Of Two Minds – by Charles Hughs
If we understand property taxes as a “lease from the local government for the right to gamble on another housing bubble arising,” we see “ownership” in a different light.
We’re constantly told ours is an ownership society in which owning a home is the foundation of household wealth. The concept of ownership may appear straightforward, but consider these questions:
1. If the house is mortgaged, what does the homeowner “own” when the bank has the senior claim to the property?
2. If the homeowner owes local government $13,000 a year in property taxes, what does the homeowner “own” once they pay $260,000 in property taxes over 20 years?
The answer to the first question: the homeowner only “owns” the homeowners’ equity, the market value of the home minus the the mortgage and closing costs.
In a housing bubble, homeowners’ equity can soar as the skyrocketing value accrues to the homeowner, as the mortgage is fixed (in conventional mortgages).
But when bubbles pop and housing prices return to reality-based valuations, the declines also accrue to the homeowner’s equity.
If the price declines below the mortgage due the lender, the homeowners’ equity vanishes and the property is underwater. The property may still be worth (say) $400,000, but if the mortgage(s) total $400,000, the owner owns nothing but the promise to pay the mortgage and property taxes and the right to claim a tax deduction for the mortgage interest paid.
To answer the second question, let’s consider an example. In areas with high property taxes (California, New Jersey, New York, Illinois, etc.), annual bills in excess of $10,000 annually are not uncommon. If we take $13,000 annually as a typical total property tax in these areas (property taxes can include school taxes, library taxes, and a host of special assessments on top of the “official” base rate),the homeowner “owns” the obligation to pay local tax authorities $130,000 per decade for the right to “own” the house.
In states without Prop 13-type limits on how much property taxes can be raised, there is no guarantee that property taxes won’t jump higher in a decade, but for the sake of simplicity, let’s assume the rate is unchanged.
In 20 years of ownership, the homeowner will pay $260,000 in property taxes.Let’s compare that with the rise in their homeowners’ equity.
Since home values are high in high-tax regions, let’s assume a $400,000 purchase price with an $80,000 down payment and a conventional 4% 30 year mortgage of $320,000.
In 20 years of mortgage and tax payments, the homeowners paid about $197,500 in interest to the bank (deductible from their income taxes), and about $170,000 in mortgage principle, leaving them total homeowner’s equity of the $80,000 down payment and the $170,000 in principle, or a total of $250,000.
Since they paid $260,000 in property taxes in the period, have they gained anything? If we look at the property as merely leased from the local government for the annual fee of $13,000, then was “ownership” a good deal for the local government or for the homeowner? If the homeowner subtracts the lease fee (i.e. property taxes) from their equity, they are underwater by $10,000.
The real estate industry answer is that “ownership” is great because the skyrocketing appreciation accrues to the homeowner. If the house doubles in value from $400,000 to $800,000 in a decade, who cares about the $130,000 in property taxes paid? If we subtract this $130,000 lease fee, the homeowner would still pocket a hefty profit: $800,000 sales price minus the $400,000 purchase price, the $130,000 in property taxes, the costs of 10 years of maintaining the home and the selling commission and closing fees.
So in effect, anyone “owning” a home with high property taxes is leasing the property from the local government for the “right” to gamble that a new housing bubble is underway.
But of course real estate doesn’t always go up. Overseas buyers can vanish (or be arrested by angry mobs at home before they abscond to North America with their dirty money), mortgages rates can click higher despite central bank manipulation, and the economy can tank, causing household income to crater and home buyers to dry up.
The “ownership” gamble is a big loser if real estate declines over the 20 years.If our example property declines in value from $400,000 to $300,000 in 20 years instead of doubling (or property taxes rise another $4,000 a year as local governments demand their pound of flesh to cover rising pension costs), the net equity of the “owner” declines to a $110,000 loss after 20 years.
The conventional response to this “ownership” gamble is that renters have no upside. But this is not true. Renters can leave for cheaper regions without losing equity or having to wait for their house to sell. Renters can negotiate lower rent somewhere else.
If we understand property taxes as a lease from the local government for the right to gamble on another housing bubble arising, we see “ownership” in a different light. As the saying goes, buyer beware, especially if there’s no limit on how high desperate local governments can jack up their lease fees, i.e. property taxes.
http://www.libertyzone.com/Communist-Manifesto-Planks.html
I hate property taxes! The majority of ours goes to fund the ISD, which I can’t stand! We are forced to pay to produce another commie.
“The conventional response to this “ownership” gamble is that renters have no upside. But this is not true. Renters can leave for cheaper regions without losing equity or having to wait for their house to sell. Renters can negotiate lower rent somewhere else.”
The above statement answered some questions I’ve had about renting. I always knew that renters were basically paying for the owner’s mortgage, if they have one, yet the renters themselves will have nothing to show in the end. Basically paying someone else’s house off.
The part about the loss of equity is a great point.
How about for those that don’t have a mortgage? Is home ownership a plus?
Darn, who knows, you still pay property taxes under duress of loosing your home.
I have no problem paying for the roads and bridges of which I utilize, but the schools, grrrrrr!
No body funded the schooling of my children, but I’ve funded theirs.
IRRITATING!!!!!!!!!!!!!!!!!!!
Katie,
I’m going to tell you a little secret, but you got to promise not to tell anybody else.
Under the people’s Bill of Rights and the common law being the supreme authority, there cannot be not but an absolute voluntary tax, otherwise the government would have an authority created by the Constitution to seize our property without going through the common law process, of which they absolutely cannot operate in or exercise any perceived power in, as these are absolute people’s courts.
Only an individual in his or her individual capacity can exercise their authority through the common law court. And it must be a personal loss of property or right for a cause to exist. All true crimes like theft and murder are violations of the Bill of Rights on an individual basis, absolute, and are to be prosecuted in the people’s court in the jurisdiction wherein the cause has arisen.
Don’t forget the 9th Article declares as absolute and unalienable that nothing can be created from the Constitution that infringes on the people’s rights, including a so-called federal or supreme court, or by the way, IRS.
Henry, I comprehend what you’re saying.
The TX’s state constitution PLAINLY accommodates for property taxes to fund schools.
I’m aware of the theory that unless you’ve recorded your personal and private property(voluntarily) or if the title is in fee simple(absolute ownership) then the county can’t tax you.
I’m not sure if Texans have no way out because it’s in the state const..
Anyway, I’m studying the subject hoping to learn so that once and for all the state can’t hang mammon over people’s ability to sustain life.
If anyone has some help they can provide, I’m all ears.
” Under the people’s Bill of Rights and the common law being the supreme authority, there cannot be not but an absolute voluntary tax, otherwise the government would have an authority created by the Constitution to seize our property without going through the common law process…”
This reminds me of the many times we’re told the fed. income tax is voluntary.
People are VOLUNTEERING only because they think EVERYONE has to pay fed. tax, when the truth is public sector workers ONLY are responsible to pay the tax due to the privilege.
This criminal cabal LOVES the scam they have going.
I’d only know what I know because of Cracking the Code.
Now, I need to get the property tax deal figured out.
I’m glad I never, ever considered ‘buying’ a house, without even knowing any of this.
What a freakin’ SCAM!!!
wow… 4:20.
But I’m at the library… 🙁
Aren’t the thieves(because they never come right out and tell 90% of the population that they don’t owe income tax) so nice to make the deductible available on the tax form of which nothing needs to be deducted so as not to pay higher taxes of which they don’t owe .
Mortgaging anything is poor economic practice. The only thing it offers is to have what you couldn’t have afforded in the first place, now.