third, these assistance programs stymie the economic growth potential for beneficiaries. Perhaps some of these workers lack the capacity to improve their financial condition, but for those that could get ahead, they discover that succeeding financially renders them ineligible for housing assistance. The State punishes success and rewards sloth.
Who is harmed the most?
Existing homeowners are the biggest beneficiaries of inflated home prices. Those who want to become homeowners endure the most damage from our exclusionary policies. High wage earners may not like paying so much for housing, but they can always substitute down in quality and price out someone further down the income ladder. Low wage earners can obtain housing assistance, though not all of them will be so fortunate.
The group hurt most by California’s terrible housing policies are the working poor. Higher wage earners substituting down in quality buy the homes meant for them, and they make too much money to qualify for government assistance. In short, the people working the hardest to provide goods and services to make California great end up bearing the brunt of our misguided housing policy.
It’s difficult to objectively examine the results and conclude this the kind of housing policy we want for California.
Housing Crunch Exacts a Heavy Price on Californians
By Vanessa Rancano, FEBRUARY 1, 2017
California is producing less than half the new homes it needs to meet demand in the Golden State.
In its first comprehensive analysis since the year 2000, California’s Department of Housing and Community Development … suggests lawmakers will need to consider serious policy changes if California is going to build the projected 1.8 million new homes needed by 2025.
The problems with chronic shortages, inflated house prices, and the substitution effect to lower quality housing is a direct result of the development approval process in California being 100% in the hands of local politicians. In California no State or regional entity has the power to mandate that any local political body must provide sufficient housing to meet local demand. Further, since local governments are highly dependent upon commercial and business tax revenue, they are always keen to zone for more commercial than residential land uses, which in turn creates imbalances between the number of jobs and the number of available housing units.
The only way California will ever have housing that’s affordable in a free-market, non-subsidized way is to shift some power away from local governing bodies — a course of action that will not be popular on the local level. This could take the form of direct approval override of local governments by a State or regional decision-making body, or it could take the form of mandates for development. In whatever form, some State or regional body must be given power to stop NIMBYs from lobbying local government officials to stop development that benefits everyone.
“About a third of all California renters today are paying more than 50 percent of their income in rent,” California Department of Housing and Community Development Director Ben Metcalf told the group.
This fact will suppress the home ownership rate for the foreseeable future because very few potential homebuyers save for the necessary down payment, even the paltry 3.5% required by the FHA. And since renters put a large percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they lack the disposable income necessary to save for a down payment. No magic bullet or simple solution to this problem exists.
Perhaps it’s “old school” and unfashionable in our modern era of unlimited entitlement, but the only way to save for a down payment is for potential homebuyers to sacrifice current consumption and adjust their finances to live within the constraints of their income. Unfortunately, sacrifice is no longer the American Way.
Those paying the largest share of their income for rent and transportation aren’t concentrated in expensive cities like San Francisco — they’re largely living in rural Northern California counties and in the Central Valley.
“We’re seeing home ownership rates at the lowest level they’ve been since World War II,” Metcalf said. And, he added, while just 12 percent of Americans live in California, 22 percent of America’s homeless live here, more than in any other state.
When we fail to provide enough housing for everyone, homelessness is inevitable.
Among the challenges driving the lack of affordable housing is unstable funding, the report finds. Federal allocations for affordable housing declined in California from 2003 to 2015. There just aren’t enough affordable rentals, and even for those who get assistance, Section 8 vouchers can’t keep pace with soaring rents.
One of the biggest obstacles to truly solving the problem is the unfortunate advocacy of affordable housing mandates by the political left. There will never be enough affordable rentals when there simply isn’t enough housing of any kind.
The authors also point to regulatory hurdles and land use policies that jack up development costs and delay building.
So the actual cause of the problem is relegated to dishonorable mention? If legislators fail to properly define the problem and adequately evaluation the potential solutions, we will get nowhere.
Still, the report suggests there are big consequences resulting from the failure to meet housing needs. When you factor housing in, California has the highest poverty rate in the country. Housing instability affects people’s health and kids’ academic performance. And as people move farther from jobs, long commutes increase pollution.
Overall, the report concludes the lack of housing costs the California economy almost $240 billion a year.
