Landmark Links July 25th – Full Speed Ahead

Full Speed Ahead

Lead Story… It’s not much of a challenge to trace the genesis of much of California’s affordability crisis back to Prop 13.  Whether you love or hate the iconic ballot measure that resulted from a 1970s tax revolt, there is little doubt that it created a disincentive for residents to move which pushes a higher burden on new construction for entry level housing.  At the same time, it acts to drive up impact fees since cities and counties have almost no ability to re-assess property taxes to cover funding needs, pushing all of the burden on to new development.

The tendency for California home owners to stay put is undoubtedly contributing to the current housing affordability crisis.  After all, why move if it will cause your tax basis to go up substantially – even in cases when you downsize? Better to stay put an renovate. The California Association of Realtors has proposed an initiative which aims for a spot on the November 2018 statewide ballot that would attempt to make moving a bit less painful.  From the LA Times (emphasis mine):

Under a ballot measure filed Thursday, California’s landmark Proposition 13 property tax breaks would be extended to young homeowners who sell their residence and buy a new one.
The proposal, which aims for a spot on the November 2018 statewide ballot, would allow homeowners of any age to carry a portion of their existing property tax rate across county lines when they purchase a new house. Homeowners often are reluctant to switch houses, given that Proposition 13’s cap on annual property taxes ends once they sell and move somewhere else.

A more limited version of this has actually existed for a while.  Homeowners older than 55 in some California counties can transfer their existing basis to a new home of equal or lesser value than their current home sells for.  The idea was to get rid of a negative financial impact to those who wished to downsize.  However, this proposal would go much, much further.  Again, from the LA Times (emphasis mine):

“A lot of people kind of feel locked into their properties,” said Alex Creel, a lobbyist for the California Assn. of Realtors, who filed the proposed initiative. “This will free up those folks.”
The new tax rate, Creel said, would be based on a “blended” value of the old and new properties, and could be considerably lower than the market rate property tax otherwise assessed once a new home is bought.
Creel filed three different versions of the proposal, all of which would create tax incentives for selling one house and buying another.

……………..

Unlike current law, the proposal would allow homeowners to take advantage of the tax break as many times as they want.

This would be a major win for current homeowners since they could maintain a low basis forever – especially because of that last sentence about being able to take advantage of the transfer an unlimited number of times.  It would mean that you carry your assessed basis from the first home you buy throughout your lifetime which seems insanely lucrative.  Someone who owns a $300k condo, wins the lottery and buys a $20MM beach front mansion would still carry the tax basis from the $400k condo, blended in with the basis of the new home. The statewide revenue impact would be devastating.

To be clear, I’m a California homeowner and would benefit from this financially.  I still think that it’s a bad idea though.  The proposal may very well entice people to move but it will put even more pressure on impact fees in doing so.  As we’ve seen since the passage of Prop 13, when municipalities can’t raise property tax revenues they look to one of the few places left where they can without facing voter backlash – impact fees.  New construction is already shouldering a higher burden that is sustainable thanks to astronomical fees – it’s far more palatable for politicians to raise taxes and fees on new residents then it is on current constituents.  If this were to pass, expect that burden to worsen as revenue from property taxes inevitably shrinks.  In a sane world this thing would never get to a vote.  However, never underestimate the willingness of California homeowners to vote themselves into a new entitlement that will ultimately be financed on the backs of newcomers – and the CA Ballot Proposition system gives them the vehicle that they need to do just that.

Economy

Still Thriving: Bank profits are near pre-crisis levels despite all of the new rules and red tape.

Sliding: The dollar has been falling since January.  That’s good news for exporters and a mixed bag for consumers.

It’s a Start: The cost of higher education is now growing roughly in-line with overall inflation after out-pacing it for decades.  Perhaps trees don’t grow to the sky after all.

Commercial

Conversion: In order to stave off decline, Australian malls are becoming more like village centers, offering medical facilities more restaurants and even amusement parks.

Residential

Bombshell: Breaking story from the New York times sure seems to imply that the government changed the terms of the Fannie & Freddie bailout in 2012 in order to make more money at the expense of shareholders.

Loosening: More than 70% of non-cash, first-time home buyers — and 54% of all buyers — made down payments of less than 20% over at least the past five years.  See Also: Millennials want to buy houses but not save for them.

Level Playing Field: Any proposed Fannie-Freddie reform in the coming months will hinge on keeping small lenders happy.

Rise of the Machines: Real estate appraiser could be the next job where robots displace humans.

Profiles

The Heist: More than 20% ($750mm) of the Democratic Republic of Congo’s mining revenue is being lost due to corruption and mismanagement. Remember this when you hear about mysterious shell buyers purchasing high priced real estate in the US. (h/t Darren Fancher)

Trust Bust? Scott Galloway on how Amazon will be the world’s first trillion dollar company but will eventually be undone by a DA with larger political aspirations looking for an anti-trust fight.

Get Off My Lawn: Sure Millennials ruin everything but then again, that’s what every generation says about the ones that come after it.

Simpler Times: Why some pot growers in California are already longing for the more paranoid but profitable days before legalization.

Chart of the Day

From the Daily Shot

Yields on commercial properties are at pre-recession lows (suggesting that the market may be overvalued).

Source: Credit Suisse

Residential construction pay for skilled workers is rising faster than the national average.

Source: John Burns Real Estate Consulting

The reason for better pay in construction is labor shortages.

Source: John Burns Real Estate Consulting

The number of existing homes for sale in the US is at the lowest level since the mid-1990s.

This is why I believe that the next recession is unlikely to hit housing all that hard: we aren’t building much and there just aren’t many existing homes for sale.  This is one time when the raw numbers of available homes may turn out to be more relevant than the favored months-of-supply metric.

Source: Capital Economics

WTF

Seems Reasonable: Airport bosses in Russia sparked controversy after creating ‘women only’ car parking spaces since:

This is because women apparently need more space to get in and out, as well as extra space for loading and unloading…

The spaces are also marked with a giant pink high heel which is going over as you would expect.

Probably a Smart Bet: A company is betting that people with pay $30 to sit in a club and watch cat videos because, Millennials.

Jealous: China banned Justin Bieber from playing concerts there due to “poor behavior” since they are apparently smarter than we are.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 25th – Full Speed Ahead

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