It’s not easy for local governments to spend as their tax bases shrink.
Last week’s G.D.P. report included one number that seems ominous to me: Spending by state and local governments is plunging.
Few noticed this because it is common to focus on the “real” inflation-adjusted numbers. By that measure, state and local government consumption (as opposed to investment) spending was up 0.1 percent in the fourth quarter.
Evidently, however, the federal government thinks state and local governments are benefiting from a lot of deflation. The “nominal” figure — the estimate of actual dollars spent — fell at an 11 percent annual rate. That is simply unprecedented. The previous low for that figure came in the third quarter of 1952, when it fell 4.5 percent.
It is a hard figure to believe, and I suspect it will be revised upward. But if it is not, it is scary.
To get a feeling for why those governments are in trouble, turn to the S.&P. Case-Shiller house price indexes.
The November figures, which also came out last week, showed monthly declines in each of the 20 markets.
The following lists show the cumulative declines from the peak of each market, separated into four groups:
Gentle Decliners
Dallas, -6 percent
Charlotte, -8 percent
Denver, -9 percentNo Disaster Yet
Portland, -13 percent
Cleveland, -13 percent
New York, -13 percent
Seattle, -14 percent
Atlanta, -15 percent
Boston, -15 percent
Chicago, -16 percentWorth Worrying
Minneapolis, -22 percent
Washington, -28 percentForeclosure Specials
Tampa, -32 percent
Detroit, -34 percent
Los Angeles, -36 percent
San Diego, -38 percent
San Francisco, -38 percent
Miami, -40 percent
Las Vegas, -41 percent
Phoenix, -43 percent
Each of those markets covers much more than the city — New York covers the whole area from New Haven, Conn. to Trenton, N.J. — and some parts of those areas no doubt have done better than others. Nor did everyone buy at the peak.
The pain may be worst in outlying developments that came to market at or after the peak, where most if not all of the homes are worth less than their “owners” owe, assuming they were sold at all. The median age of completed new homes for sale is more than nine months.
The pain in Miami and Las Vegas may be greater than those figures indicate, because they are for single-family homes, not for the condominiums glutting those markets.
Perhaps the most surprising number is the one for supposedly recession-proof Washington.
While I was in Davos, Switzerland, a letter arrived at my home from New York City, telling me my house was assessed for less than it was a year ago. It is no wonder the city is talking about layoffs.
Floyd Norris, the chief financial correspondent of The New York Times and The International Herald Tribune, covers the world of finance and economics.
From 1 to 25 of 35 Comments
part of the situation
— ishtachIsn’t it nice?
Instead of sharing and lowering the salaries of everyone paid by the bureaucracy we lay people off – of course if they have been around forever, they will get esp. nice city/state pensions in the NYS/NJ area…..
And of course, we won’t put in a truly progressive income tax because that might be fair. More fun to watch people squirm to pay fees like 8 cents per plastic bag or get arrested for not paying for a ride on public transit.
Taxes on homes have been rather low in NYC, compared to the surrounding area. With a lower assessment, I guess Bloomberg is buying property owners for the next election. He’s already bought the unions with his ridiculous wage increases (43% for teachers in his seven years in office).
— “Hetty Green”Home values mean nothing in my town in New Jersey. The assessment on my home has not budged in eight years. Still I am paying $1000 more per year on property taxes than I did three years ago.
— amannIt should be noted, however, that in many places local government revenues are not directly affected by the fall in housing prices. In Portland Oregon, for example, tax assessed values have been so far below market values for housing that housing prices would need to fall 40-50% before affecting property tax revenues.
— Rick MichaelsonI don’t follow this argument. Are property values relevant for any taxes other than property taxes? And if not, as far as I know, almost all property taxes are recalculated so that only the relative values matter in determining the different tax liabilities by people; the total amount collected should not be affected assuming compliance rates don’t change.
— Aleclook at Washington
— ralphamillikenMost of the substantial declines in property values have come in the areas where Americans have moved in the past 25 years, the Sun Belt States. They were the states with the greatest population growth and they are the states where the greatest declines are taking place. The phenomenal growth of places like Las Vegas and San Diego was such that the value of housing rose exponentially. Now, they are suffering the consequences.
