Falling real-estate prices and rising taxes

Falling real-estate prices and turmoil in the mortgage market are expected to reduce property values for U.S. homeowners by a total of $1.2 trillion next year, according to Global Insight Inc., a research-and-consulting firm.

Nationwide, falling real-estate prices mean local property-tax growth probably will slow significantly, and taxes could even fall in many places, Global Insight said in a report released last month by the U.S. Conference of Mayors.

Falling house prices are "the No. 1 danger to the economy," says Torsten Slok, an economist at Deutsche Bank.

California could lose $2.96 billion in property taxes over several years because of the housing bust, Global Insigh predicted. New York could lose $686 million; Florida, $589 million.

Local governments, which rely heavily on property taxes, will have to find ways to replace lost revenue or face having to cut services, lay off staff members or delay projects.

Property taxes in Florida have more than doubled in the past six years and local government budgets are growing faster than their residents’ ability to pay for them.  In the past three years property taxes have increased 42% and they continue to grow at a rate three times as fast as the population and inflation. 

 

The use of incentives by home builders and home sellers to entice buyers is making it difficult to adequately determine property values.

Value of incentives is often rolled into the price recorded by the county clerk. However, given that incentive information is not included on the public record and that builders and real estate practitioners are not required to disclose the information to appraisers, it is virtually impossible to determine the actual price paid for a property.

There are concerns that incentives used by builders conceal discounts that might anger owners in the same development who paid more for their units. Including incentives in the recorded price also may lead buyers of nearby properties to pay too much or enable lenders to make bigger loans than they would have otherwise.

Tax protests are rising in states that have seen the most decline in property values. In Indiana, for instance, residents staged a rally where they dunked a giant tea bag in a canal – a reference to the Boston Tea Party – at a rally outside the governor’s mansion.

Depending on who’s guessing, the predictions – offered just in time for the new year – vary greatly but few are optimistic.

The National Association of Home Builders (NAHB) forecast continues to show a bottom for the housing cycle in 2008, followed by a gradual recovery process that will lift home sales and housing production back toward the demographically based trend over a period of several years.

A recent Economy.com report also predicts that home sales will hit bottom in early 2008, with housing starts hitting bottom mid-2008. But prices will continue to drop, and by early 2009 home prices will have fallen about 13 percent nationally from their peaks, according to the report. Prices will have fallen more than 15 percent if nonprice discounts to buyers are taken into account.

The forecast anticipates a trough for home sales in the first quarter of 2008 and a bottom for housing starts around mid-year.

Builders likely haven't seen the bottom of the market yet, according to James Hughes, dean of the Edward J. Bloustein School of Planning & Public Policy at Rutgers University. "We certainly haven't hit bottom yet," Hughes suggests. "We may well be in uncharted territory here. Since the Great Depression, we haven't had a sustained national downturn like this."

"Once we hit bottom ... we're going to stay there for awhile," at least in terms of new construction, predicted Richard F. Moody, chief economist of Mission Residential, a multifamily real estate investment firm.

NAHB’s forecast shows GDP growth of only 0.5% in the current quarter — virtual stall-speed — and NAHB estimats only 1.5% growth in the first quarter of 2008.

The near-term growth pattern leaves the economy highly vulnerable to negative economic surprises, such as another surge in energy prices or another round of turmoil in the credit markets. According to NAHB in such a danger zone, the probability of outright economic recession is about 40%.