The pain of this problem will only get worse until we start building enough homes to accommodate the number of jobs created in California. Even if we only created enough jobs to accommodate our children, we do a disservice to them by failing to provide enough houses to allow them to remain in the state. But nimbys don’t care about that. After all, California nimbys don’t love their children.
Super Bowl
I turned off the game when the Falcons were up 28-3 in the third quarter to write this post. I thought the game was over. Fortunately, I recorded the game, and I was treated to one of the greatest performances in Super Bowl history. I gave the Patriots up for dead, and they mounted the most remarkable comeback in Super Bowl history.
Housing boom or bubble in 2017?
The resilience of Orange County’s housing market in 2016 surprised many folks.
Challenges were numerous. Home listings were thin. Builders didn’t construct many “affordable” homes. Questions swirled about the durability of the local economic rebound and the quality of the jobs it was creating. Where would mortgage rates go and would lenders keep lending? And would foreign buyers, a noteworthy force, stay interested?
Nonetheless, pricing hit new record highs and sales activity was the best in 10 years.
So, was the surprisingly good 2016 a harbinger of more upward momentum or the last gasp of the rebound from real estate’s ugly crash? Is a boom building or a bubble brewing?
8. Prices
Does “record high” matter?
Orange County’s median selling price for all residences for 2016 – that is, the midpoint of all sales completed – was $645,000. That was up 5.9 percent vs. 2015.
Gains were pretty widespread, with prices up in 70 of 83 Orange County ZIP codes. Curiously, the 13 ZIPs without gains included the second-cheapest (Santa Ana 92701 at $304,000, off 16 percent in a year) and the most expensive (Newport Beach 92662 at $2.63 million, down 9.5 percent.)
But the median’s march higher may be more of a reflection of few cheaper homes to buy than fast-appreciating homes.
But will house hunters continue to pay up? Great question.
7. Affordability
No matter how you slice it, local housing has been pricey – and will stay that way.
But it depends on your viewpoint. Look at this example:
The typical mortgage used by a 2016 buyer resulted in an estimated monthly loan payment of $2,960, up 6 percent in a year, according to CoreLogic.
Perhaps worse, that’s up 41 percent from 2012. But exactly how many folks wanted to buy a home in those early days of the market rebound?
Note that last year’s estimated house payment looks cheap vs. the bubble days: It’s 14 percent below the $3,422 payment made by the typical 2006 buyer – back when the market peaked amid a buying frenzy.
Affordability measures must be gauged wisely.
6. Supply
Forget affordability. Finding a home is a big challenge.
Last year, an average of 5,965 residences were listed for sale on broker networks. That’s down 2 percent vs. 2015.
But look at the historical perspective: House hunters the past two years have had basically one-fifth fewer choices to buy an existing home or condo than the average supply of 7,544 since 2005.
Unless something dramatically changes in the broad economy or owner psyche, or builders go crazy, tight inventories won’t change much as homeowners dig in for the long haul. But watch out if inventories do skyrocket!
Lack of Supply Drives Prices Way Up
New homes in California are now $300,000 more expensive than in Florida and Texas.
When supply doesn’t meet demand, prices go up. To illustrate this, we divided an area’s population by the number of actively selling new home communities and compared this population / new home community calculation to the median new home price. The results are clear:
Affordable homes: Many of the most affordable new home markets in the country such as Houston, Orlando, and Las Vegas have less than 10,000 people per new home community. The median new home price in these markets is $291,000.
Expensive homes: Conversely, the most expensive new home markets in the country such as San Jose, Los Angeles, and Fort Lauderdale have more than 30,000 people per new home project.
When Supply Does Not Meet Demand, Prices Go Up
What does President Trump mean for housing?
It’s early days in President Donald Trump’s administration, but he’s already moving fast to make changes in the housing market.
An hour after being sworn in, Trump stopped a cut to FHA costs that could save first-time homebuyers $500 a year.
The longtime real-estate developer’s other plans could cap the popular mortgage-interest deduction, do away with the federal financial and mortgage watchdog and privatize mortgage giants Fannie Mae and Freddie Mac.
Also, Trump’s order Wednesday to start a border wall as well as his plans to deport many more illegal immigrants mean fewer available construction workers, particularly for homebuilding.
