LVTFan's Blog

Economic Indicator: Westport, CT, teardowns

Teardown of the Day - WestportNow.com

This blog-like page contains an interesting economic indicator: despite a tepid economic environment for most home construction, the pace of teardowns in Westport, Fairfield County, Connecticut, seems to be steady to rising.

Westport sits on Long Island Sound, and has a reputation for excellent public schools and good express trains to midtown Manhattan.  ($308 for a monthly pass -- 44 miles, about 67 minutes; $5 per day for day parking -- 300 spots -- but a 4 to 5 year wait for one of 1800 parking stickers -- $325/year.)

Many of the entries show recent transaction prices, which readers of this site will know are clearly simply for land value.  

It would be interesting to know what the bank appraisals on these properties would show, in terms of the value of the houses and the value of the land itself -- assuming that the buyers needed to take out mortgages.

And it would also be interesting to know how Westport's assessor values these properties, and what adjustments take place in neighborhood land values as the evidence of most of the value being in the land accumulates.

Some years ago -- 2003 -- the assessor's worksheet was published.  It is still online, at http://www.westportnow.com/Revalmodel022704.pdf.

And it turns out that Westport's assessments are online.  So let's look at the newest teardown, posted 10/1/2011:

This was the aftermath of the demolition this week of 3 Great Marsh Road in the Saugatuck Shores across from the entrance to the Saugatuck Harbor Yacht Club, Built in 1934, the 1 1/2-story conventional-style house had 1,701 square feet, was situated on a 1.11-acre property and changed ownership in August 2011 for $1,136,174

The assessor's database shows an "appraised" value of $249,800 for the buildings, and $696,400 for the land, or a total of $946,200.  (This is the supposed "market value" of the land at the date the valuation was done, October 1, 2010.  By Connecticut law, assessed value is 70% of that market value.  Peculiar law; one wonders whose interests it was designed to serve.)

The Assessor’s primary responsibility is to find the “full and fair cash value” of your property so that the taxpayer may pay only his/her fair share of taxes.

The record also shows that the property sold in August 2010 for $1,000,000.  The previous transaction was in 1973, which suggests that it might have been an estate situation.  But 14% appreciation in 12 months is pretty sweet these days.

So that 1.11 acres sold for $1,136,174 in August, 2011, and then the buyer paid an additional amount for the removal of the 1700 square foot building -- say, $10 psf?  That's $17,000, for a total of about $1,150,000.    And the assessor says the land is worth $$696,400.  

And that $250,000 square foot house?  Over valued by quite a bit.

The 2010 tax rate for Westport was $14.85 per $1000 of value.  (I couldn't find the 2011 figure, but it was expected to be 15% higher.) That's based on the 70% value, which for this property was $662,400.  So the 2010 property tax was $10,300.   

$10,300 as a percentage of the transaction price, $1,136,174, is 0.91%.

Clearly the town is well run, and people want to live there.  They're willing to pay $1.1 million for a lot.   And even in these times, financially difficult for many people, there are people who can afford to pay $1.1 million and more for a bit of land on which to live.

How much of the value of these lots comes from excellent schools and good municipal services, and how much from the existence of Metro North, of I-95 and the Merritt Parkway, the presence of Long Island Sound, and the presence of NYC?  And how much comes from the presence of hedge funds and other high-paying employers which are skimming the cream from the productive economy and pocketing that value, because we let them do so?

As Stadiums Vanish, Their Debt Lives On

As Stadiums Vanish, Their Debt Lives On - NYTimes.com.

"Paying for arenas and stadiums that are now gone or empty is a result of a trend that stretches back decades. Until the 1960s, public works were often defined as bridges, roads, sewers and so on: basic infrastructure that was used by all and was unlikely to be built by the private sector. With few exceptions, like County Stadium in Milwaukee, teams constructed their own stadiums."

Isn't it amazing what some special interests will manage to get defined as "public works"?

The article continues,

Some politicians in New Jersey applaud the Jets and the Giants for building their own stadium. But the old Giants Stadium generated about $20 million a year for the authority. Now, the agency will receive only $6.3 million in lease payments from the teams, and needs additional state subsidies.

The authority has promoted Xanadu, a privately built retail complex that has yet to open next to the Izod Center. But desperate to plug holes, the authority has spent the entire $160 million in rent payments it received from the developers. Some of the money was meant to pay off debt associated with the arena and the stadium, and was supposed to last 15 years.

The whole thing reminds me of a friend's sigfile:

"I believe in the division of labor. You send us to Congress; we pass laws under which you make money ... and out of your profits, you further contribute to our campaign funds to send us back again to pass more laws to enable you to make more money."

-- Senator Boies Penrose (R-Pa.), 1896, citing the relationship between his politics and big business.

back to the NYT article:

"How municipalities acquire so much debt on buildings that have been torn down or are underused illustrates the excesses of publicly financed stadiums and the almost mystical sway professional sports teams have over politicians, voters and fans.

Rather than confront teams, they have often buckled when owners — usually threatening to move — have demanded that the public pay for new suites, parking or arenas and stadiums."

Do professional sports team owners really have a mystical sway over voters?  Or is it mostly over politicians?

So how do we reduce our reliance on oil?

I've not heard any really good answers to this question yet.  Which is not to say that I don't think there are answers; they just aren't being widely discussed yet.

The answer lies deeper than the analyses which are commonly discussed.  We need to shift our incentive system at a deeper level than what is currently being discussed.  

We spend a lot of money heating and cooling older homes many miles from where people actually work.  People commute long distances -- most of them via private cars because there aren't viable alternatives.  Why do they live so far from their work?  Usually because they can't afford to live closer.

The selling price of most housing within a commutable distance of any vibrant city is mostly land value.  And most people don't know it. 

Let me say that again.

The selling price of most housing within a commutable distance of any vibrant city is mostly land value.  And most people don't know it.

And they don't know why this is so, or realize that there is an alternative which would be desirable from virtually every point of view, or realize the far-ranging ramifications of this reality.  And this is as true of people who hold graduate degrees in economics from our best universities as it is of people whose formal education ended with high school. 