The cities with moderate losses, Portland, -13 percent
Cleveland, -13 percent, New York, -13 percent, Seattle, -14 percent, Atlanta, -15 percent, Boston, -15 percent and
Chicago, -16 percent, haven’t been huge growth cities in the past 25 years. In fact, most of them have lost population and that is what saved them. There was appreciation of housing in those places but there simply weren’t enough people buying, or houses being built for there to be disaster.
Of the real problem cities, most of them are retirement havens, with the exception of Detroit, which is always in the forefront of crisis, and Los Angeles, which has had price inflation for 40 or more years. Tampa, -32 percent
San Diego, -38 percent, Miami, -40 percent Las Vegas, -41 percent, Phoenix, -43 percent, are completely understandable. What San Francisco, -38 percent, is doing in the group is something that I don’t understand.
The loser cities are in trouble for another reason; they are largely filled with people living on fixed incomes and those people, at least those counting on their investments to live, are rapidly losing ground.
Answer; we are heading for a major Depression!
— Joel L. FriedlanderThe numbers for the California cities look ominous, but I wonder if, because of the ceiling that Prop 13 put on property taxes, these cities’ coffers ever swelled as much as housing prices would have suggested during the boom times–in which case, they may not be contracting as much now. Small comfort, I guess. But it would be worth quantifying.
— Paul SelfaHome prices falling does not mean that real estate tax revenues have fallen significantly.
I live in new jersey and my property taxes have not gone down in the last two years even though my house has lost approximately 20% of its value. Local governments in the metropolitan NYC area are not receiving as much in state aid due to lower returns on income and sales taxes. This is what forces local governments to either spend less money or borrow money to cover the shortfall. NYC is a great example. It is losing billions in tax revenue primarily because of a precipitous drop in the number of people employed in the financial industry and because of reduced salaries and bonuses in that industry. NYC will be forced to pass a smaller budget because of that and not because of depressed home values.
Areas with many foreclosures will have an impact on state and local budgets. Typically past real estate taxes are paid after the foreclosed home has sold. In areas where there are many homes going into foreclosure you will see reduced local revenue. NYC does not have a large number of foreclosures so therefore it does not have a falling real estate tax base.
It’s disappointing to see someone who is called the “chief financial correspondent” for the New York Times link layoffs to his home value. Floyd Norris could not be further off the mark.
— frankwilliYes the falling price of housing hurts property tax and deed transfer tax revenue, but it helps housing affordability which helps households in the long run.
Over time, let’s say Americans spend 15 to 20% of their income on housing, as opposed to 30 to 40%, they have more to spend on health care and consumption.
Also, if you can cut the amount we spend on housing by 5% of GDP, you can increase savings by 5% of GDP without impacting consumption.
Falling house prices are painful today, but its a good thing in the long run.
— winthrop1892I don’t know about the rest of the US but here in Washington state a decline in real estate values does not mean there is a corresponding overall decline in tax revenues.
— MarkI don’t believe many of us realize that the super rich in our society don’t “work” for their wealth in the traditional sense. Rather, they gain their fortunes by manipulation and exploitation of the “market” by devising clever and very complex strategies whereby they are able to prey on the trust and greed of others to carry out their devious schemes. Ponzi scams are a typical example of such activity. Another example are banks and the way they take advantage of the gullibility of folks who fall for their credit card racket. Some credit card companies are now charging 45% interest to those folks who fall into the trap of using credit card money to tide them over. And the most sinister of all their schemes is the way they have spawned an industry dedicated to the creation of debt and a system requiring that people use credit cards on a regular basis in order to have a decent credit score. And these same credit scores are now being used by employers, banks (to open an account), and to qualify for a mortgage as well as utilities that use the score to decide how much deposit one is required to post in order to get power and telephone service. What I have described here are circumstances that didn’t even exist 30 year ago, yet there was very little in the way of financial problems for people in those days. Something is terribly wrong with the whole financial process in the world today and until these problems are corrected they will continue to fester and weaken our society. As for the reoccurring statement that “THE GOVERNMENT CANNOT GIVE TO ANYBODY ANYTHING THAT THE GOVERNMENT DOES NOT FIRST TAKE FROM SOMEBODY ELSE,” is a very week argument since the monetary system is based on the ability of the Federal Reserve (a private corporation) to create fiat money from thin air, and then circulate that money in any way they see fit. What they are doing is no different from criminals who print counterfeit money. Indeed, both forms of money have the same basic value as do the creators of such funds.
