walkitout (walkitout) wrote,
walkitout
walkitout

not-so-random commentary: ownin' a place, anywhere

Property taxes: you will be paying them. Now, in theory, you pay property taxes as a renter -- the person you rent from pays them and the theory is they get passed down to you. In practice, that's not entirely true. They may be willing to eat the taxes when the property is appreciating -- or if they can't rent it for any more than you are paying.

Let's consider the effects of the market on owning a place.

The premise of home ownership is that you gain control of your housing costs. This isn't true, of course, with some of these new-fangled loans where you get a choice of payments, but no sensible person takes one of those loans so I'm going to ignore them.

If you own the home outright, or have a straightforward fixed loan (whether 15 year, 30, or other) with no weird balloon payment down the line or readjusment of rates or whatever, the idea is that you can predict the size of your monthly payment for the duration of the loan, and after the home is paid off, you don't pay anything. In practice, there's that list I put together earlier of everything you have to pay when you own a place. I think most people recognize that over time, that list of stuff is likely to get bigger, rather than smaller, over time. We tend to expect that rate of increase to match the general rate of inflation, and, post-Reagan, we tend to expect the general rate of inflation to be quite low. These assumptions are not justified.

For example, heating oil costs and energy costs in general have recently demonstrated they can undergo substantial changes quite quickly.

As important, however, are property taxes. When you win a non-monetary prize (all expenses paid trip to Paris in the spring), you owe taxes on the value of that prize. This is sort of a problem if you don't have enough money to pay the taxes. And it can happen to homeowners. It's very nice to know that you can sell your home for more than you paid for it. Being able to borrow against that amount (home equity loans) can be very convenient. But when you pay taxes, you pay taxes based on the estimated current market value of your home. Every year, people are forced to sell their homes (which they can otherwise afford -- the fixed loan payment, the maintenance they do themselves or know how to hire affordably, the frugally used energy, etc.) because they can no longer afford the taxes on their home. Sure, they make a lot of money, but if they cannot afford to buy another home in range of their job -- or any job -- they may have just been forced out of home ownership entirely, putting them back at the mercy of the rental market, which prudent home ownership was supposed to get them out of.

Property taxes can vary widely from one location to another, and it's well worth investigating ahead of time. Once you are subject to them, your motivation to participate in the political process goes up substantially. Schools, fire and police protection are all funded entirely or in part by property taxes, which is why ballot measures involving those services are often a lot more contentious than seems justified to someone who has only rented in the past. In a locality that has numerous revenue streams (income tax, wealth tax, sales tax, property tax), this effect is somewhat muted. In a locality which gets the majority of its revenue from property tax, homeownership and the political process start to feel like a game of dodge 'em. Or chicken. Or whack a mole. Something violent and arbitrary, basically.

I have no simple advice on this subject. Forewarned isn't much ammo when you are up against this kind of avalanche. But you shouldn't go skiing in the backcountry not even aware that avalanches can happen. Find out what the taxes are on any place you are considering buying BEFORE you buy. Know that past taxes are a poor predictor of future taxes. Learn as much as you can about the local political landscape (upcoming bond measures, levies, etc.) as possible. Recognize that whenever your property becomes more valuable (yay!) your cost goes up (boo!) -- so once you buy, continue to pay some attention to the real estate market. Don't find out your place got worth more by realizing you're paying double taxes this year compared to last -- see it coming, so you can consider relocating to a cheaper place if it's going to be a big problem (or lobby for a cost of living adjustment at your job).

One last remark: if you think you have a Clever Plan for avoiding high property taxes, Watch Out! Everyone has already tried the Live in a Crappy Neighborhood and Live a Long Ways Out of Town strategies. Gentrification and sprawl eventually bring high taxes to you. One slightly less considered strategy is to buy into a nice neighborhood after the first wave of families' kids' have gone to college (everyone in the neighborhood is about to become grandparents). If you time it correctly, you'll have nice low schooling costs (as the district closes schools) and no major capital costs (everything has already been built). If you time it poorly, you'll buy in as all those people are moving into retirement communities/condos/assisted living, and another wave of families shows up and they start building schools again, or, worse, redoing the HVAC on old schools, which is a nightmare of unexpected cost overruns.
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