Popular tax break for homeowners
Trump’s pick to run the U.S. Treasury Department, former Wall Street banker and movie producer Steve Mnuchin, wants to limit the mortgage-rate deduction.
It’s not clear yet what he plans exactly. But housing advocates, including the National Association of Realtors, are concerned because deducting interest payments on mortgages is a big draw for many U.S. homeowners.
Now, the mortgage-interest deduction is capped at $1 million on loans, if you are married and filing jointly. The cap is $500,000 for homeowners filing taxes solo.
What about Fannie Mae and Freddie Mac?
Talk about the federal government handing over the biggest mortgage backers in the country to the private sector has been swirling around for a while.
The U.S. had to take over the failing Fannie and Freddie during the crash.
Treasury pick Mnuchin backs privatizing the mortgage giants.
But analysts say the 30-year fixed rate mortgage, the most popular option for U.S. homebuyers, would go away if the Fannie and Freddie didn’t have government backing.
Plus, it could cost billions to wrest the mortgage giants from government control.
81 Percent of First-time Homebuyers Made a Downpayment of Less than 20 Percent
More first-time homebuyers avail of a low downpayment loan compared to all homebuyers, according to the December 2016 REALTORS® Confidence Index Survey Report, a monthly survey of REALTORS® about their sales activity and local market conditions.[1] Among first-time homebuyers who obtained a mortgage and whose transactions closed in October—December 2016, 81 percent made a downpayment of less than 20 percent.[2] In comparison, 62 percent of all buyers who obtained a mortgage and whose transaction closed in December 2016 made a downpayment of less than 20 percent.
America the Stuck
The Census reports that a record-low share of Americans are moving. A recent paper suggests government policies might be curbing mobility.
Our ability to move to opportunity—our mobility—is a key factor in our own and our nation’s economic success. But the mobility of Americans has reached record lows, according the latest data from the U.S. Census.
Just slightly more than one in ten Americans (11.2 percent) moved between 2015 and 2016, almost half the 20.2 percent rate back in 1948, when the Census began tracking American mobility. Mobility was once the cornerstone of the American Dream, but today Americans move less often than Canadians, and only a bit more than Finns or Danes.
Both longer and shorter moves have declined over this period. Just 6.9 percent of Americans made shorter moves within the same county, down from 13.6 percent in 1948. The mobility rate for these types of moves plummeted between 1998 and 2008 (with the economic crisis) as the chart below shows, and has declined more slowly ever since.
Longer moves between counties declined from 6.4 percent in 1948 to just 3.9 percent today over the same period.
But.. but… but… housing (lived-in) is an investment LOL
Many people just escaped their “investment” from 10 years ago with little or nothing to show for it other than 10 years of paying more to “own” than they could have spent to rent.
Agreed… Housing (lived-in) is a speculation. Now surely even you don’t disagree with that?
I’ve heard you say this before about the lack of new housing as a problem. Know how to get the NIMBYs on board with building new housing? Remove or modify prop 13. All of the older folks who live in homes bought in the 70’s and 80’s in Irvine, Fullerton, Huntington, Corona Del Mar, Laguna Niguel, Tustin….they pay next to nothing in property taxes while the younger folks moving into the same house next door pay a huge sum. Property taxes fund local services…so do the older generations stop using local services? No. they just aren’t paying for it. Even worse is when these old homes are rented out to young families. The older generation pays CRAP in property taxes and makes bank on monthly rent. Ever notice how half of all of the beach property is for rent? The owners pay next to nothing in taxes but then have renters who live there. And those renters send their kids to local schools and call the fire department when they smell smoke. But who pays for it? The sucker next door who pays his fair share in property taxes. And even if Granny does still live there, who does she call when there’s a crack in the sidewalk outside or when her kitty gets stuck in a tree? She calls police and fire. But who pays for it? Not her! She still pays a few dollars a month in property taxes for her beach-front mansion! So who pays? Her neighbors who bought their home in the last 15 years.
Bottom line: to run an expensive state like California, we need property taxes and we need the older generation to downsize. I have family in New York and I can tell you that the only way the NY suburbs survive is that Grandma and Grandpa eventually decide to move to Florida or to downside because their homes are taxed in accordance with current market value of the home. Why is Irvine alone paying 20% of the cost of fire services in the OC? Why are the Irvine schools so good? Younger buyers=Property taxation at current standards.
