Wednesday, March 22, 2006

Proposition 13 and the Housing Bubble

Proposition 13 was a very bad idea (in hindsight) for all the right reasons. It is a significant factor that contributes to the very high cost of housing in California. Proposition 13 lessens the willingness to sell thereby decreasing the housing supply and, when combined with California's strict environmentally-based zoning restrictions, which further limit housing supply, is it any wonder that we find ourselves in the current mess?

The aftermath of Proposition 13:

Proposition 13 has greatly benefited homeowners whose homes have appreciated in value since it was passed, particularly those (such as the elderly) whose incomes have not risen as fast as property values. In cities with many older residents, this has led to a severe shortage of affordable housing, since new developments must often be far above the state's median home price in order to provide enough tax revenue to pay for the services they require. Impact fees have offset this problem somewhat, but are limited by developers' ability to go "jurisdiction shopping" for localities with low impact fees.

Owners of commercial real estate have also benefited: if a corporation owning commercial property (such as a shopping mall) is sold or merged, but the property stays deeded to the corporation, ownership of the property can effectively change hands without triggering Proposition 13's provision that fixes the amount of tax based on the property's resale value. Since many properties are nominally owned by shell companies whose sole assets are the properties in question, this has led to situations that have struck many commentators, such as Steve Lopez and Michael Hiltzik of the Los Angeles Times, as absurd and unfair. For example, the Times has reported that the property tax bill of the historic Capitol Records building in Hollywood is approximately five cents per square foot, while a small house assessed at $300,000 may pay up to 60 times that on a per-square-foot basis. Critics of Proposition 13 have argued that this situation unfairly benefits commercial property owners and should be changed, but recent attempted ballot initiatives have not succeeded in altering assessment formulas.

Proposition 13 has hurt mainly immigrants and young upwardly mobile workers in California. Because Proposition 13 is a disincentive to sell, there is less turnover among owners near the older downtown areas, and prices have appreciated fastest in these areas. Young people who would be wealthy in other states are house-poor in California, and are forced to live tens of miles from their workplace in order to afford a home. Thus, the Proposition can be seen as a "transfer tax" from the working classes to the retired class, as retirees are subsidized and the young have less working hours in their day because of long commutes. Immigrants are another class of losers under proposition 13, since they come from other states where property taxes are higher and their real estate equity buys less in the California housing market.

Imaginative strategies have been necessary for localities to compensate for Proposition 13 and the state's loss of most property tax revenue (which formerly went to cities and counties). Most California localities have recently sought their voters' approval for "special assessments" that would levy new taxes earmarked for services that used to be paid for entirely or partially from property taxes: road and sewer maintenance, school funding, street lighting, police and firefighting units, and penitentiary facilities. Sales tax rates have skyrocketed from 5% (the typical pre-Prop 13 level) to 8% and beyond.

California localities have taken measures such as using eminent domain and "redevelopment" laws to condemn "blighted" residential and industrial properties and convert them into sales tax generators such as shopping malls, multi-dealer "auto malls," and strip malls anchored by "big-box" retailers such as Costco and Wal-Mart. Cities that have been notably successful with this strategy include Cerritos, Culver City, Emeryville, and Union City. However, the spread of big box retail is credited as another major factor behind California's severe housing shortage, as cities have routinely rezoned vacant parcels and "blighted" neighborhoods for retail in an attempt to increase their share of the sales tax pie. With developable land made scarce by open space preservation laws and by the resistance of single-family homeowners to up-zoning, the resulting market pressures have led to urban sprawl that has brought formerly rural areas like the Antelope and northern San Joaquin Valleys into the urban areas of Los Angeles and San Francisco, respectively.

Some commentators have said that cities no longer control their own property tax revenue, and even claim Proposition 13 has exacerbated city-suburb class and racial tensions in California, particularly in Los Angeles. On talk radio and in other venues, working- and middle-class white and Asian residents of the conservative San Gabriel Valley often complain that the city of Los Angeles "steals" their tax dollars and funnels them into impoverished black and Latino districts.

Should Proposition 13 be repealed? If so, what should replace it? There are other states in this Union that do not assess property tax; how do they do it and still provide for public services? Post your thoughts. Write to your representative.

