Property Taxes and Home Affordability in Florida.
Impact of property taxes on homeowners in South Florida.
By: Henry B. Nathan
A key factor in the present Florida real estate troubles is home affordability. Many other issues exist and can be considered part of the normal market fluctuations. However, affordability is invariably the essential element.
Comparisons of Home Prices and Family Income in 1980 and 2005
Let's use Miami-Dade's median home price and Florida's median family income statistics for this purpose.
Median Home Price in 1980 - $75,000.
Median Home Price in 2005 - $372,000.
1989 Median Family Income in Florida = $ 21,355.
2005 Median Family Income in Florida (estimated) = $60,000.
Increase of Median Family income in the same period = 181%.
Increase of Median Home Price between 1980 and 2006 = 396%.
Note: These figures have not been fully verified. They have been taken from different sources, and could reflect some inaccuracy. They are used to graphically explain a tendency, and only in this context, will they serve the purpose of this essay.
Average property tax for new buyer (including Homestead exemption) in 1980: $ 850.
Average property tax for new buyer (including Homestead exemption) in 2005: $5,899. (Approximate figures)
Homestead exemption grants a $ 25,000 deduction on the home assessed value for homeowners who qualify and register with their county appraiser.
What is Save our Homes ?
In 1992, Florida voters approved an amendment to the Florida constitution that limited the amount of value a homestead property could increase for tax calculation's purposes. The law limits assessment increases to 3% percent or the increase of the Consumer price Index - whichever is less.
Non-Homestead property is assessed at the full market value annually.
Home Affordability as considered through FNMA guidelines
$36,588 Minimum Yearly Income, as per FNMA guidelines, was necessary to cover Median Home purchase in 1980, assuming 90% financing @ 12.5% annual interest, 1% insurance annual rate, (PITI= $854). Note the very high interest rates prevailing in the 80's. (PITI = Principal + Interest + Taxes + Insurance)
$134,086 Minimum Yearly Income as per FNMA guidelines, was necessary to cover Median Home purchase in 2005; assuming a 90% financing @ 6.5% annual interest, 1% insurance rates, (PITI=$3,152)
Roughly, FNMA basic guidelines require that no more than 28% of the buyer's gross income should be dedicated to pay for his monthly PITI (Principal + Interest + Taxes + Insurance).
To be noted is the dwindling affordability despite the fact that mortgage rates in 2005 were half of what they were in 1980.
Impact of Property taxes as compared to median home values in 1980 and 2005
Property Tax for new buyers as a proportion of median home value in 1980 = 1,133%
Property Tax for new buyers as a proportion of median home value in 2005 = 1.586%
The heavier burden is partly due to the decline of the homestead exemption as a proportion of home value.
The $25,000 exemption represented 33.3% of the median home value in 1980.
It represented a measly 6.7% in 2005.
Percentage of Median Family income dedicated to Home Property Tax in 1980 = 4%
Percentage of Median Family income dedicated to Home Property Tax in 2006 = 9,83%
However, this increase is only valid for new buyers in this market. The Save our Homes Tax break unfairly burdens new buyers, vacation-home owners and investors, and protects Old Homestead Owners with the limitation to 3% yearly increase in their property taxes.
Fact: Even though Median Home Values have increased proportionally more than double the Median Family Income, and substantially increased the tax base, Counties and Cities, as beneficiaries of property taxes, have found their way to increase their mileage (or tax rate), further aggravating the cost of owning a property in Florida.
Do we fully understand the message that these irrefutable facts are sending to all parties?
To old homeowners in Florida: Do not ever, ever move from your house or condo. You will be punished by an unsustainable raise in property taxes, even if you downgrade to a smaller and more affordable home.
Do not try to add space, build or remodel. Every added square foot will be taxed at the full market value, because it would not be covered by the Save Our Homes exemption. You would be surprised by how much it could raise your tax bill.
