Getting property taxation right

Why isn't the purchase price the permanent valuation for the length of time you own it?

Only in Dayton is the $10K house a reality

Are you your neighbors keeper?

Every week I look at the listings of homes sold in Montgomery County and marvel, because only in Dayton can you buy a home for less than the price of a nice used car.

This doesn’t happen in surrounding communities (other than the depressed ones- Jefferson, Trotwood) . Do you wonder why?

It’s all supply and demand would be the perfect capitalists answer. But, what drives demand?

In real estate 101 they say “location, location, location” – and people choose communities based on the schools. And to some extent this is also correct. Yet, my house, bought for $14,500 in 1986 is worth close to 10x that, and a slightly larger home 2 doors down, just went for the same amount 7 years ago. It shouldn’t have sold that low, but it was a foreclosure. And, my property value dropped- not just because the price was low, but because of the cancer that moved in.

Four doors down, a house sold for $95K 3 years ago. The new couple put at least $40K into it before splitting. It sold in a day- price unknown, but for well over $125K. And my property values are sure to go up.

Yet, I didn’t change locations, and my schools still suck. My investments in my house shouldn’t penalize me with higher taxes anymore than what my neighbors do. The value will come to me, and to the community, when I sell.

How and why do the actions of others affect my property values? If I own a share of stock in 3M, does my value go up just because Apple had a great year? No. Yes, if I go to sell my car, and someone else paid X for a similar car- that’s the price- but, I’m not selling my home, I just want to live here. Why should my value change until I do something?

Simple answer- it shouldn’t. And, this constant re-valuation of real estate based on the actions of others is causing gentrification, housing bubbles, foreclosures, and a mangled economy.

The purchase price of an owner occupied home shouldn’t change until the house is sold. The same should be said of rental property. When the government steps in and raises your property value for taxation purposes, they become an uncontrollable variable in a business equation. They distort markets. They screw existing businesses and property owners when they offer tax abatement to the new guy, while the long term investor gets shafted.

And, it’s almost counterproductive to do improvements to your property, if the tax man is just going to charge you more. But, what could be worse? Your neighbor doing improvements.

Case study: Dr. Michael Ervin, shadow mayor of Dayton before he left town for Scottsdale AZ, bought a dump of a bar in the Oregon District and poured $1.6M into it. This skewed the valuation tables for his neighbors, who were thankful the bar left, but were asked to pay more for Dr. Mike’s excess. Some, couldn’t pay the additional taxes and were forced to sell or move. Others might have spent more on a crappy house, because Dr. Mike did what he did. The market skewed. But, 10 years later, when it came time to sell, Dr. Mike got less than half his money back on his taj mahal. Yes, it’s still double the value of any of the other single family homes- and still skews things, but, the only person paying the tax on the new market rate evaluation- $725K , should be the new owner. Just as the neighbors who never left, shouldn’t have been forced to pay more when the $1.6 boondoggle went in.

The reason we pay property taxes is supposedly to support public infrastructure and government to keep our investments safe. Income taxes are supposedly a more progressive tax that are supposed to be based on ability to pay. When property taxes unfairly start to penalize people for making a long-term investment that they hoped to keep- it’s wildly unfair, un-American.

The fact that almost every office building downtown has been foreclosed on, while tenants have moved to fairer pastures funded in part by tax dollars- with more advantageous tax structures (both income and property tax) like Austin Landing is proof positive that our property taxation and income taxation hodge podge is causing more problems than it’s helping.

The value of the Kettering Tower, once the premier office space in Dayton, was decimated by Dayton’s high income tax (now 2.5%) and property taxes based on market forces beyond the owners control. Would Austin Landing have looked so good, without the huge investment in infrastructure by the county, or the income tax free zone for white collar workers (while the retail underclass pays 2%)? Probably not.

It’s time to realize that tax policy and abatement has serious consequences to the entire region, and we need to find a way to level the playing field and stop letting the choices others make, affect our tax rates.

