Sunday, November 20, 2016

Need a Movement along the Lines of CA’s Prop 13 to Save American Home Ownership

Need a Movement along the Lines of California’s Proposition 13 to Save American Home Ownership

During the last recession, the real meltdown in the housing market occurred in the Sunbelt. The market then came roaring back, eclipsing the pre-recession price levels. Was this due to the strengthening of the market internals or was this due to the unprecedented improvements in the overall economy? The answer is neither.

The lax credit which contributed to the meltdown took a 180 degree turn during the recession, making it extremely difficult for the normal folks to buy homes – even the highly credit-worthy were given a significant run-around. The reason was very simple: Banks preferred the all-cash buyers, including Wall Street raiders and speculators, foreign nationals and flippers and bundlers.

Tapping into the Fed’s zero interest loans the Wall Street raiders and speculators took full advantage of the rock-bottom prices in the Sunbelt – from San Francisco to LA to Vegas to Dallas to Miami and everywhere in between – creating a whole new REO-to-Rental market which later came to be known as the SFR Rentals. Foreign buyers, sensing the high returns in the rental market as well as the lure of free green cards, took a plunge. Flippers and bundlers were the usual scavengers.

In a normal market, where everyone gets to participate, a normal (fair and equitable) assessment roll is in order. But when the market gets hijacked by certain raiders and speculators, it is inherently immoral to distribute the tax burden equally on all, particularly on the “real” homeowners who had nothing to do with the sky-high speculative prices – eventually the assessment roll would be based off.

Undeniably, this untenable property tax burden pushes the real homeowners, especially the totally defenseless seniors – who live off their limited retirement incomes – off the cliff. Sadly, due to the ever-escalating property taxes, seniors are increasingly being uprooted from their homes and neighborhoods every day, everywhere.

We need a nationwide movement along the lines of California’s Proposition 13 to change this unfair and inequitable assessment practice, forcing the raiders and speculators to contribute their fair share of the taxes by anchoring their sales activities into the roll. We need to re-index assessment rolls at the 2010 price level when the speculative activity came into the forefront, thus sparing and differentiating the real homeowners from the raiders and speculators.

The universe of so-called non-arms length sales must also be retested; for example, sales between family members and intra company transfers must be construed as non-arms length sales for this purpose and remarked to the market as such. Since the vast majority of home sales between 2010 and 2015 were controlled by the raiders and speculators, the underlying sales universe becomes a double-edged knife from the research point of view – from the automated valuation modeling to sales ratios to equalizations, etc.  

While real homeowners would still be responsible for the statutory 1 or 2% annual hike, the new sale prices would substitute the market values on the rolls, leading to a two-tier (real homeownership vs. speculative trading) assessment system and the resulting taxes. Since the new sale prices would be in line with the current market, those assessments and taxes would be commensurately higher than those of real homeowners who did not participate in the speculative trading.

Needless to say, speculative home purchases give rise to unwarranted land speculations forcing vacant lands to be warehoused. Therefore, the land speculators must also be subjected to the same two-tier assessment system as their SFR-speculating counterparts. 

Of course, some reasonable and non-speculative exceptions (e.g., first-time home-buyers) - limited to US Citizens and Permanent Residents - must be built into the system. Minimum holding periods for homestead exceptions and IRS Schedule D short-term gains/losses must also be revisited. 

Just the way the banks preferred the all-cash speculators during the last recession, perhaps they may be forced to align with the first-time home-buyers in disposing of their future (in future downturns) REO inventories, hopefully recreating opportunities for those who have sadly been left out of the current ownership loop.   

Commercial properties will follow the same algorithmic path as well, with one exception: When sale prices exceed income values, those sale prices will stand, disregarding the age-old all-income approach.  It’s an open secret that the values generated by the income approach will not even come close to the vast majority of those sale prices.   

An independent index like Case-Shiller home price index could be used in building the base and establishing the period levels, to avoid having to deal with conflicting ratio and equalization studies. Establishing the commercial valuation charts (and the underlying valuation parameters) must be a private-public endeavor.  

Now, let’s consider the following Case-Shiller (seasonally adjusted) table:
(Click on the image to enlarge)

By implementing the aforesaid two-tier assessment system we will force the speculators in San Francisco to be assessed, on average, at the 226-level while the real non-speculative homeowners would still be assessed at the 139-level (plus the statutory 1 to 2% annual hikes). Granted, this will allow two homes side-by-side on the block to be assessed at vastly different levels (age-old argument), but that’s the system we chose. While most Assessors – as individual homeowners – will agree with me on this front, they will disagree upon wearing the Assessors’ hats – obviously!   THEREFORE, THIS IS FAIR AND EQUITABLE. THIS IS THE NEW NORMAL.

Ideally, we should re-institute the annual reassessment (avoiding unnecessary gyrations like time adjusting sales / incomes), ending the ongoing experiments like the 4 or 5 year assessment cycles with a frozen valuation date in between re-assessments. I was in favor of the 3-year cycle before but after having seen how the Sunbelt markets got easily hijacked by the raiders and speculators, I had to change my outlook about the fairness of our assessment practices and property taxes. Again, if we have to move to one of those cycles, the 3-year cycle is preferable as it prevents total politicization of the system, while staying close to the realities of the marketplace. 

Though this change, in most cases, will require changing the jurisdictional Charter, the referendum will comfortably pass considering that the real homeowners comprise the majority. This will make valuations a mere algorithmic event. In addition to entrusting central ITs with the management of those algorithms, they must also be tasked with the data collection and management (existing inventory = to be technologically updated and new inventory = as originated by the building and zoning).

It’s time that we recognize and differentiate between the real home ownership and trading our neighborhoods. The raiders and speculators must be reminded that their profit-making on the backs of the real homeowners would carry a hefty social premium.

Let the movement begin!  

Case-Shiller Index is a trademark of S&P CoreLogic

PS - If you like the proposal, please post it to your Facebook page. Thank you.

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