How to avoid a housing bubble, state regulation edition
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Which nanny state:
- Banned its mortgage lenders from imposing prepayment penalties;
- Banned balloon repayments;
- Banned negative amortization mortgages;
- Banned loans based only on collateral value without regard to the borrower’s ability to repay the loan;
- Banned lenders from charging for services the borrower didn’t receive;
–and thereby avoided the worst effects of the housing bubble?
Mike at Rortybomb has the answer, which might surprise you.
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Doesn’t surprise me. Awesome!
Being from Texas, that does not surprise me at all. While I think our conservative lending laws were very helpful in avoiding the crisis, there is one other factor that is key: our high real estate taxes. Texas has no state income tax and relies on real estate taxes (and sales taxes) for its income. I moved from an incorporated city to the “country” two years ago to reduce the 3.6% I paid each year in real estate taxes (I still pay 2.2% in the “country”). So no matter how low the teaser rate, no matter how low the initial interest rate appears, monthly mortgage payments have a substantial floor under them due to the taxes. Thus you could never qualify for a $500K loan on $60K of income (or whatever crazy ratios were being allowed) no matter how low the interest rate and amortization. Just the taxes alone would likely be $1,500 per month.
Outrageous property taxes will be the deciding factor whether anyone can afford a home in the future. Where I live, in PA (no bubble here either!) “in the country,” that same $500K property would cost you that same $1500/mo, plus sales tax, PLUS PA STATE INCOME TAX, and this in a rural, undeveloped section of the county.
The number of “For Sale” signs in my neck of the woods is getting scary. More and more people want to get out, and can’t unload paid-for homes at bargain basement prices. A lot are simply walking away, and houses are sitting vacant and abandoned and eventually vandalized and derelict. The tax god’s can’t even get $1.00 at auction because of the high property taxes.
High property taxes may indeed shut out a housing bubble, but in the end will be the death of an area!
Wow, sometimes being the party of “no” isn’t such a bad thing, huh?
Bingo! Property taxes were the reason I looked into Texas investment properties but never bought. In fact, I never bought anywhere since California and Texas were my only two options due to management availability. Neither made sense from an investment point of view. By the way, I’m buying in California now. High property tax rates are incredibly destructive of real estate value. A person with money is going to look around and purchase where he can get the best rate of return. Taxes are expenses that shrink the net income a property can produce, thus the sales price of the property must be reduced to attract a buyer.
Yeah, a lot of people just aren’t used to thinking from an investment point of view, especially journalists who don’t know anything other than how to write, and government types who have no real world experience outside of politics. That’s why there are so many stupid policies that simply won’t work like rent control. Rent control discourages investment and new construction–that will increase rents in the long run due to less supply of housing.