Gas Prices Contributing to Bursting the Housing Bubble?

Are increasing gas prices to blame for the bubble bursting in the housing market? According to a recent report conducted by the Ceos for Cities organization there is some relationship between gas prices and the housing market. Or more specifically, they claim that the price of homes in the suburbs is being forced to come down because people can’t afford the increase gas costs…so they either need cheaper suburban homes or live closer to work.

The collapse of the housing bubble, punctured by the gas price spike, marks a watershed point for the nation’s suburbs. When gas was cheap, buying a house in a distant suburb where housing prices were cheaper seemed like an affordable housing choice for many families. But as the more severe decline in housing prices on the urban fringe over the past year illustrates, $3 a gallon gas has made low density development a false economy across the nation.

I don’t know if I buy into the complete conclusions of this report, but I think it does raise some important housing accessibility and affordability questions for policy makers. Is demand going to increase for more urban homes? But what about the argument that more affordable homes are in the suburbs? You can read the full study here: Driven to the Brink

Oh and another article in the Deseret News today about gas prices in Utah have hit another all-time high…$3.47 a gallon. Read the article here.

 

Truth-in-Taxation

                         Property taxes are frequrently cited as the most hated tax, partially because they are also the least understood tax.  One reason property tax is more complicated is because of the various tax entitites and their differing tax rates (as illustrated with this picture).  However, property taxes can be explained in a relatively direct and simple manner….which we have sought out to do.  

Property Tax Myth #1: Cities receive more money when home values increase    We have found through our trainings of newly elected officials that there are a number of misperceptions regarding property tax revenue during times of increasing home values.  Even among many elected officials there is this perception that cities recieve a windfall of revenue every time the homes in their community appreciate in value.  However, truth-in-taxation prevents exactly this from taking place. Instead truth-in-taxation creates a brake on revenue windfalls associated with increasing property values.

Roger Tew and I recently presented a basic outline of how truth-in-taxation works to our city officials across the Wasatch Front. You can access the presentation here: ulct-property-tax-forum3

 

States experiencing budget shortfall

At least a dozen states are anticipating significant budget shortfalls in 2008. The biggest crisis is occurring in California where Governor Schwarzenegger has declared a fiscal emergency — after reporting a $4.6 billion revenue shortfall. Schwarzenegger recommended reducing every state program by 10%. One in interesting quote in the article comes from Iris Lav (deputy director of the Center on Budget and Policy Priorities:

“It’s amazing how sales tax revenues are tied to the housing market,” said Iris J. Lav, deputy director of the Center on Budget and Policy Priorities. “People aren’t buying construction materials, people aren’t furnishing new homes. Some states also have real estate transfer taxes.”

Doug Macdonald, ULCT economic consultant, has been saying the same thing. In fact, at our September Annual Conference Doug presented on the cycle of residential development. In this presentation Doug stated that for every $1 billion decrease in residential construction values, taxable sales in Utah could drop by 3%. Utah is not one of the handful of states that is experiencing the budget shortfall this year…but historically Utah has been a year or two behind the national curve. So what can we anticipate in 2009? The way things look right now (with national trends and a slowing local housing market) I would bet on some level of a budget shortfall for the next FY. You can read a couple of recent articles here:

• Governors seek remedies for budget shortfalls (DNews)
• States tighten belts (Wall Street Journal)

Cycles Happen — November ULCT Newsletter

 

Utah’s property-tax system isn’t broken…

Property taxes have now caught up with increasing home values not only across the nation, but even here in Utah. According to New Jersey assemblyman, John McKeon property tax issues are “issues No. 1, 2, and 3″ for his residents. New Jersey isn’t unique, at least 21 states are currently working on property tax cuts or shifts for the upcoming or current session. And apparently the same sentiment is brewing here. Last I checked there were 6 bill files here in Utah opened to do the same thing.

However, fortunately Utahns are in a pretty good place with comparably low property tax burdens. According, to a recent Utah Foundation study property tax is the least burdensome tax or fee Utahns pay — Utah’s property tax burden ranks 37^th (Utah Foundation State and Local Tax Burden). According to a recent article by Money magazine Utah’s property tax burden (for a family of three making $100,000) is around $1,400 below the national average. Tax-friendly places 2007

Last week the Deseret News editorial board articulated a great article opposing shortsighted property tax caps or reforms. You can read the full editorial here: Utah’s Property Tax System Isn’t Broke. Here is an excerpt…

“Before state lawmakers begin tinkering with the way counties levy and assess property taxes, they need to take a deep breath, then wait for the urge to disappear…the truth is, Utah already has a strict and fair system of keeping a lid on property tax rates. If anything, a few counties need to tweak the way they assess properties, nothing more.”

I couldn’t agree more.

Hopefully, before we move toward restricting property tax even more we carefully evaluate the potential effects of shifting revenue dependency. The reality is property tax caps usually result in increases for other taxes or fees–taxes and fees which in Utah are already relatively high.

 

The causes of suburban growth

What has spurred the incredible growth in American suburbs over the last few decades? A Fannie Mae Foundation commissioned survey (of urban scholars) identified these top five contributing factors:

1. The 1956 Interstate Highway Act and the dominance of the automobile
2. Federal Housing Administration mortgage financing and subdivision regulation
3. Deindustrialization of central cities
4. Urban renewal: downtown redevelopment and public housing projects (1949 Housing Act)
5. Levittown (the mass-produced suburban tract house)

You can read the full paper here: The American Metropolis at Century’s End

I bring this topic up in light of a current debate on the Economist’s Free Exchange blog. Monday there was an interesting post titled the Density of Nations this post argued: America systematically starved and disassembled its public transportation and rail infrastructure and spent rather extravagantly on highways, both within and between cities. While Europeans also increased their spending on roadways, they nonetheless maintained strong national commitments to rail and public transit. Megan McArdle of the Atlantic disagrees with some of this reasoning, you can read here opinion here.