And the fact that the selling price of a home in a metropolitan area is mostly land value -- not value associated with the current structure -- seems to be invisible to most of us.  As are the ramifications of the fact that houses -- like nearly everything else which is manmade -- depreciate!   What appreciates is land value -- locational value -- and it appreciates for reasons which have nothing to do with the landholder himself.

The ramifications?  I'll list a few here, but the list is very long.

• As population grows and more jobs are in cities, population density in the city itself and the closest surrounding suburban rings needs to increase.  What might once have served as large-lot single-family housing ought to give way to multi-family housing -- townhouses, low-rises, mid-rises.  Vacant lots ought not to remain vacant for long.  Low-rise commercial ought to give way to mid-rise commercial, or high-rise mixed use, with retail on the street level and housing or offices above.
• More people living in walkable communities, with public transportation to move them to their work, reduces our reliance on cars.
• More people living in technologically modern housing reduces the per-person fuel to heat and cool their living spaces.
• Incentives which discourage redevelopment of underused sites are counterproductive
• Incentives with encourage the prompt redevelopment of well-located sites to their highest and best use will reduce our reliance on oil and other non-renewable natural resources as well as the pollution associated with those fuels. 
• When we tax land value, we don't take from anyone value which they created.
• When we tax land value, we reduce our reliance on income taxes and sales taxes.
• When we tax land value, we can reduce our taxation of buildings and other improvements, which reduces the disincentives to redevelopment, to using modern techologies -- both of which create jobs. 
• When we tax land value, we reduce the selling price of housing, making it more affordable to ordinary people, and requiring them to borrow less.  This frees up credit for activity which creates jobs. 
• When we tax land value, we stabilize our economy, reducing or eliminating the boom-bust cycles which afflict us roughly every 18 years.

That's enough for starters.

It is time for a paradigm shift on housing

Well-paid economists are trying to figure out how we can back out of the situation our current set of incentives have created with respect to purchasing housing.  It used to be that a 20% down payment on a home purchase was standard, and one rented until one was able to save that amount and still have something left in the "rainy day fund."  Today, the concept of a rainy day fund is considered a quaint oddity, something it would be nice to have but which few seem to be able to attain, for the vast majority of Americans.  And 20% down payments are apparently fairly rare, not just for first-time buyers but for those purchasing "move-up" homes, unless one is moving from a part of the country where housing is expensive to a less expensive area.

20% down payments gave way to 10% down payments, which in turn gave way to 5% and 3% and no down payment, and then to 107% financing.  Homebuyer tax credits have been supplying the down payment for many people in recent months.  But how do we wean ourselves from this?

It is time to start thinking outside the box.  I don't yet see the full mechanics of the transition, but here's the thought process.

Houses do not rise in value.  Like cars and other mechanical things, they depreciate, year in and year out.   It is never worth more than what it would cost to construct today, less depreciation.  At some gut level, every homeowner knows it.  (And most renovation projects do not increase the value of a house by as much as they cost; the exceptions appear to be adding a 2nd bathroom to a house with only one, and adding a deck to the house.  Other renovations customize the house to the preferences of the current owners, which may be something quite different from what others would be willing to pay that amount for; there's nothing wrong with that, as long as owners do it with their own money.  A, say, $50,000 renovation might only increase the market value of the property by $25,000 or less.)

Let's think about what one buys when one buys a house.  First of all, with very few exceptions, one is buying the piece of land on which it is built.  (In a leased land situation, one does not buy the lot, but one may be buying the right to occupy it for the payment of some amount of ground rent to another party; the formula for the ground rent will affect the selling price.  In a condo or co-op situation, one is buying a part of a larger entity which usually involves owning the land.)  While this may be a surprise to those who have only owned land in the heartland of America, in many places the value of the land under the home represents more than half, sometimes far more than 75%, of the price of the home.  These are what used to be known as "high rent districts."  (You know the song, "New York, New York" -- "if you can make it here, you'll make it anywhere?"  Some of that is a reference to coping in a high-rent area.)

One is buying the house that sits on that lot, which might be quite new and technologically up to date, or quite old and, despite being well maintained, somewhat out of date.  One is also buying the right to replace that older building, subject to local zoning and other requirements, with something which better suits current market wants.  The existing structure may be quite usable, but if it is a cottage in the middle of a city block, the building itself may actually have a negative value: it will cost you something to tear it down and remove the debris.

Here's the part we need to think about.  The buyer pays the seller for the value of the land and for the value of the structure on it.   The seller, or someone in the chain of previous owners of that site, created the building on it.  But he didn't create the land value.  The community did.  The current owner, if he has owned it for more than a few years (a few months, in some places, even in 2010) has ridden the value up.  He might have put down a 10% down payment, and experienced a, say, 10% increase in the value of the total property, doubling his money.  In places where land is scarce or conditions are structured to discourage selling, he may have experienced a 50%, 100%, 150% increase in the value of the total property.  But remember that the house itself has been depreciating while he owned it, even if he has taken good care of it.   The seller is reaping something he didn't sow.  The buyer must borrow from a lender to pay him for it, and will be paying it off for the next 30 years of his life.

Suppose that we started recognizing the distinction between the land and the building on it, and set things up so that our buyers were buying the building and the right to the land under it, but instead of paying the seller for something the seller didn't create, would pay the community, year in and year out over the course of his ownership, the annual value of the lot.  In a place where land was quite valuable, that would be a lot of money each year -- more than local government needs, and enough to send some up to the state and federal governments, which have paid for the infrastructure in the highest-value cities.  In a place with little infrastructure and few services and no natural amenities, it would be quite little. Banks would lend some percentage of the value of the house itself, while recognizing that they're financing a depreciating asset.

