Stewart Blog

As I have written earlier about 2010 being THE year to appeal property taxes (see blog entries Video on Property Taxes and As Home Values Decline Property Taxes Should Have) I failed to mention a key issue allowing property owners to appeal property taxes even if the assessed value is less than market value.  That is the principle of equalization.  I also did not emphasize how important it is that property owners have applied for all of the tax exemptions they qualify for to assist in reducing the property tax burden.

In dealing with property taxes and process of appealing them, several definitions are needed to understand the jargon of the property tax world.

The tax rate is the tax amount per level of assessed value.

The effective tax rate is calculated by dividing the annual property taxes by the market value of the property.

The principle of equalization states that regardless of property value, properties with equal values should have equal property tax burdens.

The assessment level is the percentage of the property that is subject to taxation.

Assessment levels are usually defined by legislation. An exemption is property (or a portion of the property) that is not subject to taxation.  Many states have exemptions’ that reduce taxes for certain groups of individuals and property types.  A common one in the homestead exemption that allows homeowners a tax break on a portion of their primary dwelling.  Other common ones in some states  include elderly exemptions (limiting property tax increases for those 65 and older), agricultural use exemptions (valuing property at the value of income it produces if used for agriculture rather than market value, and open space exemptions giving tax breaks to owners for not building and developing their properties.  Be aware, however, that some exemptions, while reducing taxes for years in which the property qualifying, may be due if and when the property sells or the exemption no longer qualifies.  Check with your local real estate professionals for clarification in your market.

Fractional assessment is an assessment rate of less than 100 percent (also usually specified by law).

Assessed values can be appealed typically at the annual appraisal review hearings (each state and local jurisdiction has their own specific rules in how and when to appeal property taxes).  Tax rates can be appealed at the ballot box by voting out those politicians that continue to overspend which drives up the tax rate.  (In some states and jurisdictions, tax rates are capped by law).

So how does the principle of equalization work? Assume for example, your home is worth $200,000 but the assessed value is $180,000.  Should you appeal you assessed value?   The answer depends on how much similar homes are assessed in your neighborhood.  If for example, there are several homes of similar quality, size, condition and amenities as your property assessed for less than yours, then you should appeal invoking the principle of equalization.

As I stated earlier, this is the time to aggresively appeal your assessed value by the tax appraiser. To appeal the tax rate, go to the ballot box and elect leaders that control spending.

In this video link I explain how now is a good time to sell or buy a home.

Ted C. Jones PhD Good Time to Buy or Sell

In the video link below I explain how to help you with property taxes and market values changing.

Ted C. Jones, PhD on Property Taxes

See post from March 8th for more information on Ad Valorem/Property Taxes

But a Ways to Go to Get There

James Hagerty of the Wall Street Journal once again has written about upcoming speed bumps in the road to recovery in the housing debacle.  (see below following this commentary).

As the housing bubble commences the final–albeit still painful phase of bursting–we see light at the end of the tunnel.  It’s a way off but at least it’s not another train.  But there remains a lot of broken glass yet to walk barefoot over to get there.  One out of every five homes on the market are foreclosures.  The next 18 months includes the resets of Alt A loans (where buyers merely stated their qualifying income rather than having to prove it) and Option Payment ARMS (which are almost all deeply negative amortization and even more underwater than other loans). 

 We face continued high quantities of distressed real estate coming onto the market—and this does not even account for the pent-up supply that will eventually come on as prices recover in the future.  And recovery does not mean immediate return to the record price levels seen in 2007—that will be several years away. 

 So when do prices increase?  What are normal prices?  We are likely bouncing at or near bottom in most markets across the country, but do not expect any significant price recovery for 18 months as we work through this last lump of foreclosures and short sales.

 Since 1987 the Consumer Price Index grew at 2.9 percent on annual rate, while the Case-Shiller Home Price Index showed an annual compound appreciation rate of 3.9 percent. Thus, housing appreciates at the rate of inflation plus 1 percent per year.  The really attractive part of using the Case-Shiller Index rather than the median prices of all housing is that over time, home sizes have changed, which could erroneously lead to the conclusion of a greater than actual appreciation rate.  Since the Case-Shiller Indices are based on resales of the same property, size and other factors are automatically considered.

 If we assume that 2000 prices were normal, then the table below shows actual prices and expected prices since that time.   These data imply that in 2005, existing home prices were 29 percent over-valued, and that current prices are 11 percent undervalued.  Just like a pendulum swinging, the market is over priced on the top and underpriced on the bottom.

Normal Existing Home Prices

Consumer Price Index for All Urban Consumers: All Items

CPI data are from July of each respective year

Median home price is annual average of the median prices

So when do prices turn upwards?  It is my expectation that we will have minimal price changes (up or down) in the next 18 months (and that is a long time to forecast in these volatile times).  Eighteen to 24 months from now we will see home prices rise more than typical as we return to normal levels and prior to new construction coming back to normal levels.  I believe that builders have another 24 months of tough times ahead.  Where prices head will be a function of the rate of inflation and job growth.  The following table shows projected home prices under several levels of inflation.  And remember, in the short run prices may not change at all.

Assuming that inflation runs 2 percent per year, prices should reach the previous record by 2018.  At 3 percent inflation, prices may recover sometime in 2015.  But at 1.5 percent, reaching the previous price high will not be reached for more than a decade.

Forecast Future Home Prices

Based on Inflation + 1 Percent Annual Premium

Source: Ted C. Jones, PhD, Senior Vice President-Chief Economist, Stewart Title Guaranty Company

Once again I invoke the TINSTAANREM clause.  (There Is No Such Thing As A National Real Estate Market).  Each real estate market is different, and within those markets, submarkets are likewise diverse.