So what is the answer? Why are European cities more dense? I’m inclined to think that it has more to the American obsession with the status of a large home, a large yard, and a two car garage–which is usually pursued with suburban property.

 

Subprime Mortgages and the Housing Market

Harvard Avenue–not Salt Lake, but Cleveland– once was a vibrant area of Cleveland before numerous foreclosures.

 

The mortgage meltdown is continuing and taking the stock market with it. Countrywide Financial, the nation’s No. 1 writer of mortgage loans, was forced to tap an $11.5 billion line of credit today to address its looming liquidity crunch, and as a response Countrywide is tightening their lending standards.

So what does this mean for cities and towns? Well for some cities the rate of single family home foreclosures are alarming. The number of foreclosures in Cuyahoga County, Ohio (Cleveland metropolitan area) has spiked from 2,500 in 1995 to 15,000 last year. For example, the mayor of Cleveland estimates that 10,000 of the city’s 84,000 homes are now empty. As a result many of the suburbs around Cleveland are spending millions of dollars trying to contain blight.

So what about here in Utah? There are still a lot of reasons to be optimistic about the housing situation here in Utah—or are there? It is becoming a confusing issue, not only is the issue complex due to the nature of subprime lending (I’m still not entirely clear of the mortgage maze of who is exactly backing all the debt…this NY Times graph helps “Mortgage Fault Line”), but the issue is also complex because Utah is always a bit behind the national trend. Utah still has a low unemployment rate and the growth projections are good for the housing industry. However, the costs of homes are now out pacing income levels (which becomes an even bigger concern when mortgage lenders tighten their financing standards). Some local economists are optimistic, others are already starting to notice the housing downturn. For example just take a look at two articles in the SL Tribune and Deseret News today (August 16th):

• Real estate still looks rosy in Utah, local experts say (Deseret News) –The headline for this article doesn’t exactly indicate the content of the article, by the way

• Sales slow for new, ritzy Utah homes glutting real estate market (SL Tribune)

And if you have been a little confused or more curious about the subprime discussion the Urban Institute just hosted a great forum a couple of weeks ago that is podcasted here: The Future of Subprime Mortgages

 

Citizens to decide on tax cut…

The Florida Legislature last week in special session passed an interesting tax cut in two parts… First, the tax-cut requires cities and counties to hold tax rates at 2006 levels – and then cut up to another 9 percent, depending on how much they raised taxes over the past five years. Those that raised the most will have to cut the most.

However, the more interesting (to me) component will come in January. In January FL voters will vote on to change the state’s constitution to increase the property exemption for primary residential homes. It will take 60 percent of the voters to approve the measure, which would exempt 75 percent of the first $200,000 of a home’s value from property taxes. Homes valued between $200,000 and $500,000 would get an additional 15 percent exemption.

I’m curious how the campaign will go the next few months…of course we all want lower property taxes, but what are we willing to give up? Or will this just cause a shift in public finance (higher impact fees for developers, higher sales tax for residents, etc)?

Florida Gov. Crist signs tax-cut legislation last week (I love how this kid with the truck is so uninterested in the Governor).

 

A world of walls…

Are we becoming a world of walls dividing our neighborhoods and countries? What are the consequences of creating these physical boundaries? I found this article on Reuters interesting: Around the globe, walls spring up to divide neighbors. In my opinion, I have some concerns about these physical walls dividing populations…but my concerns are not limited to just these international examples. What about gated communities and PUDs in our own neighborhoods?

 

Housing Development

The housing market continues to capture a number of headlines. Especially with reports today of the sharpest decline in home sales in 18 years (here). Overall the housing market in Utah still appears strong, but when the market continues to fall in Vegas and Phoenix it makes you wonder what is in store for the Salt Lake metro area in the next year or two.

I also found these two recent articles regarding housing development interesting.

• New York Times article on housing development along the TRAX lines in Murray City.
• Article in Slate about how a cornfield became a town.

 

March HOA Forum Reviewed

Around thirty staff members from a number of cities attended our recent March homeowner associations forum at South Jordan City. Here are a couple of questions discussed at the forum:

• Why is communication between the city and HOA important? There are a couple of reasons. First, improved communication can improve emergency response at a time of crisis. Some larger HOAs may have a emergency response plan that can be coordinated with the city.
• What is the best way to improve communication with HOAs in your city? This is a difficult task, especially since part of the challenge is just identifying the individual HOAs that exist. South Jordan City literally has gone door to door to identify HOAs and COAs. In addition, now they ask HOAs to record contact information with the city.
• What can cities do to help prevent HOA failure? Unfortunately there really isn’t a lot cities can do. However, one key maybe is to closely review the proposed financial plan of a new HOA. Often HOA failure is due to inadequate reserve funds for emergency situations, the city can help review and approve this plan prior to development.
• What does HOA failure mean? Really there are two kinds of failure. One kind is complete failure that results in absolving the HOA entirely, this failure is very rare. The other kind of failure relates to a specific private service (private road in the HOA , sewer or water, etc) this is more common. Often the frequency of service failure is directly related to the fiscal strength of the HOA.

Thanks to John Janson(West Valley City) and Chip Dawson (South Jordan City) for participating in the panel discussion and offering their experience/insight.

Check here is you are interested in my presentation. March HOA Forum