Here's a quick and dirty table.  It hasn't caught the extremes at the top or bottom end, but perhaps it will help illustrate:

	House Value	Land Value	Land Share Real Estate Value	Land Rent at 5%	20% Down Payment	80%  Mortgage	(Annual) Mortgage Payment at 5%, 30Y	Property Taxes	Annual Carrying Costs	Annual Income Needed at 28%
Major coastal city	150,000	850,000	85%	$42,500	30,000	$120,000	$7,730	0	$50,230	$179,393
Major coastal suburb	150,000	600,000	80%	$30,000	30,000	$120,000	$7,730	0	$37,730	$134,750
Exurbs*	100,000	100,000	50%	$5,000	20,000	$80,000	$5,153	0	$10,153	$36,261
Beach	150,000	400,000	73%	$20,000	30,000	$120,000	$7,730	0	$27,730	$99,036
Ski Area	100,000	600,000	86%	$30,000	20,000	$80,000	$5,153	0	$35,153	$125,546
Midwestern city	100,000	200,000	66%	$10,000	20,000	$80,000	$5,153	0	$15,153	$54,118
Midwestern suburb	100,000	50,000	33%	$2,500	20,000	$80,000	$5,153	0	$7,653	$27,332
Rural	80,000	20,000	20%	$1,000	16,000	$64,000	$4,123	0	$5,123	$18,296
*beyond commuting distance, but perhaps weekend-accessible

Incidentally, you might be surprised to learn that construction costs don't vary all that much from one part of the country to another.  Based on costs in southern California, as 1.00, the range is from .73 in El Paso, .74 in Charlotte and Raleigh, .76 in Savannah, .77 in Montgomery, Jackson, St. Petersburg, .87 in Dallas, .91 in Boston, .95 in Seattle, 1.02 in Newark, 1.03 in New York City,  1.08 in San Francisco, to 1.29 in Anchorage and 1.44 in Honolulu.  And, according to the same source, economy construction for a 2000 square foot, 1-story home can be as little as $86psf, or $172,200 -- in southern California -- which would equate to $126,000 in El Paso.  "Luxury" construction on a 3,000 sf home would run $210 psf, or $630,000 in SoCal.   The cost of the building varies much less than the cost of the land does.

This is consistent with Mason Gaffney's findings.  (Search this page for the word "wine," and then go up 6 or 8 paragraphs.) 

This is also consistent with Morris Davis and Michael Palumbo's May, 2006 paper, The Price of Residential Land in Large U.S. Cities, at http://www.federalreserve.gov/pubs/feds/2006/200625/index.html: average structure values vary far less than average land value does across metro markets.  See, for example, Table D and Tables 6a through 6g.

See also http://www.masongaffney.org/essays/How_to_Thaw_Credit.pdf

Today a significant number of homeowners with mortgages owe more than their homes are worth.  While what I am proposing would create a certain major disruption for many people who expect to live off their home equity, I think it is something we need to look at very carefully, and find a way to make an orderly transition to.   A gradual shift of taxes off productive activity and onto land values is in order.

Which part of a house is unaffordable?

I'm going to take the liberty of quoting a blog post from another site in full.  Here it is:

http://www.landvaluetax.org/the-lvtc-blog-by-henry-law/which-part-of-a-house-is-unaffordable.html
http://www.landvaluetax.org/pdf/the-lvtc-blog-by-henry-law/which-part-of-a-house-is-unaffordable.pdf

Which part of a house is unaffordable?

Is it the roof, the bricks or the drains?

"Unaffordable housing" The term still keeps cropping up. Which part of a house is not affordable? The roof? The bricks? The drains? The roofing tiles? The plumbing system? The amount builders have to be paid to put it all together?

Go into any builders' merchant and check the prices. They are all very affordable. It costs, at most, £100k to build a decent house. Which is very affordable when spread over 40 years - £50 a week. So what is going on to make houses unaffordable? I have asked this question many times over the past 30 years. Usually, the response is a yawn, so the resulting problems, are in a sense a richly deserved reward.

Too many have stood aside, not watched what is going on in the world and failed to try and make sense of it. Hence the talk about "unaffordable house prices" Anyone who uses the phrase "unaffordable house prices" without further explanation is guilty of extreme mental laziness. Which is most of us, and now we are living with the consequences of our neglect.

This of course includes the Nationwide Building Society, which would do everyone a good turn if they scrapped their so-called House Price Index and replaced it with a housing land price index.

I don't think I need to add anything to this one!

Reading Lowell Harriss

As I've noted in an earlier post, Lowell Harriss died a few weeks ago.  I've been reading some things he wrote during his long and productive career.

The first is a piece he wrote in 1978, a few months after Proposition 13, California's taxpayer initiative which lowered property taxes and "protected" property owners from paying for services through property taxes, was passed.  It is entitled "Property Taxation After the California Vote." 

He starts with this: What approach to property taxation would be most in our interest and that of our children?

He provides some history of the property tax, in general and then specifically in California.

Keep in mind that, in California more than in most of the country, assessments on homes rather promptly reflect market conditions -- in an environment in which house and land prices have been rising rapidly. Often, however, local officials did not use the increases in tax base to finance offsetting reductions in tax rates. Homeowners faced rising tax bills; cash income, especially for retired persons, did not always go up correspondingly.

California's colleges and universities were, however, among the best in the US, and surely some significant portion of the public spending was to provide the very services which caused California's property values to rise.

Lowell went on to say,

The full results of Proposition 13 will not appear at once. Only time will reveal whether new jobs develop now as property owners use the addition to their disposable income; whether extensive declines will occur in state-local employment; and how much more erosion of local authority will result from expansion of state payments to replace revenues lost by the sweeping changes in real estate taxes.

He continued,

Present owners of property have voted themselves capital gain "windfalls." The reduction in property taxes will tend to raise real estate prices. Today's owners, in voting essentially permanent reductions in annual property taxes, have enlarged the stream of net benefits (income) to be capitalized in valuing real estate. This one-time capital gain in effect absorbs much of the future benefit from the tax cut. In this respect, the specific results of Proposition 13 are difficult to judge because assessments (but not the tax rate) will rise after a sale. Future buyers will pay a higher price -- higher by enough, in general, to offset the tax benefit.  "No election will ever be lost by votes in the future," runs the conventional wisdom. And certainly California voters did not have future property owners (or voters) in mind when they rallied to the support of Proposition 13.

Lowering the tax reduces the cash required to hold on to underdeveloped land. "Speculative underutilization" becomes less expensive. Waiting for population growth and inflation to boost prices will cost less. The current offerings of land will decline -- and thereby prices will be raised -- because owners face lower cash pressure to sell or develop.  Income tax considerations, of course, complicate individual decisions and require some caution in generalization, but the net effect on land use will be some -- or much -- distortion away from the direction of free-market forces.

