April 7, 2008

How Big is 41,231?

(c) copyright, View from Silicon Valley, 2008.  All rights reserved.



Today's rant takes aim at a front-page headline in last week's local paper.  In big, bold print the April 4, 2008 local paper touted, "41,231" with a caps-only sub-text stating, "HOMES IN SANTA CLARA COUNTY GETTING A CUT IN ASSESSES VALUE."
(http://www.mercurynews.com/ci_8807346)

Thinking such a front page headline page surely included a wealth of actual data, I was a couple minutes late hitting the road for work that morning.  Boy, was this article a disappointment!

It was filled with the usual anecdotes about (sarcasm alert!) geniuses signing up for hundreds of thousands in debt, secure in the knowledge the rest of us were the real idiots.  Who ever pays attention to that variable-interest-rate thingamajig?  Of course, "everyone knows real estate prices always go up."  Right?

Sorry, back to the point at hand.  The article severely failed to supply details!  Let's extract what hard numbers they did bother to report and put them in some kind of useful context:

1) "The good news is that more than 41,000 homeowners will get hundreds of dollars or more in property-tax relief, starting in October."

---Interestingly, a headline in the same paper from April 2 read,
"Assessor to lower values of 26,000 properties." (http://www.mercurynews.com/ci_8787501) 

Is it 26,000 or 41,231?  Is the local housing market so bad that the figure grew from 26,000 to 41,231 between April 2 and April 4?  Sadly, a careful reading of both articles finds no clues on how to reconcile the discrepancy so let's run with 41,231.

Do reporters (or their editors) ever think to provide context? 

How big is 41,231?  Is it one house out of two? One out of ten?  A hundred?  A thousand?

You may be relieved (or horrified) to learn we invested time teasing out total Santa Clara County housing units over the last few years.  Our current estimate is ~429,000 county houses.  (Up from 422,000 in July, 2006, up from ~399,000 in September, 2002.)

So how big is 41,231?  It's 9.6% or, roughly one house in ten.

Keep in mind, this does NOT mean tax revenue declines 9.6%. 

Fortunately, the article later adds one useful figure,
2) "...of the $6.6 billion in assessed value that's evaporating, roughly half is due to residential properties."

Side note: -$3.3B across 41,231 properties is -$80,000 written down per property.

How big is -$6.6B?  It's a -2.25% loss of property value.

That right, even with 10% of houses getting a write-down, that's only a -2.25% property tax revenue decline.

Keep in mind, the 90%+ of houses not getting a reduced assessment will get Prop13's annual +2% tax increase.  This works out to a +$5.274B increase in new residential property taxes for the "other" 90% in 2008.

At risk of going a factoid too far, some resales inevitably bring circa 1980's (and older!) assessments up to market value.  We know 12,713 resale homes changed hands in 2007 (~3% of the total market).  Per last week's "Joy of Owning" missive, we know 25+-year-old assessments are often taxed at ~0.2% (0.002), or 20%, of market value (or less).  Next, we assume 20% of resales are for such "old"  assessments and the average assessment increase is then $650K (2007 sales price minus old assessment). This works out to an "extra" $1.65B increase in 2008 residential property values.

In summary, despite the budget misery claimed in the headlines, total local residential real estate assessments net out to -$3.3B plus $5.274B plus $1.65B equals a $3.6B residential property assessment increase!

Given the appropriate data, we predict a similar exercise on commercial real estate nets another $3.6B.

That suggests a total $7.2B assessment increase on Santa Clara County property in 2008.  Instead of a -2.25% tax revenue decline, that nets out to a 2.46% tax increase!

Yet, based on the headlines, you might think budgetary hell was about to ensue!?!

4) "...the declines will mean about $80 million less in taxes for area school districts, Santa Clara County and cities that rely on those dollars to fund vital services."

You quickly see -$3.3B in lost taxes works out to -$80M school revenues.

As reported, this is disingenuous.  Repeating our earlier point, applying Prop13's 2% annual increase to that "other" 90% generates roughly +$10.6B in new taxes, more than offsetting the lost $3.3B.  Using their implied ratios, +$10.6B generates +$128M in school revenue, more that offsetting the headline -$80M. (Net = +$48M!)

Our second objection to "$80 million less in taxes," is, again, context?  If we accepted -$80M as the true impact, is that 10% of the school budget?  Is it 5%?  1%?  Less?

At California's 1% property tax rate, a $293B assessment becomes $2.93B in taxes.  Under Proposition 98, half of those revenues go to school budgets.

Given two data points, we again rush out our famous seventh grade algebra to show 50% of $2.93B means $1,465M goes from Santa Clara County house owners to schools.  If the schools lost -$80M, that's a -5.5% decline.

Per the previous exercise, we know the actual change is +$48M which is a +3.3% gain!

5) " 'Property tax constitutes 30 percent of the county's general fund revenue,' said county spokeswoman Gwendolyn Mitchell."

Once again, how big is the impact here?

Our seventh-grade algebra goes once more unto the breach: $2.93B total taxes times 30% is $879M.  Accepting the original headline and the implied -2.25% loss, a budget of $879M loses -$20.2M.  Given Santa Clara County's 2007 spending budget at $3.9B, losing -$20.2M works out to -0.052% ( -0.005179).

Again, working back in the 90% gainers in property taxes, the net-net on taxes is +$12M or 0.3% (0.00308).  Not much impact on a $3.9B budget but, as my grandmother used to say, "It's better than a sharp stick in the eye."

6) "School districts will feel the pinch from the real estate slump, too - especially "basic aid" districts that get their revenue directly from their local property tax pot instead of a wider statewide pool. Such districts include Campbell Union, Fremont Union and Santa Clara Unified high school districts."

---This sounds like reporting to please your constituency.  "Basic Aid" school districts generate so much local property tax revenue that they only get a mandated minimum contribution from the state.  There are a bunch(!) of "Basic Aid" districts in Santa Clara County. (Non-"Basic Aid" districts don't have enough local real estate wealth to cover their school budget and therefore get more subsidy from the state.)

To imply "Basic Aid" districts suffer disproportionately in a real estate downturn is like sympathizing with Larry Ellison complaining his 22,000 square foot home is over-taxed.  Even if Ellison loses, we would personally love to have his budget "problems."

Conclusion. 
Study algebra.  Then you too can write missives with way too many numbers and barely enough snarky comments.  (Sorry, it's late and time to wrap this up.)

Back to the original question:  How big is 41,231?  It represents less than 10% of Santa Clara County houses.  Despite the dire headlines, net property taxes will still increase in Santa Clara County in 2008. 

The "problem" is taxes aren't growing as fast as in past years.  If we're lucky, this will quickly expose how state and local governments continue to spend not only every nickel coming in but also most nickels that are assumed to arrive in the future.