— Jud WilliamsIT would be nice to see some links to the data; or some greater perspective; links to other resources?
http://en.wikipedia.org/wiki/File:Case-shiller-index-values.jpg
— johnCalifornia is a bit of an exception. House taxes are based on the purchase price (with a yearly increase capped at 2% I think). So the taxes on a condo purchased in 1997 for 185 k are still increasing this year as the tax appraisal value is still far below the current market value, even after the 30-40% decrease in market value. The only taxes that decrease will be on homes whose current value is below the purchase price, which, roughly speaking, are only the homes that were purchased after 2004 or so. Taxes on most homes sold prior to 2002 are likely still increasing as the appraised value, which is slowly increasing at 2% per year, gradually catches up to the market value. Therefore, the change in property tax base on residential property should not be quite as dramatic as the initial numbers suggest.
— rjmThe good news? The value of my home in New York City was assessed at 20% less than last year.
The bad news? The assessed value has gone up so quickly over the last decade that my property taxes hadn’t yet caught up (they’re only allowed to go up ~5% a year) and they won’t catch up for another decade at least.
With a cushion like that, real estate taxes in New York City should be somewhat protected for some time.
Peter Steinberg
— Peter Steinberghttp://www.FlashlightWorthyBooks.com
Recommending books so good, they’ll keep you up past your bedtime. ;)
Every year there are some people who are surprised when Winter arrives, but predicting the bursting real estate bubble did not require a crystal ball. Even in 2007 it was easy to see the signs that the market was not sustainable. If you do a quick google search on “Overpriced Markets”, you’ll quickly find a number of vintage press releases showing the same cities that appear on the list in this article. The reason some cities have not fallen as far is simply that they didn’t rise as far.
As a resident of Northern California, my wife and I watched things get whipped into an irrational frenzy and became the “chicken littles” who were ridiculed because we felt that things were unsustainable and due for a huge fall.
Gee, why is it starting to get colder outside?
— mquinslandOh Floyd,
Trust me you are right. I sold an REO home for Citibank in far SE burbs of Phoenix yesterday. It sold for $35k! I got the listing 5 months ago, and they had it listed at $120k. They refused to lower the price and get it sold. Followed it down to this. I am still stunned that they took it. Now it’s a new comp. and 8 empty REO or short sale listings are in eye sight. The home was bought new in 2006 for $220k with 5% down, 15% purchase 2nd, and 80% primary with no mortgage insurance.
Sold one last month for $280k with $960k worth of notes on it. Trust me this is far from over. Maybe I am tainted because I work in the worst market on the front lines, but this is a disaster. I can’t gripe, I am making good money and too busy. But this is not the time to play games with this.
I challenge you to spend a day with me or other areas of America that are hard hit. Go ahead and drink tea in Davos, but we are starting to see plywood on the homes here. With gas going back up and the job losses starting to hit, this is a black hole.
This mess is so toxic eventually all the bright eyes in Washington will pay attention. This is not the time for a no-growth president. This is not the time for worrying about the spotted owl or appointing tax cheats. I honestly hope BHO gets his head on straight soon. I actually hope he comes thru. I now think we are not even half way thru this mess.
It’s time to cut the crap and let this country grow. Get Washington , tax burdens, and global warming out of the way. That is unless people desire to see this country fail.
— RobertI’m struck by the parallel to Gulf coast municipalities loss of revenue due to physical home destruction after Katrina.