To Owners of second homes or vacation homes in Florida: Congratulations, your equity has tripled in the last 10 years. Now, take your money and run. From now on, you are being hit with taxes three or four times higher then 10 years ago; while you are not taking advantage of schools and other infrastructure designed for permanent residents, you are paying the highest bills. Conclusion: Sell
To Investors who have held their property for more than 5 to 10 years. Congratulations; time to take your profits and find a better investment. Your tax expenses are 3 or 4 times what they were when you bought the property. You have tried to raise the rents you collect to cover your rising costs, but you have not been able to keep up to tax and maintenance fees increases. The fact is that renters cannot afford to pay a rent that would make sense for your investment.
To Investors who bought recently. Good luck. You have paid the high price. Your property taxes are high and relentlessly increasing. Your rents barely cover your taxes, maintenance fees and a tiny part of your monthly mortgage payments. The message: Cut your losses, sell and run... But this is the sticky situation of thousands of other "lucky" investors. As a last recourse, just try to rent it, take a monthly loss and hope for the best.
To New Homebuyers. Good luck. You are paying the highest prices. You are paying the highest property taxes. Your expectations of a quick valuation of your new home will have to wait for better times. Meanwhile, just clench your teeth, take the hit and hold on.
To Renters. You are already experiencing a strong pressure on rent prices and it will persist for some time. Your American dream of homeownership is being crushed and is almost unattainable now, but what you are paying in rent is almost a bargain. But expect progressive and unavoidable raises.
And the message that Florida residents are increasingly sending:
To Local Governments: You have been running wild with our dollars. You are fat and rich but you would not give up; you keep wasting our money and you keep increasing our taxes, and today you are the only beneficiaries of the real estate mayhem that is threatening our state. What about some legislature-mandated spending limits?
Correcting the problem:
Whoever is now a beneficiary of the Save our Homes taxation should not tolerate any intent to take away this privilege. After all, 3% cumulative annual increase (as allowed by the Save our Homes rules) is more than fair. Cost of living has not on average increased more than this percentage during the last 10 or 15 years. So, why accept to be taxed on hypothetical sales value of your homes by greedy local government? We all know that county and city services have not improved in any way to justify three and four times larger tax bills. Therefore, their expenses should have increased at the same rate as the national inflation rate. Unless they have chosen to mask their inefficiency at taxpayers' expense.
To the contrary, we can even argue that the mushrooming new constructions have already increased their tax base in such a way that the common homeowner should have expected a reduction in tax rates.
Legislators should better consider new regulation to transfer these Save our Homes advantages, when homestead owners switch properties of the same of lesser values. This would surely reactivate the real estate market.
There is no doubt that the present level of property taxes should face a serious examination in order to place them back at their historical levels, as a reasonable proportion of median family incomes, as opposed to their now almost confiscatory levels. I am talking about reduction of tax bills.
The present real estate recession is not due to circumstantial or accidental factors. There are deep economical reasons which can and should be corrected. Affordability of homes is part of our government responsibility and should be addressed accordingly. Unfair and abusive property taxes are one known issue and voters should put pressure on their representatives to correct it.
We are not talking about tentative and timid measures. I have heard of a motion to increase the Homestead exemption from $ 25,000 to $50,000. This will not solve anything. It would just be a symbolic and political step.
What about a real study of the impact that 25 years of inflation have done to nullify the economical and social effect of this exemption? Shouldn't we roll it back to be the same proportion of basic home values as was in its original intent? Wouldn't a $ 100,000 exemption be closer to reality? Wouldn't that help the first time home buyer achieve the American dream? Wouldn't that be a real injection of reality to our real estate market and our economy in general?
Affordable housing for Floridians is an urgent necessity. No doubt that million-dollars homes and condos have contributed to our economy, but will there be any economy left when working people start leaving the state because of unsustainable home values?
The "save our homes" laws have somehow protected a portion of our homeowners. However, they are an incomplete and unfair arrangement. A complete revision to maintain this protection and also protect new homebuyers, vacation home buyers and investors against abusive property tax increase would be welcome.
Of course, soaring property tax issue is not the only element in home affordability. Interests and financing costs, inflation, salaries, cost of building, land values, are also determinant factors.
But property taxes are a cumulative burden on the homeowner and they will haunt him year after year. It is time for local governments and our legislators to address this issue that is vital for the survival of our battered middle class.
Disclaimer: This article represents the personal opinions of the writer and are not related to any firm, association or business with which this writer maintains any kind of relationship.
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