Personally, I favor a flat tax on all residents that has nothing to do with the value of a resident's property combined with tax exemptions for the folks that Prop 13 was designed to protect. But that's just me.

27 Comments:

Blogger Marinite said...

This part really sticks out in my mind:

Because Proposition 13 is a disincentive to sell, there is less turnover among owners near the older downtown areas, and prices have appreciated fastest in these areas. Young people who would be wealthy in other states are house-poor in California, and are forced to live tens of miles from their workplace in order to afford a home. Thus, the Proposition can be seen as a "transfer tax" from the working classes to the retired class, as retirees are subsidized and the young have less working hours in their day because of long commutes.

Mar 22, 2006, 9:31:00 AM  
Blogger Wickedheart said...

The big problem I have with Prop 13 is NOT the senior homeowners who stay in their homes but the long time owners who sell and receive the windfall selling for todays prices without ever having to pay the higher taxes for it's increasing value.

Also, did you know that if you transfer your property to a family member that Prop 13 exemption goes with?

Mar 22, 2006, 9:53:00 AM  
Blogger Marinite said...

lso, did you know that if you transfer your property to a family member that Prop 13 exemption goes with?

Yes. I have a childhood friend who still lives in the house he grew up in (Mill Valley) because he cannot afford to sell it and live somewhere else in Marin. He'd love to sell it and move elsewhere in Marin as it is inadequate and inconvienient to live there. He pays a few hundred dollars in prop tax.

Mar 22, 2006, 9:57:00 AM  
Anonymous Anonymous said...

Have you ever been to a county fair in CA?

I was in the Santa Clara county one last year - there were all these senior citizens out gathering signatures to "Save Seniors - Protect Prop 13"

Who cares that we have the worst public schools in the nation...

http://www.pbs.org/merrow/tv/ftw/

Mar 22, 2006, 11:23:00 AM  
Anonymous Anonymous said...

Hoo boy. If Social Security is the third rail of American politics, Proposition 13 is the third rail of California politics. This sucker is here to stay. It will never be overturned. Despite the massive damage it has caused to our state, all of that damage has been borne by non-homeowners and non-voters (the young), who aren't "real" people and therefore don't count. If you didn't get your slice of the pie early enough, well, that's just tough. Move to another state.

Mar 22, 2006, 12:06:00 PM  
Anonymous still waiting in Sacramento said...

I was a student in the California public school system prior to prop 13 and am now the parent of two elementary age children in the california public school system. What prop 13 did to our public school system is shameful. It is also shameful what those who cannot afford to buy property within the best elementary school "boundaries of attendance" must go through in order to exist as a renter. I speak from personal experience on this matter and although we earn a salary within the top 15% at our school, the majority of parents who currently own homes tell me they could not afford to buy the same home today. It seems hopeless but we are determined not to relocate out of California if possible.

Mar 22, 2006, 12:10:00 PM  
Anonymous still waiting in Sacramento said...

I would definitely support a flat tax based on property value. Why should children have to pay the price for seniors to "protect their wealth". How much is enough?

Mar 22, 2006, 12:15:00 PM  
Blogger peterbob said...

Woa, this topic will surely generated some discussion.

If Prop 13 is untouchable, due to politics, then how about this:

Towns levy special assessments on all property, and make property tax "deductible." That way, if you pay more in property tax, you pay less in the new assessment.

This seems to me to be a great way of making the old timers pay their fair share.

Mar 22, 2006, 1:13:00 PM  
Anonymous Anonymous said...

The main purpose of Prop 13 was to protect aging homeowners (and those whose prospects for increased future income were diminished) as RE prices skyrocketed through the 70's. Of course the reality is, it benefits a much larger spectrum of homeowners, many of which have no need for it. So instead, why not make direct state/local subsidy payments to those who DO need it -- i.e. the elderly and poor?

Mar 22, 2006, 1:43:00 PM  
Blogger Rob Dawg said...