— milo_nyJust some anecdotal evidence from here in Tucson, Arizona: Our mayor was interviewed for Arizona Illustrated last Friday on the local PBS TV station (KUAT) and said the city was projecting a fiscal year loss – or budget deficit – of $78 million. Sales tax revenue – which AZ government at all levels mostly depend on – has fallen off the proverbial cliff with new car sales being particularly hard it. It wasn’t so much what our mayor said about the fiscal budget gap; rather the look of fear/terror on his face that explained the situation. And the economy here continues to deteriorate by the day. This may partially explain why the Obama economic rescue plan doles out funds to the state governments in hopes of stabilizing this financial predicament. Whether it works as planned I have no clue.
— Rev. DaveBad news about state and local governments and economies! I agree with Mr. Norris that the numbers are worrying, but I think that they are worse than reported. It’s not just a matter of housing. Sales tax revenues will decrease as sales plummet. There won’t be any capital gains to report for years, as futures gains will be offset by current losses. Income taxes will decrease as unemployment rises and wages and salaries decrease. Motor vehicle registration fees will not experience the usual nominal increases because peopoe aren’t buying cars. And as Mr. Norrris notes, real property taxes are going down, down, down.
The U.S. Treasury will borrow 400+ billion for the current QUARTER alone. But, unfortunately, Pentagon expenditures will be decreasing by 10% in FY2010. (Although I think that President Obama is doing a fine job and is a great guy, this is the first thing that he has done that has worried me deeply. I think that the Pentagon budget should be increased., Our armed services are underpaid to an extreme degree, our weapons systems are degraded and we are now facing another long range missle test by North Korea. What on Earth is the president thinking? Good grief!!!!!! I think that we should forget about bailouts, which won’t do any good, and put our 800 billion into long range missile defenses. Hey, I live in L.A. — ground zero.)
In any event, all this adds up to the frightening thought that the U.S. itself will soon be facing negative credit watch and subsequent downgrading. Our government and population need to get a grip. Our financial system is broken beyond repair; our economy is on the brink. Before long our country itself will be in jeopardy. We need to “get real.” It is time to get our financial house in order; to rely upon ourselves and to be fully prepared to defend ourselves. In my view, time is running out.
— JHDReads this together with the NY Times article today explaining how a typical mortgage backed security with 9,000 second mortgages (each of which was created in a “no money down” purchase or refi) is still valued by the bank at 97% of par, by S&P at 85% of par, and by proposed buyers at 37% of par. And then tell me whose value is likely correct.
If the government purchases these MBS at anything close to book or S&P value, we are indebting our children to pay for the sins of bankers, rating agencies, regulators, real estate agents, appraisers and their thousands of academic apologists. This is an outrage occurring right before our eyes. WAKE UP!
— Jeffrey GoodrichThey’ll just raise the property tax, as they’ve been doing during an average of 10% a year in Westchester during the boom years. Where else will they get the money to pay for the retired town and county workers who moved to Florida?
— MikeThese cities are in trouble, but politicians are holding on to their spending as long as they can. Keep in mind that the long standing annual NYC property tax $400 rebate ended. Our valuations are down, but we’ll pay more in the end. NYC somehow has increased the amount of taxes they collected over the last eight years and promises more in 2009. I guess Bloomberg is doing his part for the cause. Gotta love politicians, now taxing is patriotic.
— mbiDuring the last Depression in 1934, my father purchased our little bungalow for $4000–a deep discount. He could have purchased a 30 unit apartment building for the same amount in that nobody wanted it and the bank considered it a total loss..
No matter what the stimulus package, housing will be a drag on the economy for 5-10 years. The only winners will be first time buyers with a steady jobs–like my dad. Of course in 1941 he was summarily fired but survived by working in a munitions plant.
Norris has every reason to be worried. We apparently are in a slow-motion train wreck–all us. The stimulus package might result in a little less pain but not much more. However Roosevelt did much the same and earned widespread adulation from a populace who felt ignored by their “leaders”. Small solace.
— RobeDid anyone stop to realize …..
The number 1 industry in the world right now is scaring the hell out of weak investors so they dump stocks and other investments for pennies on the dollar ?
That had to be about a $5 trillion industry this past year.
— Ivan