Tag Archives: economic crisis

Unintended consequences: when property values decline, seniors with frozen property taxes pay more

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Programs that freeze the property taxes of older homeowners may reduce their taxes for a long time – unless property values decline and seniors end up paying more:

The state’s Senior Citizens’ Assessment Freeze Exemption works by capping participating homeowners’ property assessments. So even if the property’s value rises each year, a participating homeowner is taxed only at the level when the “freeze” was put into effect. In better times for real estate, participating homeowners in some suburban townships averaged as much as $38,000 reductions on their assessments, which would have reduced their property tax bills by hundreds of dollars. But instead of just losing out on the revenue, governments shift the tax burden onto property owners who don’t qualify for the freeze.

The law was intended to prevent fixed-income seniors from being taxed out of their homes since, to qualify, participating homeowners have to earn less than $55,000 a year.

“But nobody thought property values would decline,” said state Rep. David Harris, an Arlington Heights Republican who sits on the House property tax subcommittee. “Now, the issue is huge.”

Here’s why. If property values drop below the frozen level, there is no longer any benefit to the participating homeowner because he or she is taxed at that lower level.

That wouldn’t be a problem if the value dropped for only that homeowner. But when the value drops for everybody and the tax levies for all government bodies stay the same, or more likely increase, tax rates have to increase to meet the levies governments are allowed to collect.

The most important thing to me in this story: nobody assumed property values might drop. In other words, legislators and those receiving the tax help didn’t think about this possibility. So now they are stuck trying to scramble to find a fix.

While there are certainly other reasons contributing to the financial troubles of the last seven years or so, I wonder how much ignoring this simple idea – property values could decline for a while and not bounce back – contributed to the larger issues.

Teardowns McMansions responsible for the big American homes of today?

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A story about a family who has downsized links teardown McMansions to the big American homes of today:

At a time when smaller, older homes are routinely torn down to build sprawling new “McMansions” — the median American home size has soared 250 percent from 1,000 square feet in 1950 to 2,500 in 2008 — Lindsay and Sue took the opposite approach when they remodeled their 1920 Arts and Crafts style bungalow in 2011. They actually lost square footage, about 40 square feet.

Just how indicative are teardowns of bigger American homes? They can be viewed as a symptom of longer and larger trends, particularly when looking back to 1950. Over the course of 60 years, the average new American home expanded by a factor of 2.5. This is significant as it led Americans to have the largest average new homes in the world. And all of this has happened as the average American household shrunk – perhaps suggesting Americans like even more space and more stuff in that space. Across the board, Americans now consume more than their counterparts in the 1950s – and this includes houses.

But, there might be some merit to linking teardowns to a larger average house size. Teardowns are still relatively rare. They occur most frequently in wealthier or gentrifying neighborhoods where there is money to spend on buying a home, destroying it, and constructing a whole new home. Yet, the average new house size might continue to be pulled up by the luxury housing market that may not have been hit as hard during the economic crisis. Look at the distributions of new homes by square feet from 1999 to 2012: 34% of new American homes in 1999 were over 2,400 square feet (17% over 3,000) compared to 45% over 2,400 square feet in 2012 (26% over 3,000).

On one hand, McMansions are often the whipping boys of the early 21st century American consumer culture. On the other hand, their presence may have helped keep the average new house size high even as the lower end of the housing market has had more difficulty recovering.

Headed toward another housing bubble in the United States?

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A CNBC editor looks at some data that suggests the United States may already be experiencing a housing bubble:

On Monday, we got the fourth month of home affordability data coming in below trend, which is a strong confirmation that the housing market is once again in a bubble. (The NAR index is published with a two-month delay, so the latest numbers are for July).

The affordability index measures the household income needed to qualify for a traditional mortgage on a median-priced single family home. So it’s looking at a mortgage with a 20 percent down payment and a monthly payment below 25 percent of income at the currently effective rate on conventional mortgages…

The index has been dropping rapidly since peaking in January at 210.7. We’re now down to 157.8, according to the preliminary numbers released for July on Monday. Home prices have been rising and interest rates climbing, while wages haven’t kept up. That’s how we got to the lowest level of affordability seen since July of 2009.

According to the NAR, this shouldn’t be dire news. A score of 157.8 officially indicates that a household earning the median income has 57.8 percent more income than needed to get a mortgage on a median priced home.

A few interesting things to note here:

1. There is some debate about whether this index has predictive power. In other words, it isn’t necessarily easy to identify when there might be a housing bubble.

2. This adds more evidence that a housing recovery in the US is a long-term project. Housing prices may have risen so much by the mid-2000s that it will take years to sort it all out. A slow-growth economy doesn’t help.