Prop 13 was passed in 1978 the same year that the State took over school funding in a SEPARATE action. School funding went up and has gone up ever since. Prop 13 had nothing to do with the schools collapse. You see in 1978 the same year as Prop 13 it was deemed illegal to spend different amounts locally as previously when California was 4th in the nation for school
performance. So now we spend different amounts locally as directed by the State as commanded by the Supremes and are now lowered to the 4th worst in terms of results.

Prop 13 was only passed because the Legislature refused to enact reforms. A meat cleaver when we needed a scalpel. The intent and effect of Prop 13 was to keep money away from politicans. Anyone advocating "fixing" Prop 13 is in effect advocating for more taxes.

I'm truly astounded at the "fair share" issue. Before Prop 13 you paid what the people with guns told you pay. After Prop 13 you paid 1% and 0.02% more per year thereafter. What could be more fair? How would you like to pay the amount of sales tax based on what the govt thought you owed rather than 7.25%? Prop 13 correctly protects people and businesses against arbitrary government distortions of the market. That's one point of government regulation in the first place isn't it?

I have no truck with the market aspects nor even the speculative portion of home buying decisions. I just think Prop 13 does a good job of capitating some of the non market risks with no external costs. I'm sure others feel otherwise and I'm only expressing an opinion among many. Perhaps we can go about this in reverse. I've got a 4 bed 2.5 bath SFR California ranch. How much should I be paying in taxes? California has 36.6 million people and spends/incurs $116 billion. That's a whopping $3400 per person. How much of that should come from property taxes?

Hey, nice $5,000 cat you got there. You say you got him for $17 at the shelter? Cool, here's your feline liciense fee of 10% of assesed value, $500. You are one lucky cat owner I must say.

Mar 22, 2006, 1:44:00 PM  
Blogger fredtobik said...

Being an "immigrant", I don't know much about the effect of prop 13 on schools, but after reading the different ways it is manipulated is kind of scary.

Is it possible to put a home under a company and just sell the company and circumvent any new assesment?

We could always repaint the blue parking spaces, that should get rid of a few old people. j/k

Mar 22, 2006, 1:56:00 PM  
Blogger Wickedheart said...

Maybe it might be better to complain about the fact we are being overtaxed for stupid stuff like this.

Lease-Purchase Home Ownership Program


The Association of Bay Area Governments administers this program through the California Home Source. This program is designed to help individuals and families who have a steady income but lack the cash necessary for down payment and closing costs and/or lack the credit history needed for a home mortgage. California Home Source purchases a home that is selected by the Lease-Purchaser and leases the property to the Lease-Purchaser for three years, whereupon the Lease-Purchaser assumes the mortgage. There is no down payment, no minimum credit score, no first-time homebuyer requirement and the program pays all closing costs. An administrative fee of 1% of the purchase price is required at the beginning of the lease.



To qualify for this program in Marin County, applicants must meet the following requirements:



• Have a stable source of income from a job or business

• Have an income insufficient to support a mortgage payment for the home they wish to purchase.

• Not own another California residential property while in the program.

• Be able to provide 1% of the purchase price of the home before the lease begins.

• If your FICO credit score is below 580, then it is necessary to prove that your rent has been paid on-time for the last 12 months.

• If you have unpaid collection accounts or charge-offs, you must be willing to repay them during the lease period through a debt management plan supervised by a non-profit, credit counseling service.

• If you have prior bankruptcies or foreclosures due to financial mismanagement, you must have 12 months of re-established credit prior to applying for the program.



Income requirements for this program are up to 140% of the higher of county or state median income, thereby allowing more people to be eligible to participate. You may be eligible if you meet the following income limits for Marin County:



Household Size
Annual Income
Household Size
Annual Income

1
$89,670
5
$138,320

2
102,480
6
148,610

3
115,290
7
158,830

4
128,100
8
169,120

I'm not a fan of any affordable housing programs and this has to be most stupid one ever.

Mar 22, 2006, 2:00:00 PM  
Blogger Marinite said...

robert cote -

I think I would agree with you FWIW except I would say that it is obsurd to pay tax on your property year after year. I think there should be a one time sales tax on property just like everything else.

And why should only people who own property pay for public services, etc., the stuff that prop tax pays for? Everyone should pay their fair share.

