donnay
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- Nov 20, 2007
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Dear Homeowner: If You're Paying $260,000 in Property Taxes Over 20 Years, What Exactly Do You "Own"?
If we understand property taxes as a "lease from the local government for the right to gamble on another housing bubble arising," we see "ownership" in a different light.
We're constantly told ours is an ownership society in which owning a home is the foundation of household wealth. The concept of ownership may appear straightforward, but consider these questions:
1. If the house is mortgaged, what does the homeowner "own" when the bank has the senior claim to the property?
2. If the homeowner owes local government $13,000 a year in property taxes, what does the homeowner "own" once they pay $260,000 in property taxes over 20 years?
The answer to the first question: the homeowner only "owns" the homeowners' equity, the market value of the home minus the the mortgage and closing costs.
In a housing bubble, homeowners' equity can soar as the skyrocketing value accrues to the homeowner, as the mortgage is fixed (in conventional mortgages).
But when bubbles pop and housing prices return to reality-based valuations, the declines also accrue to the homeowner's equity.
If the price declines below the mortgage due the lender, the homeowners' equity vanishes and the property is underwater. The property may still be worth (say) $400,000, but if the mortgage(s) total $400,000, the owner owns nothing but the promise to pay the mortgage and property taxes and the right to claim a tax deduction for the mortgage interest paid.
To answer the second question, let's consider an example. In areas with high property taxes (California, New Jersey, New York, Illinois, etc.), annual bills in excess of $10,000 annually are not uncommon. If we take $13,000 annually as a typical total property tax in these areas (property taxes can include school taxes, library taxes, and a host of special assessments on top of the "official" base rate),the homeowner "owns" the obligation to pay local tax authorities $130,000 per decade for the right to "own" the house.
In states without Prop 13-type limits on how much property taxes can be raised, there is no guarantee that property taxes won't jump higher in a decade, but for the sake of simplicity, let's assume the rate is unchanged.
In 20 years of ownership, the homeowner will pay $260,000 in property taxes.Let's compare that with the rise in their homeowners' equity.
Since home values are high in high-tax regions, let's assume a $400,000 purchase price with an $80,000 down payment and a conventional 4% 30 year mortgage of $320,000.
In 20 years of mortgage and tax payments, the homeowners paid about $197,500 in interest to the bank (deductible from their income taxes), and about $170,000 in mortgage principle, leaving them total homeowner's equity of the $80,000 down payment and the $170,000 in principle, or a total of $250,000.
Read more: http://charleshughsmith.blogspot.com/2016/05/dear-homeowner-if-youre-paying-260000.html
If we understand property taxes as a "lease from the local government for the right to gamble on another housing bubble arising," we see "ownership" in a different light.
We're constantly told ours is an ownership society in which owning a home is the foundation of household wealth. The concept of ownership may appear straightforward, but consider these questions:
1. If the house is mortgaged, what does the homeowner "own" when the bank has the senior claim to the property?
2. If the homeowner owes local government $13,000 a year in property taxes, what does the homeowner "own" once they pay $260,000 in property taxes over 20 years?
The answer to the first question: the homeowner only "owns" the homeowners' equity, the market value of the home minus the the mortgage and closing costs.
In a housing bubble, homeowners' equity can soar as the skyrocketing value accrues to the homeowner, as the mortgage is fixed (in conventional mortgages).
But when bubbles pop and housing prices return to reality-based valuations, the declines also accrue to the homeowner's equity.
If the price declines below the mortgage due the lender, the homeowners' equity vanishes and the property is underwater. The property may still be worth (say) $400,000, but if the mortgage(s) total $400,000, the owner owns nothing but the promise to pay the mortgage and property taxes and the right to claim a tax deduction for the mortgage interest paid.
To answer the second question, let's consider an example. In areas with high property taxes (California, New Jersey, New York, Illinois, etc.), annual bills in excess of $10,000 annually are not uncommon. If we take $13,000 annually as a typical total property tax in these areas (property taxes can include school taxes, library taxes, and a host of special assessments on top of the "official" base rate),the homeowner "owns" the obligation to pay local tax authorities $130,000 per decade for the right to "own" the house.
In states without Prop 13-type limits on how much property taxes can be raised, there is no guarantee that property taxes won't jump higher in a decade, but for the sake of simplicity, let's assume the rate is unchanged.
In 20 years of ownership, the homeowner will pay $260,000 in property taxes.Let's compare that with the rise in their homeowners' equity.
Since home values are high in high-tax regions, let's assume a $400,000 purchase price with an $80,000 down payment and a conventional 4% 30 year mortgage of $320,000.
In 20 years of mortgage and tax payments, the homeowners paid about $197,500 in interest to the bank (deductible from their income taxes), and about $170,000 in mortgage principle, leaving them total homeowner's equity of the $80,000 down payment and the $170,000 in principle, or a total of $250,000.
Read more: http://charleshughsmith.blogspot.com/2016/05/dear-homeowner-if-youre-paying-260000.html