3. Instapundit has a good take: “I WISH IT WOULD GET TO MY NEIGHBORHOOD.” While the idea of a bubble could be troubling, there are plenty of homeowners who would welcome some increased value for their home. Of course, that increased value might disappear again…

Four reasons more Americans are downsizing

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Pollster John Zogby gives four reasons he thinks more Americans are downsizing:

“There is a downsizing and downscaling and re-evaluation of values,” asserts John Zogby, a pollster and author of The Way We’ll Be: The Zogby Report on the Transformation of the American Dream. “It’s not always taking people down to a 600 square foot apartment and wearing a loin cloth, quitting their job and growing your own organic food.”…

• A growing number of Americans are working for less, voluntarily or involuntarily — but mainly involuntarily. In 1991, 14 percent told Zogby’s survey that someone in their household was earning less. By 2007, it was up to 27 percent and it reached 37 percent last year. “Suffice it to say, there is a sort of enforced simplification. People can’t afford to chase that whole American Dream.”

• Upwards of 11 million Americans in the higher income brackets are saying that conspicuous consumption “isn’t what cracked up to be, it’s not producing the satisfaction that I want my life to be about.”

• Baby Boomers, who are coming of age, “are looking for a second act in their lives, those who can’t retire and those who want to make a difference. In effect, they’re saying I want my life to be about something larger than me. I call it secular spiritualism.”

• And the fourth source of this cultural shift, Zogby maintains, is the latest iteration of a tendency among Americans that he says doesn’t get enough attention: “Our tendency to sacrifice to a higher cause.”

There are a variety of reasons here, suggesting this isn’t a monolithic movement. Some people might want more but can’t afford it. Others have lived into middle age and want more. It is one thing to downsize because of economic scarcity or an economic downturn; it is quite another thing to do so because of “secular spiritualism.”

Zogby isn’t alone with this fascination with this trend. This seems to be a popular topic, particularly when contrasted with American materialism and consumption. In a country where people generally want more and the accompanying hyperbole about everyone wanting McMansions, SUVs, and super-sized meals, people who try to make do with less are often looked at positively, especially by vocal critics of consumerism. For example, see the coverage of tiny houses.

Sales of $1 million plus homes back to 2007 levels

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A new analysis shows that the upper end of the real estate market, at least homes over $1 million, has recovered:

Home sales from Los Angeles to Charleston, South Carolina that are priced at more than $1 million are gaining at triple the pace of the broader market, according to real estate research firm DataQuick Inc. Wealthy purchasers, helped by gains in equities, are diving into real estate a year after a recovery began in the housing market when less-well-heeled buyers rushed to take advantage of record-low interest rates, said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School…

Sales of homes priced at more than $1 million jumped an average 37 percent in 2013’s first half from a year earlier to the highest level since 2007, according to DataQuick. Transactions priced at less than $1 million rose 11 percent in the same period to the highest since 2009, data from the National Association of Realtors show.

The $1-million-and-up end of the market usually trails cycles of the broader market because real estate purchases by wealthier buyers “tend to be discretionary spending” that can wait until economic conditions are right, Wachter said. Those homeowners usually can hang onto properties during tough times, and their houses are big enough for them to stay even if their families expand…

Homes priced at more than $1 million lost about 46 percent of their value during the housing crash, according to a Bloomberg survey of sales in the top four cities, based on valuation data from Zillow.com. Since then, their value has more than doubled. Home prices in the broader market fell to $154,600 in early 2012 and increased to $214,200 in June, according to the Realtor’s group.

At least one part of the market is doing well (the lower end is not doing as well): some expect homeownership rates in the US are expected to fall into next year.

I wonder if another reason these homes are selling at such a rate includes a perception that real estate is a good investment at this point, particularly compared to other investment opportunities that are more uncertain. This would assume that home prices would rise consistently but it would also help explain why so many investors are purchasing real estate.

Hoping McMansions aren’t making a comeback

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Not everyone is happy with the idea that McMansions may be making a comeback:

Please don’t tell me we’re picking up where we left off. Don’t get me wrong, I’ve got nothing against big houses in particular, but I had hoped we’d seen the end of over-building tiny residential lots to gain spaces far larger than they really needed to be. If there was a silver lining in the housing downturn, I thought it might be a shift toward smaller spaces that put a premium on creativity, great design, and organization.

Thankfully, I don’t think the census data points toward the whole nation deciding, once again, that bigger is better. Instead, I think we’re seeing the results of a very simple economic fact: When the economy is in the tank—which it undoubtedly was a few years ago, when 2012 completions were in the planning, permitting, and construction phases—the only people building houses were the “Go Big or Go Home” crowd whose members probably splurged for the extra bedroom or three. That’s why the census data is now showing a record high median home size. I hope, at least.

See recent posts about a possible return of McMansions: a CNN report in early June 2013 and a New York Times follow-up on the CNN piece.

Tim Layton hints at several complaints against McMansions. First, the homes are simply too big to start with. They have more space than people really need. This is related to the idea that Americans often think “bigger is better” and don’t think about anything else. Instead, Americans could think more about the design of their homes rather than just focusing on more space. This sounds similar to Sarah Susanka’s arguments about her Not-So-Big House.

Additionally, this also gets at trends and cycles in housing. McMansion-type homes emerged in the 1980s with the term exploding in the early 2000s. But, the economic crisis led to smaller homes for several years. The question is what will come next. Layton does not want McMansions to return but he also notes that we may also be in new kind of market where the wealthy continue to purchase such homes while they don’t really extend to the larger housing market. Perhaps there will be a limited McMansion comeback? If so, there may be plenty of opportunity for builders and others to be more creative with smaller homes.