Here in California, many people own a number of multi-generational inherited homes for which they pay next to nothing. I’m not saying that higher property taxes are a good thing. But I am saying that the state needs to even the playing field. It can’t be that the younger generations continue to pay the majority of the property taxes. Either reduce property taxes for all of us, or at least make them equivalent so that next door neighbors aren’t paying such wildly different amounts for the same homes. I can’t tell you how painful it is to see that the mortgage on the house I want will include an extra thousand a month in property taxes while the next door neighbors who bought in the 80’s pay $50 a month in property taxes. That is so very unfair and it hamstrings the younger generation.
The arguments you make are all valid, and the problems you discuss are a direct result of Proposition 13, but the kind of reform you advocate will never happen — unfortunately.
Senior citizen homeowners are a difficult voting block to take on. Their voter participation rates are nearly 100%, and if they are united on a single issue like protecting their tax basis, no politician would support such a change, and if it ever came to a vote, it would be defeated. This was the genius of Howard Jarvis when he linked commercial and apartment interests to single-family homeowners interests. He turned out senior citizens to vote for a measure that ended up screwing everyone except commercial property and apartment owners, who are the real long-term beneficiaries of Proposition 13. Our problems with funding wouldn’t be quite so bad if commercial property owners paid taxes based on fair-market value.
I think many boomers feel trapped in their homes by Prop 13 and are unaware of the ability to transfer the tax assessment (props 60, and 90). They just sit in their big dated house with which they can no longer afford to maintain.
Maybe if inventory gets tight enough, Realtors will get hungry enough for new listings, they will educate these retirees and we will see that great rotation of Boomers selling to next generations.
If Prop 13 didn’t exist, those buying in 2009-2011 would have property tax bills that increased 40-50% in just the past 6-8 years. That doesn’t really seem fair does it?
Perhaps not, but then again, it would probably curb some of the nimby opposition if they paid a financial price for the results.
Yes, actually I think it is fair! Those folks could sell at a huge profit if they wanted to! How is it fair that they only get taxed on a portion of their home’s value but they get to sell it at fair market value? And what is the actual cost of that sort of tax increase in real numbers? $50 a month for the low end housing up to $250 for the high end? I gotta tell you, if you buy a half million dollar town home and you can’t afford an extra $50 a month, then the bank should have never approved you for a loan. Likewise if you bought at 1.5 million and can’t manage an extra $250 a month! Are we seriously saying that folks sitting on a property in Corona Del Mar that would get fair market of 5 million should only pay a few thousand a year in taxes? What about if they rent it out for $7000 a month? Should they still pay so little to support the community?
Look, I’m all for reducing taxes…bring it on! But it can’t be that the lion share of the tax burden is on the folks who are new buyers while the lucky ones who bought back when CA was still affordable pay so little.
Your numbers are little bit off..
A half million dollar town home pays around $5,550 per year in property taxes. If that goes up by 50%, they are paying $8,325 per year or a $231 monthly JUMP in taxes paid. This is for a town home which most people consider low end or a starter.
Somebody buying a $1.5 million home would see their monthly taxes JUMP by $694 per month.
So to talk about this accurately, you need to multiply your assumptions by 3-4x your amounts to show the impact on somebody’s pocket book due to market forces they have no control over.
Forcing people to move to pay their taxes seems cruel and inhumane.
im sorry, I guess I’m not understanding you correctly. Are you saying that a town home that sold for $500k in 2011 would now sell for $800k? Hmmmm. I thought you were playing devils advocate with those numbers, but perhaps we are thinking of different parts of Southern California?
But even if such a huge jump existed, why would it be fair to only charge those taxes to the new neighbors but not the old ones? Do the families who moved in 2006 or 2016 use more services than those who bought in 2011? While it might seem hard to believe, other states hold every home to the same standard of market value. I am right now looking at my grandfather’s tax records from his house in Long Island, NY. His taxes jumped from $7000/year to $9000 per year between 2011 and 2015. For a 670k house. But this is why (despite the modest price of homes) the schools in his neighborhood have 13 students per teacher and are ranked some of the best in the nation. In Orange County we have 23-30 students per teacher and many of the schools are poorly rated, even in the million dollar+ neighborhoods.