Will the California economy get a boost from Proposition 13? Of course it will. Other things being the same, tax something, and there will be less of it (land being an exception). The 50- to 60-percent cut in taxes on man-made capital will alter favorably the "arithmetic" of construction projects in California. How much so is difficult to say. This cost reduction will interact with many other factors, including the forces tending to raise land prices. The change in prospective net returns at the margin may be more modest than impressive. But one conclusion is clear: More capital will flow where tax reduction improves the prospects for investment.

He continues,

The once widely accepted criticism that property taxes are regressive does not survive modern economic analysis. In fact, a persuasive argument in favor of property taxation for local services can be made on grounds of equity. Especially important, it seems to me, is the fact that in effect this tax enables localities to capture some of the fruits of forces raising prices of land, including public outlays on streets, schools, sewers, and other facilities.

He concludes,

Finally, and probably of greatest potential, there is a real opportunity in the wake of Proposition 13 for restructuring fundamentally the way we tax property. We can reduce burdens on man-made capital and make up the revenue from higher taxes on site values, a procedure which seems to me eminently desirable on several grounds. This possibility should be part of the broader public discussion of the role of property taxation stimulated by the vote in California.

One change may be politically tempting -- to reduce burdens on residential property while maintaining or even raising burdens on business and public utility property. Such moves would not only add to concealment of costs of government in the form of hidden burdens on consumers and investors. In addition, the productive portions of the economy would suffer. Building better communities will not come from boosting taxes on business.

Americans should be "up in arms" -- or at least doing something -- about restricting and effectively controlling the growth of government. "Revolt" seems to me too strong a term; it also seems misleading, implying as it does that a single, dramatic action will do the job. Patient, informed, continuing efforts are required. Among them will be the reform of property taxation to develop its potential as a high-quality revenue producer.

Another, earlier paper entitled "Equity of Heavier Reliance on Land Taxation (Location Value) and Less on Improvements" (1970), starts with this:

    Greater fairness in sharing the costs of local government constitutes a prime -- but not the only -- reason for shifting much of the tax from improvements to land. This country will be around for a long time. So also, I hope, will meaningful local government. Effective freedom requires financial independence, including ability and responsibility for raising revenue.

    One of the biggest legacies we leave our children will be the tax system. We want to make it as good as possible. Equity is one (again, not the only) element of "goodness" of a tax system.

He proposes a shift to a structure where the millage rate on land is about 4 times that on buildings.  He talks about transition issues, and issues of equity during and after the transition:

    Two markedly different sets of equity issues command attention. The one of dominant concern ought to be the situation in which we (and our children) would carry on our affairs after generally full adjustment as contrasted with conditions then if present practices were to continue. The long run in which "we" are not all dead! The other concern involves the transition. The shift itself would produce results distinguishable from those to prevail after the economy had settled down to the new system.

Writing of long-term equity issues -- remember that this was 1970 when you consider the dollar figures --

    Community Use of Values Created by Social Development and Local Government Spending

    Over the longer run, landowners would get less of the increment in the values of location. The general public would get more in the form of a larger flow of the rising yields of the worth of location (land) to finance local services. On this score, the equity results commend themselves very strongly indeed. Socially created values would go for governmental, rather than for private uses -- and locally. The absorption of the increments for local, rather for state or national, governmental use would channel these funds on a benefit basis geographically.

    The localities doing most to make themselves attractive would have most of this revenue source. In major cities $10,000 to $15,000 (now often considerably more) of governmental outlay is frequently needed for each new dwelling unit -- schools, streets, fire and police, sanitation and health, park and prison, facilities. Under present arrangements much benefit from such outlays in developing areas accrues to the owner of locations being "ripened" for more lucrative use; his payment in taxes (and special assessments) toward the cost will generally be only a modest portion of the total.

He describes this as a "burdensomeless" tax:

    As for the future, the tax on values of location above their present levels would be almost burdensomeless, except as owners of land and their heirs get less of the "unearned increment" of rising values over the decades. Much of the element of true economic surplus would be used for public purposes. For those parcels of land whose values drop, the annual tax would also decline. Then, because tax rates on land would be higher than today, local government would share more fully in the loss of worth. For landowners the proposal would not be a one-way affair which assumes that land always rises in price.

    No other revenue source seems to me to compare so favorably on this score of fairness. Future users of land would be no worse off for the much heavier tax they would pay on the value of location. The purchase price of land would be correspondingly less. Of the total flow of yield of location value, interest (explicit or implicit) would be smaller, taxes higher. Who would be less well off? The landowners and their heirs who would have gotten the (unearned) increments!

    More of the rise in land value which results from (1) governmental investment in community facilities and (2) the general rise in demand due to the growth of population and income would go to pay for the costs of local government. Such a tax on a pure economic surplus seems to me about as fair as any imaginable source of funds for financing community services. The National (Douglas) Commission on Urban Problems estimated that in the 10 years to 1966, and despite rising interest and tax rates, land prices rose by over $5,000 per American family -- $250,000 million.  Even a modest fraction of this amount if used for local government would have permitted quite a reduction of burden on buildings. The estimated rise in land prices was over four times the total growth of state-local debt and was greater than all of the property tax paid in the 10-year period.

And

    Land as area is fixed in quantity. Tax it heavily, and it will not move to some other place, or decide to take a vacation, or leave the inventory of productive resources by going out of existence. Tax land lightly, and the favorable tax situation will not create more space in the community.

    Our ethos apparently ties economic justice -- equity -- to rewards based on "accomplishment." This principle does not lead to justification of large rewards because of the ownership of land. Differences, big ones, in payments for human services or for the use of capital can rest on what the recipients have done. But for the owners of urban locations such justification can rarely be found; when there have been private inputs for community development, to the extent feasible administratively, they belong on the tax rolls as improvements rather than as land.

And just before he concludes, he writes,

    What an owner can get in the form of land price increases in and around cities has made rich men out of owners of farmland, vegetable plots, and waste areas. More than one owner of a few acres of potato land on Long Island or farms on the outskirts of many a city in the United States, of a small plot of rice land near Tokyo or Bangkok or Taipei, has reaped handsome gains because of the pressure of population. In America, North and South, in Europe and Australia and Africa, private enrichment has come to the passive owner of land who has done little or nothing to enlarge its worth as part of the city whose growth has brought his good fortune. In fact he may have paid no more than an infinitesimal fraction of the taxes which have financed the streets and other governmental facilities that have helped to elevate the value of his land.