So a flat tax.

Mar 22, 2006, 2:05:00 PM  
Blogger Athena said...

personally, I favor a system similar to what Texas has going on. Where your property taxes are used for YOUR community. The funds go to YOUR schools and for your services instead of going into the state coffers to be redistributed.

I also have a hard time with "Affordable housing" plans. I think too much emphasis is placed on that- and I think it sucks when you have worked really hard to make sure you make a good living and you are priced out of normal homes and make too much because you are too productive for the "affordable housing"

I prefer to think of affordable housing as simply that it is possible to make a six figure income and buy a house without having to mortgage your soul and first born child.

Mar 22, 2006, 2:16:00 PM  
Blogger moonvalley said...

I have owned property, and I have rented. I now rent and I think a flat tax is a great idea. I do get tired of hearing people who own houses talk as though they were the only ones shelling out tax money and all renters are some sort of freeloader. I'm self employed and incorporated. I pay a lot each year in state and federal taxes. I always liked the idea of a flat tax that was floated back in the 90's

Mar 22, 2006, 2:23:00 PM  
Blogger peterbob said...

Athena said...I prefer to think of affordable housing as simply that it is possible to make a six figure income and buy a house without having to mortgage your soul and first born child.

I certainly hope that you can earn LESS than six figures and still afford a house, otherwise only about one in six will be able to buy!

Mar 22, 2006, 2:36:00 PM  
Blogger renting in mass said...

I don't see the issue. If a long time owner doesn't sell, there house doesn't go on the market. On the other hand, they also don't go looking to buy another home, so a buyer is removed from the market as well.

An idea that makes more sense is that the regulations limiting building on the coasts contribute to the boom/bust cycle. When demand picks up, the market doesn't react, so prices go up. Then speculation piles on top of this. But eventually, it all unwinds as supply catches up, or as is happening in MA, people move out.

Mar 22, 2006, 6:13:00 PM  
Blogger renting in mass said...

And didn't California have a big housing bust in the early 90's, long after Prop 13 had been passed?

Mar 22, 2006, 6:18:00 PM  
Anonymous rejunkie said...

The biggest travesty, IMO, is the fact that commercial real estate is protected under Prop 13 -- that should be a no-brainer that old people aren't going to get turfed out of their homes if the local Mall has to pay property taxes that are indexed to the actual value of the property. BTW, this is the only state which does not reassess every year or two and raise taxes according to the assessment. It is absolutely a huge contributing factor to both the lack of supply and the ridiculous machinations local governments have to go through to accomplish something like balancing a budget (witness the sales tax raise in San Rafael for just that purpose). No other state has a law like this, even the other fast-appreciating ones like Mass., Nevada, Arizona, Florida and DC.

Mar 22, 2006, 8:16:00 PM  
Anonymous astrid said...

A property transfer tax would cause similar distortions to the housing market as prop 13. It might be more fair, but a big transfer tax will still prevent would be sellers from selling.

@ renting in mass - Prop 13 artifically decreases supply and help bubbles to form. A distorted market will reach an equilibrium but will result in less overall social welfare.

@ Marinite: Like Athena said, property tax is the best way to fund and control schools locally. While I think this has unfortunate effects on poor districts, it's probably still the best alterntive out there.

Do you think the gov't has no business in educating kids? Personally, I'm glad we're not quite in that Libertarian paradise yet.

Mar 22, 2006, 8:34:00 PM  
Blogger Athena said...

yes... Ideally a person should be able to make less than a six figure income and still be able to buy a house without participating in a social program designated for that purpose.

That being said- it is even more appalling when you can make a six figure income and still have to fork over your soul for a house.

Mar 22, 2006, 10:40:00 PM  
Blogger brian said...

Marinite,

I think property tax paid year after year makes sense when you think of real estate in terms of a cash generating investment. If you have a bond that pays $10k per year you also pay tax on that income. Property is really no different, its just that some people choose to live in the property and effect pay rent to themselves.

Another problem with prop 13 is that, rather than constrain spending, it has caused income tax rates to be sustainably high. In effect, California has become one of the most inhosipitable places for young families. Thus, making this housing bubble even more laughable as you see families continually forced to move out of the state.