So even if we assume your extremes, my answer is yes. Yes I think it is fair to expect a small family to be able to come up with an extra couple hundred bucks a month over a period of 6-8 years. A family who can’t plan for a few hundred extra bucks given that much time should have probably bought something cheaper. So perhaps they should take their equity and move.
Everyone wants to be able to stay here but no one wants to pay for the schools and the community! The teachers who teach in Tustin also have to pay more to buy a home in 2017. But none of the folks who bought in Tustin in the 70’s and 80’s wants to pay more in property taxes. So how in the world do we expect our teachers to be able to buy a home? How do we expect to have good schools or to pay our firefighters?
But as was pointed out, the over 55 crowd are the most powerful voting block in CA. And they don’t care if their kids and grandkids live house poor or have to move out of state or have to attend crappy schools. As long as it’s not them, why do they care? That’s why prop 13 is the third rail of California politics. But it has ruined our state.
Shopping for homes in Laguna Niguel has been fascinating. The people who bought there in the 80’s were not movie stars and doctors and lawyers. They were teachers, county employees or low level white collar workers. Nowadays, you can’t get into most neighborhoods there without a 200k+ a year salary. Were it not for prop 13, things would be very different.
Two comments on Prop 13:
1) The problem is much more wide spread than those who bought in the ’70’s and ’80s. Anyone who has bought low and held is benefiting. I bought in 2012 and if not for Prop 13 my taxes would be double and I am a Millennial.
2) Prop 13 may have also hampered wage growth. Housing costs consume a major part of a family budget. Locking in a fairly static housing costs allows for established home owning workers to accept less pay than new non-established workers. Once again, if taxes were leveled, companies would have to pay more to keep employees.
Case and point linked below. They are selling it for 5 million and they paid $1800 in taxes for 2015. ‘Inhumane’ indeed!!! Imagine if just this one home alone were required to pay their fair share??
http://www.zillow.com/homedetails/2324-Pacific-Dr-Corona-Del-Mar-CA-92625/25497824_zpid/
You are using the example of somebody that is wealthy (an extreme example) to make your point. The other 90%+ of Orange County residents that aren’t wealthy shouldn’t be forced to pay 50% more taxes after 6 years of ownership due to forces that are beyond their control. Yes, what you advocate for is cruel and inhumane.
The rules apply equally to everybody. If somebody wants to buy today and hold for 50 years like the CDM owner, they too will benefit immensely from Prop 13. You say it’s unfair to young people, but young people become old people. They have the same exact deal that old people have, just less patience, and lacking the perspective to see that removing Prop 13 hurts them in the long run.
So please, enlighten me… who is supposed to pay the teachers and firefighters enough money to live in the communities where they work? If you are saying that it’s unfair to ask the community pay, then who should?
Right now the city of Irvine pays 20% of the bill for Orange County firefighters. Take that in for a moment. Fullerton, Brea, laguna, Anaheim, garden grove, Laguna, seal beach, etc etc. Why? Prop 13 and city approvals for new housing. Irvine allowed for more home development which resulted in more new homeowners than anywhere else in the county. So they pay for all of us! Ludicrous!
And in the meantime… look. Feel free to zoom in close on zillow listings and take a gander at how rare the example I gave actually is. Every second or third house in Seal Beach, Laguna Beach, Newport and Corona Del Mar is a property bought long ago that has either been inherited or is a rental. That is how the wealth in this state has become so concentrated at the top.
California has so much wealth that if everyone, including corporate land holders, paid their fair share, we could likely reduce the property tax rate for everyone.
And once again…. seriously? You want to keep it this way? That people live so house poor that over a period of 6-8 years they can’t come up with a few hundred extra bucks?
And if that is the case, they are probably teachers and you should probably consider creaking open your wallet, blowing off the dust, and paying them more so that they aren’t forced to move out of state.
Teachers and firefighters make a lot of money. I should know, my wife is a teacher and she makes just shy of $100k per year. This is with 3 months vacation, a generous pension that allows her to retire at age 51 after 30 years of service, and insanely good health benefits for our family. Her case isn’t unique either. Any unionized public worker in the state gets these types of generous pay/benefit packages.
