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Another Way Responsible Borrowers Could Get Screwed: Property Taxes
By JLP | January 28, 2008
I think the handwriting is on the wall for citizens of areas facing lots of foreclosures. If municipalities are left with lots of vacant properties due to foreclosures, they will have to cut expenses, raise property taxes, or a combination of both in order to meet their budgets.
Remember, there are two parts to the property tax equation:
1. Property values
2. The tax rate
When property values are increasing, the city gets a nice raise every year. However, if one of the two parts (property values in this case) of the equation declines, the property tax amount declines. One way around this is for the municipality to raise the tax rate. Fortunately, cities can’t just raise property tax rates on a whim. I know in my city, large tax rate increases are put up for a vote. Fortunately, my town hasn’t been impacted by all this silliness.
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Last night I watche a 60 Minutes segment on the mortgage crisis. Surprisingly, they did a fairly balanced report on the mess. One of the couples they interviewed was asked if when they took out their big mortgage, if they thought of the consequences of their actions. The husband responded with something like, “No, I didn’t think about that. I thought about my family and getting them off the block we lived on.” In other words, he made a purely emotional decision and now his family is going to suffer the consequences. I wonder how they will feel moving from a less desirable location, to a better location, and back again?
If anything, the 60 Minutes story only reinforced my beliefs that a bailout is the wrong way to go.
Topics: Housing Market, Mortgages, Taxes | 6 Comments »
January 28th, 2008 at 1:46 pm
[...] unknown wrote an interesting post today onHere’s a quick excerptHowever, if one of the two parts (property values in this case) of the equation declines, the property tax amount declines. One way around this is for the municipality to raise the tax rate. Fortunately, cities can’t just raise property … [...]
January 28th, 2008 at 4:22 pm
I love your website, and I come here quite often. However, I am pretty tired about hearing people refer to the plan as a “bailout”. A detail about the plan can be found at this website:
http://www.americansecuritization.com/uploadedFiles/FinalASFStatementonStreamlinedServicingProcedures.pdf
A bailout would imply that this will cost taxpayers money. This plan does not cost us anything. Why? Basically, the government is asking that banks that bought subprime loans with teaser rates from another company (securitized loans) leave the teaser rates in place. This does NOT cost tax payers any money; this simply is protecting those who bought the MBSs to not forclose and allow the MBSs to reduce even more in value. This is no more of a bailout than having the government ask the local grocer not to raise the price of milk.
And no, this will not affect mortgage rates for prime borrowers, as those are based on T-Bill prices more than the cost of doing business with subprime borrowers. In other words, the cost of losing some of this business will not affect the prime mortgage rate. What it will affect is the guidelines that banks use to lend money, which are now more strict than ever.
In short, if you have a FICO of 800, prove your income, and have 20% to put down for a house, this “non-bailout” will not affect your mortgage rate. Or your tax bill. Or the number of times you need to mow your lawn.
January 28th, 2008 at 6:54 pm
It’s a chain reaction. Turbulent real estate markets cause trouble in municipal budgets. The money has to come from somewhere… so the people who survive the turbulence wind up picking up the tab.
TheWalrus
http://www.thewalrus.biz
January 29th, 2008 at 2:32 am
Thanks , great post,
Love it,
Good luck,
Tracy Ho
wisdomgettingloaded
January 29th, 2008 at 11:30 am
…property-taxes have been rising anyway for many years, as state & local governments spend extravagantly.
Remember what “Proposition 13″ was all about 30 years ago in California ? (California politicians have since evaded most of the Prop 13 restrictions thru clever manipulations of law & administrative powers.)
The current mortgage mess is a only a small part of the financial crisis facing municipalities. Municipal employee unions are bankrupting cities with outrageous pay & retirement benefits.
Americans never really own their homes — they only rent from the local government…via ‘property-taxes’ as rental payment. Fail to pay your property tax and you’ll soon see who actually owns your home.
January 30th, 2008 at 10:01 am
Property taxes is a big problem in my town. Our local government used money like there is no tomorrow when they had it. They re-did the shopping parking area, created a pond at the end of a little stream, cut a bunch of really nice willow trees. I liked the original better, more trees… The project lasted for almost a year, and cost a lot more than expected. (What else is new?) Then they decided to “fix” the train station including a clock that cost $30K (I am absolutely sure I could find contractors to do something like it for 3K). Their reason – train station is what the town visitors see. Except for a small town in NY is hardly a tourist attraction, and the only people who come by trains are commuters who work in Manhattan. Now they are rebuilding the library; they also plan to increase pensions for city workers (how many of us are going to have pensions?), and hire a special Spanish-language teacher to work with Hispanic kids in a local school.
I am lucky in that my taxes are pretty reasonable by local standard – $4000 a year for a two bedroom townhouse condo. But the complex where I sold my one bedroom had taxes equal to $3000 a year for one bedroom. The next door complex where I’d love to move to has taxes over $10000 a year. It is slightly more expensive than mine, $550K for townhouse vs $420K in my complex (they have garages, I don’t), but I could’ve easily afforded the difference given that I own mine outright. But $10K a year in taxes is a big deterrrent – the amount is like paying a mortgage except for you will never repay it like mortgage. Instead you are almost guaranteed the payments will go up. So I am staying where I am.