source: http://www.nytimes.com/2008/06/06/business/06mortgage.html: About 1 in 11 Mortgageholders Face Loan Problems
a few excerpts:
- About 1 in 11 American mortgages were past due or in foreclosure at the end of March, according to a report released on Thursday, a figure that is rising fast as home prices fall and the job market weakens.
- California and Florida, for instance, accounted for nearly a third of all mortgages that were in foreclosure or 90 days delinquent. Home prices, construction and mortgage lending were particularly ebullient in those states earlier this decade. The housing industry accounted for a bigger portion of their economies during the boom.
- “The problems in California and Florida are extraordinary, and they are the main drivers of the national trend,” said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association.
- In states like California and Florida where they have huge inventories of repossessed homes, some companies are starting to move a little faster by auctioning off properties...
What do California and Florida have in common?
Importantly, California has Proposition 13 and Florida has "Save Our Homes." Both limit the increase in property taxes, and force others to subsidize long-time owners. California's is the more strict limitation; it limits property taxes to 1% of assessed values, and limits the annual increase in assessments to 2%, no matter how fast market prices rise, reassessing properties only when they are sold. Florida's limitation applies only to year-round residents, and limits the rise in assessments to 3%.
Limitations in property taxes actually drive land prices and housing prices sky high. They help fuel speculation and bubbles and boom-bust cycles.
How do we fix the problem?
- Make our assessments honest and current. That means assessing every property based on its current value, without regard to how long ago its current owner bought it, or whether they occupy it year-round, part of the year or not at all.
- Value the land and the buildings separately. Value the land first - it is eternal. Treat the existing buildings and other improvements as the residual between the land value and the total value of the property in that market. Recognize that the building depreciates, even with excellent maintenance, and that few renovation projects increase the value of the property by as much as they cost, even when the owner's labor is treated as free.
- Reduce -- even eliminate -- the millage rate on the building's value. At the same time, increase the millage rate on the land value. Harrisburg has been doing this for 25+ years, and its millage rate on land is six times its millage rate on buildings. That city has experienced a revitalization which its mayor, Stephen Reed, attributes in large part to this tax reform.
When a house purchase comes with a, say, $1500 tax bill, its selling price in the market will be lower than the same house would be with a $1000 tax bill. This is similar to the effect produced by an increase in interest rates: the same monthly payment will only cover a smaller mortgage.
Why is a $1500 tax on land value superior to a $1000 tax on land value? Because it drives down the amount one pays the seller, and therefore the amount one pays the mortgage lender for the next 30 years -- eliminating a portion of the principle and a portion of the interest. If the alternative is paying the $500 via a tax on your wages, would you rather be paying both the bank and the wage tax? If the alternative is paying the $500 via a tax on your purchases, would you rather be paying both the bank and the sales tax? Paying once, via a tax on land value, seems vastly superior to me.
In this scenario, your property is not going to rise in price as much as it would have with a low property tax. But neither will it fall as much, because the boom-bust tendency we seem to deal with on an 18-year cycle will tend to be reduced via a heavier use of a tax on land value.
This means that your children, and my children, and everyone's children will be more able to afford housing, which seems to me to be a very good reason to undertake this reform.
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