When you say Irvine pays for 20% of OC firefighters, what you are talking about is the Orange County Fire Authority, which only certain cities participate in. Any city that has its own fire department isn’t going to contribute at all, therefore your example is intentionally misleading and a terrible example of why Prop 13 needs to be eliminated. Irvine pays 20% because they are one of the largest cities to utilize county fire services.
So now that we’ve established that the teacher sob story act is not grounded in reality and the Irvine firefighter stat is misleading, what is your justification for raising a middle class family’s taxes by 50% in 6 years?
We’ve already gone over the math that your example of a low end townhouse would have their taxes raised by almost $3,000 per year. Despite that, you ridicule these low end home owners for living house poor. Maybe you have thousands laying around, but most low end owners of townhouses don’t. Just a fact. If they purchased within the past 6-8 years, they are also already paying their “fair share”, yet you have no qualms about raising their taxes by $3,000 per year.
You also keep bringing up the extreme Corona Del Mar example, but the townhouse buyer example is the norm for most in OC. If you have a vendetta against the rich, then why take it out on the middle class and poor?
Your wife is a teacher, making 100k a year in the public school system. Since the average is 70k a year, your wife must have 2O+ years invested, or perhaps even more. She is literally at the top. So let me guess? You bought your house back in the 80’s? Early 90’s? No wonder you guys don’t want to see prop 13 overturned!!!
What’s so sad is that with the average teacher salary at 70k, what do you think the younger teachers are earning? 50k? 60k? I’m so happy that your family was able to buy when home prices were in line with income. And that the government lets you pay next to nothing in taxes. But think about the young teacher trying to buy something on 50-60k a year?? What should they do? They can’t even afford a family sized condo! And if they live next door to you, why should they have to pay more in taxes than you do? How is that fair?
I love it that you are trying to pretend that your real concern is the poor families. And you like to keep insisting that their bill would have gone up $3000 in a single year!! Gasp!! Actually, no. If we assume that prop 13 never existed, then even according to your own extreme assumptions, we are talking about an increase of $3000 stretched over 6-8 years. That means that their monthly bill would go up… what? $30 a month? Maybe they should stop ordering pizza. Or better yet, they could get rid of their cable tv and viola!!! They’ve saved hundreds a month!!!
So then let’s assume that prop 13 is repealed right now (and not in 5 years from now). Are you seriously thinking that there would be no graduated process of transition? If prop 13 were suddenly repealed with no graduated process, honestly I would be far more worried about the older generation than the family that bought a starter home in 2009. The worst hit would be the baby boomers still living in their homes that were bought in the 70’s and 80’s. They are approaching or in retirement and it would be catastrophic for them if prop 13 were repealed. And I’m not just talking about skipping the pizza or cutting out cable.
My best guess is that this is the category you fall into. So with your wife’s 100k salary, sweet pension, both almost at retirement, house probably close to paid off…. no wonder you’re invested in keeping Prop 13 in place.
I would suggest that there could be a way that over the next 20 years, prop 13 could be phased into an even playing field. Would 20 years be enough time for you?
Katy, actually he bought at the bubble peak.
Welcome to reality.
Are you guys buddies?
Whether he bought at the bubble or after the crash…perhaps you can help me understand why people feel so strongly about a rule that is totally irrational. So if I understand it right, the logic of prop 13 was that homeowners needed financial protection from an unstable housing market. That folks whose homes had massively appreciated in market value would see such large increases in property taxes that they would be forced to change their lifestyle, to sell or possibly to downsize. So let’s see if we can apply the logic of prop 13 to other situations to find out whether it will generalize.
So let’s say I started a family in Laguna Hills back when it was super cheap in the 70’s. I have one of those awesome ranches with horses and what not. And prop 13 passes so I get to keep my big ranch. Sweet.
But then oil prices start to rise and the gd government signs off on gas tax after gas tax! I used to buy gas for less than a dollar a gallon!! Well how am I supposed to pay for my monster truck? It’s a huge part of my lifestyle! And now they hit me with the whole emissions thing! And WHAT? Car insurance is mandatory??? So are you saying I should sell my truck??? Buy something more practical??? But I love that truck! It’s paid off!