Next, I moved on to a longer piece, from the same time, and containing some of the same material.  I ended up feeling that it is perhaps the best piece I've read in a long time on Land Value Taxation.  It is titled "Property Tax Reform: More Progress, Less Poverty" and it is a lecture he delivered at DePauw University in 1970.   I commend it to your attention.

Finally, I note a book from the TRED -- Committee on Taxation, Resources and Economic Development -- series (#6) entitled Government Spending & Land Values: Public Money & Private Gain edited by C. Lowell Harriss (1973).  Each book in this series came out of a 2- or 3-day conference, held at the University of Wisconsin-Milwaukee.  Lowell organized this conference, and wrote the book's introduction.  Here's the dust jacket material:

Billions of tax dollars are spent annually on government subsidy programs which are designed to help certain groups, areas, and industries, and contribute to the general welfare. Despite the good intentions of legislators, however, analysts point to evidence that the programs are not only burdensome for the taxpayer but often fail to do their intended jobs. Critics find that major benefits go not to those whom the programs are designed to help, but to others who can "capitalize" on them.

One major feature of the subsidy benefit pattern -- unintended but predictable -- is the capitalization of land values. The value of land will increase when the benefits, chiefly money income, are enhanced by government subsidization. When the land is sold, the benefit of a subsidy which seems likely to continue will be captured by the seller. Thereafter, tax funds that continue to subsidize a program will not fully benefit those for whom they were presumably intended, but the seller will have made a capital gain.

A classic example can be drawn from the experience of federal farm programs. Taxpayers and consumers have been spending billions annual to aid some farmers. In practice, of course, these programs have often -- and intentionally -- reduced farm output and raised consumer prices. The consumer-taxpayer is thus dealt a double blow, in effect subsidizing an increase in his own food prices. Yet the operating farmer, burdened with a higher land price, fails to get the full benefits of the programs established for his welfare.

In farm programs, as in some other subsidy programs, the expected annual benefits are capitalized into higher land prices. Then, after land prices have gone up to reflect these benefits, the annual payments to farm operators in effect support the higher land prices. In effect, the seller of land realizes the benefits of government subsidy into perpetuity. A somewhat similar pattern is to be expected in other public spending programs, including those concerned with urban renewal, where benefits are localized. The pattern shows that farm programs do not raise wages of low-paid farm labor, that urban projects do not rid cities of slums, and that the taxpayer-consumer bears the burden of both.

This volume explores, and at least attempts to define, the extent to which land values tend to capture the benefits of subsidies and other government spending through capitalization. It includes papers by proponents as well as critics. The contributors, who include some of the nation's leading economists, discuss the nature and effects of farm and housing programs, commodity price supports, transportation outlays, land preservation projects, water resource development, and urban renewal programs. Their work will be of more than routine interest to economists, political scientists, lawyers, political officeholders and government officials, planners, and all others who seek to unravel the complex fabric of multi-billion-dollar government spending programs.

Lowell made contributions in many parts of economics; I am probably familiar with only a small portion of his work, but I am grateful for it.

The Feoffees, the Ipswich School Committee and the TENANTS of Little Neck

I've been following this story for nearly as long as I've had this blog:

• The Feoffees, their tenants, and the Ipswich public schools  (February, 2008)
• Update on the Feoffees' tenants in Ipswich, Massachusetts  (July, 2008)
• The Feoffees may sell Little Neck to the tenants ... for ever and ever   (December, 2008)
• The Feoffees of Ipswich are still thinking about selling that fine piece of land at Little Neck  (February, 2009)
• Update on the Little Neck (Ipswich, MA) sale by the Feoffees of Ipswich's Public Schools   (May, 2009)

I've not posted here in a while, though I've commented on individual articles on the Ipswich area newspapers' websites. It seems that, despite the terms of the trust which forbid the sale of the land, an agreement has been reached to sell the land to the tenants for the quite pitiful sum of $29,150,000.

A bit of background: about 350 years ago, a forward-thinking landholder in Ipswich (a town on the shore north of Boston, famous for its clams) donated for the benefit of the Ipswich public schools a magnificent almost-island called Little Neck.  The trust required the Feoffees (trustees) to collect market rent on the land, and donate the proceeds to the town's public schools.  Little Neck totals perhaps 27 acres, of which about 24 acres show up on the Ipswich assessor's database; the rest, I assume is the roads which wind around it. 

For centuries, the land was used for farming, but early in the 20th century, the Feoffees recognized that farming was no longer the highest and best use of this scenic and well-located acreage, and they subdivided it into lots and permitted people to rent them and erect cottages on them.  There are 167 cottages. 

Today, less than half of the land is rented out to individual tenants: my spreadsheet, which is probably pretty close, suggests 10.32 acres rented to tenants and 13.88 acres held unrented by the Feoffees, but available to the tenants as Commons, for a total of 24.19 acres.  There are beaches and a community center, a pier, a playground, playing fields.  Presumably the Feoffees maintain these commons.  A few years ago, a sewage plant was installed.

Houses on Little Neck are mostly small cottages, many under 1000 square feet and built between 1910 and 1935.  Few have more than one bathroom.  Most are seasonal; that is, they can under the terms of the land lease be occupied only from about April to January.  24 are year-round.  I've not been able to figure out which ones, and I don't recall ever seeing one for sale in the times I've looked.

These cottages are old, weather-beaten and modest.  Some have very appealing interiors, but tiny rooms and modest outfitting.  Most are seasonal, and have no heat.They sit on lots which range from 0.041 acres (1,786 square feet) to 0.112 acres (4,879 sq ft), with most at 0.069 acres (3,005 sq ft).

Were they not on Little Neck, with its fabulous views and huge common spaces, its beaches and community amenities, these cottages would be worth no more than $50,000 to $100,000.  (An 800 square foot cottage at $60 per square foot is $48,000.  A 1200 square foot cottage at $80 psf is $96,000.  $60 psf and $80 psf are excessive valuations for cottages built between 1865 and 1950.  Houses depreciate, even with the best of care.)

Yet asking prices for these cottages when I looked 10 days ago were $175,000 (924 sq ft, built 1930) to $620,000 (1,779 sq ft, built 1910, waterfront).   