Overview of the move of Toll Brothers into urban development in the last ten years

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Commonly known as builders of McMansions, Toll Brothers has branched out into urban development in the last decade. Here is a description of their efforts in New York City, as told by the head of Toll Brothers City Living:

We did some projects early on in Williamsburg, which I didn’t think would have been ahead of the curve. But for a lot of people who came to our sales office from places like Manhattan felt the neighborhood hadn’t arrived yet.

Based on that experience, we’re really focusing on neighborhoods that are established. When your main focus is condo, the way ours is, it needs to be that way, because you get one chance to sell a project. If everything isn’t perfectly right, then you’re going to suffer for it…

We’re certainly busy, but we’ve been more selective, so we’re on Gramercy, we’re on Park at 89th, we’ve got a tower on Park Avenue South going up, we just did the Touraine at 65th and Lex. Further down the line, we’ve got something on First and 52nd and in Hudson Square, on King Street. The project we’re doing in Brooklyn is in Brooklyn Bridge Park, which is basically in Brooklyn Heights, which was basically the first suburb…

We were fortunate coming out of the real estate recession and having a lot of cash and not needing to borrow, when most lenders were very reluctant to do condo loans. Toll has about a billion in cash and a billion-dollar credit line nationwide. We bought the Touraine site with just cash; we bought the Gramercy site with just cash; we bought a site in Dumbo with just cash. This was in ’09 and ’10. Most of the condo guys were not yet back, and we were competing with the rental guys, and we can always pay more than them.

Three quick thoughts:

1. It is hard to tell whether the image of Toll Brothers is changing. This article is similar to a number of other ones in recent months (example here) discussing the company’s efforts in New York City. At the same time, Toll Brothers is consistently linked to the construction of large suburban houses. In the long run, I wonder if there are critics who will never be able to look past the company’s connections to McMansions and see whatever else they are doing.

2. Few of the articles that discuss the efforts of Toll Brothers in New York City give any numbers about how much of the company’s business is in cities versus suburban development. From the projects described above, I would guess the urban efforts are still just a small part of the total operations.

3. The last paragraph hints at the dynamics of the housing market in recent years. Toll Brothers had the resources to capitalize on the housing market bubble. They aren’t alone but while these flush buyers make more money at the upper-end of the market, the lower end languishes.

Average new US house over 2,500 square feet; average new Chicago area house 2,650 square feet

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Here is an update on the average (not the median) new house size in the United States and in the Chicago region:

As a result, the average new home completed last year was 2,505 square feet. That represents the third annual increase in square feet and puts the average home size on par with where it was in 2008. Average home size peaked in 2007 at 2,521 square feet…

In the Chicago area, the average size of homes being built today is about 2,650 square feet, down from the 2,800 to 3,000 square feet constructed during the housing boom, according to Chris Huecksteadt, director of the Chicago region for Metrostudy, a housing research firm.

The US average is not surprising but it is rarer to see see figures for specific metropolitan regions. The higher than average new housing size in the Chicago area is likely related to the wealth of the metropolitan area but its lack of recovery compared to the national average suggests the region hasn’t bounced back as much as some other regions.

More Americans retiring with a mortgage

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The number of Americans retiring while still having to pay off a mortgage has increased in recent decades:

In 1989, just 26.4% of all households were retired with a mortgage, according to data from the Federal Reserve’s Survey of Consumer Finances. That jumped to 46.5% by 2007, before receding a bit during the recession.

These stats trouble traditionalists, who view owing money on a house in retirement as heresy. After all, paying off a mortgage brings peace of mind, because you know your living expenses have been cut and that your home equity offers a sturdy safety net.

Yet clinging to a mortgage in retirement has benefits too, especially with the average 30-year fixed-rate mortgage running at just 3.5%. You might be better off keeping the mortgage and investing the money elsewhere, which amounts to borrowing at a tax-deductible 3.5% in order to start a business, invest in stocks, or purchase an income property. Over time, such investments should provide superior returns.

This new calculus assumes that you have the means to pay off your mortgage in the first place. Many folks have been downsized into retirement prematurely and may still hold a mortgage because they can’t do anything about it. But for those with a choice, the basic rule of thumb: If you expect to earn more after tax on your investments than you pay after tax on your mortgage, keep the mortgage. However, if you are a conservative investor and keep your money in bank CDs and Treasury bonds, it is probably better to pay off the housing debt.

I imagine most of these Americans who have retired with a mortgage would say they don’t like having a mortgage at retirement. But, they likely have some say in this: they could wait longer to retire to help pay off their mortgage.

What is behind this? It could be a number of reasons. Perhaps Americans moving around more at later ages, leading to more mortgages near retirement age in the first place. Perhaps this is the result of economic issues – people are not as able to pay off mortgages. Homeownership rates haven’t changed all that much since 1989, roughly 2% point difference in recent years (Table 14 here), so something is happening with the nature of mortgages or the age at which mortgages are started.