Regional tax policy, from property to income tax, needs to be set and managed at the county level, and by fair market forces, for all of us to live within our means, and to stop changing the playing field in the middle of the game.

 

The $20,000 house problem solution

Yes, you can buy a house for under $20,000 in Dayton. I bought three of them.

The problem is that our system isn’t set up for buying $20,000 homes. In fact, banks don’t want to give loans on them, insurance companies don’t want to insure them, and for the most part, people don’t want to live near them- for fear their “comps” will be brought down- devaluing their home.

And I’m talking about the homes that are habitable- not shells, waiting for demolition.

The city is backed up with a demolition list that will never get cleared. We’re spending an average of $11,000 to tear each one down- with no real return on that investment. It’s money down the drain.

In the meantime, we’re giving incentives to build new units to people like Sims Development, and Crawford Hoying, to build more housing. Desirable, “market rate” housing. The problem is- our population is stagnant and declining- not just Dayton proper, not just Montgomery County- but the entire state of Ohio. We’ve lost congressional seats because of it.

What happens when you add housing inventory when you have declining population? Simple rules of supply and demand apply- housing inventory loses value, market gets flooded. The other problem is that the inventory isn’t exactly lining up with the demand. Poverty isn’t decreasing- but the supply of low-income housing is decreasing as subsidies have been cut. Numbers of jobs that can afford to support a normal mortgage have decreased, young college-educated home buyers are already carrying significant college debt. If this sounds like the setup for another economic collapse based on a screwed up housing market, you’re paying attention.

A simple solution

Currently, one of the economic measurement tools that economists love to bandy about is “new home starts.” A strong construction market is considered a jobs stimulator, since the construction industry is still considered a low-tech, blue-collar employment engine- i.e., you don’t need a college degree or even a high school education in their minds to build homes. The reality is you don’t even have to be an American anymore to build homes- with immigrant labor owning the roofing, sheet rocking and masonry work forces for most building developments. That’s both illegal and legal immigrants by the way

What is missed is the effect on supply.

What Ohio should do is put a moratorium on new unit construction unless the state has an increase in population exceeding 2% annually. The only way to build new units, is to buy up and demolish old units with a ratio of one structure for every 2,500 square feet of new construction. The “structure” definition could be variable based on location- more on this later. While this would add approximately $10,000 to the cost of each normal sized new building, it decreases inventory and in the end helps drive up property values.

The worst homes would be demolished first, and the values of marginal homes would rise as new construction credits rise. This would help low-income people recapture some of the value sucked out of their neighborhoods by the foreclosure crisis. It would also stop government from diverting money for services to making empty lots.

Along with the demolition credits, the state could issue credits to rehabbers- for taking old buildings and renovating them- effectively incentivizing rehab. The credits for rehab- would be at double the rate of demolition- i.e., rehab 2,500 square feet, get to sell the equivalent credits of 5,000 square feet of new construction. Why this incentive? Because rehabbing old infrastructure and bringing it back online, doesn’t require government to run new water and sewer lines, nor does it require adding police patrol areas- or, even in the case of infill new construction that wouldn’t require these either- it doesn’t fill up a landfill with demolition debris. It also makes it more affordable for rehab which often has higher costs due to compliance with new construction code .

Incentives can be placed by changing the credit awards structure- with some neighborhoods getting double credits for demolition, and others, fractional credits. Same can go for rehab projects.

Even as population begins to grow- the credit system can be kept in place based on where you are building. Any place where new utilities or infrastructure is required- would continue to require trade credits- infill to existing developments, no. If your county isn’t growing in population, swaps will still be required.

This system is sort of in-place with Historic Tax Credits- but generally is only used on large-scale development. The idea of this new system is to force value back into the worst communities where developers haven’t gone because of the policies of banks and insurance companies.

Do you have a better idea?