Mar 22, 2006, 10:52:00 PM  
Blogger vespabelle said...

rejunkie is wrong when he/she says that no other state doesn't reassess propeties. Oregon passed Measure 5 our mini-Prop 13 back in the 1990s (it was amended later with two "son-of" measures). Oregon's assessors do appraisals (well, mass appraisals) but they don't base taxes on market value.

Our property tax assessments were rolled back to 1995 levels minus 10 percent and are limited to 3% increases each year. And our millage rate was capped as well.

Unlike California, the assessed value doesn't go up once you sell. So, a house like mine which was in the ghetto in 1995 (when I bought it) is taxed as if it is still a crackhouse.

And like California, Commercial properties are part of this. Unlike California we have no sales tax so moving in a big box for sales tax revenue is not as popular.

Mar 22, 2006, 11:18:00 PM  
Anonymous King_Cash said...

Question from a non-CA resident:

Doesn't Prop 13 decrease the incentive to buy as much as the incentive to sell? If I buy the new place I can't rely on the seller's assessment to gauge my property taxes, I will recieve a new and inflated assessment upon the transfer of title. Seems to me that buying a tax increase of nearly indeterminate size, particularly one that I KNEW would be inflated to cover shortfalls of my neighbors' taxes, would be a major disincentive to buy; I'd bid lower because of it.

Others obviously don't care, otherwise there wouldn't be a housing bubble. Then again, I don't own a house because I'm not willing to take on a zero down, negative amortization, 105% CLTV $1,000,000 debt obligation to live in a pre-war shoe box on a postage stamp of former toxic waste dump near the fault line simply because "They aren't making any more land", and "Housing only goes up!" But that's just me. I could be wrong.

Mar 23, 2006, 7:54:00 AM  
Blogger Marinite said...

king_cash:

I guess Prop 13 could be a disincentive to buy for some. But not for me. If I buy a place and if I plan on staying in it for a long time (like 30 years) then it is comforting to know that I'll be paying less tax later on when, presumably, I am earning more on an inflation adjusted basis.

That's an incentive to buy.

On the flip side, it is now 30 years later. I'd really like to sell and move out. But dang, then I'd have to pay prop tax at today's rate. That would be no fun at all especially if now I am retired or planning on retiring soon.

That's an incentive not to sell.

So older folks are in greater concentration near city/town centers. Younger folks are progressived pushed further and further away from city centers (and where they are likely to work).

Prop 13 was a bad idea for all the right reasons.

Just my $0.02.

Mar 23, 2006, 8:40:00 AM  
Anonymous rejunkie said...

rejunkie is wrong when he/she says that no other state doesn't reassess propeties. Oregon passed Measure 5 our mini-Prop 13 back in the 1990s -vespabelle

I did not know that. I was kinda making a sweeping statement there. Thanks for correcting me.

I will rephrase: "this one of very few states which do not reassess every year or two..."

Mar 23, 2006, 12:33:00 PM  
Anonymous Anonymous said...

Regarding Robert Cote's post:

I think Robert made several good points that prop 13 is about limiting the governement's ability to tax. However, I think the last comment he made illustrates the unfairness of prop 13 and that there has got to be another way to limit taxation to what's necessary while sharing the burden somewhat fairly:
Robert said:
"I've got a 4 bed 2.5 bath SFR California ranch. How much should I be paying in taxes? California has 36.6 million people and spends/incurs $116 billion. That's a whopping $3400 per person. How much of that should come from property taxes?"

CA's spend is $3400 a person. Is it fair that I pay almost $11000 in state income tax, and another $6600 in property tax (3 bed 1.5 ba on < 6000 sq ft lot), not to mention what I pay in sales taxes, because I had the misfortune of being born in 1974, while my neighbors in larger houses pay a fraction of this?

I realize that I knew this when I bought the place - but my point is the distribution of taxes could be a lot more fair. Younger workers like myself who want to own a place and live in CA have to settle for paying more than their share - that's the bottom line of prop 13 and the point of the post.

Mar 24, 2006, 12:25:00 PM  

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