What does this mean?  It means that the current land rent being collected is nowhere near the market value land rent. 

Currently, the Feoffees are collecting about $10,000 per year each for the 143 seasonal cottages, and a bit more for the 24 year-round ones.   But the difference between the $50,000 to $100,000 value of the cottage itself and the asking prices of $175,000 to $620,000 represent capitalization of uncollected land rent -- Land Rent which the Feoffees are REQUIRED by the terms of the trust to collect!

Perhaps a year ago, or maybe it was two, I spent some time looking at the Ipswich assessor's database, and assembled a spreadsheet.  I think I probably have 95% of the lots accounted for.  I found some interesting things.  In no particular order,

• Occupied lots total 10.32 acres.  The land represented by those lots was valued by the assessor at  $30,990,200, or $3,004,382 per acre.  
• The per-acre assessed value of the occupied lots ranged from $2.6 million to $5.2 million
• Untenanted lots are of two sorts:

1. one large one, listed at 39 Bay Road, of 11 acres, valued at $842,500, or $76,591 per acre
   

2. perhaps 42 small ones, totaling 2.88 acres, valued at $918,800 total, or $320,000 per acre  

• The untenanted lots, totaling 13.88 acres, were valued by the assessor at $1,761,300, or $126,941 per acre.   Had they been valued at $3,004,382 per acre, their value would be $41,700,822. 
• Add together the $30,990,200 at which the assessor valued the occupied lots and the $41,700,822 for the untenanted lots -- the commons -- and the value of Little Neck's land would be $72,691,022.
• The assessor valued the cottages on Little Neck at $14,857,592, an average of $88,968 per cottage, ranging from $38,700 to $223,600.  
• The assessor valued the tenant-occupied lots on Little Neck at from $161,600 to $343,500, with most falling at $185,500, or $228,700, or $290,000 to $300,000.  (Perhaps differentiating a bit for views or for year-round occupancy rights)?

As a letter to the editor pointed out, the Feoffees don't own the land, and therefore can't sell it.  They are merely trustees for the land.   So the discussion about selling ought not to be happening at all.

But if somehow the powers-that-be determine that black is actually white, and up is actually down, then the Feoffees ought to be getting the full current value for the land.  And they ought not to act as mortgage lenders.  That is not within the terms of the Trust, and is nothing but trouble.

$72,691,022 divided by 167 cottagers works out to $435,275 per cottage -- quite a bit more than the $174,000 they're offering, to break the Trust which has been in place for 350 years.

Twenty years' purchase, or 5% of the $72.7 million, works out to land rent of $3.6 million per year.  Divide that by 167, and the average annual land rent would be $21,800.  Some would be worth more -- the larger lots, the ones on the waterfront, the ones with prime views, the ones with year-round occupancy rights -- and some would be worth less -- the smaller lots, the ones with less desirable views, the seasonal ones.  

Would charging the market rent make Little Neck unaffordable to some of the current tenants?  Yes, quite possibly.  Did the Grantor of the trust make an exception for that?  Or did he simply charge the trustees with collecting the market rent and being good stewards of the property, forever?   The trust was not created in an attempt to be kind or generous to tenants; the beneficiary was explicitly named as the schools of Ipswich.  If the interests of the tenants now somehow outweigh the interests of the schools of Ipswich, please tell me where to buy a new compass, because North is no longer North.

How will we know when the Feoffees are collecting the full market rent on the Little Neck property?  When the selling price of a $50,000 cottage is $50,000.  Until we see that, we'll know they're not collecting the full rent, but leaving a significant portion in the pockets of the cottage tenants.   The difference between the $50,000 value of a cottage and the $250,000 PRICE of a cottage when the land rent is not being collected is enough to put a cottager's child or grandchild through college. 

But the Trust was set up to benefit not the TENANTS' children but the children of the schools of Ipswich.  Got it?

The Trustmaker gave Ipswich's public schools and Ipswich's community a very fine gift: a goose that he knew would lay golden eggs.   The recent and current Feoffees may have failed to collect those eggs.  That's past history.  We can't change it.  And it doesn't change the nature or terms of Mr. Paine's foresighted gift.  Just collect the eggs.  Keep feeding the goose.  If the current group of Feoffees isn't so inclined, replace them with Ipswich residents who are.  If necessary, hire professional staff; at $3.6 million in annual rent flow, volunteers can't do it all.

And, by the way, when you announce the schedule under which rents will be raised from current levels to market levels, a lot of cottages are going to go on the market.   It will take a while for them to sell, and you'll see the prices drop.  The cottagers will claim theft on the part of the Feoffees.   They're wrong.   Many of the cottages will be teardowns.   The new owners will ponder for a while, and then begin to build interesting and attractive new homes there, within the constraints of those postage stamp lots.  Preservationists will bemoan the loss of "historic cottages."  Unhappy tenants will say sad goodbyes to summer homes whose full carrying cost they can't absorb.   The grocery shopping and restaurant visits these 167 families -- and their tenants -- represent may fall off for a summer or two, while new owners build new cottages.

The construction trades in Ipswich will prosper (the Feoffees might be wise to prohibit construction work during the high season) and so will the town itself, for all sorts of reasons, including the rent flowing to its public schools.

Unless, of course, the stakeholders -- or the courts -- think that the interests of the tenants ought to be primary.   In which case, please order me the new compass.

This blog has more observations and history on this story.  See them collected at  http://lvtfan.typepad.com/lvtfans_blog/feoffees-land/.

Gary Schilling's idea ...

Somewhere, this week, I heard or read that Gary Schilling has proposed an idea to solve two of this country's problems.  Here is the snippet note I made:

Gary Schilling proposed a novel solution to two problems our country is facing: the foreclosure problem and the illegal immigration problem: he suggests that they be able to buy the foreclosed homes and after some period of time, become legal residents

I don't happen to think his solution is a good one.  Property ownership should not be a condition for anything resembling citizenship status, even legal residency.

But I've got one to propose in its stead.