So what do you think? Should we set up a new proposition to save the monster truck lifestyle for this guy? Should every person who got used to being taxed at a certain rate be coddled so as not to change their lifestyle? Why draw the line here? Should we all party like it’s 1979?
Katy you can always move somewhere else where taxes on a $800K home are $24K a year and live the dream!
Re: your claim that Irvine is a big city and that this explains why they pay so much for OCFA…
“The OCFA provides emergency services to 1.8 million people in 23 cities and the unincorporated pockets of Orange County. It is funded by two sources: Direct fees for service paid by eight “cash contract cities,” and a slice of property taxes designated for fire protection from the unincorporated areas and 15 cities, including Irvine.” (OC Register 2017
Population of Irvine at last census was 236,000. OCFA provides services to 1.8 MILLION. So why, again, do you imagine that Irvine pays 20% of the bill given that Irvine represents only 7% of their customers? Would you like to reconsider your response?
Katy +1
My parents just took them home off the market, I was hoping they would sell and walk away with a few hundred grand and ride the wave but they kept insisting that they just didn’t see themselves renting an apartment for $2000 – 2500 and get 1/4 of what their home offers now. They have 2 businesses and are cash positive but they don’t really have retirement savings – when they came to me to discuss selling their home, this was my main concern, they lost one business in the recession and I believe things are headed that way. This would have been their retirement – they were going to rent and then buy in 2 years which is about the time frame I think would take for homes to retract in prices.
Oh well. They decided to stay and the comfort of their home is priceless which I understand but with no retirement savings, they will just have to keep working instead of enjoying a more relaxed life. This is why inventory is tight, even people that want to downsize, don’t cash out because they look at how what 300k – 400k gets you, and it isn’t anything nice unless you move out of state.
Baby boomer are now retiring in large numbers. I suspect many of them will take their golden parachutes and leave California, particularly those with no retirement savings. I also expect to see plenty of financial cancer loans (reverse mortgages) from the same group. The ones that take the money and run will be much better off financially than those that stay and struggle.
Reverse mortgages hmm – I suspect many of these people will be in trouble later on, they will end up giving their home away. I have 2 friends that work for AAG – in middle management, they have been making really good money the last 3 years, I think they know the drill. The company was growing really fast, I think it slowed down now but will probably be in a good position to take over thousand’s of properties when these boomers pass or can no longer maintain the home.
FutureBuyer – Prior busts have taken about 5 years from top to bottom with the heaviest declines in the first 3 years. (This was true of the early 80’s, early 90’s, and mid 00’s.) The thing is that all of the traditional signs that point to a bust happening aren’t showing up yet:
-Sales are still up.
-New home sales are up.
-Defaults are trending down.
-Foreclosure sales are trending down.
-Affordability has been much worse before prior busts took hold.
The only reason I say this is timing the market is imprecise at best, and it could take a lot longer than 2 years for the next bottom to be reached. (My personal opinion is that it will take at least 2 more years for a market peak and at least 7 for the next bottom.) You might want to tread cautiously with the advice you give your parents. It could end up costing them more by selling too early in the cycle.
I don’t dispute your statements but I also don’t believe all retractions happen for the same reasons. One key thing you noted is affordability, it is really bad right now. I work in DTLA and I see many young professionals here making nice incomes. But for everyone breaking 100k there are about 10 more making around 40k. Our rent is still way below parity so we stay where we are at but at some point we will either buy or just give up looking. Maybe affordability has been worse as you stated but I see too many factors working against people, one being that many company balance sheets are not healthy. The job losses will have to follow.
My parent’s are heading into their 60’s, I don’t get involved in their finances but in this particular case they wanted lots of feedback. If they sold now they would come out way ahead, sure they could miss out on gains but odds are that they are most likely not going to gain another 100k in equity. We might be talking about 20-30k here, with buying season around the corner it could happen but nothing is promised. They don’t have 20-30 years to make up at least on paper a huge potential loss. I could just tell them to stay put and eventually I’ll own the home in a very nice area of Orange but I believe their home is priced right and definitely not worth another 100k above what their listed price was. This is the time to cash out and walk away as they say.