Yes—there is light at the end of the tunnel—but getting there remains an arduous and uncertain journey.  Remember this is not rocket science.  Home prices rarely move exactly as expected from period to period, but in the long run, they sync up.  At least now we are now seeing the ground.  And any landing you can walk away from is not all that bad. 

Supply of Foreclosed Homes on the Rise Again- WSJ

I’d like to hear from you. Please leave me a comment.

Per NAR Existing Home Sales Up 7 Percent Year-Over-Year in February But Down Sequentially Almost 1 Percent From January — Median Price Down 1.8 Percent Year-Over-Year — Supply Up to 8.6 Months from 7.8 Months in January

February Existing-Home Sales Ease with Mixed Conditions Around the Country- NAR

Existing Home Sales by Region and Sales Price of Existing Homes Source: NAR

Weather & Economy Provide One-Two Combination.  Not a Knock-Out Punch, But it Did Hurt

New housing starts edged lower in February as bad weather and a similar ongoing bad economy slowed residential building permits to an almost one-half million annualized pace.  The continuing below normal results were anticipated, however.  Further reduced new home sales numbers will not be a surprise in coming months.  After all, if fewer are being built, fewer will be sold. 

So what is normal?  And when do we get there?  And what does it take to get there?

The following table shows existing homes sales, new home sales and residential permits commencing in 2001 (in which 2002 was probably the last ‘normal’ market we had, following the recession of 2001 and prior to the significant below-market rates provided by then Federal Reserve Chief Economist Alan Greenspan).   These data reveal several important insights into housing numbers. 

• First, as far as housing sales numbers go, existing home sales are the dog and new home sales are the tail of the dog.  A normal market will contain 5.68 existing home sales for each and every new home sale. (These are national statistics, so a local market growing jobs at an above-average rate will have a different ratio and vive versa).
• 100 new home sales will occur for every 135 single family permits issued (on average)
  Which portends an estimated 671 thousand single family permits issued in 2010   
• 100 new home sales occur on average for every 175 total residential permits (on average)
  Which portends an estimated 870 thousand total residential permits issued in 2010 of which 199 thousand will be multi-family

2010-2011 Forecast: Fannie Mae, February 2010      Analysis: Stewart Title Guaranty Company

New home sales will rise as soon as employment increases.  And that has yet to occur.  The coming months will show tepid job growth.  Thus, from a job driven perspective, 2010 is going to be less than normal.  From a builder’s perspective, 2010 is going to be abysmal. But at least improving a little bit.      

Housing starts drop 5.9% to 575,000 rate 

Illusions of Consumer Credit Health

Total U.S. revolving debt (credit that can be used repeatedly up to certain amount as long as payments are being made–basically credit card debt) reached almost $1 trillion in September 2008 (at $975.7 billion) and fell to $866.1 billion by year end 2009—a drop of $92.0 billion.  This debt declined even further to $864.4 billion at the end of January 2010. 

Great news—right?  I mean it’s positive news that consumers are reducing their revolving debt—correct?  Unfortunately, the reduction in debt is not consumers paying off this debt, but rather the charge off of these debts by U.S. banks as non-collectable. 

Of the $92 billion decline in 2009, banks wrote off $83.3 billion of that amount—or 90.5 percent.  As far as actually paying down revolving debt, U.S. consumers paid down just $8.7 billion in 2009, less than 1 percent of the balance on the books at the beginning of the year.

Total consumer debt outstanding (essentially, total consumer indebtedness outstanding less mortgages) tallied just more than $16,000 per household in 2009, down approximately $300 from 2008.  But the right-off of just revolving credit was more than $500 per household, so total consumer debt in 2009 rose, net of the right-off of bad loans on credits cards.

Download graph

Bottom line is that we still have a credit-heavy system, and some of apparent good financial news, particularly on the credit side, are but mere illusions.

Why credit-card payoff? Consumers are dumping debt

Trulia Reports That Sellers are Reducing the Urge to Cut Asking Prices Portending a Bottoming of Prices and Setting the Stage for Price Increases Down the Line (NAR Summary)

Fewer Sellers Are Cutting Prices

Newton’s third law of motion states “For every action there is an equal and opposite reaction.”  Take a look at the Jones on Real Estate Blog entry on February 26^, 2010, when I discussed the economic impact of the actions of Congress and the President to ‘protect consumers’ from fees and charges by credit vendors. Part of that protection was a component requiring banks to obtain consumers permission to be charged for overdraft privileges. 

Bank of America has announced that they will no longer allow overdrafts on debit cards.  So that solves the problem of getting consumers permission to charge them an overdraft.  What the CARD Act essentially accomplished was a significant reduction in the availability of consumer credit. 

Banks are not canceling overdraft fees—they are canceling overdrafts.  Period. And to this, no one should be surprised.  Newton sings true again. 

Bank of America to deny debit card overdrafts

The Federal Reserve Bank has purchased a majority of the residential lending packages put together by Fannie Mae, Freddie Mac and Ginnie Mae since early 2009.  Total lending for purchase and refinance one-to-four family homes in 2009 is estimated to tally to $2 trillion of which the Feds bought $1.25 trillion (confirming that historically, half of all lending flowed through Fannie and Freddie).

Good news is that the Fed is not anticipating a quick sales of these assets, as to do so would cause a major decline in the value of these and a rapid increase interest rates

Bad news is that this signals the end of record low rates. 

ANALYSIS – Fed to linger in agency MBS market after exit