Suppose that local governments which thought about buying foreclosed homes and fixing them did so, but instead of turning around and selling them at some significant discount to people who meet certain income criteria (income no less than $X, no more than $Y), suppose that they fixed them up, and then sold ONLY THE HOUSES to whomever was interested, and KEPT THE LAND as city property.  The buyer of the house would have a land lease and would pay annually 5% of the assessed market value of the site.  This would provide participating towns and cities with a reliable income source several times the property tax they currently collect, which might range from as little as 0.1% of market value in California to perhaps 2% or even 3% in a few places.  It certainly beats borrowing the money to buy the land, if one has limited funds, and paying interest for 30 years on that debt.  

It has parallels to the Community Land Trust movement as a way to provide affordable housing, but it doesn't require contiguous lots, and the entity that collects the land rent is the local community as a whole.  Land rent is an excellent way to fund public spending.

Land appreciates, if the local economy is healthy.  And over time, it may be that the neighborhood around one of these homes will shift from single-family residential to commercial or to multi-family housing.  At that point, the value of the house drops to very little IN THAT LOCATION.  It might be possible to move it to another lot, or a developerwill come along and offer the homeowner something for access to the site, taking over the land rent payments and spreading them over multiple residents or multiple businesses. 

Mortgage payments leave town.  They ultimately go to the shareholders of out of town banks.   Land rent paid to the community gets recycled locally, to meet local needs.

That acre in midtown Manhattan: $800 million -- as a teardown!

I don't know how reliable the estimates involved are, but this article from a Pakistan website came across a google alert today.  The property is a 1-acre teardown within a short walk of Manhattan's Grand Central Terminal: 

Roosevelt Hotel to be sold out Naveed Miraj ISLAMABAD: The government has finally decided to sell the famous PIA-owned Roosevelt Hotel in a bid to add some foreign exchange to the national exchequer and has asked the Privatization Commission to arrange open bidding to this end. The commission hopes to get a minimum offer of eight hundred million US dollars as compared to two hindered million dollars the Shaukat Aziz-led government had expected for the hotel located in the busiest commercial area of Manhattan in New York. The previous government was in haste to sell off the hotel apparently to oblige some of its blue-eyed officials but shelved its plan following the Supreme Court's ruling in the Pakistan Steel privatisation case. In the wake of the current economic crunch, the government has decided to sell the hotel in the hope of getting handsome foreign exchange.

If you are one who thinks that land rent -- the value which the land itself would rent for each year -- is not a large enough tax base to provide much in the way of revenue, consider that this single acre, taxed annually at 5% of its proposed selling price, could provide $40 million each year in income to support the spending needs of NYC, NYS and the federal government.   I don't know what NYC is collecting in property taxes on land and buildings, but it isn't much -- which is part of why the asking price can be so high.

Think what it would mean to shift $40 million worth of taxation off wages, off sales, off buildings! 

PIA is the airline of Pakistan.

See previous posts about this site at That block in Manhattan ... and Hotel Roosevelt For Sale at $1 Billion

Productive loans, vs non-productive ones

As I listened to the news coverage of the financial market meltdown, I heard Sec'y Paulson refer to productive loans. It set me thinking -- not along the lines he intended, I'm sure.

A loan to buy a home is not entirely a productive loan.  By this, I mean that it is to cover the purchase of two very different kinds of assets. 

• One is manmade.  It was produced by a builder, who coordinated a team of workers and assembled the appropriate materials.  This might have occurred last month, last year, 50 years ago or 100 years ago.  If others have occupied the home over the years, they, too, may have made improvements to the structure and to the rest of the property. (At the same time, the house itself has been depreciating; a May, 2006, Federal Reserve Board study pegs annual depreciation at 1.5% -- a good deal slower than the 27 years over which a commercial property gets depreciated.) 
• The other is a value created by the community. None in the string of previous owners created the land value.  The land value is created by the entire community.  Where the economy is healthy, where jobs are available, where schools are good, where emergency services are reliable, where courts are respected, where transportation systems are available, where wages are good, land value will tend to be higher and to rise faster than where these conditions do not apply.

But a homebuyer, as we do things now, must pay the homeseller for both the house itself and the land it sits on.

The portion of his purchase money -- and his mortgage payments over the next 30 or more years -- that goes to paying the seller for land value is nonproductive.  It doesn't incentivize anyone to do anything useful; it rewards the seller for value he had no part in creating!  It doesn't create any jobs for anyone.  The seller may have sat on many lots of increasingly valuable land for decades, forcing the community to sprawl outwards, building infrastructure to get past this pocket in the development.  Or he might have simply occupied his own little lot for decades, riding the value upwards.

[Am I blaming him?  No. Not at all.  I'm blaming a foul system, just as Winston Churchill did 99 years ago, and calling for its identification and correction.  And I'm calling attention to how it affects our younger people, in particular.]

The Big (and unnoticed) Winners in the Mortgage Crisis

Among the big winners in the current mortgage crisis are a large subset of those who complain bitterly that they "played by the rules" and "used good sense" and "didn't take on mortgages they couldn't afford" -- and now feel put-upon because they think they might somehow be forced to subsidize those who, from their perspective, took advantage.

The unnoticed winners (and perhaps whiners) are those who, over the past few years, sold their previous home for a price that was inflated by the eased availability of low-priced mortgages.  At the closing table, they pocketed value that they didn't create, and patted themselves on the backs for their wisdom and goodness and hardworking efforts over the preceding years to pay the mortgage which made this day possible. 

They turned around and used the home equity they had so painstakingly* built as a downpayment on a higher-priced home.  That they could afford a higher-priced home** was a function of several factors:

That block in Manhattan ...

A google alert today says that the owner of a choice block --roughly one acre -- in midtown Manhattan might be ready to sell it.  My browser seems to crash every time I try to read either of the two articles referring to it, but the property involved is a single block, a short walk from Grand Central Terminal, which, according to my research earlier in the year, was said last summer to be worth $400 million to $1.2 billion as a teardown.  But the owners seemed to be satisfied with $15 to $20 million per year in operating profits from its current use.  The property is about an acre.

$15 million annual on a $400 million property is not much of a return -- 3.75%.  But it isn't bad while one waits for the taxpayers of NYS and NYC and the federal government, as well as the private sector's activities, to cause the land to appreciate. Covers the carrying costs, and employs a number of people!  The city doesn't impose much of a tax on the land value.   And so a year's appreciation could be significantly more than a year's operating profits!  What a sweetheart deal we give to the owners of our choice urban land.

My previous post on the subject is here.

Being born into the Landed Gentry is like holding the winning lottery ticket

The Ianded gentry ...  sounds so noble ... so gentle ...  so aristocratic .... so entitled!

What is it about? 

Valuing life, and applying fiscal stimulus, and setting us all equal

If we are going to claim to value every life, and encourage every pregnant woman to bring every fetus to term, we need to acknowledge that every child born is the equal of every person already born.  Interestingly, Alaska has been doing something important in this regard, for more than 20 years.

Every man, woman and child who lives in Alaska receives an annual income from the Alaska Permanent Fund, which represents dividends from the invested proceeds of Alaska oil revenue, and which, if properly managed, will continue to provide an annual income for every Alaska long after the oil has all been tapped. And Alaska's governor has had the fortitude to increase the share of the public in Alaska's oil revenue due to the high price of oil. (See another post on the subject from a few days ago.)

(And much of Alaska's state government spending comes from oil revenues, too.)

Our oil is not the only resource that needs to be treated this way.  Urban land values can be hundreds of thousands of times the value of an acre of agricultural land.  There is an acre in Manhattan said to be worth $400,000,000 to $1,100,000,000 -- as a teardown.  If we were to tax that land value at, say, 5% per year, at $400,000,000 it would produce $20 million in income for we-the-people, relieving the need for $20 million in sales taxes, or $20 million in payroll taxes, or $20 million in income taxes.  Talk about fiscal stimulus!  Talk about a permanent tax holiday! Talk about getting the incentives right!  

The Landed Gentry

We hear the phrase "the landed gentry" from time to time, often in the context of first-time homeowners, lyparticularly those who have bought  in a neighborhood undergoing "gentrification."

But what does it mean to be the landed gentry?  What is it that matters about being landed?  And what is "gentry"?

Krugman: Stranded in Suburbia - New York Times

Link: Stranded in Suburbia - New York Times.

If Europe’s example is any guide, here are the two secrets of coping with expensive oil: own fuel-efficient cars, and don’t drive them too much.

Notice that I said that cars should be fuel-efficient — not that people should do without cars altogether. In Germany, as in the United States, the vast majority of families own cars (although German households are less likely than their U.S. counterparts to be multiple-car owners).

But the average German car uses about a quarter less gas per mile than the average American car. By and large, the Germans don’t drive itsy-bitsy toy cars, but they do drive modest-sized passenger vehicles rather than S.U.V.’s and pickup trucks.  ...

Can we also drive less? Yes  —  but getting there will be a lot harder.

There have been many news stories in recent weeks about Americans who are changing their behavior in response to expensive gasoline — they’re trying to shop locally, they’re canceling vacations that involve a lot of driving, and they’re switching to public transit.

But none of it amounts to much. For example, some major public transit systems are excited about ridership gains of 5 or 10 percent. But fewer than 5 percent of Americans take public transit to work, so this surge of riders takes only a relative handful of drivers off the road.

Any serious reduction in American driving will require more than this  —  it will mean changing how and where many of us live.

Earmarks, nightlights and windfalls - Individual, or Community?

I've heard this point made a couple of times recently, but particularly liked the way Gail Collins expressed it in her recent column, George Speaks, Badly:

Besides being incoherent, this is a perfect sign of an utterly phony speech. Earmarks are one of those easy-to-attack Congressional weaknesses, and in a perfect world, they would not exist. But they cost approximately two cents in the grand budgetary scheme of things. Saying you’re going to fix the economy or balance the budget by cutting out earmarks is like saying you’re going to end global warming by banning bathroom nightlights.

The relative magnitude of earmarks relative to total federal spending or total discretionary federal spending may be rather small.  But earmarks do have tremendous potential to do good locally. They can fund projects that may not be feasible for local government to fund, which can contribute mightily to local economic activity and economic rent.

The question, I think, is what happens AFTER the earmark project.  Will the local community that benefits from that federal spending collect the benefit from the local residents who are benefited, or will that benefit keep accruing to particular individuals, and continue to be just a nice permanent federal gift to them? 

Affordable housing -- for all of us. What policies promote it?

Link: http://www.sun-herald.com/Newsstory.cfm?pubdate=030808&story=tp1ch5.htm&folder=NewsArchive2

A front-page article in the 3/8/08 Charlotte (County, FL) Sun entitled "Not Affordable Enough" speaks to some interesting and important issues regarding Florida's housing.  A few excerpts:

The current downturn in residential real estate sales has created the closest thing to a buyer's market Florida has seen since the 1990s.

While that might be great news for a Northern couple looking to retire in Punta Gorda or Port Charlotte with their life savings, Charlotte County's median home price -- about $175,000 according to recent Florida Association of Realtors figures -- is still a barrier for many local wage earners ...

Despite North Port's reputation as a haven for working families, the median sale price in the Sarasota-Bradenton market remains about $260,000

Referring to recent problems in the housing market,

"It's a blip on the screen really, and in a year, we're going to be thankful that we did some investing in affordable housing," said Ron Thomas, executive director of Enterprise Punta Gorda, the city's economic development bureau. "When everybody says that there's plenty of affordable housing, we have to qualify that by saying that there is plenty of affordable housing for people who are in the 80 percent or above the median income. This doesn't have any positive effect for anybody in the 30 to 80 percent median income bracket."

"Even as low as (housing) has come down, it still might not suit firefighters, police, and school teachers. They're still struggling," said Bill Albers, Punta Gorda city councilman. Albers is the council's liaison to the Punta Gorda Housing Authority.

Hotel Roosevelt For Sale at $1 Billion

Link: ROOSEVELT'S UP FOR SALE AT COOL $1B - New York Post.  This article is actually 8 months old, but popped up on a standing google alert in my mailbox, and it contained some factoids I'd not previously seen.  I'm not going to get into the background story (which some might find quite interesting, based on my bit of research).  Rather, I'm going to focus on the land values involved, because they might surprise the ordinary mortal, and provide some food for thought.

The property is just under 1 acre, and currently has a 1,013 room 20-story luxury hotel, built in 1924, on it.  The $1 billion valuation is as a teardown, as a site for a higher and better use, given current markets.